Joe F. Sanderson, Jr.

- Sanderson Farms, Inc. D.

Michael Cockrell - Sanderson Farms, Inc. Lampkin Butts - Sanderson Farms, Inc.

Heather Jones - Vertical Group Jeremy Scott - Mizuho Securities USA LLC David Carlson - KeyBanc Capital Markets, Inc. Ken Zaslow - BMO Capital Markets (United States) Farha Aslam - Stephens, Inc.

Kenneth B. Goldman - JPMorgan Securities LLC Adam Samuelson - Goldman Sachs & Co.

LLC Lubi Kutua - Jefferies LLC Francesco Pellegrino - Sidoti & Co. LLC Eric J.

Larson - The Buckingham Research Group, Inc.

Thank you. Good morning, and welcome to the Sanderson Farms first quarter conference call.

Last evening, we announced net income of $51.2 million, or $2.24 per share, for our first quarter of fiscal 2018. This compares to net income of $24 million, or $1.06 per share, for our first quarter of fiscal 2017.

Net income for the quarter reflects a one-time non-cash income tax benefit of $37.5 million as a result of a one-time adjustment to a deferred tax liability on our balance sheet resulting from the recently enacted federal tax reform legislation. I will begin the call with comments about general market conditions, and grain cost, 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'll ask Mike to give the cautionary statements regarding forward-looking statement.

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 those forward-looking statements because of various risks and uncertainties facing the company.

Those are described in our Annual Report on Form 10-K, and in the company's quarterly report on Form 10-Q filed with the SEC yesterday in connection with our first fiscal quarter ended January 31, 2018.

Thank you, Mike. Results for the first quarter reflect higher dark meat market prices compared with the start of fiscal 2017, but lower white meat prices.

Demand from retail grocery store customers has remained stable, and that stability is reflected in chill pack prices, 2.1% higher than during last year's first quarter. On the other hand, market prices for bones, breast meat sold to the food service customers were lower compared to last year's first quarter and remained seasonally weak through January.

The boneless market has not improved in February. Market prices for corn were slightly higher during the quarter compared to last year, while soybean meal prices were lower.

Our feed cost per pound of chickens processed were lower about $0.005 per pound during our first fiscal quarter, when compared to the first fiscal quarter of 2017. Both corn and soybean balance tables are healthy, as we head into 2018 planting season.

But market prices have moved higher over the past several weeks owing (00:03:34) good export demand, and weather concerns in Argentina. The next events in the grain markets that we will watch are the South American harvest, the March supply and demand report, and the March 31 planning intentions.

The South American harvest is progressing well in Brazil and expectations now are for good crops from the region. However, hot and dry conditions in Argentina have raised drought concerns and lower yield estimates for that country's harvest.

At its 2018 Agricultural Outlook Forum this morning, the USDA estimated corn acres in 2018 will be down slightly to 90 million acres and that acres planted in soybeans would be essentially flat at 90 million acres. These estimates are consistent with average trade estimates of 89.9 million corn acres and 90.6 million acres of soybeans.

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 haven't priced a significant portion of our grain needs for the fiscal year, and remain relatively close to the market. Based on our cost 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 2018 would be approximately $56.4 million more than during fiscal 2017. This total increase of prices paid for grain, when offset by slightly lower estimated basis would translate into a $0.005 per pound increase in our cost per processed pound of poultry, absent any efficiency gains.

At our Annual Shareholders Meeting last week, I've told our shareholders, we're focused on several things as we start fiscal 2018. As I just mentioned, we're watching the quality and quantity of the South American crops, and we'll be watching the March 31 planting intentions report.

We will of course watch chicken production numbers and consumer spending behavior. The USDA is projecting that the industry will produce 2.4% more chicken during calendar 2018 than last year, which will compete with more beef and pork as well.

According to USDA data, pullet placements have increased in recent months and eggs sales are trending above last year. Average chick placements year-to-date are only up 1% and average industry hatch rates reported by the USDA are 2% lower than historical rates.

We believe that the markets can absorb 2% more pounds of chicken with little price disruption, absence of demand shocks such as avian influenza or a trade dispute. Exports continue to improve and American consumers should have more disposable income in 2018 as tax rates move lower and the overall economy improves.

Finally, we will focus our efforts on our growth. St.

Pauls is running near full production, construction in Tyler remains on schedule to open in the first calendar quarter of 2019. I remain optimistic about 2018.

I believe grain markets will at worst be benign. The tray pack environment remains strong and supply and demand for tray pack products seem balanced.

Food service and export demand are again the wildcard for 2018. The Restaurant Association's Restaurant Performance Index has shown some improvement in restaurant same-store sales, and while legacy food service establishments continue to struggle for traffic, local chain concepts are doing better.

As I mentioned, we are also hopeful that consumers who find extra money in their budget will take their families out to eat. Regardless of the markets, however, our plan for the balance of the year is to remain focused on what we can control, focus on our strategic growth plans, and let the markets take care of themselves.

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

Thank you, Joe, and good morning everyone. Overall market prices for poultry products were lower by 1.2% during the quarter, when compared to our first quarter of last year.

Market prices for chill packed products reflected good demand during the quarter and averaged 2.1% higher during the quarter compared to the first quarter of fiscal 2017. Well as compared to last year, chill packed prices were lower by $0.158 per pound or 1.2% sequentially.

Bulk leg quarter prices during our first quarter averaged $0.336 per pound compared to $0.29 per pound last year. Final numbers for calendar 2017 showed the volume of all broiler meat exported during the year was higher by 2.5% compared to 2016.

The average price for jumbo wings was lower during our first fiscal quarter compared to the last year and reflected counter seasonal weakness. Jumbo wing prices averaged $1.

63 per pound during our first quarter this year compared to $1.80 per pound during last year's first quarter. Boneless breast prices averaged a $1.03 during last year's first quarter compared to a $1.06 last year.

We sold 1.1 billion pounds of poultry products during the first quarter, a 14.4% increase from the 967.2 million pounds sold during last year's first quarter. Our processed pounds were up from 983.4 million to 1.1 billion pounds.

This was 3% higher than our previous guidance as yields were better than estimated and live weights were about 1% above our targets. We expect to process approximately 1.09 billion pounds during our second quarter, up from 1.04 billion pounds processed during last year's second quarter.

We expect to process just over 1.1 billion pounds in both our third and fourth fiscal quarters. Those estimates are 100 million pounds lower than previous guidance and reflect the change in our target live weights.

We are lowering our target live weight at both our Hazlehurst, Mississippi and Hammond, Louisiana processing plants from 9 pounds to 6.75 pounds. We're making this change to meet demand for tray pack products as a result of new business.

This new business will be a perfect fit for the Tyler, Texas plant, but until Tyler is running at 75% capacity we need additional (00:11:14) volume. Once our Tyler Plant is running full, we will re-evaluate this strategy, but we are pleased with the new business and look forward to making this shift.

The net effects of those changes will be to move 409 million pounds from our big bird food service plants over the next three quarters and add 309 million pounds to our tray pack capacity. This mix change will benefit the bottom-line based on the current environment.

We will be producing 1 million fewer boneless pounds per week, 119,500 fewer tender pounds, and 253,000 fewer pounds of wings. The market for all three of those products is weak and we will also produce 408,000 fewer pounds of leg quarters.

Prepared chicken sales were down $326,000 on 193,000 fewer pounds sold, offset by an increase in our sales price per pound of 0.1%. We had completed our $13.9 million expansion of our par-fried capacity at the prepared chicken plant and expect new business to move the plant to near full capacity later this year.

The expansion will allow us to process 50% more par-fried pounds or 32% more of total pounds of prepared chicken and allow us to generate $60 million in additional sales annually. We look forward to improve performance at that plant this year.

We have fielded a lot of questions over the past few weeks regarding higher fuel and trucking expenses. During our first quarter of 2018, freight costs per pound were higher by 13.7% compared to last year's first quarter, which is a quarter of a cent per pound.

The higher costs were the result of carriers having fewer drivers available during the holiday season and weather-related problems, both of which forced us into the spot market for carriers which increased our costs. Based on our experience during Q1, we expect between 10% and 15% – a 10% to 15% increase in freight expense during fiscal 2018.

We are currently negotiating 2018 rates as many of our contracts with carriers expired in January or expire soon. We have a number of our customer agreements for fresh chicken products that would allow us to open the freight provision and renegotiate freight as freight goes up.

We have a number of distributors that – the freight is line itemed in their invoice and actually changes every two months. So, that will automatically be passed on, and we'll be dealing with each customer and hope to pass this freight along to our customer.

It has yet to be seen what, if any, impact the new regulatory environment will have on trucking cost. Many expect available capacity in the marketplace to shrink once mandatory enforcement of the new regulations takes effect in April.

We understand carriers are incorporating pay increases and signing bonuses to attract and retain drivers and they are sure to try to pass those on to their customers. We don't expect problems though finding adequate trucking capacity.

We're constantly looking for efficiencies in our trucking operation. We have strong relationships with our asset providers.

Availability is stabilized since the holidays and our own driving positions in our live grow-out division are adequately staffed. We operated well during the first quarter and the year is off to a good start in terms of operations.

Our big bird product mix is a challenge in the environment we faced November through January, but we continue to look for efficiency improvements and we'll do everything we can to meet our goal of performing at the top of our industry. At this point, I'll turn the call over to Mike to discuss our financial statements.

Thank you, Lampkin. Net sales for the quarter were $772 million and that's up from $688.3 million during the same quarter last year.

Our net income of $2.24 per share during the quarter compares to net income of $1.6 per share during last year's first quarter. And as Joe mentioned, that number includes $37.5 million in a one-time income tax benefit as a result of the new tax legislation.

Our cost of sales for poultry products for the three months ended January 31, as compared to the same three months a year ago increased 16.8%. This increase is a result of the increase in pounds sold, offset by a slightly lower fee cost.

Higher wages also impacted cost of goods sold. We discussed on our December call that we increased most salaried employees, salary ranges in August following a detailed study of our wage ranges versus the market.

We expect the annual increase to affect wages by $24.5 million during fiscal 2018 compared to last year. $5 million of this increase will flow through SG&A, as higher administrative cost and $19.5 million will flow through COGS.

Hourly wages will also increase by 3.6% this year or $13.2 million, which will all flow to the cost of goods sold. Just to drill down on that a little bit excluding St.

Pauls, so that we can have a true apples-to-apples comparison, non-feed related cost of goods sold were higher by $25.3 million which translates to 7.7% on a per pound basis, compared to last year. Several factors contributed to this increase.

First, processing wages were up 8.2 million compared to last year for the reasons I just discussed, packaging costs were up $2 million or about 10%. Fixed costs were higher by $1.6 million as we began depreciating some equipment upgrades that we put at our plants last year, and maintenance costs were higher about $2.5 million.

Live costs were also slightly higher as a result of higher wages in our live production division and some increases in grower pay that we put in place in December. On the other hand our feed costs per pound were lower.

They decreased by 1.9% to $0.245 per pound compared to $0.249 per pound last year. While our feed cost per pound of poultry products processed were lower by $0.05 per pound, as Lampkin mentioned our sales price per pound also decreased by a 1.2% or $0.01 per pound compared to last year.

This combination, of course, resulted in lower margins during this year's first quarter compared to last year. SG&A expenses for the first quarter of 2018 were $6.5 million higher than the same three months last year.

This increase compared to last year is the result of $1.3 million in higher trainee expenses, $1.7 million in higher administrative salaries, and $1 million in higher legal expenses. We expect administrative salaries to be higher by $5.1 million for the year compared to last year, and we are modeling $51 billion in SG&A for Q2, $52 billion for Q3, and $55 million for Q4.

Those estimates do not include any accruals for ESOP or bonus award programs. We spent $51.7 million on CapEx during the first quarter, and have approved $345.6 million in CapEx for 2018.

This 2018 budget currently includes $178 million in Tyler, and the approved CapEx also includes approximately $32.2 million for progress payments, as we replaced some older aircraft in the fleet. We will also spend around $37.3 million on several large scale equipment upgrades at our older processing plants.

Our depreciation and amortization during the quarter was $26.6 million, and we expect $112 million for the full year. Finally, let me discuss just for a minute the impact of the tax reform on our quarter and what we expect going forward.

I will tell you this is still a work in process. As mentioned, we recognized a one-time non-cash benefit of $37.5 million during the quarter as a result of our reevaluation of our deferred income tax liability to reflect the lower tax rate.

Our effective tax rate during the quarter was a blended rate reflecting income during November and December, taxed at the prior higher rate on the one hand and our rate estimates based on a new lower rate for the balance of the year on the other hand. The rate during Q1 of this year would have been 24.4% compared to 32.6% last year absent that one-time benefit.

Going forward, we are modeling 24.4% income tax rate for the balance of the year. Our capital allocation strategy hasn't changed.

We'll invest heavily this year as I just mentioned in new construction and on improvements at our existing plants. Those improvements will allow us to take advantage of some efficiency gains, improve product quality and improve food safety.

The lower tax rate might allow us to accelerate our pace, but our strategy has not changed. This worked well for us and for our shareholders.

With that, Miller will now open the call for questions.

Hello. Can you hear me?

Yes.

Yes.

Good morning.

Hey, Heather.

Hi. Good morning.

Hey. So I guess – your call covered a lot and so I just I guess I would start with the SG&A.

On your December call, if I remember correctly, you guided to $186 million before any accruals for ESOP or bonus. And so, wondering what surprised you between then and now that you're increasing that guidance?

Yeah, a couple of things. Well, first of all, just compared to last year, during the first quarter as I mentioned all other SG&A was up $6 million and we're expecting that to be right up $4 million for Q2 and Q3, and $1 million in Q4.

Legal expenses have come in higher than what our expectations were, and let me see what else... (00:23:24-00:23:29)

Hold on one more second, I'm going to get (00:23:29) number in front of me. (00:23:31).

Okay. (00:23:33-00:23:44)

Yeah. Okay.

Thanks. All right.

Versus our guidance, the stock compensation expense is up $3.6 million. You may recall we accrued that during our first quarter last year.

So quarter-to-quarter it's the same, but versus what our estimate was it's up $3.6 million in the first quarter because we weren't sure when we provided that guidance in December that we would be in a position where management deemed the earning of those stock compensation awards probable, but we now are. So versus our estimate, that's a big chunk of the miss in Q1.

Our legal expenses again were up a $1 million based ahead of what we guided to, advertising expense up $150,000. (00:24:33)

The other SG&A has several things in it that we did not expect. We had a workers' comp accrual on a – actually a – unfortunate death of one of our key members here in the General Office.

So that was about $320,000 higher than what we guided to. Our repairs were up $300,000.

So a lot of little things to be perfectly honest compared to what we guided to.

Yeah, because your guidance sounds like it's roughly $210 million for the year versus $186 million, originally?

Yes. And we thought that...

So with that...

Yeah. Go ahead.

Well, I was going to say, is this – is it – all of these little things you just outlined, did they all accumulate or was there some or did the labor sides come in higher than you thought it would?

Well, the labor side came in a little higher than we thought it would. But yes, what I've done, we missed the trainee cost in Q1 for example by over $1million.

I've gone ahead and built that into Q2 and Q3 and Q4 models...

Okay.

The stock compensation expense, I'm very comfortable with. Legal expenses, we've added a little bit more during Q2, Q3, and Q4 as well to our estimate.

Okay.

So, yeah, I'm much more comfortable with it now and sorry about the miss.

No, no it's fine. On the cost of good side, if I remember correctly on your Q4 call, you were talking about, Joe, that you strongly stated that you were going to get a $0.01 or $0.005, I can't remember which one exactly back on cost...

$0.01.

...if you sell – $0.01. So, given all of these issues with freight and labor and all of that, do you still think that your non-feed costs could be down $0.01 year-on-year in 2018 versus 2017 or have these other cost sort of changed your view on that?

Heather, this is Lampkin. With the changes we made at Hammond and Hazlehurst, we're not going to...

We're not going (00:26:54).

(00:26:54). We also targeted, besides Hammond and Hazlehurst, we're targeting 9 pounds this year.

We ran heavier than that last year. That also will work against us as far as reducing plant cost.

Yep.

Okay.

Lampkin is right. Actually in the first quarter compared to last year's first quarter, because of the reduction is live weight this year versus last year, our cost were 0.75% simply because of the reduction in live weight, that's live production and processing, even though our yields were up, just total cost to live production and processing our total yielded costs were up 0.75% because of reduction is the live weight.

And that was in Q1?

Yeah.

Yeah.

Yeah.

So this Hazlehurst payment thing started in Q1?

(00:28:12) were up as well.

No. That's not in Q1.

That...

(00:28:19).

Hazlehurst and Hammond.

No. No.

That's going to start in March.

That was just...

Okay.

...we had taken our live – our target live weight down from a year ago (00:28:31).

In Hazlehurst.

We took it down because (00:28:34).

Okay.

I don't know when we started that, probably in April, May...

Of last year.

...of last year and we realized it all summer, and but we finally got it down in the first quarter. It was – our cost were up $0.75 compared to first quarter a year ago.

But I'm not going to get...

And my final...

I'm not going to get my (00:29:02).

Well, I think (00:29:10). My final question, it used to be like 22%, 23% you gave throughout a bunch of pounds and I wasn't able to keep up with that.

So just it used to be like 22%, 23% or so of your pounds went into a tray. After the Hammond, Hazlehurst conversion, I mean it sounds like it's going to go much higher, it sounds like it could be close to 30%.

Could you help me with that?

What percentage it's going to be? We can get that for you.

We'll get it for you, I don't know.

I don't have it as a percentage total.

Okay. All right.

Thank you so much.

We'll get it for you.

Okay. Thanks.

We'll try to have it before the call is over.

Okay.

Hey, it's Jeremy. So, this is a pretty strategic meaningful decision here with Hammond and Hazlehurst, and just trying to corroborate maybe the equipment upgrades that you're making, is that going into these two plans as you covert and what's the thought process around this being a temporary conversion and not a permanent conversion?

It's Joe. It's temporary.

Hammond actually has already – what is our budget on converting all these plants?

Over two years, it was $200 million.

No. No.

$130 million, over two years.

$130 million. We're putting in a new eviscerating system and, we're having to add on the Laurel and Hazlehurst and Collins.

Hammond already has the new eviscerating system in. We're adding some dark meat deboning to all of the plants.

For all plants (00:31:18) are getting the new eviscerating system. Those three I mentioned, Hammond already has it.

Palestine.

Palestine is going to get it...

Over the next two years...

All 12 plants...

We started St. Pauls, the St.

Pauls plant started with this equipment and then we put it in Hammond and it's just worked very well. It's done everything we wanted it to do.

It's much less labor with...

Best/better (00:31:47) on food safety.

Yeah. So, we're going to go to it across at every plant.

At every plant.

It'll take two years to do it.

Okay. But just on the conversion.

Can you walk us through maybe when you decided to make this transition, I think at the Investor Day you were talking about how food service traffic was starting to get better, was there something that changed in the last couple of months that really made you decide that maybe it's time to move on to tray packs?

We had an opportunity to make this sale. Somebody came to us, we got – had an opportunity to pick up this tray pack business and we took the opportunity.

We figured out we could put these pounds through our other four plants. And when you get an opportunity, you can't turn it down.

We're going to need it when Tyler gets up which is going to be in nine months. So, we've made a decision to go ahead and take this business, tray packet in those other four plants and then give it to Tyler when Tyler gets operating.

And right now the margins are much better in tray pack than they are in big bird deboning and they have been for three years frankly. Big bird deboning's been pretty good for, like, six months the last year, but when you look at the year as a whole for three years, the margins have been better in tray pack.

So, this is a temporary thing for us. We're not going to need these chickens or, at least, we're not going to need all of them, when Tyler gets to running full.

So, we think this is a temporary decision. And one other thing that's going to happen, when we do this, we're going to have excess housing in Mississippi.

So, we're going to pay our growers more money to compensate them for extended out times. Another thing, we will do is we will – instead of being 17 days, they are going to be without chickens...

27.

27 days, so we're going to use that opportunity to put fewer chickens per house and go to less density, which ought to make the chickens grow better and be a little bit healthier and less mortality, but we're going to end up paying them for 18 months more. So, that's going to be an additional cost to us.

I guess maybe – that makes a lot sense and its demand-led and so temporary makes a lot of sense. But can you give us a sense, when you stack it all up with the processing, the higher wage cost and grower cost and packaging cost, what your expectations for non-feed cost per pound is this year?

Non-feed cost per pound?

Just the inflation in non-fee cost per pound.

Do you have that margin thing that you gave me yesterday?

Let me see that.

Let me just tell you what we think about margins. While he gets that up, I will put some color around our shift from – in the plants, with St.

Pauls running full, we are producing 65% of our pounds at big bird deboning plants and 35% at tray pack, that's going to go to 54% at big bird plants and 46% on tray pack. So, the number of pounds we're putting in a tray is going to go up significantly after this conversion, 31%.

Again the numbers on how many pounds will be produced in the tray pack and big bird...

Yeah.

...after this convert.

And Mike maybe while they're looking that up, can you talk about legal cost expectations this year and ongoing?

We don't know.

Yeah.

It's going to be a lot.

Yeah. That's because, (00:36:44) as I mentioned earlier, they exceeded my expectations during the first quarter and we're...

How much were they in the fourth quarter?

...and we're going to go ahead and build those in. They're built into our estimate for the first quarter, legal expenses were $2.5 million.

How much you've got for the second quarter?

I got 2.7% in the second quarter, 2.7% in the third quarter and 2.7% in the fourth quarter. The pace of this litigation that we're involved in has picked up and I suspect we'll – I'm modeling about the same run rate for the rest of the year, it could be higher than that.

Our margins on tray pack versus big bird deboning, this is three years and this is not in – it is about $0.20 per head better tray pack versus big bird deboning.

That's over the course of three years or is that just – that's what you're running currently?

Three years.

Okay. I'll leave it there.

Thank you.

Thank you.

Thank you.

Hey, thank you guys for taking my question. Can you hear me?

You bet.

All right. Quick question, I don't know Joe, Mike anybody can address this, but in a separate filing yesterday, the company disclosed that I think it's the EPS thresholds for the incentive program which you said you have not currently built in your estimates.

Looking at the $13.03 (00:38:50) is pretty similar to what was discussed on the last call I believe. What inform the company's decision not to just the EPS threshold for the impact of tax reform?

And then adding on to that – I had a follow-up to that, just...

Go ahead.

...if my interpretation of the filing in the program is correct, the fiscal 2018 threshold would be rewarding employees during a period of deteriorating performance which somewhat seems counterintuitive. So, just want to hear your thoughts.

Well, a couple of things. The compensation committee, the board of directors in consultation with their advisors set those rates last week at the January meeting, but they do build in actually a significant impact of the new tax bill.

For example, as you and others who have followed for a while know, we've always set those targets based on a 20% return on average equity. And this year is set based on a 23% return on average equity.

The threshold went from $12.02 to $13.03 and at the top it went from – I'm sorry went from $10.98 to $13.03 and at the top from $12.02 to $16.13. And the threshold, the target return on equity went up.

So, it did take into account a significant part of the tax increase.

And they eliminated this one-time tax benefit.

Yeah. They did.

The one-time tax benefit was taken out and then part of the tax rate increase was taken out.

So, essentially your threshold would then become $13.03 plus what, the $1.68 from that one- time?

That's right. As opposed to the $10.98 which was a threshold last year.

Okay. No.

Thanks for straightening me out on that. One other question, cash flow tax reform related.

Given pullback in the stock since early December, so would the company be more inclined to accelerate share repurchase activity in 2018, or is there just too much uncertainty relating to the current chicken industry backdrop to commit to increasing cash returns to shareholders, just wanted to get your thoughts?

Right now, even at the level where they pullback David, $1.25 today or $1.22, 2019 as we speak, to buy back if I have...

It makes more sense to build another plant.

It does. If you got $300 million to spend and our capital budget this year is $340 million, if you got that same amount to spend to buy back stock, you can improve efficiencies and add capacity at a much higher percentage than the percentage of the company, you could buyback and, at least, as long as that's true, the math changes at different stock prices obviously, but that math right now favors putting the metal down or the pedal down on the metal to continue what we're doing and that's the current plan.

Thank you very much guys.

Thank you.

Bank of Montreal.

Hey, good morning guys.

Good morning.

How are you?

Good.

Good.

I need a couple of clarifications, I'm sorry. In the quarter, how much of the – I believe it was $27 million, $28 million – I'm sorry, $25.3 million for incremental this quarter.

Could you just talk about what is temporary cost and what are permanent costs and even as I took out the cost for the quarter, your margins were probably below, what I would've thought they would have been I think, but I haven't been able to figure out, because I can't figure out what's temporary and what's permanent. Can you just walk us through a little bit and I'm sorry for the rehash, but I was a little confused with the numbers?

No worries. As we mentioned in our prepared remarks the labor increase of, right at 10%, that's permanent, that is going to be true for the rest of the year.

The packaging cost is up 10%, it's not going to keep going up, yeah I don't think – but we've got higher costs, these are going to be true for the balance of the year or... (00:43:42)

The lower you tray pack versus CVP, your packaging cost is going to go up at tray pack plant. The live (00:43:52) costs were up three quarters of a cent a pound, that's about 5.2% and that's because of higher wages and higher grower pay.

And because of lower live weight.

That's right. And live...

As such the live weight (00:44:12) is temporary until you get the facility back online, no?

That's 18 months.

No, no, no. Last year during the first quarter, we were running a 9.5 pound live weight.

This year we're running a 9 pound live weight.

Okay.

You following me?

Yeah.

So, our costs are up versus a year ago because we lowered our live weight a half pound for chicken because of woody breast.

Go ahead sorry.

In live production you've got four 10s, four 100s, six 100s (00:44:54) odds and ends like that. And just little bits all over because of lowering your bird weight half a pound.

And that's going to be...

Your 2.2% margin is real, that was you really – there's no temporary issues, this margin that you generated in this quarter is the real margin that you've got and it is – the issues that you faced this quarter will continue through the year? (00:45:35).

No. No.

On the cost side. Yeah.

Oh! Yeah.

Maybe on the cost side, but not on the margin. He said margin.

Yeah. That's right.

And those margin – yeah, on the cost side, yes, but our margins obviously are dependent on what we sell the chicken for and we're comfortable with...

All Right. Okay.

But the cost side, all the costs are permanent? This was a legit margin of what you got?

Yes.

I guess considering all the modeling I've done over the years, this was significantly below what I would say, statically would have come out. That's why I just can't figure out exactly how there was such a discrepancy between the margin in the market and your market.

It just came in a lot lower than I thought and I'll take it offline, I was just curious. The next question I have is on production levels.

Can you talk about what you think production levels will be going forward and how much do you think the new breed will either add or subtract based on the efficiency of it for this year?

Industry production, you mean?

Yeah, please.

We think industry production, it's running up 1% right now and we don't see that changing very much. You might get another 1% in the springtime, maybe these hens will lay a little bit better, but right now the rate of lay, we've got 5% more hens in the field, running 105%.

But the rate of lay is 96.5% and the hatch is running 81% to 82%. And people are calling every day looking for eggs.

So, we don't see 1% to 2% more chicken out there, head. When springtime comes, might lay a little bit better in the springtime with longer days, maybe the hatch goes up a little bit, but not a lot.

Now what we do think is, beginning in the fall, this is for 2019 production, you're going to see pullet placements increase, because we think you're going to see one, two, three, four complexes come online during 2019 plus ours. So, they'll need to start placing pullets in 2018 for 2019 production.

We'll start placing pullets in April for Tyler, for January start. The four other complexes are going to start up in 2019?

Yes.

And so, they'll start placing pullets in late summer or the fall, but as far as production for 2018, no.

And just to reiterate one thing you said, anecdotally, at least, we're getting calls from people who are looking for eggs. So, with the hatch rate I know there's been a lot of anxiety around the size of the breeder flock, but that breeder flock is just not producing and the hatch rate is down 3% and you've got people scrambling for eggs that I think supports the notion that the USDA at 2.4%, if anything, may be aggressive.

Yeah.

So, why do you think the pricing is better, again that's – my understanding of it, is that there's a limitation of how much is coming to market, but the pricing hasn't been indicative of that and I guess that's my surprise? And then my final question is when you think about the margin structure, do you think of it is like, 2016 type of level, is that how we, kind of, should think about it?

Those are my two finals.

Tell him about the weather and what we think.

Yeah. We think boneless breast was a little cheaper this year than last $1.3 versus $1.6 and we think of course it hasn't moved in February.

We think it mainly has to do with weather and downtime in plants due to weather. In our own plants Texas, Mississippi, Louisiana, Georgia, North Carolina in December – we have 11 plants, we lost the equivalent of six full days of processing across those 11 plants just due to weather, snow and ice.

And in January, we lost 11 days across 11 plants, different plants some plants weren't down, some were down two days, but when those plants were down, we come back and make up what we can on a Saturday, but you don't always make it all up and that was going on across the whole industry. We had snow in that same path in December and again in January.

Our bird weights, even though they are down from year ago, they were heavier than what we projected and that was true for the industry. We saw one 10 pound live weight, not at our complex, but another one in December, I don't think that was on purpose.

People have moved away from that because of woody breast, but that was – and the other thing is, if you're down on Wednesday and run on Saturday, those birds are older and they weigh more. We think that just put a little extra meat on the market and kept the boneless breast prices down.

And that weather by the way also affects demand. I mean you had weeks in the Northeast when people were shut in, they weren't going out to eat.

And when that ice falls even in South Georgia, nobody goes out to eat. You've got heavier birds, more pounds and, at least, a temporary impact in demand.

Now for demand going forward, we're comfortable. Like Joe said, consumers ought to have more money in their pocket.

Wages are up a little bit, taxes were down, and that's one of the reasons why we can express some optimism about the balance of the year.

Yeah, it's really it's continuing in February and that a lot of Saturday runs. Of course, we're running Saturday to get this weight, age and weight down for Hammond and Hazlehurst, but every time the boneless breast market gets to the point of a move up, somebody cranks up a Saturday plan and it just hasn't moved yet.

Great. And the margin structure 2016 seems like the right kind of level to think about, is that fair?

I think it's fair.

2016 or 2017? You can make a real conservative case for 2017.

Okay. That sounds impressive.

Okay. Cool.

Thank you.

Thank you.

Thank you, Ken.

Hi. Good morning.

Good morning, Farha.

Can you just share with us how you think about passing along all these costs back into the market, can you do it in retail tray pack, can you do it in big bird?

No over time it happens. But we think the freight cost we can, but not labor and packaging things like that.

I mean you don't pass the cost along in a commodity, it works its way – everybody in our industry faces the same thing we're facing. And the only thing different with us is our housing costs are probably higher than most, because we built new houses, but everything else is about the same.

Okay. So, the freight cost in – that you can pass along in both retail and in tray pack, but all the other costs are just going to have to be absorbed?

That's correct. We have some freight cost at the foods division that – they won't get passed on until the next contract, so that would be a year at the most.

But all the others, it won't happen overnight, but most of the others, we'll be able to renegotiate.

Okay. And your 2017 EBIT margin, in response to Ken's question, was 12.7% and we're starting the year at, like 2% to 3%, so that implies really big acceleration.

So, is that acceleration really driven by freight going into the next three quarters?

Yeah.

Yeah, I would say a lot of it is.

Okay. And this (00:55:47)

Particularly in big bird deboning.

Right.

This quarter fiscal in 2018, the big difference is, to me, was the price of boneless and excess boneless, the price of wings and excess wings and the price of tenders and excess tenders. We had all of that, particularly running on Saturdays in December and January.

We did fine in tray pack, but we had too much excess boneless, tenders and wings that we discounted heavily in December and January. And nobody has mentioned that yet, and the cost was not the biggest deal here.

The reason we didn't make the margins we normally make was because we discounted product in December and January because of those down days and having to run on Saturday. That was why we didn't make the margins that you all though we ought to make.

If you look at...

You lose a sale on a Tuesday and Wednesday, because you're down, you lose the sale and then you run two Saturdays and...

You got to go and sell it.

...you've got to go sell it. And that sale is gone, so you have to run in and everybody in North Carolina is running and you're running a heavier bird.

And everybody is after that running on Saturday and you're discounting tenders and wings and boneless breast. That was the difference in – that's why we didn't make the margins.

Yeah. If you look at Farah, last year, you made $1.06 in the first quarter, with a 12% gross margin and then you had an 18% in the second quarter, a 26% in the third quarter.

Are we going to do the same thing this year? We don't know for sure.

But we can certainly build a reasonable model where you could do that again and make it up in the second and third quarter, same thing in 2016, you made $0.47 a share, 8% gross margin, by the second quarter of 2016, we were doubling and tripling that. So, yeah, it can be done.

And on the cost size, we are going to benefit at St. Pauls from more volume, we're going to – we'll have less cost at St.

Pauls.

Yeah.

Okay. So, you're confident in, kind of, forward outlook has more to do with your company product mix versus the market improvement because you're just going to have more of it sold in tray pack versus having to sell it in the big bird open market.

Am I understanding that correctly?

Well, I feel like the big bird market is going to improve too. I mean...

Okay.

...I don't think (00:59:26) for the rest of the year.

And so that would be my final question. Put some color on market pricing, kind of what you've seen in the export market from like January going into the spring on your outlook.

Some color on tender pricing, I've heard that's starting to (00:59:47). And color on boneless, I believe last year it started to move in March.

Do you expect that to happen again this year?

Tenders have come down a little bit this week.

Okay.

They were very firm but sort of I think they're coming down this week. The export market is good.

We were selling – we aimed at – at the end of December we were selling late quarters our export net at the plant, we were in the low-20%s which moved up a little bit in January, a little bit in February and March is going to be a little higher. We've got 60% of our March production is booked and priced, and March is in the $0.30 to $0.34 range (01:00:41).

We think exports going into the summer look good and could move another $0.01 or $0.02. Boneless breast, I don't know.

A minute ago we told you, well we think it's stayed low at $1.3. We think the next move is up.

We don't ever know for sure, but we think the next move is up, hopefully 1st of March. But our best markets usually come after Easter, so we may have to get (01:01:18) the Easter market.

Great. Helpful.

But you keep saying to me chick price went to 1% – 0% and 1%. You're going to see boneless breast move up.

Okay. And my final question, Joe.

As you look out into 2019, 2020 with those plants opening up and the demand you're seeing in the export market, retail and food service market, any color you can provide on kind of the market's ability to absorb that supply?

Well, they're going to be – I'm not crystal clear about, the plant that's going to open in Nebraska. It's not going to be a plant that's going to be – that product does not go into the marketplace.

It's going to one customer and so that's a kind of a wildcard to me that I'm counting that is new production, and then there are going to be two other tray pack plants. We're going to have one and Tyson is going to have one.

And then there's going to be another plant, two of the plants, two big bird deboning plants, both in North Carolina, (01:02:49) and refurbished plant in Raeford will be, we believe will be opened – rebuild their – plant that caught on fire should be, we believe to be open up in 2019. They're big bird deboning plants.

I think tray pack needs the product. I think pressure could come in big bird deboning arena.

If there's going to be pressure, I think that's where it might be, but if the economy is different, if people have money and they're going out to eat, if they returned to 2007 habits and they go out to eat maybe not. So – but that's kind of – I don't say, I'm not worried tray pack so much.

It's...

And this new volume is going to unfold between later this year and 2022.

Yeah. Those two plants are going to ramp up, taken a year to ramp, the two big bird deboning plant.

Right, but I'm saying five or six years for the market to absorb about 8% more volume over five or six years?

I'm not counting. I didn't, I don't think (01:04:33) would be open.

What was the...

(01:04:37).

Yeah. (01:04:37), yeah, it's organic.

Okay. So, it will really just – the markets ability to absorb the chicken will really depend on the economy and export?

I think you're (01:04:54) more than anything.

Okay. That's very helpful.

Thank you so much.

You bet.

Thank you, Farha.

Hi. Hello, everybody.

Good morning, Ken.

Good morning. We are – I just wanted to follow-up.

Joe, you're pointing to higher bird weights as the reason for weak boneless. But USDA numbers which show that the average weight of a bird over 7.75 pounds was up only slightly in January, not that much.

(01:05:35) is not perfect, but that's all we have. And you've had situations in the past when bird weights have gone up, right.

This is not the first time. But it is the first time in many years that breast prices have fallen to these levels this time of year.

So I'm struggling a little bit to understand why we should only blame the supply side for the boneless softness. Why isn't soft demand given what we're seeing on the supply side maybe almost a bigger part of the explanation?

The Urner Barry medium breast market went up in January. It's the big bird deboning product was where the pressure was.

(01:06:18).

And this is Mike, Ken. First of all congratulations to your Eagles.

Second, I think....

Thank you.

Sure. I think a lot of what Lampkin described too and Joe did, was – it wasn't just the bird weight.

It was how it all unfolded. And if you lose two days of processing in the middle of the week and you're planning to sell that to one of your regular distribution customers, you lost that sale, he went and found chicken somewhere else, and then you get to Saturday and everybody in the industry that was in the path of that ice storm in Georgia and North Carolina was running on Saturday, all having to get it sold Saturday evening and it just affected the rhythm of it as much as the way...

It's excess supply.

Yeah, it's too much supply.

I mean, nobody...

(01:07:13).

...nobody needed it.

That's right. Everybody is calling around, trying to get rid of it and...

No, you can't run. If you lose four shifts, Tuesday, Wednesday.

Right.

You can't run four shifts on Saturday.

That's right.

So you got to run two Saturdays.

Yeah.

And they're bigger. All the way from the time you were down to that Saturday, you run, they're getting bigger.

They're older and they weigh more. And now you're into February, we're running on Saturday to bring our bird weights down, so it's continuing in February.

It wasn't so much bigger as much it was Saturday.

(01:07:53) Yeah. That's right.

And everybody's bought what they needed, and anything run on Saturday most of the time it's not needed and it's excess, but they are bigger, but that's not the biggest deal. Biggest deal is, they are not needed.

That makes sense. Thank you for that.

And then follow-up for me. You and others in the industry, if I've heard you right have said for a long time that, we in the investment community we shouldn't expect the chicken plants on a large scale converting to different sizes, because in terms of equipment, packaging changes downtime, it's very costly and very time consuming.

But now you're going to do it, I know it's only temporary, but you're going to do it in fairly quick time and then reverse back. So I guess I'm curious two questions.

First, it is easier to convert plants to different bird sizes than it used to be? And the second question, I don't know if I missed this or not, but did you give us the cash cost of the conversions?

Yes. Now here's what we're going to do.

We are going to process these chickens in Hammond and Hazlehurst, and we're going to transfer the products to our tray pack plants for packaging and chilling and freight pricing. We cannot do that in Hazlehurst and Hammond.

Okay.

Very little capital cost at Hazlehurst and Hammond. (01:09:24-01:09:31)

Yeah. We're going to put in some additional freight price and overwrap and stuff at our tray pack plants, but a couple of million dollars that will actually end up going to Tyler...

Right, when Tyler opens.

...when Tyler open. So, it's not going to be have we spent earlier than we would have spent it.

But it's going to end up going to Tyler, when Tyler opens up. But we're going to process the birds at Hammond and then cut it up and send the parts to the tray pack plants and then they'll package it there and overwrap it, chill it, and pre-price it at the tray pack plants.

And yes that it will create some inefficiencies Ken, but it's worth it to do it for this customer and the additional customers we've got because, as Joe said in his prepared remarks, they fit like a glove for Tyler. So, you want to go ahead and get the customer, satisfy the customer and then when Tyler opens switch it over there.

Thank you very much for that.

Yes. Thanks.

Good morning, everyone.

Good morning.

I guess there's been a lot of ground covered. So I'll try to keep it quick.

On the logistics pressures that you've seen and you talked about kind of 10%, 15% kind of costing is transportation freight cost increase and some ability to pass it on. Some of that actually come up in the net price number as you're kind of increasing kind of your contra revenues on the freight side.

So it's not just in the other cost per pound that might actually come up in the revenue line and maybe why the price realizations was probably below some people's models this quarter?

No. The net price isn't affected by that.

Great.

It's just in COGS.

Okay. And then I guess just on the boneless market, actually on the wing market, excuse me.

Wing prices have been weak really since the fall, as you've seen still the traffic at the wing chains kind of fall and people talking about the NFL viewership declines, et cetera. I mean is there anything that you're seeing in your customer order patterns to suggest any rebound in that market, obviously move into what normally is the seasonally softer period for wings or kind of the status quo likely to remain in place as we go in through the summer at this point?

We think status quo going into the summer. We think this summer will be different than last summer, with all the new concepts that had opened, the two large ones that had opened many new restaurants, the demand was excellent, circling prices to $2.16 a pound, and once they got to $2, we think those wing concepts promoted other items to move their product mix away from that expensive wing.

We sort of priced ourselves out when we got about $2 and it worked because we got in football season, and the wing market continued to decline. We think it's a combination of promotions and product mix at the restaurants and high priced wings last summer.

(01:13:26-01:13:34)

That's right.

That's what still happens.

So what do you think that level is? And how long do you think you could take before you start to see that kind of promotional activity kind of come back to market?

Our guys think if wings are going bottom out in the low $1.30 (01:13:48) and it'd be right before March madness.

Okay, all right. That's all I have.

Very helpful. I'll pass it on.

Thanks.

You bet.

Thank you.

Thank you, Adam.

Hey. Good morning.

This is actually Lubi on for Akshay.

Good morning, Lubi.

Good morning. So, I wanted to come back to an earlier question regarding industry supply growth and just some of the moving parts within that.

So, what we're struggling with a little bit is just bridging the gap between the growth that we're seeing in the breeder flock, right which is spin-up sort of mid-single digits for the last several months? And then production growth for the industry, which I think you guys are estimating, I think you said earlier a 1% to 2%.

So it was our understanding that maybe 1 point or 2 points of that gap is related to just lower hatchability as a result of the breed change in the industry. But isn't liveability – isn't that better and having yields especially on breast meat gone up.

So just any help you can provide in bridging that gap would be great and then I have a few follow ups.

Lubi.

Yes.

Here's what you need to – see if you can follow this. The breeder flock out there is, let's say it's 105% of the year ago, but that's an older hen and older flock.

As a result of that, they're not laying as many eggs. They're laying at a 96.5% rate of lay as a normal breeder flock at a normal age would lay.

So they're getting fewer eggs and because they're old, the hatch is running low. So that's why you're only getting a 100% or 101% egg sets and chick placements, old, it's not a young flock, it's an old flock and that's why you're not seeing any supply growth.

And so that's actually USDA numbers. USDA you get that from the government.

Is there – isn't part of that being offset by the higher yields on – particularly on the breast meat and on the liveability side or?

I don't have any information about liveability. There's no...

There's no...

...improvement in liveability that I'm aware of.

Okay.

Livability...

There is some improvement in yields.

Boneless yields are higher and the livability last year was a little better than the year before and the big birds like 0.75%, but it was 0.75% worse in the 6.5 pounds to 7 pound birds.

That's because of no antibodies.

And then the big birds were better because people reduced live weight and the head.

Yeah.

Okay.

When you reduce live weight, you get a better yield, but you get fewer pounds of boneless breast meat.

Because weights are down.

Got you. And actually that kind of goes to my next question which was this breed change, right, our understanding is the industry has undergone this breed change because it's the better yielding bird primarily on the breast meat side, right.

So, the question is, should we expect breast, the supply growth of breast meat to outpace that of the broader market and then what would the implications of that be in terms of breast meat pricing? I know you mentioned earlier that you think breast meat prices are biased upwards from here.

But just wondering if that accounts for some of these moving parts between the higher yield and how that could potentially grow relative to the broader market?

Breast meat yields have increased every year for the last 10 years or maybe 20 years, every year. That's part of particularly (01:18:41) and we think also for the Cobb700.

We think it improves every year as well, but that's always been true. It's not true just right now.

It's a marginal improvement, it's not a huge improvement and that's being offset by these lower live weights.

Got it. So the bottom line is you wouldn't expect to see supply of breast meat sort of meaningfully outpace the broader production for the industry?

Not for 2018...

Not for 12 months.

Got it.

2019 maybe a different story.

Okay. That's helpful.

And then just one last one if I may, if I'm not mistaken, I think your pounds produced, sold came in a little bit higher than you had previously guided to in this quarter. How do we square that with I guess some of this loss of productivity, is there something else that's offsetting that?

No. We've processed – we guided....

(01:20:04)

...and we processed about a half percent more head than we thought we were. Our bird weight was up about 1% more than what we guided to and that's because of the issues Lampkin's already discussed and our yield was higher by 1.3% than what we estimated.

So we did get better yields a little bit. It was across the board (01:20:28) need, one thing that we missed by a large amount and as a result of all three of those our pounds processed were higher about 3% than what we guided to.

Got it. Okay.

That's very helpful. Thanks.

I'll pass it on.

Absolutely.

Thank you, Lubi.

Good morning, guys. So, Mike, did I hear you earlier say you're anticipating lower basis levels for the remainder of 2018.

Basis. (01:21:12)

So with the freight headwinds though that everyone is talking about that seems a little bit counterintuitive.

I don't know how much basis we have – how much basis we have about, (01:21:31) and it's down soya basis is down, corn basis is...

It's down a little bit.

Just a little bit. It's essentially flat with a year ago, but yes, soya basis is down and it's substantially.

Yeah. How do we square that with the fact that railroads might be having to pay more for fuel and other stuff.

(01:21:52)

Yeah. That's exactly.

Yes.

We bought our basis back in Oliver.

Yeah. Long-time ago.

Got it. Okay.

I understand everything that's happening with the product mix as you start moving some big bird to tray packs. That's a nice story to everything.

What I really haven't heard that much about is what's happening with the late quarter pricing. Yes.

This has been a really nice February and I'm just trying to understand maybe how much of that is due to a really depreciated U.S. dollar and how much of it could just really be robust demand outside of a depreciated U.S.

dollar internationally? That could be a pretty big story, a $0.01 moved here or there for late quarters can really make your outlook for a stronger composite selling price, really happened for the remainder of the year.

Absolutely.

Yes. From December really to March, $0.10 a pound, that's what we – it's moved up slowly a little bit, January a little bit, February a little bit, more in March.

Our March product, we will net $0.30 to $0.34 a pound and that's $0.10 higher than what we saw in December. A little weaker dollar always helps, but mainly we're seeing good demand from the markets we shift to.

Last year when we saw jumbo wing prices run though, just given the percent of what that represents on a processed bird, no one really got carried away. I guess right now there is at least when I modeled the story, just thinking about where late quarter pricing is, it's strong right now.

What do you guys think a ceiling might be for late quarter pricing potentially, just given it just really shouldn't be this strong in February and it is and I'm just wondering when it eventually reverts back to the mean, but before then like, where can this run to?

Well, our export department thinks the next, they think the balance of March will be $0.01 to $0.02 a pound higher, but I think the summer is going to be good. You could say $0.39 or $0.40 a pound, I don't know.

We don't ever know and we need to have good NAFTA meetings regarding Mexico. But assuming we don't have an event like a NAFTA collapse, I'd say $0.39 to $0.40.

$0.39 to $0.40 and then there are other bullish...

Yes. (01:24:38).

...catalysts out there that could also drive pricing even higher. It just seems like?

(01:24:44)

Let's talk about India opening up sometime this year. That could be a really big event for the long-term.

I don't think they're going to buy huge quantities right off the bat. But given time that could be a huge destination for USA late quarters.

Got it. Can you help me quantify wrap my mind around what's happening with the delay in Brexit and what it's doing to some of the export pricing for certain cut-out?

Brexit, I don't know.

I don't know anything about that.

Yeah. I don't know much about that.

I did read a good story yesterday about how KFC was having to close all of its...

UK.

UK stores because they can't get chicken.

I was afraid (01:25:33).

Yeah.

Right – which should be pretty good for pricing into the UK.

We don't sell them.

We don't sell them.

Right.

They should buy product, but they don't.

Right. Okay.

And then can you quantify in dollars just what the higher freight was during the quarter because it sounds as if you ate the entire increase? Is that correct?

No.

Okay.

We didn't. No, we're not all of it, but it was higher.

I mean it was higher by...

31 points.

...31 points. (01:26:09).

$3 million.

How of it was in foods and how much of it was in poultry? (01:26:16-01:26:23)

...some of those contracts it takes two months to pass it on, so you could...

Right. That's why I thought you ate it all, almost.

Most probably.

And all of that was during snow. All of that was...

Spot load – we really did.

Yeah, yeah, yeah.

Okay.

It leveled back out in January.

Got it.

...and February.

And then Joe you had mentioned, yes that if your feed costs were priced as of the close yesterday feed costs would be up $55 million for the full year. Could you just give us a breakdown of how much of that would be due to commodity fluctuations and how much of that's going to be – would be due to just the change in the product mix that's occurring at the company?

Yeah all of that...

(01:27:10) volume increase as well.

No. That was just – that was apples-to-apples, that was...

Got it. Okay.

That was...

Forward price (01:27:23).

Wait, I can't think this is because of – mainly because of soymeal are running. Very little that's corn.

$10 million is corn and $46 million is soymeal.

Yeah. Soymeal is often running because in Argentina and if I get a rain in Argentina this is going to reverse, funds are all over, soymeal right now and soybeans – and we're going to be hand them out, I think this is not – we've got over 500 million bushels of beans here in the U.S.

and the export pace is slow and the USDA said this morning that they're going to plant 90 million acres of corn and 90 million acres of beans and that's going to get us a reasonable yield, that's going to take carry out on beans to 600 million bushels unless the exports pick back up. So, I feel fine about that.

I'm going to probably have to pay a high price for a little while, but I don't think for very long.

Yeah. If we had priced it all yesterday, you know we hadn't priced any of our third quarter needs, but if we had priced it all yesterday, today the market is $3.60 something, and but if you priced on that future contract, you'd pay $3.80 for it, that's a big chunk of that increase.

And it's still actually half cent a pound.

Yeah, that's right.

Even at those prices.

Yeah, no, that's consistent with what you said. And then just my last question, I thought you guys did a good job of addressing the tax rate changes, the tax noise during the quarter explaining the blended rate in the first quarter.

But your blended rate, Mike I think you said was something like 24.4% or 24.5% in the first quarter using a blended rate. I'm arriving at something a little bit different, but regardless, I would've just thought that the blended rate would've been theoretically higher, since you were using a blended rate.

After we back out all the tax noise and everything, so I'm looking at it from just like an adjusted basis.

Yeah, so that blended rate of 24.4% that we used in the first quarter and we're using for the rest of the year...

Right.

...we have to make assumptions about what we're going to make for the balance of the year and what portion of our annual net income is going to be taxed at the lower rate versus the percentage that was taxed at the higher rate. And that's November and December and we didn't earn as much money, just, there are some assumptions that...

Got it

(01:30:28) obviously, but we'll be – we're going to tweak that as we go through year because our assumptions may prove incorrect, but as I say it's work in progress.

So, this slower start to 2018, is it really the worst thing just given – considering where you're going to be taxed essentially throughout the year?

Well, I prefer a fast start.

Yeah. Yeah.

I get it. It is what it is at this point.

Yeah. Absolutely.

That's it from me. Thank you, guys.

Thank you.

Thank you so much.

Yeah. Thanks, guys.

Thanks for sliding me in here quickly.

Yeah.

So, drilling down a little bit more, kind of, on the feed costs side of this, it is, I think you did say – $56 million was the last question, was just on the line as well, but then you also said that you had bought your basis last August. So, when you refer to the bought the bases for last August, what do you mean by that, had you covered for a bit of 2018, but then I think Joe just said that your hand to mouth for right now for most of 2018?

Hand to mouth on the board, on the actual pricing of our (01:31:51). But you can lock in basis a year at a time if you're so inclined.

Right.

And you think, when Joe goes out to bid on bases periodically, we went out in the fall and got what we thought were some pretty good bases numbers. And I think it's proving to be correct.

Yeah. That was probably a pretty good size benefit in your first quarter I'm guessing because you would've had a little bit different situation if you hadn't locked in a pretty nice basis, I'm guessing.

Yeah. And the corn basis is that Joe locked in for the year.

There's a really good benefit. Corn is about flat.

$700,000 for the year, lower, maybe, something like that, but soy basis is good.

We do that every year, because you can't price the grain until you buy the basis. So, if you go and lock-in your bases...

Right.

...if you then later see a really good move that you want to take advantage of you can price the corn. If you see a good move and you hadn't done your basis, you've got to go buy the basis first and then the grain.

Correct. Yes.

(01:33:02)

But if you do it the other way, the guy that owns the basis can stick it to you.

Yeah. I get that whole program pretty clearly, but if you, kind of, look at what – if you look at the overall the, kind of, global grain markets, we've been bouncing along the bottom for a bit of time.

We still have, as you said a lot of supply coming in, we may have a change in the meal market that might be more sustainable depending on how you argue what's going on in other places of the world, but now with potential capacity coming on over the next three years, the poultry companies have really enjoyed the benefit of having good pricing, pretty tight supplies and lower feed costs the last three to four years. Is that dynamic potentially changing a bit here going forward?

Is that clouds that high margin outlook that you guys have had?

It's hard to say that, there's a weather event going on in Argentina. But if they got a couple of weeks of rain it would change the whole outlook.

I mean the genetics of these plants are such that they're made to withstand droughty weather and if they got a couple of weeks' rain at the end of the season, the whole outlook would change. So, I don't think – and at the same time, Brazil is going to have a great crop, so Brazil is going to make up some of what Argentina is losing.

Yeah, correct. I agree.

Well, maybe I'll drill down a little further with you offline on that. Thank you for taking the question.

Absolutely. Thank you.

Hey, guys. Thanks for the follow-up.

Just wanted to ask about the wing price forecast that your guys are telling – I mean, it seems like if that were to happen, you get back to the low $1.30s, that would be a structural breakdown of the complex. I'm always intrigued by the per capita demand versus price chart that you show at the Investor Day every year.

We broke through that level of 2015, so I'm just wondering what the source of the pessimism, is there really going to be more an ongoing switch by some of these wing providers, maybe just comment on the low $1.30s price objective there?

Well, I think the shift will come back. I don't think that's permanent.

I think that was just a result of $2.16 a pound wings, the $1.30 going into the summertime, that's not that unusual. We've normally seen our best demand in the football season after Labor Day, best demand for wing product.

We fully expect that to come back, it may not get back – I'm not predicting $2.16 for this year, but we still think wings will move up after Labor Day.

Okay. Thank you very much.

You bet.

Good. Thank you and thank you all for spending time with us this morning.

We'll look forward to reporting our results to you throughout after year. Thank you.