Q3 2019 Earnings Call

Good day and welcome to the center.

Sanderson farms incorporated third quarter fiscal 2016 conference call.

Today's call is being recorded.

And at this time for opening remarks, and introductions I would like to turn the call over to Mr. Joe Sanderson. Please go ahead.

Thank you.

Good morning, and welcome to Sanderson Farms' third quarter conference call.

Lampkin bunch in my Cockrell are with me this morning.

We reported net income for the third fiscal quarter of $53.4 million or $2.41 per share.

This compares to net income of $11.5 million or 50 cents per share during last years third quarter.

Net income during the quarter reflects the accrual of probable liability for contribution to our E shop of $2.7 million before income tax or 10 cents per share net of income tax I will begin this morning's call with a few general comments before turning the call over to Lampkin and Mike.

Before making any further comments I'll ask Mike to give the cautionary statement regarding forward looking statements. Thank you Joe and good morning, everyone. This morning's call will contain forward looking statements about the business financial condition and prospects of the company. Examples of forward looking statements include statements about our beliefs about future grain and fresh chicken prices consumer demand production levels, the supply of fresh chicken products or economic conditions and our expansion plans.

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 annual report on Form 10-K for the fiscal year ended October 31 2018.

I caution you not to place undue reliance on forward looking statements made this morning as each such statement speaks only as of today.

We undertake no obligation to update or revise forward looking statements external factors affecting our business such as feed grain costs market prices for poultry meat.

And the overall health of the economy, among others are volatile and our view this morning might be very different from our view a few days from now.

Thank you Mike.

Similar to last years third fiscal quarter. This years third fiscal quarter results reflect significant counter seasonal weakness and market prices for boneless breast meat produced at our plants processing larger birds for foodservice customers.

Fortunately market prices for other products produced at our foodservice plant were higher than last year.

And reflected good demand during the quarter.

Average market prices for dark meat jumbo wings in chicken tenders were all higher than average is the same period a year ago.

Realized prices for tray pack products produced for retail grocery store customers were slightly higher than a year ago and continue to reflect balance supply and demand dynamics.

Overall poultry market prices were higher by six cents per pound sold or 8.5% compared compared to last year's third fiscal quarter.

While the overall supply big bird boneless breast meat is up only slightly demand is weak.

We believe the counter seasonal decline in market prices for the second straight year is due at least in part.

Turning to an an abundant supply of competing proteins. We normally expect strong chicken chicken demand during our third quarter and while we have seen some promotional activity for chicken at foodservice it wasn't enough to support boneless breast meat prices as historical levels.

Market prices for tray pack products sold at retail grocery stores held up better during the quarter and while we saw more promotional activity than last year, we haven't seen the volume of feed your activity, we normally see during the summer months.

On the other hand to export demand has been good.

End demand for wings held up well during the summer.

As a result market prices for the other products produced at our foodservice plants average higher than last year.

Our chicken supply outlook for the balance of this calendar quarter is consistent with U.S. Da's estimates.

Of the 1.7% increase in chicken production during calendar 2019.

Through June to U.S.J. reports did fewer than 1% Morehead were process.

Live weights are up three tenths of 1% from a year ago, and total ready to Cook pounds were up 1.1%.

With respect to calendar due to the next calendar year. Our view is in line with the U.S. Da's estimate of 1.1% more chicken production during calendar 2020.

The U.S.J. published a highly anticipated supply and demand report for grain on August 12.

Given the weather delayed planting season in the United States, most were expecting the U.S.D.A. do significantly significantly lower estimate that its estimate of planted corn acres and to increase soy acres.

Instead, the 82 million harvested acres estimated for corn was actually higher than its previous estimate.

When applied to an estimated 169.5 bushels per acre yield production of corn is estimated to be just under 14 billion bushels.

And when offset by lower demand estimates the stocks to use ratio at the end of the new crop year actually increases to 15.4%.

Market prices for corn sale following the report and future prices are now trading off this report at levels similar to fiscal 2019.

The U.S.J. took down its estimate of soy acres, but maintained its estimated year to 48.5 bushels per acre.

Because of the near record high supply so I from last year, the estimated stocks to use ratio at the end of the new crop year remains very comfortable at 18.8%.

We have priced our grain needs for the balance of this fiscal year.

Based on these purchases, we expect our grain costs to be approximately $32 million lower this fiscal year than last fiscal year.

These lower costs will translate into relatively flat feed cost per pound of chicken processed this fiscal year compared to last fiscal year.

We have priced only a very small portion of our fiscal 2020 needs at this time.

Looking solely at to Chicago Board of trade prices for Graeme.

We could actually priced 2020 needs at board prices very similar to 2019.

So I may have basis is also very close to 2019 values.

However, corn basis quotes are currently 20 cents per bushel higher.

What we paid for corn basis in 2019.

My view is that farmers are reluctant to sell their new crop at current values, where they are convinced to U.S.J. supply estimates are inflated.

Until they become more willing sellers corn basis quotes are going to remain high.

Our progress continues in Tyler, where we have reached 50% capacity and we expect to reach full capacity during the second fiscal quarter of 2020.

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

Thank you Joe and good morning, everyone.

Overall market prices for poultry products were higher during the quarter compared to our third quarter last year.

Average retail fuel pack prices during our third quarter were slightly higher when compared to our third quarter of 2008 as a result of improved mix sequentially prices were lower by 13% per pound.

Pricing is pricing continues to reflect the relatively balanced supply demand environment for chicken in retail grocery stores.

Market prices for production at our Big Bird plants were higher bulk leg quarter prices.

We're up for the quarter compared to last years third quarter.

Increasing 17.1%.

Through the first half of the calendar year overall industry exports of role and they were up 1% in volume compared to the same period last year quoted bulk leg quarter prices averaged 39.8 cents per pound during our third quarter versus 34 cents per pound during last years third quarter. The current growth were arterberry frozen bulk leg quarters is 40 cents per pound.

Prices for Jumbo wings were higher during our third quarter Jumbo wings averaged a $1.77 cents per pound.

And that's up 37.6% from the average of $1.29 during last years third quarter.

Arterberry quote is currently $1.76 cents per plan.

Boneless breast prices were lower during our third quarter decreasing by 3.2% compared to the third quarter a year ago. This year's third quarter average arterberry price of $1.14 cents per pound.

Compares to an average of one dollar an eight cents per pound during last year's third fiscal quarter.

Today, the only Barry quoted market for boneless breast is $1.81 cents per pound.

The overall result of these market price changes was an increase of six cents per pound in our average sales price per pound of poultry products, so compared to last years third quarter.

In addition to our overall average sales price for poultry products. They hire during the third quarter compared to last year. Our feed costs were slightly lower our average feed cost per pound processed during the third quarter was 25.5 cents per pound down from 26.6 cents per pound during last years third quarter.

We sold 1.15 billion pounds of poultry during our third fiscal quarter.

A 2.3% increase from the 1.12 billion pounds sold during last years third quarter.

We processed 1.19 billion pounds of dressed poultry during the quarter that's up 2.9%.

From the 1.15 billion pounds, we processed during last year's third quarter.

But fewer pounds then we estimate.

We ran fewer heads and we estimate as with all of our plans around Memorial day and July 4th holiday days, because orders were lighter than expected.

For the first nine months of the year, we sold 3.27 billion pounds of poultry products compared to $3.3 billion for the same period last year and processed 3.33 billion pounds. This fiscal year compared to 3.34 billion last year.

We expect pounds processed during our fourth fiscal quarter to be approximately 1.24 billion pounds up compared to the same quarter last year by 6.9%.

We now expect to process 4.57 billion pounds this year.

An increase of approximately 1.5% compared to the 4.5 billion pounds processed during fiscal 2018.

We so 35.6 million pounds of prepared chicken products during the quarter up from 31.3 million pounds last year, our average sales price at that facility decreased 3%.

At this point I'll turn the call over to Mike. Thank you Lampkin and good morning again.

Net sales for the quarter totaled $945.2 million and that's up 10.9% from the $852.4 million. During the same quarter last year. The increase was a result of higher average sales prices and higher volumes described by Joe and land.

Our cost of sales for the three months ended July 31, 2019 as compared to the same three months last year increased 5.4%.

A result of the increase in pounds of poultry products sold and an increase in non feed related cost of goods offset by the lower feed cost per pound process.

Non feed related cost of goods increased 3.4 cents per pound or 8.9% compared to last years third quarter.

Feed cost in flocks processed decreased 1.1 cents per pound compared to last year.

The answer to the increase in non feed related Cogs was due primarily to a penny per pound increase in labor cost.

Half a cent per pound increase in freight as a result of an accounting change.

And a half cent per pound increase in fixed cost.

Any efficiencies at Tyler cost us 1.4, or five cents per pound processed.

As Joe mentioned.

We have price to all of our grain needs for the balance of the year and we estimate our feed cost per pound process will be approximately 25.9 cents per pound. During Q4, that's up 43 points from Q3 the cost.

Yes, DNA expenses for the third quarter of fiscal 2019 were $52.2 million compared to $55.8 million for the same quarter last year.

Year to date SGN, a expenses include $2.7 million accrued for the shop contribution compared to $2.4 million accrued through the first nine months last year.

We expect to accrue approximately $900000 for the stock during our fourth quarter and all of the ESOP is booked as ASP M&A expense.

Year to date.

Startup expenses at Tyler were higher by $2 million compared to last year legal fees were higher by $4.8 million and administrative salaries were higher by $2.4 million.

Trainee cost on the other hand were lower by $1.7 million and advertising costs were lower by 15.3 million.

The company's effective tax rate during the quarter was 20.7%, but that reflects a $2.3 million discrete income tax benefit related to certain state income tax credits for the balance of the year exclusive of any discrete items, we expect a 24.2% rate.

We spent $210.9 million on capex through the third quarter, which includes $62.7 million in Tyler and $9.4 million related to a progress payment that we made on our new company aircraft.

We now estimate our capital expenditures for the full fiscal year will be approximately $288.4 million, which include $65 million in Tyler 9.4 million on that progress payment for the aircraft 70, and a half million dollars for large scale equipment upgrades and corresponding building improvements at various processing plants, and a $143.5 million for maintenance and other onetime price smaller onetime projects.

Our depreciation and amortization was $97.8 million year to date.

And we expect a $135 million for the year.

We also declared $21.3 million in dividends through the first three quarters of the year.

As of today, approximately $21.6 million in letters of credit are outstanding under our $1 billion committed revolver, and we had $55 million in loans outstanding under the revolver.

Our shareholders equity at July 31 was 1.5 billion, our net debt to cap was negative and our total debt to cap was 2%.

Before opening up the call for questions I'd like to remind everyone that the company will host an Investor Conference in New Orleans at the Ritz Carlton on Friday morning October 18 2019.

We will host a dinner at Acme Oyster House, the night before Thursday October 17, and the conference will start at eight o'clock Sharp Friday morning.

We will land by noon on Friday, we hope many of you will join US in New Orleans, and I encourage you to go ahead and register and make your hotel reservations the deadline for making hotel reservations in September the tent and you'll find that information on our Investor Relations page of our website.

Savannah that concludes our remarks and you can open up the call for questions.

Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our.

Again that is star one to ask a question and we will pause for a moment telenor when an opportunity.

Yeah.

And we will take our first question from Ben Andrew with Stephens incorporated.

Please go ahead.

Thanks, Good morning, everybody.

Good morning, Dan asked I want to ask around your commentary on your production outlook for next year, what she said aligns with.

You asked yeas outlook.

Hi, Joe if I recall, when we saw some bigger pullet placement growth numbers earlier than in the year. You said you thought they were too high and they might be revised back lower and they in fact were.

Just be curious to get your take on on the July Pullet placement number that we just saw if you thought it might be revised lower.

And if your comments about next year supply growth kind of reflects that expectation.

I do expect.

The July had to be.

Revives lower weve actually spoken with.

One of the primary breeders.

And.

They.

When I saw the story much and ROE at 8.7 million.

Politics.

We.

Question the ability frankly.

The primary breeders to produce that many.

And so.

Some some of our people called.

And.

We believe that.

We were told.

That.

They reported.

Five weeks of placements instead of four.

And.

So I do expect July to be reduced by.

A week and.

So that will go back to about 105% when.

Its restated.

Very helpful. Thanks.

And then I want to ask around the demand outlook for breast meat. In particular, you said that demand has been a little bit softer we've talked in the past about some of the factors at play for weaker breast meat demand I'm curious to what extent.

Do you think we'll see any improvement in demand could you talk about what Labour day looks like from a feature standpoint.

And then your outlook into the fall.

Well this is lampkin.

We we don't typically think of post labor day is our peak demand season off peak demand season. This summer.

We have features for labor day.

At retail grocery stores, but there.

Every feature is below other proteins is not.

They're not feature in chicken and nothing else that feature in beef pork and chicken.

Some of our customers.

I do not have taken in the feature most of them voted with their a couple that Dol, but we're competing against a lot of other protein.

It's not it's not.

We're running.

All but one plant right now on Saturday before.

Labor day, and then we're not running labor day.

It is it is not unlike.

In the script, we said we did not have a lot of demand around memorial day and July the fourth we had birds.

To process, but we did not have the demand this is.

We we do need to run Saturday to fill orders.

For Labor day.

But.

It's.

It's only at only at grocery stores not for food, we're running on rate and we run Saturday at our Big Bird plants is called were down Monday.

Okay. Thanks.

I appreciate it best of luck.

Thanks, Dan.

And our next question will come from Benjamin Theurer with Barclays.

Please go ahead.

Hey, good morning, Joel Lampkin and Mike. Thanks for taking my question I wanted to elaborate a little bit on on the grain cost volatility and obviously now and you've mentioned that the prices have come down significantly back to the levels beforehand, and what you haven't priced much into 2000 Twentys, what's your expectation behind on pricing. What do you think corn is going to turn out into fiscal 2020 for you and what do you think.

Good to see the whole trade dispute with China have as little net impact when it comes to planting and the ultimate outcome for Soi, which obviously used to be very important when it comes to shipment to China. Both has come down significantly. So also the prices down it's just a little more color on on your feed cost outlook is that would be great.

Yes.

There are a lot of variables.

Left.

The.

A deal with China would change our outlook.

With with one.

I don't know how much China is going to need.

With.

African swine fever, I don't know how many.

Yeah, well with with a good portion of their hog herd.

Oh no.

They will not need as much now I don't know.

I don't know I don't know they will need some but they won't need as much so I.

And.

[noise] there.

With with ethanol use down there won't be as much corn being ground.

In the U.S. So yeah, you had you had those two factors you also with this late crop.

You have to be aware of an early frost.

And so you.

That's a that's a factor as well.

And so with all those.

Caveats.

Right now.

Our contacts are telling us.

And I would not have we the reason we price through October because I thought we were going to have a bad crop.

And frankly, we priced a little early on our own or corn or the board's come down significantly from when we priced our corn, where we were pretty much close on our show it but.

I was thinking with this very light plant and.

Probable yield drag.

Corn was going to the board is going to run away from us and but it has not Dave excellent.

Excellent weather.

Sensed a crop was planted.

And ER everybody is telling me that the yields are going to be decent.

Not 178.

The 165, plus and ER.

The crop is getting better every week.

ER and ER with maybe an exception in Ohio, and Indiana, maybe maybe Missouri, but Missouri got a little bit better, Illinois gotten a lot better.

Last week, so right now we're looking what were looking at is a corn and soy meal being up right now.

I could price it.

It's the same price.

That.

2019.

And I don't think that's going to change unless there's a chance the deal or an early frost.

Yeah.

The basis for corn.

We we frankly, we bought soy basis.

ER through March.

And we got it basically the same price we bought in 2019.

ER and I could I could go both my soy right now.

And have the same price are headed and 29 team, but we think it might get a little bit cheaper.

Sort crop got better last week and right now the carry out is substantial.

And so I don't see any reason to be booking so right now the thing are the two things early frost or the China do you might change the outlook on that but there's a lot of soy all over all over the world all the blow.

So I don't we don't see any need to be hasty about that and.

Oh, there's a lot of Cold war and.

So we feel comfortable.

I think when when this.

Harvest began drilling if corn, there's 2 billion bushels that has to come to market from last year.

And we think maybe the basis, we'll start moving back favorably toward us.

When that occurs.

So I don't think.

I don't think grain prices are.

Or going to be the issue I think.

I think oh.

Abundant protein is.

More of a challenge then grain prices are.

Okay.

That brings me actually Tim I took my follow up question. So abundant protein what you just said during the quarter still lot affected because of competition from competing protein coming I guess, mainly pork, but also beef to certain degree with your expectation now if growth into next year on chicken just 1.1%. What are you are seeing on the competing proteins and what are your expectations. There on the supply outlook and I mean, obviously, many many moving pieces again with African swine fever, and trade disputes and so on but considering just the 1% increase in chicken into next year versus where it was a couple of months ago still expected to be more than doubled that for 2020, how do you. How do you feel about the become competing protein environment into fits into your fiscal 2020 .

A lot of that wouldn't do that.

We believe this African swine fever is going to affect that in 2020.

Oh more shows and it has this year, although there's China's band pork from United States right now even with the heavy Terry we think they'll buy more of it if there's a great deal.

And but even if there's not.

The U.S. is going to back fill somewhere.

Pork and beef and poultry.

When.

In some way or.

To fill that void in China this protein void in China.

Now I think it'll be more dramatic in terms of trade deal the new U.S. shipped protein to China.

But.

Timing of that and and and.

You know.

Add worked exactly.

Well you asked is going to benefit indirectly I got it.

Yeah.

The causes Africans swine fever, it'll be directly and more dramatic in terms of trade deal made.

And thank you good luck, well then 2020.

Okay.

Perfect. So net net do you think it's good it's going to be positive and also the fact that there was not that much more chicken coming into 2020, she will help them get into it.

Probably yeah used to 1%, we it's going to be more than 1% increase in production and 22.

I believe that 1.7%.

Oh, okay.

Yeah based somewhere around 1.7 is what we think.

1.7, okay.

Okay. Thank you very much.

Good Thank you Ben.

And our next question will come from Eric Larson with Buckingham Research group.

Good.

Yeah. Good morning, everyone. Thanks for taking the north area.

You bet so up so.

You know obviously, we know the.

It is the the white bras pricing has been pretty weak, but now fairly consistently over the last you know.

Three four weeks still periodically we're we're seeing either we're seeing kind of the dark meat pricing go down as well.

Is it is it again I think it's you probably already answered it was competing needs, but what helps clear the salt for a show.

Yeah.

Well.

You know.

Nobody is losing any money right now that I know of or by making money in until.

You know a trade deal with China would help.

Somebody losing some money.

Would help getting past the holidays will help.

Like we did last year.

It is.

Turn in the cycle you know, we're we're five years into the beef cycle and that's normally a 10 year cycle.

And we're about five years, and then the pork cycles and that's that's a shorter cycle normally.

This has to Badger time, you never know, but well make it turn but nobody is lost any money yet to speak of in.

It'll turn naturally at some point.

Yes.

Yeah. It definitely will so I think probably one of the things that you thought maybe you'd get a little bit of benefit from the summer, which doesn't seem to have materialized. It's done a lot cooler summer so youve.

Are your weight still running are your weights running higher too because he just didn't get the heat that you normally do or am I mistaken on that.

But no.

The industry wage and over the last three months you've actually increased.

They didn't crash.

January February March and they started increasing in about April and for the last very much they have increased and.

Oh, we had he here in August .

But you got heat in Texas right now yeah, we have heat in Texas right now, but it's not we haven't lost any weight.

In Mississippi, or Georgia, North Carolina.

Like we normally do in the summer.

It has not been as hot as we normally see.

Yeah, I mean I.

Yeah, I definitely saw that and that probably has a little bit of a contributing factor to kind of some of the recent weakness I'm guessing.

Well.

It is you know you normally we get a little bump in July because wage go down and we didn't we didn't get that at all this summer a way that did not go down I have not seen the July U.S.D.A. have I believe.

Is that up but yes, yes.

Well they were flat June July were flat.

Weights were unchanged, but they were up.

[noise] substantially from a year ago.

Tent.

10 points from a year ago.

And that reversed the trend that we show in January and February .

Okay. Okay. Good and then and then finally, Joe I mean, one of the issues that you have.

That you've highlighted that kind of you know you've got your I believe you said before you have a 50 point Chuck off sheet that you need to check off the the checkmarks to start a new plant in one of the biggest constraint here again as has been the labor I'm, assuming you haven't seen any relief on that side yet.

That's still continues to be an issue.

That's correct. There's a if you look if you will.

There's no place right now where are you.

You could look and say there's ample labor.

And to locate and build a complex we don't know of any place where there's ample labor and.

The other thing you wouldn't want to.

You wouldn't want to build a plant well their tariffs on steel and aluminum.

And the economy is just hot there contractors are not readily available right now.

There's too many things.

They are not favorable for construction or hiring or any of the things you look at that we have on our.

Our check list.

It's not a good time, where we are looking and we kind of know wire, but.

Uh huh.

It's not a good time to be.

Thinking about building a complex right this minute.

Okay. Good well thanks looking forward to hearing your your presentation next week at Barclays too so.

So I get that left bar. So you then or.

Our next question will come from Heather Jones, I'm, Heather Gentry research.

Please go ahead.

Good morning.

Morning, Heather.

So going back to.

Yes see.

Wondering if you could give me a sense of how much you'll think production is up year on year Chris.

You have had a shift in production to a you know a larger bird with some of the big bird plants that have.

That have come on and are ramping so do you have an estimate of how much you think boneless skinless.

Production is up for this year.

[noise], 1.5% maybe.

Uh huh.

Let me see if we can get a chart here hang on just.

Do you have.

Can you going forward.

2%.

Oh, he's talking about boneless skinless.

Our.

We can get that other model I don't know.

Okay. Okay, Okay, I can follow up on that.

You don't have the only thing that's new is the one plant in North Carolina.

That's the only thing you had on me.

Vision.

Yes, he has a big yeah.

Okay, I think I want to follow up on that.

Then going back to the export question.

So we have seen started to see a softness in dark meat pricing just wondering if you could flush out like what specific markets, you're seeing some sequential softening on.

If you haven't had any color on that.

Heather.

Mexico has been good.

Continues to be good.

It was good.

Iraq was closed for about 30 days, but they they're not a huge volume country.

They were closed for 30 days.

We were seeing a little more production, we're seeing a little more.

Leg quarter product that there's some plants that are.

Struggling they bound dark meat till they're packing leg quarters and stay as well, we're seeing a little more.

MPT leg quarters out there.

We Oh it began with.

The rage in Mississippi, the ice Rage, and then read into Alabama, and Georgia people not coming to work because they were fearing ice rage.

And so there is.

Less deep owning a dark meat and more production of leg quarters.

And that is.

Why we think.

The export market softened a couple of much earlier than normal.

Okay, Okay, and sticking with that like Joe you mentioned nobody's, losing any losing any money at all I mean is the thing that's going to cause the abundant or ample protein supply you mentioned to tighten up is it just when we start to see this increased demand.

Whether backfilling or direct to China is that when we will start to see this tighten up.

Yes, that's what I think I think there's plenty of.

Yeah, that's what I think and I think it will start report I mean.

If you go back and look and see what lean hogs were on the futures were trading for in April My dog or futures were at $100 and their 60 560 and $61 today.

And.

And they were.

They were $100 in April may and that was all speculation on.

Oh, China deal.

And and African swine fever.

That and today there are a lot of that much that they've lost.

Sorry dollars.

At least $30.

Mhm worth more than that $35 and.

That's what I can move.

And my second move and then and then the volume leaves and goes to China.

Kinda back end of the I saw the other day.

China ban.

You ask Paul right now.

I'm paying a huge telephony if they didn't have that Terry if they buy a lot more.

[laughter] okay.

On the retail side, you mentioned that you all are competing with other proteins I mean.

[laughter].

How much of that is it your sense that is ample protein availability and do you think there's any is AOCF playing a role in that in the sense of.

Retailers wanting to feature pork.

Because of concerns that they may not be able to feature at next year. I mean is that playing a role at all in our retail or decisions in your view.

Say that.

No I have not heard that.

I don't.

Yeah, we have we have more than one customer did say that.

You know there.

That was off the cuff, but they're they're looking at same thing other people are saying, we're going to have this deficit next year and.

But they're like us they don't know.

And I also I mean beef prices have gone up dramatically less that's right two three weeks that's right.

Hmm.

Okay, Mike Thanks, plus.

Okay. Okay. Thank you so much. Thank you okay. The other.

And our next question question will come from Michael Piken with Cleveland Research.

Go ahead.

Yeah. Good morning, I wanted to dig a little bit deeper into the ice rates that that took place and just trying to understand a little bit you know in terms of Ah you know what the industry might be doing in terms of maybe moving toward automation.

The things that can be done with wind speeds or you know any updates there just in terms of how you guys can work in a tight labor situation still potentially grow your volumes.

We've been.

The $70 million that Mike.

Mentioned during his presentation about some of our capital expenditure.

Oh all of that was automation.

All of our Big Bird de Boning plants, and a couple of our tray pack plants.

We automated the front end of.

I can't remember [laughter], Oh, all of our Big Bird Deboning plants are now estimated Ronnie and good ones like that and one tray pack plant and then we put in dark meat de boning.

Ah yes.

Five of our seven big Bird de boning plants and.

We will.

We have.

We've we've done that this year and.

We will complete.

Yes and.

In February we have to.

A big bird plants to go and three tray pack plants to go.

And we'll we'll complete all of our plants with all the automation, we know of that.

But we didn't.

But.

Didn't have anything to do with ice rage.

It would just labor saving devices and converting our.

Increasing our capacity for dark meat de volume, but to increase margins.

Great can you quantify roughly how much that might save you by the time you put in all those Ah.

Yeah automation or how much you know we might say on a per pound basis, what type of savings you're looking at.

Pete Rose is God what was it.

It was different and every place you have some of the some of it was something we had to add building too and when you add building it.

So longer pay back longer pay once the newer plants that had room for it it was less than a year play but yeah.

Where's it.

I mean, I don't want to give away all my secrets.

Okay.

[laughter], but it was a.

It was a good payback.

Increase our margins.

And then.

You know we also raised our wages in June .

$15 an hour for employees.

Then once a year 90 days.

I mean 90 days.

So.

We've got a lot of.

Balls up in there.

Okay. That's helpful. And then shifting gears. So you don't have to give way to me I trade secrets, but just curious you know I'm the.

Boneless Skinless time, it's been almost a trading at a premium to boneless skinless breast I mean, do you think that there's been a major.

Shift in terms of the taste preferences are among the U.S. public toward dark meat and away from almost skinless breast meat and if so like you know how do you think the genetics may play out next year are we going to continue to breed for more breast meat yields or how do you see that evolving over the next few years.

Uh huh.

We have not set down with the primary breeder and told him to breed bigger size yet.

A bigger late.

They won't be able to do that next year I know, that's a long answer that alone.

Selection process, but.

Right now they're trying to select.

Get rid of Woody breast and that's a five year deal they told us to get rid of Woody breast and they've been selected for bigger breasts make for so long.

But.

It wouldn't.

We will have a conversation.

With.

What's our primary breeder.

This fall.

All right and then.

And our process and Paypal.

What they could do.

Is.

Select for better Lee.

To go along with this heavier breast.

And in fact many of.

Ill bigger leg.

Debt.

That might be better.

Good.

Michael we do see.

We I don't know about a drastic shift in demand, but we do see.

Manus Boneless stymied boneless dark meat is very popular were doing when we get finished with all our deal.

How many.

Pounds of boneless breast meat.

Weve, producing 16 million and then how many and we're going to be doing about 5 million pounds of boneless dark meat.

So you're still doing.

A lot more boneless breast and you're doing boneless dark meat.

And.

Well the demand has absolutely increased for the boneless dark meat.

You still the demand for the bonus wipe me, there's still triple what it is for the dark meat.

All right. Thank you.

Thank you Michael.

Our next question will come from Adam Samuelson with Goldman Sachs.

Go ahead.

Yes. Thank you good morning, everyone.

Good morning, Adam.

So I was hoping to talk a little bit more on the on the export side and really just trying to evaluate you talked about some of the weakening and are softening of late and that being partly a function of just their speed lusty boenning and more leg quarters just on the market.

More broadly, though with African swine fever and.

A lot more global protein starting to get redirected towards China are you finding.

Markets, new customers and even new forms of poultry, though outside of leg quarters that you're getting inquiries for offshore demand.

We.

Oh, we have.

We have to shift some.

When we would with doing this dark meat de boning, we're producing more drumsticks and some of those are going export and they're going to.

A different location and we have traditionally ship leg quarters too.

Into the Caribbean Cuba.

And.

We actually ship in some boneless dark meat export a little bit.

Which Steve.

Oh, I know I got it okay I got it.

I'd, rather not divulge where that's going.

But yes, they're viewed new market should we never have shipped before.

Good.

Good.

I think other people may have shipped to but we never had that is for boneless dark meat and for Drumsticks popped up when we started the boenning.

And actually there was a name we had an inquiry back in the spring.

When a doctor won't be it China the deal that they wanted whole legs, they did not want leg quarters.

And we think they were going to take them over there and the bone sale.

Hey.

They have a company has a history of bringing lean hog carcasses into China.

Breaking them down in China, rather than bringing.

Cut parts.

Right and so we are pretty sure that we're going to be bone those whole legs in China.

So that would have been something different.

Okay. That's that's helpful color and then kind of shifting gears on the non feed production costs I mean, you've had some of it.

More temporary with some of the fixed costs under absorption on Tyler versus some of the other inflation and accounting changes that you guys have.

Maybe this is for Mike and just as we as we're thinking about next year and at a high level I mean, how much of.

How much of the non feed cost inflation per pound is a bit more transitory versus kind of is going to just stay in the base.

Yeah, well not a 40 sharkskin.

Opinion 47 out it is time and one time or be running full by next spring.

And you're going to get that back to 50 point, sorry, excuse me the half a penny on great that's baked in.

Freight would have been flat absent that so all of that is because of the accounting change and that's there for non fee related cost, but that's just moving money around.

And then your training college is going to continue to go down the ASP in a yes, yeah and.

The Penny a pound for labor is that's permanent you know that's the 15.

Dollar an hour a week, they will be able to offset that with efficiency and yields we vote. We know we've offset some of that already.

And we're confident as we were when we put that in place of that that is that we'll get that back but.

Oh, PPI or you get back.

Yes, let your legal fees are going to stop at some point, yes, they're going to decline.

It probably won't be in 2020, it might be in 2021, but you are peaking out this year and next year on your legal thing.

We think and.

What was the other three times.

Yeah, you had the ESAU.

We were pleased the labor coming.

Advertising and not advertising it was very thing.

Were going to school at the start of a well planned plant start a legal fees and one more administrative salaries.

It was raining huh training yeah.

Those three things are going to go away.

Okay, Okay great.

Yep. Okay go ahead.

Yeah, that's very helpful. I appreciate it thank you.

Our next question will come from Ken Zaslow with BMO capital markets.

Go ahead.

Hello, everyone. This morning.

Subbing in for Ken today.

Yeah. So I know you've discussed a lot regarding 2020.

I'm just wondering if you could frame 2020.

In terms of past cycles.

[laughter].

That's hard then.

Absolutely.

You know if you think about so many moving parts Jos said in his prepared remarks, we're looking at a cost environment. This very similar to 2019.

And so how 2020 looks versus.

He is going to depend on your outlook for chicken prices and protein deficits in the world and so many moving parts there.

You know Joe always said he said at the beginning of this year and it turned out to be exactly right. Not every every year is different every cycle is different we made the highest margins we've made.

At our tray pack plants over the last six years at a time when grain cost was the highest in that period of time.

So.

The fact that we kind of know looking today [laughter] and guess what grain is going to be done Hill.

Inform completely where do you think that cycle is going to be.

As a long way of saying I don't we don't know where I don't know if it isn't it.

It depends on what you how you think panels right and have faster that's going to hit and how that's gonna he is going to be direct or indirect.

And and how that's going to work out and.

Uh huh.

That.

That said to me that that's going to be the market factor for 2020.

And.

That's going to be.

Oh, what we show checking for.

Alright. Thank you very much guys. That's it from me.

You bet. Thanks, good question, thanks for asking it.

And with no further questions I'd like to turn the call back to Mr., Joe Sanderson for any additional or closing remarks.

Good. Thank you all for joining us today, and we look forward reporting our yen year end reserves for you in December .

And this concludes today's conference. Thank you for your participation and you may now disconnect.

Oh.