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Sanderson Farms (NASDAQ:SAFM)

Q1 2013 Earnings Call

February 21, 2013 11:00 am ET

Executives

Joe F. Sanderson - Chairman and Chief Executive Officer

D. Michael Cockrell - Chief Financial Officer, Treasurer and Director

Lampkin Butts - President, Chief Operating Officer and Director

Analysts

Farha Aslam - Stephens Inc., Research Division

Heather L. Jones - BB&T Capital Markets, Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Christine McCracken - Cleveland Research Company

Andrew Strelzik

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Katya Voronchuk - Sidoti & Company, LLC

Operator

Good day, and welcome to the Sanderson Farms Incorporated First Quarter Fiscal 2013 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Joe Sanderson. Please go ahead, sir.

Joe F. Sanderson

Thank you. Good morning, and welcome to Sanderson Farms first quarter conference call. We issued a news release this morning, announcing a net loss of $6.9 million or $0.31 per share for our first quarter fiscal 2013. This compares to a net loss of $8 million or $0.36 per share for our first quarter of fiscal 2012.

I'll begin the call with comments about general market conditions, grain cost and production decisions, 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 statement regarding forward-looking statements.

D. Michael Cockrell

Thank you, Joe, and good morning to everyone. This morning's call will contain forward-looking statements about the business, financial conditions and prospects of the company. Examples of forward-looking statements include statements regarding the supply and demand factors, future grain and chicken market prices, economic conditions in production levels. The actual performance of the company could differ materially from that indicated by the forward-looking statements, because of various risks and uncertainties. These risks and uncertainties are described in our most recent annual report on Form 10-K, and on the company's quarterly report on Form 10-Q, filed with the SEC this morning, in connection with our first fiscal quarter ended January 31, 2013.

Joe F. Sanderson

Thank you, Mike. As was the case during last year's first fiscal quarter, our financial results for the first fiscal quarter reflect continuing -- continued challenging, but somewhat improving market conditions. Conditions improved steadily through the quarter, and the company was profitable in January. While demand from retail grocery store customers has remained stable, and that stability is reflected in the record high Georgia Dock whole bird price, those service demand remains weak. Our grain costs peak with flocks sold in November and had leveled off and even come down slightly since.

While overall market prices for chicken were higher during the quarter than last year, the same is true for the market prices for both corn and soybean meal. Grain prices have stabilized below the highs set last August, but they remained high relative to historical averages.

Optimism regarding the size and quality of South America's crops has helped somewhat, but weather concerns will keep pressure on both corn and soy prices. And tight supplies will likely support relatively high grain prices, at least, until the market gets some visibility on the quantity and quality of the 2013 crops in the U.S.

Most everyone, who follows the grain market will now turn their attention to the March supply and demand report, and more importantly, the March 28 planning intentions report. Many expect the record number of acres to be planted this spring, with some predicting as many as 99 million acres of corn. The bottom line is we need these acres, and we need a good crop.

Even if we get adequate acres in the March 28 planning intentions report, those acres must still get planted, and there's little margin of error with weather as we head through the growing season. We have had 3 below-average years in a row in yields. And given record demand for grain, we need a good crop year.

Because of the tightness in supply, the market will most likely exaggerate its reaction to any real or perceived weather threat as we move into the planning and growing season.

We have priced most all of our corn needs through March, and about 50% of our needs for each of April and May. We have also priced all of our soybean meal needs through March, but have none priced past then. We have no grain priced past May.

Based on our cost through the first quarter, what we have priced so far and what prices we could lock in for the balance of the year, our grain cost for fiscal 2013, including the cost of additional volume, would be $94.7 million more than during 2012. This increase from fiscal 2012 would translate into $0.225 per pound increase and our cost per processed pound.

While grain costs will remain high, the company and the industry can still earn good margins if chicken prices moves sufficiently higher to allow us to offset these higher costs. Exit numbers relative to a year ago were lower through fiscal 2012, but have started moving a bit higher than a year ago. Despite slightly higher production, however, market prices have been steady or rising. That certainly indicates that demand has improved somewhat.

While retail demand is better, however, demand at food service is still weak. I said on every conference call the past 2 years that I continue to believe we won't see a meaningful increase in food service demand until employment in the United States moderates and Americans get their jobs back in significant numbers. I still believe that.

But fortunately, it feels like economic conditions are starting to improve. We will see seasonal improvement in chicken demand this spring and summer. And together with improvement in overall demand, the 2 might be enough to move markets higher.

We announced last week at our Annual Shareholders Meeting that we have selected sights in and near Palestine, Texas for our next expansion. While we regret we were unable to complete the project in Nash County in North Carolina, as originally announced, we look forward to expanding our presence in Texas, which has been an outstanding place to do business. The location of the new facility and is focused on Big Bird deboning will create new marketing opportunities for the company and will certainly create opportunities for our employees.

Those of you, who have followed our company for any length of time, have heard me say that we have 2 levers to create value for our shareholders, which we recognize as our primary obligation. One is to operate more efficiently, and the other is to continue our pattern of delivered steady growth to have more pounds on which to earn historical margins and increase earnings per share.

The trigger for a continued growth is always our balance sheet, and it has certainly helped enough to begin a new project. However, we must also be operating well and have some visibility into the market before we start a new project. Until the 2013 corn and soy crops in the U.S. are planted, grown and harvested, the project will remain on hold. I am hopeful that means we can start in the fall, but that will depend on the crops.

Construction of the new facility is also subject to other contingencies, including receiving necessary permits, negotiating construction contracts, timing a sufficient number of growers and final approval by our Board of Directors once market conditions improve.

As for our operations and efficiencies, we left money on the table during our first quarter. Our live production division performed well, and our feed conversions were as good as they have ever been. Our processing plants also performed well, and our cost in yields were good. Unfortunately, our sales did not keep pace. We knew we had opportunities in Kinston to mature our sales out of that plant. And we have been able to do that over the past couple of months. In addition, though, we had sales at our other plants that did not keep pace with the increasing market prices during the quarter. That, too, has been fixed over the past few weeks, and any sales that haven't been fixed will be.

January was a better sales month, and I expect our sales to continue to improve as we move forward. As for our efficiencies, while our live production division and our processing plants continue to perform well, they are handcuffed by our reduced production numbers. Feed conversions, yields, labor costs and other costs not impacted by volume have been outstanding. Grower pay, chick cost, fixed cost and other costs impacted by volume, though, have been uncompetitive. Unfortunately, as long as we run our plants 6% below capacity, we can't compete effectively.

I mentioned earlier that market prices have remained steady or moved higher in spite of higher production numbers, which signals, at least, some improvement in demand. In order to make our customers' needs and in order to improve our cost efficiencies, we will return our plants to full production by June.

I believe we will continue to see steady improvement in the macroeconomic environment, and believe that improvement will spur some increased demand. I am confident we can get the products sold well, and I know we will increase our efficiencies and reduce our costs when we resume full production.

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

Lampkin Butts

Thank you, Joe. Overall, market prices for poultry products were higher during the quarter when compared to our first quarter last year. The Georgia Dock price for whole bird reflected continued goods, chill pack demand during the quarter and averaged $0.98 per pound, an increase of 9.1% compared to last year's first quarter average of $0.898 per pound.

The Georgia Dock whole bird price quote as of today is $1.05 per pound, and continued to reflect the good balance between supply and demand of chill pack products destined for the retail grocery store customers.

Every time the Georgia Dock whole bird prize moves higher, it sets a new record high. Bulk leg quarter prices during our first quarter were lower by 2% compared to last year. Urner Barry leg quarter has averaged $0.49 per pound during our first fiscal quarter, compared to $0.50 per pound last year. Final numbers for calendar 2012 reflected a 4% increase in the volume of all broader parts exported during calendar 2012. Exports to China and Hong Kong combined were down 16%, while Mexico and Russia were up 23% and 25%, respectively. We believe that export markets are going to be steady to improve during calendar 2013.

The average price for jumbo wings was significantly higher during our first fiscal quarter compared to last year, increasing 24.6%. We had a really nice run in wing prices ahead of the Super Bowl and hit a new all-time high of $1.92 per pound.

Jumbo wing prices averaged $1.79 per pound during our first quarter this year, compared to $1.43 per pound during last year's first quarter. Boneless breast prices increased by 5.1% when compared to the first quarter a year ago. The Earnaberry boneless market averaged $1.39 per pound during the 2013 first quarter, compared to $1.32 per pound last year. While improved, these prices reflect the market that continues to be adversely affected by a challenged United States consumer and weak food service demand.

We sold 723.7 million pounds of poultry products during the first quarter, an 8.1% increase from the 669.2 million pounds sold during last year's first quarter. Our processed pounds were up 5.2% from 694.9 million to 731 million pounds. We expect to process approximately 704.4 million pounds during our second quarter, down 3% from the 726 million pounds processed during last year's second quarter. The decrease is a result of fewer processing days this year compared to last year and the effects of our cutback.

For the year, we had changed our production targets to reflect our return to full production in June and expect to process 3.04 billion pounds for the year, which will be up 2.9% increase over 2012.

While our performance during the first quarter reflects adverse market conditions, we will continue to operate this company the same way we always do. We will look for efficiency improvements, and we'll do everything necessary to protect our balance sheet and the integrity of our operations.

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

D. Michael Cockrell

Thank you, Lampkin, and good morning again. Net sales for the quarter totaled $595.8 million, and that was up from $517.8 million for the same quarter during fiscal 2012. Our loss of $0.31 per share during the quarter compares to a loss of $0.36 per share during last year's first quarter.

Our cost of sales for poultry products for the 3 months ended January 31, as compared to the same 3 months a year ago, increased 15.6%. This increase was a result of an 8.14% increase in the pounds of poultry products sold in the first quarter compared to last year and continued high feed cost. Our feed cost per pound of poultry products processed increased 12.1% to $0.433 per pound, and that compares to $0.386 per pound last year.

While our feed cost per pound of poultry products processed were higher by $0.047 per pound, our sales price per pound of poultry products sold increased 7.1% or $0.052 per pound. This combination did result in improved gross margins, which also improved as we moved through the quarter.

SG&A expenses for the first quarter of 2013 were $2.7 million higher than the same 3 months a year ago. This increase is primarily the result of our expensing during the quarter, certain costs associated with the abandoned Nash County, North Carolina project. We had capitalized certain costs associated with those sites, and once we decided not to move forward, we expensed those costs. We also reimbursed Nash County, North Carolina for its out-of-pocket costs, associated with the project, and we expensed that $1 million during the quarter as well.

Despite the challenging quarter though, our balance sheet remains strong. At the end of the quarter, stockholder's equity was $540 million, and networking capital was $259 million. Our current ratio was 2.9:1. Our debt at the end of the first quarter totaled $160.8 million, and our debt-to-cap ratio was 22.9% at January 31, 2013. We spent $11.5 million on capital expenditures during the first quarter. And so far, we have approved $45.5 million in CapEx projects for the fiscal year.

Our depreciation and amortization during the first quarter totaled $15.2 million, and we continue to expect approximately $61.4 million for all of fiscal 2013.

And with that, Rochelle, we will open up the call for questions, if you'll do that for us.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question, we'll hear from Farha Aslam with Stephens Inc.

Farha Aslam - Stephens Inc., Research Division

A couple of questions. The first one is regarding your volume in the quarter. It was up 8-somewhat percent. That's higher than you would anticipated. Was that simply growing conditions were so strong? Or did you pull birds forward because of strong demand? Just some commentary about why the first quarter volume was so heavy.

D. Michael Cockrell

It was a combination of both, Farha. We processed a few more head than we had anticipated and estimated, and those birds also came into the plant higher than we thought. And we had undershot our yields when we did that estimate. So it really was a combination of all 3 of those.

Joe F. Sanderson

The only reason we processed more birds is because they were heavier though. We've actually -- we had more down days, scheduled down days in November this year, I believe, than we did a year ago, didn't we?

D. Michael Cockrell

We did, and we have built those in to our estimates.

Joe F. Sanderson

But we had to run some because the birds were so heavy. They got up to 9 pounds in our Big Bird deboning plants were causing weather conditions. And so we had to run some that we did not intend to. But...

D. Michael Cockrell

And we have built into that estimate that we made this morning for our second quarter, and for the year. We built it in a little bit better yields than we've been estimating.

Lampkin Butts

Our yields were a good bit higher.

Farha Aslam - Stephens Inc., Research Division

Okay. And just your volume, the expectations for the second quarter?

Lampkin Butts

For the second quarter? Right now, we estimate 704.4 million pounds for the second fiscal quarter, and that's actually down a little bit from last year's second quarter. There are 2 reasons for that: One, there's one fewer processing day during the quarter this year compared to last year. And also, the effect of our cutback that, Joe mentioned, will return to full production, but that won't happen until June. So we'll have reduced production as planned all through the second quarter.

Farha Aslam - Stephens Inc., Research Division

Okay, that's helpful. And then 2 macro questions. The first one is, you've recently had some restrictions put in place by China regarding our pork export. And that will likely result in more pork staying here in the U.S. Do you anticipate that impacting chicken prices at all?

Joe F. Sanderson

What was the restriction on pork?

Farha Aslam - Stephens Inc., Research Division

Products with ractopamine in it.

Joe F. Sanderson

I think they're going to start testing. I don't think that's going to -- I don't know a lot about pork. But aren't they just going to start testing for that growth promoted.

Farha Aslam - Stephens Inc., Research Division

So you don't -- you think that it's a sort of a temporary issue, that it really won't impact pricing?

Joe F. Sanderson

I would think not. I mean, surely, they can withdraw. There's -- all the -- if we were to use an antibiotic, FDA requires a withdrawal period. I don't know anything about what that -- I know it's a growth promote they use in cattle and hogs and turkeys, but I would assume they can do a withdrawal period on it and not be in the tissue when they sample it. So I don't think that's going to -- what I read about it, it sounded like there's not going to be an issue.

Lampkin Butts

It doesn't, it doesn't happen to shut the market down. I mean it's not certain that it would do that.

Farha Aslam - Stephens Inc., Research Division

Okay, so not a chicken issue. And then my final question, Joe, is in your 10-Q that you released this morning, you had a new risk factor, and that was the availability of USDA inspectors for poultry, if the U.S. doesn't just sequester. Do you think -- how serious of a threat do you think that is for the U.S. poultry industry?

Joe F. Sanderson

Well, we don't know -- in the past, whenever there's been a budget prices or even when the government has shut down, which it has done before, the USDA inspectors have been deemed essential, and we've always had inspection. But Secretary Vilsack, really this week, issued a statement when he said, where he said that the USDA inspectors may be furloughed and for periods of 2 weeks. Now that -- without proper notice, that would be a terrible situation for us. It would be an animal welfare issue and an environmental catastrophe for our industry. So when you have birds that are 62 -- 60 to 62 days old, scheduled to go to the plant, and all of a sudden, you don't have inspectors, and you leave those birds in that house, 2 and 3 and 4 and 5 days longer, they crowd up, and they're going to die. And that's just in -- they're going to die, and that's your animal welfare issue. And it becomes an environmental issue because you don't -- there's no place -- what are you going to do with them? And you're talking about the industry, and it's going to happen to 100 -- how many birds were processed in a week? And then you think about your hatcheries. You're hatching. All the birds come out of the hatches, they don't have any place to go. So what are you going to do with 155 million, 160 million chicks a week? Are you going to destroy eggs? Or are you going to macerate baby chicks? And then what are you going to do with them? Are there enough landfills for all that? I don't they've thought about that in Washington, the animal welfare issue and the environmental impact it's going to have if cavalierly, you withdraw furlough inspectors. It's big deal. And it's more than just with furlough and inspectors has a lot of impact. And not to mention, we have roughly 10,000 hourly employees that won't have anything to do. But like I said in the past, they've been deemed essential, and my best judgment is that -- we're supposed to have our best and brightest up there in Washington, been able to work these things out and at the end of the day, I'm hopeful that they'll get that done.

Farha Aslam - Stephens Inc., Research Division

We'll keep an eye on that.

Operator

And next, we'll move to Heather Jones with BB&T Capital Markets.

Heather L. Jones - BB&T Capital Markets, Research Division

Thanks for the commentary on inspectors, that was very helpful. I was wondering if you could give us an estimate -- an estimated hit on a per pound basis of you underutilization?

Joe F. Sanderson

On what it costs?

Heather L. Jones - BB&T Capital Markets, Research Division

Yes, like you said, on things like the cost of chicks and the things that are affected by your volume, how much do you think that's running you per pound right now?

Joe F. Sanderson

Oh, Lord, I don't have a clue. I tell you what, it's going to be hard. For the first quarter, we had a lot of down days. We had 4 holidays, but in Agri Stats, where we were just not competitive in chick -- say, we were selling hens at 60 weeks and paying the growers to 65, running our hatcheries way below capacity. So chick costs, we were way out of line. Our grower cost, we're paying our growers, we're making up for their not running full. We were out of line on grower pay. Running the plants below capacity and paying for -- there is mixed up in the first quarter with holidays. So it is -- we still had a plant cost advantage. I mean we're still several cents pound better, but it's not to the extent that normal. But I don't want to mislead anybody. Our main problem in this quarter were sales. Our cost in yields were still advantageous, not as advantageous as normal, but our primary problem here was the industry went out earlier than we did that price increases got new brackets and higher sale -- special sales prices. They moved faster than we did, and that was the primary problem. We started seeing it in November and December. They went out in August and September. We didn't start until November and December. And that was the big deal. It was primarily trade pack. It wasn't so much Big Bird deboning. And that was where we were not as competitive. I can't quantify the cost. It was -- may be $0.01, $0.01 a pound when you put and roll it all together, but it's mixed up with holidays and low volume, too.

Heather L. Jones - BB&T Capital Markets, Research Division

I mean, that's not typical you guys to be behind the ball on that. I mean what happened during the quarter that you think caused you being behind your competitors from a sales perspective?

Joe F. Sanderson

I think one of the things -- the Georgia Dock kept going up. And it -- we didn't anticipate that in November and December.

D. Michael Cockrell

And Heather also, the timing on our contract was part of it. That's what I was going to say. We've had contracts, a lot of them that were booked in 2011. Some of those are 2-year contracts, some are 3. So as they've opened, as they've been renegotiating, we have an opportunity to improve some contracts, to get brackets that reflected $1 a pound Georgia that weren't in there 2 years ago. Things like that, that we've been able to correct as contract renewals came about.

Heather L. Jones - BB&T Capital Markets, Research Division

Okay. Because when I look at your quarter, I mean you had the benefit of having January in the quarter, which was obviously, a much better month than November and December. And yet, you underperformed your calendar quarter peers. So when I'm thinking about your Q2, do you believe that these issues have now been resolved that when we look at your Q2, you should, at least, perform in line with your peers now that these sales issues have been resolved?

Joe F. Sanderson

90% of the sales issues have been resolved. And also another thing, during that quarter, beginning in October, according to Agri Stats, we were very high on grain cost, particularly soy meal through January. And that has been resolved. You can look at our cost of goods sold, and it -- we began in October through January. We were high in Agri Stats on soy meal for the whole period and corn for part of that 4-month period. Not so beginning in February.

Heather L. Jones - BB&T Capital Markets, Research Division

Okay. And finally, was just wondering, because you had originally talked about keeping these production cuts in place until the end of fiscal '13. You're now moving that up to June. So just wondering, if you had to pinpoint something, is it you're just more confident on the grain outlook? Or are you more confident now on the demand side?

Joe F. Sanderson

We feel a little bit more confident on the demand side. Our sales position has changed a little bit. We believe we are going -- we're pretty well sold right now. We're optimistic about some opportunities in sales, including our prepared foods division that may be coming up in the next 60 to 90 days. We believe that we -- for the first time, you all have heard me say I don't believe people are going to eat beef, pork -- I mean, all chicken, 7 days a week. We believe we're getting a little coverage now for the first time because of the high prices of beef and pork. We're getting more play, and we believe there's going to be a little bit more demand for chicken. We think, perhaps, the economy, if the government doesn't -- if something doesn't -- if Washington doesn't quail it, we think we may have a little improvement in the economy and demand beginning in the third and fourth quarters.

Operator

And next, we'll move to Akshay Jagdale with KeyBanc Capital Markets.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

First question, so I believe, if I remember correctly, every -- almost every quarter this year, your pounds processed have been higher or sold -- have been higher than what you had sort of guided to. And you mentioned some of the issues with the weight. So first off, I mean, why is it so unpredictable in a way, right? Because every quarter, you give us those numbers, which are very helpful. So why is it unpredictable? And then when you take into account the additional pounds that you processed this year, are you -- were you still at 94%? I mean, when you say you were at 94% utilization, is that in heads or pounds?

Joe F. Sanderson

Heads, head. We're absolutely a head, but our weight -- we never had a winter here. We have never had winter. It's been -- it's like 65 today. And we just have, we just had a mild -- we probably had maybe 5 days of frost since. We just never had any cold weather. It was ideal growing conditions, November, December and January, pretty much. And never had any disease in our flocks, and just -- we've had the best feed conversions we've probably ever had. And just birds are just very healthy.

D. Michael Cockrell

And I'll say, that's my fault. And I do the estimate, and we ended up this quarter processing, as Joe mentioned earlier, we had to bring some birds in and process ahead. And on some days that we have projected to be down because live wastes were so heavy. And look at the schedule, a couple of Mondays and saw 9-pound chickens, and I knew I was going to be off.

Joe F. Sanderson

What's our average age right now in the super birds?

Lampkin Butts

59. We're down to 59 day old bird, growing to 8, 60 chicken. And usually, that's 62 days old.

D. Michael Cockrell

I'd say we set eggs to match that 6% cutback, but when they're converting that well and they're heavier, you end up bringing them early, so you actually run more head than what you -- what we've planned for with egg sets.

Joe F. Sanderson

And for the number for the balance of the year, for the second quarter and for the year, we tried -- we've tried to build those variables into that number. And I think we'll be able to refine it a little bit better as we move forward. But it's always going to be off a little bit based on weather and expectations.

Joe F. Sanderson

We're also running 1 day younger bird in our Tray Pack Plants.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. So then, related to that, the efficiency issue, meaning, cost advantage not being, or just the cost per unit, not being where you want it to be, is that -- that's -- so basically, you're telling me you manage your business on heads. The pounds were much higher and unpredictable than you expected. So even though it might seem to us -- okay, I was just trying to say because when I do my model, we do it on a per pound basis. So I'm just -- I'm wondering why there was more inefficiency than you expected. And the pounds have come in more, so that's offset some of the...

Joe F. Sanderson

They weren't more than we expect. It was not more than we expected. We knew what was going to happen. We knew exactly what was going to happen.

D. Michael Cockrell

We knew we were be going to be higher on grower pay and chick cost, and all of those things that are tied directly to volume. As Joe has said, I think he said on the last call, Akshay, that we were going to change our grower relationships and make sure that they didn't suffer as a result of the cutback, and we increased our pay deliberately. And we'll be able to restore that now when we go back to full production.

Joe F. Sanderson

And the only thing -- the sales surprised us a little bit, but nothing else surprised us. We were -- we got behind on sales beginning in November is when it showed up. But nothing else surprised us. We were not surprised by any of the -- November, December and January are always our highest cost months, and they were, this year, just like they always are.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And I honestly do not remember the last time you had an issue with the revenue per pound or execution on that end. Is that right? I mean that doesn't happened in a while, correct?

Joe F. Sanderson

That's correct, that's correct.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And that's a onetime thing, it's fixed, no need to [indiscernible] worry about...

Joe F. Sanderson

Well, we still -- I don't think it's going -- we have 90% of it fixed. We still have 4 contracts that their dates of the contracts are such that we can't -- they don't mature until later. But 90% of them are fixed.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

But there's nothing structural like one of the things...

Joe F. Sanderson

No, no.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Is entering the East Coast is harder, and now, every additional pound that you've put in the market will be harder to price. So there's nothing like that going on?

Joe F. Sanderson

No, no, no.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay, okay. And then just going back to why increased pounds. So now, I mean every year, you get larger, right? And you're sort of moving the needle for the industry more so than you did the prior year. So you're not -- no longer just a small company. I mean, you're a large company now. So how do you think of the trade-off between increasing pounds and losing revenue per pound? I mean there's a risk there, right? I mean if the whole industry puts on 6% more pounds from now until June, I mean, I don't know where 6% more demand is going to come from. I mean you're saying, food service is still weak. You're expecting it to get better. But what am I missing there? I mean are you thinking of it that way, or is that not the right way to think about it?

D. Michael Cockrell

Well, all I think about is Sanderson Farms. And my guess is the other companies do the same thing. I'm going to do what I think Sanderson Farms and -- I think this is right for us and our shareholders. And my guess is, I think you're going to see the fast food people increase for July 4. And my guess is they're already -- they'll start increasing for May, June, July and August. That's their peak. So you you're going to get an increase out of fast food people, they're on cost flush, and you're going to get an increase for that. And -- but I don't know. I don't know what other people are going to do. Depends on -- half the people in Agri Stats are losing money. So I don't know what they're going to do. I wouldn't think they'd be adding too much.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So I mean, I know we've talked about this maybe a month ago offline. So it's really the demand -- so what changed from now until 3 months ago when you were going to reinstate this cut? It's just your view on demand. You're more optimistic, and I think when we -- just put that optimism in perspective, like, have you -- when was the last time you were this optimistic about demand and why? What are you seeing specifically that makes you feel optimistic?

Joe F. Sanderson

Well, I'm always optimistic long term. You know that. You agree with that?

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Yes, yes. But...

Joe F. Sanderson

But I'm building plants. I mean, but short term, I would say, we've seen boneless breast in the Georgia Dock both go up. Boneless breast went up in December and went up in January. The Georgia Dock went up in November, December and January. And I also note that for the first time ever, that I believe chicken is being covered to a degree by the high price of beef and pork. And I've always never said that. I never have believed that. But I believe when you get to the prices of beef and pork are now, that you're going to get a little bit more play on chicken. All of a sudden, out of the blue, in the last month, we're totally sold out on drums and thighs. Now, that's different. That went through 90 days ago. And it just happened over -- just all of a sudden. And that means something, that we've never been that way before. And that means somebody at the grocery store is at our Tray Pack plants. They're buying drums and things instead of something else. And it's just -- I have a different feeling right now, and I read an article where a round roast -- an 8-pound round roast, which I'm not crystal clear what that is. I know what a little round steak is or and eye round, but a round roast at the grocery store costs $35. So I'm thinking that might be a price impediment. And so I just feel, I feel like -- and I've seen -- what's the thing you get and you send me all beef and pork? It's rib -- daily livestock report. I've seen a graph where the demand for beef and pork have both turned down because of pricing. And I believe that, and I -- because of our sales of drums and thighs.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So I don't disagree with you. I mean, the pricing number which is coincidental and indicator, right? It's telling us that things are getting better on the demand side. So why then are you cautious about demand? I mean pricing is better. You're more optimistic now...

Joe F. Sanderson

I didn't say. You're putting words in my mouth. I didn't say I was cautious. That's why I'm putting out more chickens. But I'm not...

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay, I'll leave it at that..

Operator

And next, we'll move to Christine McCracken with Cleveland Research.

Christine McCracken - Cleveland Research Company

Just a couple of quick questions here on your feed cost outlets for the summer. I assume that you're comfortable with availability over the summer, given the timing of the ramp-up in production. But it sounds like it's still pretty tight out there, and basis levels could be an issue. Can you just comment on that, and why you're more comfortable that these won't be an issue during that time until new crops?

Joe F. Sanderson

I think it will be, it's going to be very tight, basis are going to be very high, particularly in the East -- Ohio, Indiana corn and Illinois corn is not going to be there. It's going to have to come from Iowa, Minnesota, Dakotas to get to the East, except for we bought our first South American corn into North Carolina last week. And I don't know if there's going to be more or less. It priced in for the first time. We have it coming in, I believe, April, May, June, July, some. But basis are going to be very tight. It's going to be dislocated, particularly for the East. I think that's going to apply to ethanol plants and poultry and hog producers. But I think we'll be able to get it. And that's going to be so bad for Mississippi and Texas, but we actually have June and July covered for Kinston on basis. I'm going to check on Adel -- and partially covered in Adel. We do not have that for the rest of our mills. But we did -- we have a good better coverage for the East Coast. We think that's going to be the worse.

Christine McCracken - Cleveland Research Company

You're ramping up the production across the board, correct? You'll be at full production.

Joe F. Sanderson

Yes, yes, everywhere.

Christine McCracken - Cleveland Research Company

And then just on wheats, your expectations for the summer. We got a lot of productivity here with the favorable weather. Is it your expectation that you could see some limit on wheat gains over the summer, given where feed costs are expected to go?

Lampkin Butts

Just because of the heat is on its way. You'll see different wheats this summer due to the heat.

D. Michael Cockrell

We had a much -- our wheats didn't go down last summer as much.

Lampkin Butts

Not as much, but where we are now...

Joe F. Sanderson

Yes, oh, yes. Normally, our wheats go down tremendously in the summer, and it's very difficult, in particular -- it just been -- in normal summer, our wheats go down tremendously.

Lampkin Butts

Christine, are you asking whether or not we think there'll be some people that are holding wheats down because of high grain on purpose, as opposed to just weather changes?

Christine McCracken - Cleveland Research Company

Yes.

D. Michael Cockrell

Yes, they didn't do it. I haven't seen that.

Lampkin Butts

If they're profitable, they won't do it. [indiscernible] They were supposed to do it this fall, but they didn't do it. We thought they were...

Christine McCracken - Cleveland Research Company

Just one last question with the fast food programs that you're talking about for the summer. How high do you think boneless can get, realistically, given kind of what you're expecting to add to the mix and others?

Lampkin Butts

Above 60. $60.

Christine McCracken - Cleveland Research Company

Georgia Dock, you'll be profitable at those levels?

Joe F. Sanderson

Yes, yes, that's what...

Operator

And next we'll move to Andrew Strelzik with BMO Capital Markets.

Andrew Strelzik

This is Andrew Strelzik in for Ken Zaslow. Your [indiscernible] demand is, obviously, much better. So I'm just wondering, with that better outlook, kind of what level of egg sets you'd be comfortable with as we move into the spring and summer. I know that you manage the business based on Sanderson Farms demand. But just as you look more broadly at the industry, what are you comfortable with? Or what would make you a little bit more cautious as we move into the spring and summer?

Joe F. Sanderson

It's holding up fairly well. It's just $198 million to $200 million in that range, I would guess. We had...

D. Michael Cockrell

Last spring, you got up to $200 million.

Andrew Strelzik

Yes, $201 million. May 24 and 31 was your peak.

Lampkin Butts

And we're running a little bit ahead on a percentage basis, it was through February, so...

D. Michael Cockrell

You're going to have a smaller breeder flock, actually. You're coming in -- I don't know what -- this breeder flock, probably capable of $204 million, $205 million. I'm guessing we've estimated that...

Lampkin Butts

I don't think they can do any more than that.

Andrew Strelzik

But you would be comfortable with that kind of $204 million, $205 million level in the summer? You think that, that would be okay for the demand picture?

Joe F. Sanderson

I don't know. I can't tell. I don't know that. That would -- we haven't seen that. I have no idea.

Andrew Strelzik

Okay. And then, just wanted to get your thoughts around Mexico. Some of the commentary on Avian Influenza and the impending tariffs and what's your expectation is there, what you're seeing?

D. Michael Cockrell

Well, we've read reports from Mexico's Food Safety Inspection and Animal Health Agency. They confirmed that they've got the high path H7N3 Avian Influenza in some flocks in Mexico owned by [indiscernible]. Initial reports are 12 farms, 10 of those are breeder farms that are laying eggs that would end up in broiler production. That's -- this AI was just confirmed last week, so this is really new. And those are initial reports, and they could certainly change. But initially, that represents about 6% of Mexico's broiler production, 8 or 9 weeks down the road. They've quarantined the farm, they've begun depopulating. And then outside the quarantine area, they've begun vaccinating. So nobody knows if, that they had it contained or not. But we're guessing that's going to be 6% to 10% of Mexico's production when that product doesn't -- when that product is not available for the plants.

Joe F. Sanderson

As a result of that, my guess is they probably won't be interested in any tariff, if they're going to be losing that much production.

Operator

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

Kenneth Goldman - JP Morgan Chase & Co, Research Division

I know it's difficult to tell, but as you look at the seasonal decline in wings that we've seen in the last couple of weeks, you referred to some commentary that maybe, somewhat not seasonal, maybe it's a little more demand driven, perhaps, counter seasonally than what you otherwise might have seen. Are you guys -- do you guys believe that it's mostly seasonal, or do you think there's some other drivers as well right now?

Joe F. Sanderson

I think it's just post-Super Bowl. I think they're going to get down to $1.50 to $1.55, maybe by the end of next week. And then you'll start tournaments, 1st of March, you'll start tournaments. And the demand will be right back, and they might even go back up through March. And we think we're looking at $1.50 wing, $1.60 wing, something like that.

Lampkin Butts

And then a lot of the restaurants went into December this year with more wings in freezers. They had frozen more wings because the broiler was short. Well, now some of that product's coming out of freezers, and they get -- and are being used in the place of fresh. Now that'll clean up. I mean, that'll all clean up. March madness will be back, and they're freezing some right now, though. Well, some of the spot loads -- the discounted loads are being frozen.

Joe F. Sanderson

They're freezing some of these -- wings are trading right now for $1.25 to $1.30, owned any excess. And those are going in the freezer right now. And they'll come out when these wings go back to $1.60.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

That's helpful. And then one other question. In speaking with packaged food manufacturers, historically, some of them have suggested that 100% capacity of utilization is not ideal, that it allows them less flexibility, and there's some other working costs at that level that they'd prefer somewhere in the 90% to 95% level. I realize that protein, and specifically, chicken manufacturer's a little bit different. Is 100% ideal for you in all cases, or are there other costs that we have to consider when we look at that number?

D. Michael Cockrell

100% is always the most efficient from a cost standpoint. We don't -- we -- when we cut back, it's usually -- if we're losing money, we want to lose a little less. But from an efficiency cost standpoint, 100%.

Lampkin Butts

100% running flat out, frankly, Ken, is ideal. When we say we're running full, don't forget that in the fall and after -- we always cut back in November and December because we don't need the product. We'd roll the whole year together, when we say running full, we're running 97%, 98%, because we cut back in the fall. But running full is best for us.

D. Michael Cockrell

We won't run full pre-Easter market either.

Operator

And next, I'm going to Katya Voronchuk with Sidoti & Company.

Katya Voronchuk - Sidoti & Company, LLC

Just a follow-up on bird weights. Can you actually give us a breakdown by pounds for Big Bird deboning and Tray Pack, as well as your average bird weight for these 2 segments for the first quarter?

Lampkin Butts

Targets, well, we actually did.

D. Michael Cockrell

I think she's asking how much.

Katya Voronchuk - Sidoti & Company, LLC

A breakdown.

D. Michael Cockrell

Extra pounds, Big Bird deboning versus Tray Pack.

Joe F. Sanderson

Do you have it Tim? Can you call -- let Mike call you after the call. Our bird weights during the quarter -- actual bird weights at Big Bird deboning was a little more than 8.6. And chill pack, 6 3/4, just under 6 3/4 or so.

D. Michael Cockrell

Those are average -- that's average live weight.

Joe F. Sanderson

Right, that's average live weight.

Katya Voronchuk - Sidoti & Company, LLC

Okay. And I understand that you sell some of the chicken that you process under private label. And I'm just interested, have you seen stronger demand from your retail clients for private label products? And if so, does this have any impact on your gross margins.

D. Michael Cockrell

No. We've seen excellent demand for our brand and private label. There's...

Joe F. Sanderson

No difference.

D. Michael Cockrell

Been an excellent demand for breast chicken in both categories.

Joe F. Sanderson

And it doesn't affect our margins.

Katya Voronchuk - Sidoti & Company, LLC

Okay. And so for this quarter, your SG&A expense included the $1.8 million charge relating to the plant expansion, if not in North Carolina. And excluding that, your SG&A would have been below $19 million. And I'm just wondering if you could give us some guidance in terms of SG&A expense that we should be building internal models for the coming quarters. Can we expect it to be below $19 million for the second, third quarter or for 2013?

Joe F. Sanderson

There was $2.7 million special charge -- there was $1 million to Nash County and a $1.7 million...

D. Michael Cockrell

No, 800. The $1.7 million is total. Our $1.8 million is total. $1 million plus $800,000 was North Carolina. And I think you can use $19 million, that's a good number. The balance of that increase was some salaries and administrative costs that will be -- that won't go away. So during the second and third quarter, you can use $19 million.

Katya Voronchuk - Sidoti & Company, LLC

Okay, that's very helpful. And just last question. So do you think for the remainder of the year, you will be able to get to your non-feed cost per pound below $0.34?

D. Michael Cockrell

Non-feed?

Katya Voronchuk - Sidoti & Company, LLC

So for this quarter, it's about $0.34 per pound?

Lampkin Butts

Yes. With the additional volume is...

D. Michael Cockrell

Not this quarter, though.

Lampkin Butts

Not during the second quarter. Once we get the additional volume up, that number's going to come down.

Operator

And at this time, there are no further questions. I will turn the call over to Mr. Sanderson for any additional or closing remarks.

Joe F. Sanderson

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

Operator

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

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