Sanderson Farms Management Discusses Q3 2013 Results - Earnings Call Transcript

| About: Sanderson Farms, (SAFM)

Sanderson Farms (NASDAQ:SAFM)

Q3 2013 Earnings Call

August 27, 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

Brett M. Hundley - BB&T Capital Markets, Research Division

Michael Picken - Cleveland Research Company

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Andrew Strelzik

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

Operator

Good day, and welcome to the Sanderson Farms, Inc. Third 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' Third Quarter Conference Call. Lampkin Butts and Mike Cockrell are with me this morning. We reported net income for our third fiscal quarter of $67.9 million or $2.95 per share. This compares to net income of $28.7 million or $1.25 per share during last year's third quarter. Results for our third fiscal quarter include $14.2 million in expenses related to our bonus compensation plans, including our ESOP or $9.4 million or $0.41 per share, net of income taxes.

I will begin this morning's call with a few general comments. I will then turn the call over to Lampkin and Mike for more detail. Before making any further comments, I will ask Mike to give the cautionary statement regarding forward-looking statements.

D. Michael Cockrell

Thank you, Joe. 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 belief regarding future grain and fresh chicken prices, consumer demand, production levels and 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. These risks and uncertainties are described in our annual report on Form 10-K for the fiscal year that ended October 31, 2012, as well as subsequent quarterly reports on Form 10-Q filed with the SEC. Our third quarter 10-Q was filed this morning.

You are cautioned not to place undue reliance on the forward-looking statements made this morning, and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. External factors affecting our business, such as feed grain prices, market prices for poultry meat and the overall health of the economy, among others, remain volatile, and our view this morning might be very different from our view a few days from now.

Joe F. Sanderson

Thank you, Mike. Our results reflect significantly higher poultry market prices during our third fiscal quarter when compared to last year's third quarter. But as has been the case all year, we experienced continued high grain cost during the quarter. The higher market prices for fresh chicken during the quarter compared to last year's third quarter were driven in part by continued record-high Georgia Dock whole bird prices and significantly higher prices for boneless breast meat.

These increases were fueled by steady demand for chicken in the retail grocery store market and continued good white meat demand in food service. Food service demand and market prices for boneless breast meat spiked in May, as several quick -- QSR and food service establishments featured chicken on their menus. As I've stated on our May call, this food service demand has been driven by menu shifts rather than increased foot traffic through restaurants, as restaurant traffic continues to be flat at best.

While grain costs were higher during our third fiscal quarter and the first 9 months of the year compared to last fiscal year, at least some relief could be in sight. Although wet weather this past spring caused crops to be planted late, good growing conditions this summer have fueled optimism for a good crop. The crop is not yet in the bin, however, and as we saw yesterday, market prices will likely remain volatile until the crop is made and harvested.

Based on what we have priced to date and assuming that we have priced our remaining needs through the end of fiscal year, at yesterday's closing prices on Chicago Board of Trade, our cash cost for feed grain purchased would be approximately $79 million higher this fiscal year than last year. However, our cash cost for our fourth fiscal quarter would be $65 million lower than last year's fourth quarter, and these lower costs will translate into approximately $0.08 lower grain cost per pound of chicken processed, once fully priced into our flocks.

We have priced our corn and soybean meal needs through August, but we will be on the market as we head into September and the heart of the harvest season. As Lampkin will discuss in a moment, our production numbers during the third fiscal quarter reflect our return to full production in early June. And as Mike will discuss, our net-debt-to-total-capitalization ratio is, once again, back in single digits.

As we have been saying on these calls for the past year, our next phase of growth, which we are anxious to start in Palestine, Texas, will start when our balance sheet is in good shape, when we complete our due diligence in Palestine, when we are operating well and when we have a reasonable degree of confidence regarding supply and price for grain over the next year. Our balance sheet and our existing operations are both in good shape. Our due diligence and the permitting process in Palestine are substantially complete, and we are close to what we hope will be a decent harvest.

Our plans right now are to discuss with our Board of Directors in September, once the harvest begins in earnest, possible dates to break ground in Palestine. In the meantime, I want to publicly thank the officials in Palestine, Anderson and Freestone counties and Austin, Texas for their help, support and patience as we complete the process and get started on the new project. They have bent over backwards to welcome us into their communities, and we are ready to reward that welcome, and our shareholders and employees, with a new construction project.

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

Lampkin Butts

Thank you, Joe, and good morning, everyone. Overall market prices for poultry products were higher during the quarter when compared to our third quarter last year. The Georgia Dock whole bird price during our third quarter averaged $1.05 per pound, compared to the $0.94 per pound average during last year's third quarter. The Georgia Dock price for this week is a record high at $1.065 per pound, which compares to $0.9525 per pound for the same week last year. The Georgia Dock price continues to reflect good demand for chicken in retail grocery stores.

Bulk leg quarter prices were up slightly for the quarter compared to last year's third quarter, increasing 1.5% and reflect relatively good export demand. Through the first half of the calendar year, overall industry export volumes were up 2.1% compared to the same period last year, and were up almost 3% in value. Quoted bulk leg quarter prices averaged $0.5114 per pound during our third quarter this year, versus $0.5038 per pound during last year's third quarter. Earnaberry bulk leg quarters are currently quoted at $0.50 per pound.

While below last year's third quarter, prices for jumbo wings improved during our third fiscal quarter. Jumbo wings averaged $1.28 per pound, down 19.3% from the average of $1.59 during last year's third quarter. The Earnaberry quote is currently $1.43 per pound.

Boneless breast prices were significantly higher during our third quarter, increasing by 32.3% when compared to the third quarter a year ago. This year's third quarter average Earnaberry price of $1.94 per pound compares to an average of $1.47 during last year's third quarter. Today, the Earnaberry quoted market for boneless breast is $1.74 per pound and is down from its peak in May, but still reflects good white meat demand.

The overall results of these market price changes was an increase of $0.123 per pound in our average sales price per pound of poultry products sold when compared to last year's third quarter, for an increase of 15.4%. While our average sales price for poultry products increased $0.123 per pound, this was offset in part by a $0.036 per pound increase in our grain cost per pound of processed poultry. Our average feed cost per pound processed during the third quarter was $0.405 per pound, up from $0.369 per pound during last year's third quarter.

We sold 770.8 million pounds of poultry during our third fiscal quarter, a 2.7% increase from 750.7 million pounds sold during last year's third quarter. We processed 779.9 million pounds of dressed poultry during the quarter, up 2.4% from the 761.6 million pounds we processed during last year's third quarter. Processed pounds were approximately 15 million below our previous estimate, as we processed fewer head than expected during June as we increased the age of our flocks to maintain our target live weights.

For the first 9 months of the year, we sold 2.21 billion pounds of poultry products, compared to 2.16 billion for the same period last year, and processed 2.22 billion pounds this year compared to 2.18 billion last year. We expect pounds processed during our fourth fiscal quarter to be approximately 818.1 million pounds, up compared to the same quarter last year by 5.4%. We now expect to process 3.03 billion pounds this year, an increase of approximately 2.5%, compared to 2.9 billion pounds processed during fiscal 2012.

We sold 13.4 million pounds of prepared chicken products at our Foods division during the quarter, up from 12.4 million pounds last year. Our average sales price at Foods increased 4.4%. Profitability at Foods has improved, but the facility remains challenged by the relatively weak food service market in which the plant competes.

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

D. Michael Cockrell

Thank you, Lampkin. Net sales for the quarter totaled $739 million, and that's up 18.3% from the $624.9 million in the same quarter last year. The increase was the result, as Lampkin mentioned, of higher poultry volume and an increase in our average sales price for poultry products of $0.123 per pound.

Cost of sales of poultry products for the 3 months ended July 31, as compared to the same 3 months last year, increased 8.8%. The increase is a result of the 2.7% increase in pounds of poultry products sold in the third quarter compared to last year and higher feed cost. Feed cost in flocks processed increased $0.036 per pound compared to last year's third quarter, and feed cost accounted for 54.5% of our cost of poultry products sold. By comparison, feed costs accounted for 52.8% of our cost of poultry sold during last year's third quarter.

SG&A expenses for the third quarter of 2013 were $29.5 million, compared to $20.7 million for the same quarter in fiscal 2012. Year-to-date SG&A expenses include $5.5 million for an accrued ESOP contribution, compared to only $3.1 million accrued through the first 9 months of last year.

I'll take this opportunity to remind everyone that under the company's bonus award program, the details of which can be found in the company's current report on Form 8-K, which is dated January 24, 2013, most salaried employees at the company can earn up to 25% of their salary as a bonus if the earnings per share targets set out in that program are reached, and certain key managers of the company can earn an even higher percentage. The threshold EPS target under the 2013 plan is $4.37 per share, and employees earn 5% of the maximum award if that threshold is met. The plan's maximum award of 25% of salary is earned if the top EPS target of $5.43 per share is reached.

All EPS targets are calculated net of any bonus award program.

If the top target is met, we estimate that the bonus award program will cost approximately $21 million. Approximately $7 million of that would be booked as SG&A expenses and approximately $14 million would be booked to cost of goods sold.

While we can't say today with any certainty that we'll reach even the threshold target, we certainly appear to be on track to move into the bonus award program's targets, and we began accruing for that eventuality during the third quarter. SG&A expenses for the quarter include $2.3 million accrued for a possible payout under the bonus award program, and cost of goods sold includes $4.2 million accrual for the bonus award program.

I'll also remind you that on November 1, 2011, the Board of Directors approved a performance share grant to key managers in the company under the company's equity compensation plan. Earning the performance shares is contingent on meeting certain EPS as a percent of sales targets and return on equity targets. Performance is measured over a 2-year period, and in this case, that's fiscal 2012 and '13. While we finished 2012 trailing behind the targets under this program, we've made up ground during 2013.

We didn't accrue anything in 2012, but have now determined that earning at least part of that performance award grant is probable. As a result, our SG&A expenses for the quarter include $2.2 million accrued for possible performance share payouts. If earned at the end of this fiscal year, participants must remain with the company for another year before receiving the shares, so we will continue to accrue for this payment through next year as well. Maximum liability under the plan is estimated at this time to be approximately $4.3 million.

The company's effective tax rate for the quarter and the first 9 months of the year was 34.1%, and for the balance of the year, we expect 34.5%. At the end of our third quarter, the balance sheet reflected stockholders' equity of $628.4 million and net working capital of $277.6 million. The current ratio was 2.6:1. Our total debt totaled $87.9 million, and our net-debt-to-cap was 3.8% at July 31.

We spent $39.7 million on CapEx through the first 3 quarters of the year, and we've now approved approximately $55 million for the full year. Our depreciation and amortization was $46.2 million year-to-date, and we now expect just over $61 million for the year. We also declared $11.7 million in dividends through the first 3 quarters of the year. And since the end of the quarter, we've been able to pay an additional $37.5 million on our revolver.

As of today, only approximately $11 million in letters of credit and one $10 million note are outstanding on our $500 million committed revolver. We believe we'll be able to pay that last note in September and expect to end the fiscal year with only the letters of credit outstanding on the revolver.

Casey, that ends our prepared remarks, and you can now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Farha Aslam with Stephens Inc.

Farha Aslam - Stephens Inc., Research Division

And just looking forward, if you look at pullet placements, Joe, recently, you've seen an uptick of pullet placements, up about 8% year-over-year. Does that concern you in terms of supply coming on to the U.S. market?

Joe F. Sanderson

It does not. If you will, I don't look at percent. If you'll look at the absolute number, there were fewer pullets placed in July than there were in June. Everybody looks at the percent, and that is -- I just think that's the wrong number to look at. I still contend that the primary breeders do not have the grandparent and the parent stock there to satisfy the demand that might be there from the processors to place pullets to expand right now. And this number that's -- there were fewer pullets placed in July than there were in June. And that -- it wouldn't -- those pullets are going to mature in December, and they would reach peak production in February and March, which would be, 10 weeks after that, you wouldn't reduce -- put fewer pullets down in July if you were trying to expand the number of pens in the flock is what I'm trying to say. And so I just don't believe they're there. I don't believe they can be had. I do believe the industry would do it if they could, but I just don't believe they're in place. Yes, I do believe the industry would like to expand, but I don't believe they can expand very much right now.

Farha Aslam - Stephens Inc., Research Division

Okay. And then just along that same vein, you've seen egg sets, the last 2 weeks, up about 4% to 5% year-over-year. The -- I think most people are comfortable with egg sets currently at around the 2 [ph], 2.05 [ph] level. But what do you think we should look at going into the fall period? Does Sanderson plan to take their fall production cuts? And how do you think the industry is going to think about production going into that fall period?

Joe F. Sanderson

Well, the industry is still making a lot of money, and I don't know what they're going to do for the holidays. We started our super bird -- we've already started our cutback. We will do our normal cutback. We've already started it for 1st of November. We know that people -- the demand is not going to be there for chicken before Thanksgiving and before Christmas. There are just not going to be people -- grocery stores are going to run hams and turkeys, and further processors are going to be shutting down for holidays. And so particularly at our deboning plants, we just know the demand is not going to be there, so we're not going to be running chickens through those plants every week. And we've already started reducing egg sets for the 1st of November, and I don't know what the industry is going to do.

Farha Aslam - Stephens Inc., Research Division

Great. And then my final question is, going back to your prepared remarks, you commented that food service operators have shifted menus. Could you just comment about the menu shift and kind of chicken demand in food service going forward?

Joe F. Sanderson

Well, I think early in the year, they knew beef prices were going to be high, and I'm talking about in December and January, they knew beef prices were going to be high. So it just happened in May that we looked up one day and McDonald's and Kentucky Fried Chicken, and I can't remember -- Wendy's and Golden Corral, every time you turn the television on, there were chicken -- I mean, there was television chicken features going on, with wraps and boneless chicken and all kinds of things. And boneless breast went over $2 a pound while all of that was going on. And that was the menu shift from featuring beef to featuring chicken. And it was -- and we also had a little bit going on in casual dining, not to the same extent we saw in QSR, and we think that's going to continue to a certain extent. We've seen the boneless promotion continue at Kentucky Fried Chicken, and we think there'll be another one this fall at one of the major chains on boneless breast. We understand that's going to happen. And beef is going to continue to be high, we believe, so we think we will get some more action with boneless breast.

Operator

We'll take our next question from Brett Hundley with BB&T Capital Markets.

Brett M. Hundley - BB&T Capital Markets, Research Division

Joe, that was really helpful on the conversation on breeders. I was wondering if you could go a little bit further and just kind of going on the back of Farha's question there, just when is your view for when breeder growth will be available? Clearly, the industry would like to expand these margins. Your commentary suggests that they're not able to do that with breeder stock right now. When do you think that the industry will have those breeder supplies available?

Joe F. Sanderson

I think it'll be in -- I'm not speculating by the way. I just want you all -- we have had conversations with our primary breeders. They don't have it, and -- but they have to produce grandparent stock and then parent stock. And that probably started in May and June, and it'll take a year. They have to produce grandparent stock, and it takes 26 weeks to do that, and then parent stock, it takes 26 weeks to do that. So they will have all that in place in late spring. And that doesn't mean they can't go up 2% to 3%, but to make big moves, it's going to be the second half of 2014 before -- we haven't talked with all of the primary breeders. But when the industry cut back 10%, which is what happened in 2008, the primary breeders did the same thing. They didn't keep all those breeder -- all those breedings -- all their breeding stock in place waiting on the industry. They cut back just the same. And so they've got to replace their breeding stock before they can load the industry back up. So I'm thinking it's going to be gradual before it can come back, and I think it will be second half of 2014 before it can really change materially. That doesn't mean it can't change 2% or 3%, but it's going to be the second half of 2014 before it can -- there can be a huge change.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay. And then are you seeing any extra production in the form of eggs or meat back on the U.S. market, given signs that AI is kind of beginning to normalize in Mexico? And maybe against that backdrop or that outlook in Mexico, can you talk a little bit to your expectations for dark meat here in the U.S.?

Lampkin Butts

We are seeing -- this is Lampkin. We are seeing very consistent demand from Mexico. Just like we've been seeing most of the year, we haven't seen any changes there that would indicate that AI is having less of an impact down there. I don't know, I think I saw recently there was another outbreak this summer there. It wasn't a huge flock, but they're still having some outbreaks. Demand for exports remains very steady. We've got export product -- dark meat booked through for most of September. Prices are steady to up a little bit. That arena looks very good right now.

Brett M. Hundley - BB&T Capital Markets, Research Division

Okay. And then just my last question is just on weights and how to think about that going forward. You have some industry participants moving over to heavier weights. We've, of course, noticed an uptick in Big Bird production numbers. And I'm just wondering if you can talk a little bit to how you think weights are going to go on a go-forward basis.

Lampkin Butts

I'd like -- I don't...

Joe F. Sanderson

We're seeing -- the only weight change we see is in that Big Bird deboning segment. The weights in that segment continue to creep up a little bit. We have -- we're not seeing that in the other segments. I think you could continue to see small increases in the overall weight because of the movement in the Big Bird deboning segment.

Operator

We'll go next to Michael Picken with Cleveland Research.

Michael Picken - Cleveland Research Company

I just wanted to start and get a flavor for kind of how you're thinking about September from a feed cost environment. I know you said you're more on the market, but with the harvest appearing to be a little bit later, like how do you sort of plan on sourcing your feed needs for September? More imports or how are you thinking about that?

Joe F. Sanderson

We have -- we've bought our basis for September, and it's all going to be domestic. We've -- and the basis is a good bit lower for September than it was for August. And the basis going forward, particularly for meal, soybean meal, is a good bit lower than it has been this summer. As our initial indication, we do not think we're going to need to source anything, particularly corn. There seems to be plenty of corn. And what's happened in the last 3 or 4 days has just been a first weather scare of -- maybe the second weather scare of the year. There was one back in the spring when it was too wet, and that subsided. And this is the second weather scare of the -- and it's really affecting soy more than -- we think the corn is pretty much done, not totally, but pretty much. We could use one good rain and -- across the country, and I think everything would be over, but we don't think we're going to have to buy anything. We, like I said, we already own our soy and corn for September, we just haven't priced it.

Michael Picken - Cleveland Research Company

Okay, great. And then just shifting over, in terms of your new project in Palestine. I mean, how are you thinking about starting discussions in terms of -- with your customers in terms of where you're planning to send that product and kind of where you see the demand coming from, from that product, from that new facility?

Joe F. Sanderson

Well, it will go west. It'll -- all that product will go west, similar to Waco. And Lampkin may, can elaborate on that a little bit more.

Lampkin Butts

Well, we, as Joe said, Waco -- out of the Waco plant, we sell a lot of that product in Texas and west of there and also into Mexico. I think this plant will be very similar to that, and if we were to get started this fall, we'll be opening in January of '15. So we'll be working on that from now until then. We really -- for fresh chicken sale, you can't sell that, that far out front. You've got to be a little closer to execution to actually find homes for it.

Michael Picken - Cleveland Research Company

All right, perfect. I guess, lastly, just thinking about the wing market, I know we're heading into a seasonally stronger period, but -- for wings, and we already started to see some price increase. I mean, do you think that if food service demand, as a whole, kind of remains flattish, that wings can also see maybe some of the benefits that breast meat has benefited from, as we head into the fall?

Lampkin Butts

We think so. We think football season usually does that for wings and...

Joe F. Sanderson

You see the McDonald's deal yesterday?

Lampkin Butts

One of the major restaurant chains is going to have wings in every store beginning September 9, so we think it's going to be a good fall for chicken wings.

Operator

[Operator Instructions] We'll take our next question from Ken Goldman with JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Mike, first of all, you're probably the only CFO that breaks out the cost of his golf sponsorship in his financial statement, so [indiscernible] clarity. Mike, if I exclude the cost of feed and prepared chicken from your COGS, I get to all other COGS as a percent of pounds sold at about 32.6% this quarter. And that's a pretty steep drop from the prior quarter. It's the lowest number for your company in almost 2 years. So can you talk a little bit more about maybe why that figure was so low this quarter, and maybe how we should think about modeling it going forward?

D. Michael Cockrell

You're talking about all other cost of goods sold as a percent of sales, is that what you said?

Kenneth Goldman - JP Morgan Chase & Co, Research Division

As a percent of pounds sold. Forgive me if I said otherwise.

Joe F. Sanderson

As a percent of pounds sold.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

You give numbers for total COGS, you give numbers for feed. Generally, numbers for feed, and then you give numbers for prepared chicken COGS, we can back into all other, right?

Joe F. Sanderson

It was because of the cost of feed.

D. Michael Cockrell

That's right, yes.

Joe F. Sanderson

Our cost was a little bit lower because of volume, because it was the first time we've run full in 2 years. But our costs were not exceptional. They were, it was a function of the feed being so high.

D. Michael Cockrell

During the second quarter call, Ken, we guided toward as much as between a $0.0075 and $0.01 per pound decrease in those other costs. And we actually came in a little above that, above what we had guided toward because of the bonus accruals that worked their way into the cost of goods sold. But yes, Joe is right. As a percentage of overall cost, it was really more of a function in the substantial increase of feed costs this quarter.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And then a couple of more, if I can. Mike, have you given -- or would you be prepared to give any guidance for CapEx and startup expenses for next year, given Palestine?

D. Michael Cockrell

Yes, the -- just basic maintenance CapEx is going to be between $45 million and $50 million. I don't know what that is yet. We used to guide $38 million to $45 million, but we've got more plants now and more stuff to do. I would say $50 million would be a decent model for just maintenance CapEx. The final bids, obviously, are not in on Palestine yet, but it's going to be around $130 million, plus or minus, probably plus a little bit. When that gets spent will depend on when we break ground, and we don't know that yet. So I really can't say exactly how much of that we'll spend in fiscal 2014. But our hope is, and obviously, you heard this with Joe, our hope is that we spend most of it next fiscal year. So $130 million on the new project.

Joe F. Sanderson

You won't -- you will spend the building part. A lot of that equipment is going to hit -- you'll get all the hatchery done. You'll get the feed mill done, but a lot of the processing stuff is going to be in the first quarter of '15.

D. Michael Cockrell

Of '15, right. But a big chunk of it during next fiscal year, we'll be able to talk, obviously, more clearly about that...

Joe F. Sanderson

I'd guess $75 million to $80 million is going to get spent in '14, plus the $50 million for maintenance, $125 million to $150 million.

D. Michael Cockrell

When we're able to release a date, we'll obviously be more specific about that. Does that help?

Kenneth Goldman - JP Morgan Chase & Co, Research Division

It does. Just to clarify, $45 million, $50 million maintenance, and about $75 million, $80 million on top of that next year?

D. Michael Cockrell

Yes, that's right.

Joe F. Sanderson

Right.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And then startup expenses, did you mention that?

D. Michael Cockrell

Yes, we modeled, I think, $5 million.

Joe F. Sanderson

Yes, $5 million in additional SG&A expenses during fiscal 2014 for startup expenses. Everything you spend administratively, we will have people on the ground and live grow out people on the ground next year, even though we won't be processing chicken, and all of that expense will go into SG&A until we start operating. And I would say $5 million additional SG&A expenses.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

And then one last one, if I can sneak it in. I apologize for taking a little bit of your time here. Prepared foods volumes, for years, they were kind of heading down. And now, they seem to be heading up again. Can you just talk a little bit about the strategy there, if you would?

Lampkin Butts

It's going to head up some little more.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Yes?

Lampkin Butts

Same strategy. We really haven't changed strategies with food. We've picked up a little business here and there. We've got some more coming this fall, but we'll continue on the same strategy of making the margin there, not forcing product through there at a loss, but making a profit margin.

Operator

[Operator Instructions] We'll take our next question from Andrew Strelzik from BMO Capital Markets.

Andrew Strelzik

First, a big picture question. Where do you think the industry is in terms of the chicken cycle? Do you think margins are sustainable? And if so, for how long?

Joe F. Sanderson

Well, I think margins are going to come from a different kind of a -- you're going to get another benefit because of lower grain cost. You're going to have same high-priced beef. And it's going to be a different type cycle. And I think you're going to look at something different for the next 6 to 9 months. I don't know about next summer. Next summer is what I don't know about, but I think for the next 6 to 9 months, you're looking at $5 corn and normal basis, instead of $7 corn and high-priced basis, or $6.50 corn or whatever. And I don't know about meal yet, but you're looking at a whole, huge, different cost arena. And if you're looking at high-priced beef, which I think we are, you're still looking at -- and then another thing, what are we looking at with the economy. Is the economy going to start picking up, and is demand going to start returning? That question hadn't been answered yet either. And so I think this, heading into our last holiday next week, and then into November, December period, is a bad time to be making decisions about what do you look like. January 1 is the time and the spring and the summer. It's a lot different than -- it's a lot different perspective than what we're looking at right now. So I think we have good times ahead.

Andrew Strelzik

Okay, great. And then second, you made the comment that the industry would expand production if they could. So I'm just wondering what gives you the confidence that the industry will proceed with the fall cutbacks, rather than keeping the egg sets a little more elevated as a way to expand production?

Joe F. Sanderson

I didn't say they would. I never said that. I didn't say they would do fall cutbacks. I said we're going to do our normal cutback because I think the industry is making a lot of money, and they're already setting more eggs than they were setting a year ago when they were losing -- in August last year, corn was $8.5 and soy meal was $550, I believe, in August. And they started slashing egg sets. And right now, for the month of August, August is as good as July. People are making huge margins in August, and they don't have any reason to reduce egg sets right now. So I don't know if they're going -- what they're going to do for November and December. I know what we did because -- but I don't know what the industry is going to do, if they're going to cut back for the holidays. I've been -- I'm older than most people in the industry. I know what happens at Thanksgiving and Christmas. The industry can produce 200 million eggs a week, even 202 million, and we're saying that, that many, which allows us to make a lot of money right now, would be too many for Thanksgiving and Christmas seasons. But we're saying the industry can't expand that number until some more breeders become available. And that's not going to be until sometime next year.

Lampkin Butts

And Joe mentioned that we had already input our cutback in place for chickens that will come to market the first week of November. These egg sets we saw last week, those are really still for late October. So...

Joe F. Sanderson

For most of them.

Lampkin Butts

For -- yes, for most of the -- for the big bone and the 63-day old birds.

Joe F. Sanderson

You're going to see a cut for Thanksgiving, that's still to come now, keep that in mind. You're a couple of weeks off from that.

Operator

We'll take our next question from Akshay Jagdale with KeyBanc.

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

I'm in transit, but hopefully there won't be any interruptions. First, I just want to make a comment on the compensation, incentive comp issue. I mean, although it makes it really hard for us to model on a quarterly basis, I think your employees should be really proud of having you guys as your management team, because it's really fair. And we -- just from my experience, there's not a lot of companies that are that fair. So I am always appreciative of that as an analyst, and I thought it might be a good time to mention that on this call. So -- and then congrats on the quarter, as well.

Joe F. Sanderson

Good. Thank you.

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

So now, Joe, just talking about the supply issue a little bit. So if we continue as an industry to have 200 million, 202 million egg sets, presumably, if that heads into sort of the November, December time period production, we might have, I don't know, 6% or 7% more supply on the market if there's no cutbacks, obviously. And we also have corn and soy coming down, so I'm just trying to -- I'm trying to paint a picture where pricing might come down, in the context that costs are coming down a lot as well. I'm getting to a sort of a margin scenario where the industry is still going to make a lot of money even if there's no cutbacks. Am I missing something? I mean, we're talking about a $0.07 or $0.08 per pound reduction in the cost, just because of grain. Even if we have 6% more chicken, which all of us should hope we won't, people are still going to make a lot of money, right?

Joe F. Sanderson

Yes, that's possible. I don't know that we know yet. I think you do on corn, I think we kind of know where we're going to be on corn. I don't think we know yet on soy meal yet, exactly where that's going to shake out. But I think you -- I think we know on corn where we're going to be roughly, but that's exactly right. I think you're right. But November and December are 2 extraordinary months, and I don't think you ought to -- people, I mean, they can be sloppy months, but you ought not to base everything off of November and December. November and December, you just try to survive. Nobody wants chicken in November and December. I do, but nobody else does, I mean, that's turkey and ham.

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

Another way to put it, perhaps, is I think this quarter, you earned about $0.20 a pound in gross profits. And in my estimate, there's about $0.02 in there that are unusual, related to your incentive comp, so perhaps it could have been as high as $0.22. I mean, it would take a pretty draconian oversupply situation to wipe all of that out. The last time anything of that sort happened was back, I believe, in '06 when AI had hit. So am I right in thinking about it that way? I mean, from your experience, when was the last time...

Joe F. Sanderson

Yes, that's correct. Yes, you're right. You're right.

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

Okay, I mean, the last time we even saw double-digit decrease in revenue per pound for the industry and for you was back in '06, right?

Joe F. Sanderson

What was -- it was in -- no. It was in -- was it '11?

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

'11 was down, but not double digits. It was down...

Joe F. Sanderson

Yes. Yes. Yes.

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

Okay. And so that's helpful. Can you talk a little bit about demand for next year? Just your view in light of what you see in the economy and what you're seeing in your business? Like, are you optimistic, pessimistic, neutral, compared to what you said 3 months ago?

Joe F. Sanderson

Well, I'm still optimistic about the economy for -- only because I think it's time for the economy to turn, not because of the government, not because of the Congress or -- it's in my lifetime, these things don't last quite as long. And we do have an economist that we use, and he, he doesn't -- we agree about what's going to happen for different reasons. He says it's going to be led by the housing, and he thinks it'll happen in the fourth quarter of this year, led by housing. And next year will be even better. So he and I are both optimistic for different reasons. And he's educated -- an educated economist. And my reason is just history, but yes, I'm still optimistic about the economy turning.

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

And just 2 more, these should be quicker. Just to sort of summarize the margin sort of outlook that you may have for the industry. The next 6 to 9 months should be pretty good. Do you think, if you were to guess, I mean, do you think over the next 6 to months -- 6 to 9 months, you will have a higher margin than you have had now? I mean, my guess would be yes. In other words, I'm asking, do you think margins have peaked for the next 6 to 9 months?

Joe F. Sanderson

I don't really, normally, speculate like that. We're going to work real hard, and I'm optimistic. This is the first summer we've had where we didn't have a drought in 3 years, and we're operating well. We're going -- it looks like to me beef is going to continue to be high. And the pullet flock, the hen flock is, I think, pretty well set, so we have a lot of things in our favor. And -- but I'm always optimistic about our industry, and I'm looking forward to it going through the holidays and look forward to January 1.

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

And just one last one on wing prices. I don't know if you guys have heard, but there's a large QSR whose, I think, now, it's been official, they said that they're going to do a limited time promotion nationally on wings. How do you think that impacts the wing prices from now until the end of the year? And is it possible for a large QSR to have bought all the wings they needed so far this year? I mean, is it possible to do that physically?

Lampkin Butts

At the end of July, the wing -- the cold stores' report on wings was -- wings were up 189%, almost doubled from last year. So I think a lot of those are in the freezer. I do not know that whether they've been able to put them all up, but a lot of them, a good portion of them, I think, are in the freezer, those are raw.

Joe F. Sanderson

Do you think they put them up raw or do you think they put them up further processed?

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

I mean, I think they're doing a boneless fried wing, so...

Lampkin Butts

That being the other category. The other category, I think the boneless.

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

The other issue is the cold storage numbers are basically 2 weeks of supply, right? So if you're doing a national LTO, limited time offer, I would think you would need, 190% would be, whatever, 5-week supply, I think you'd need a little bit more than that, would be my guess. But what you're saying is there's a possibility that some of that could already be in the freezer. Then as such, maybe wing prices would not go up a bit?

Joe F. Sanderson

I am confident that McDonald's and their suppliers have this figured out. That they -- I don't know what -- I don't know how they put them in the freezer or -- well, I know they have it figured out and between their suppliers, and I don't know what form they are. Some of those wings right there on the cold stores' report are our customers.

Lampkin Butts

Right. They do put them up, buy them and freeze them.

Joe F. Sanderson

They do put them up, buy them from us and put them in the freezer. And I don't -- I'm guessing McDonald's is not in that category, but I don't know that.

Operator

And gentlemen, it appears we have no further questions. I'll turn the conference back over to you for any closing remarks.

Joe F. Sanderson

Thank you for spending time with us this morning, and we look forward to reporting our -- seeing you in October in New Orleans and then reporting our year-end results in December. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation, and you may now disconnect.

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