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EX-99.1 - EX-99.1 - SANDERSON FARMS INC | g26254exv99w1.htm |
EX-10.2 - EX-10.2 - SANDERSON FARMS INC | g26254exv10w2.htm |
Exhibit 99.2
Final Transcript
Conference Call Transcript
SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Event Date/Time: Feb 24, 2011 / 04:00PM GMT
SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Event Date/Time: Feb 24, 2011 / 04:00PM GMT
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Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
CORPORATE PARTICIPANTS
Lampkin Butts
Sanderson Farms President & COO
Sanderson Farms President & COO
Joe Sanderson
Sanderson Farms CEO and Chairman of the Board
Sanderson Farms CEO and Chairman of the Board
Mike Cockrell
Sanderson Farms Treasurer & CFO
Sanderson Farms Treasurer & CFO
CONFERENCE CALL PARTICIPANTS
Bob Nicholson
PCC Asset Management Analyst
PCC Asset Management Analyst
Ken Zaslow
BMO Capital Markets Analyst
BMO Capital Markets Analyst
Christine McCracken
Cleveland Research Company Analyst
Cleveland Research Company Analyst
Lindsay Drucker Mann
Goldman Sachs Analyst
Goldman Sachs Analyst
Christina McGlone
Deutsche Bank Analyst
Deutsche Bank Analyst
Akshay Jagdale
KeyBanc Capital Markets Inc. Analyst
KeyBanc Capital Markets Inc. Analyst
Stephen Share
Morgan Joseph & Co, Inc. Analyst
Morgan Joseph & Co, Inc. Analyst
Heather Jones
BB&T Capital Markets Analyst
BB&T Capital Markets Analyst
Farha Aslam
Stephens Inc. Analyst
Stephens Inc. Analyst
PRESENTATION
Operator
Good day and welcome to the Sanderson Farms Incorporated First Quarter 2011 Conference Call.
This call is being recorded. At this time, Id like to turn the conference over to Mr. Joe
Sanderson, Chairman and CEO of Sanderson Farms Incorporated. Please go ahead, sir.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
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 $33.6 million or $1.52 per share for
our first quarter of fiscal 2011. This compares to net income of $15.8 million or $0.75 per share
for our first quarter fiscal 2010. The $33.6 million net loss for the first quarter included an
adjustment of $14.4 million net of income taxes or $0.65 per share to our live inventories to
reflect the value of those inventories at the lower of cost to market. Mike will discuss the
adjustment in detail in a moment. I will begin the call with comments about general market
conditions and grain cost and then turn the call over to Lampkin and Mike for a more detailed
account of the quarter. Before we make any further comments, I will ask Mike to give a cautionary
statement regarding forward-looking statements.
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Mike Cockrell Sanderson Farms Treasurer & CFO
Thank you, Joe, and good morning, everyone. This mornings call will contain forward-looking
statements about the business, financial condition, and prospects of the Company. Examples of
forward-looking statements include statements regarding supply and demand factors, future grain and
chicken market prices, economic conditions and production levels. The actual performance of the
company could differ materially from that indicated before looking statements because of various
risks and uncertainties. Those risks and uncertainties are described in our most recent annual
report on Form 10-K and in the companys quarterly report on Form 10-Q filed with the SEC in
connection with our first quarter ended January 31, 2011 and that 10-Q was filed this morning.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Thank you, Mike. Our financial results for the first fiscal quarter reflect challenging market
conditions. While demand for retail grocery store customers has remained stable, that stability is
reflected in a slightly higher average Georgia dock whole bird than a year ago. Food service demand
remains weak. Despite weakness in demand, industry production is measured by ready to cook pounds
produced, was 7.6% higher during our first fiscal quarter, compared to the same fiscal quarter a
year ago. This increased production and flat demand is evident in the market prices for boneless
breast meat, wings, and tenders.
While market prices for chicken have been soft, market prices for both corn and soybean meal moved
significantly higher during our first fiscal quarter, compared to the first quarter of last year.
Prices for all feed grains moved higher starting in August on concerns over drought conditions in
Russia. Then, the November supply and demand report published by the USDA reflected lower than
expected yields for both corn and soybeans in the United States. And, that sentiment continued into
January report.
As a result of the less than anticipated production numbers, the stocks to usage ratio for corn is
at its lowest point since 1995 and has been lower only four other times in history. This tightness
in grain supplies as resulted in significantly higher grain prices and higher prices are likely to
continue at least through this fiscal year. Most everyone who follows the grain market will now
turn their attention to the March supply and demand report and, more importantly, the March 31
planning and tensions report. Even with normal timeline yields most believe we need 90 million
acres of corn planted during 2011 just to maintain the current type figure. We need more acres than
that to begin rebuilding supplies.
While we need more acres of both corn and soybeans, the American farmer will have a nice menu of
options available to him, as he makes his planning decisions, as commodity prices for cotton and
wheat are also at historically high prices. Even if we get adequate acres in the March 31 planning
and tensions report, that crop then needs to get into the grounds timely and there is little margin
of error with weather as we head through the growing season. Because of the tightness of supply,
the market will most likely exaggerate its reaction to any real or perceived weather threats.
Because of the uncertainties surrounding feed grains, we are on the market for both our corn and
soybean meal needs.
Based on our costs 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 costs for fiscal 2011, including the cost of
additional volume, would be $330.7 million more than during 2010. This increase would translate
into a $0.105 per pound increase in our cost per processed pound. Our grain costs will be much
higher. The company and the industry can still earn positive margins, if chicken prices move
significantly higher to allow us to offset these higher costs. For this to happen, we need either a
decrease in supply or an increase in demand or both.
Egg sets and incubators, relative to a year ago, have moderated from the increases we saw during
November and December but are still too high to move chicken markets significantly higher without
increase in demand. Ive said and continue to believe that we will not see an increase in demand
until employment in the United States moderates until unemployment moderates and Americans get
their jobs back in large numbers. Unfortunately, we do not see that happening over the next few
months. As a result, we will probably take a decrease in supply to move chicken markets higher. I
do believe current market conditions will ultimately trigger production cuts. But, it will likely
be later before that happens.
Not all of the news during the first fiscal quarter was bad. Our Kinston, North Carolina plant
began processing chickens in January on time and on budget. Lampkin, Mike, and I visited the plant
in January, and I can report that it is a beautiful plant with enthusiastic employees and we look
forward to moving that plant to full production early during the calendar 2012. With respect to
North Carolina, we also announced today that our Board of Directors has approved a delay in the
construction and startup of the Companys second North Carolina poultry complex.
We previously announced our plans to invest approximately $96 million for the construction of a
second processing plant and hatchery on sites to be determined in North Carolina. We believe it is
in the best interest of Sanderson Farms and our shareholders to delay construction of our second
North Carolina plant in light of escalating prices for corn and soybean meal and the fact that we
have little visibility regarding future input costs. Because 40% of the United States corn crop is
now expected to be used to produce ethanol, the poultry industry and other animal feeders are going
to continue to be challenged by tighter supplies and historically high prices.
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Until we have some visibility regarding the 2011 crop, we deem it prudent to be conservative with
our working capital and our balance sheet at this time. I would like to say, however, that, in
spite of this decision, we remain committed to our long-term growth to the second North Carolina
complex and to the local communities in North Carolina that have graciously supported this project.
As always, we will manage Sanderson Farms for the long-term. Well do nothing that we believe will
threaten the stability of our balance sheet, but we look forward to pursuing this expansion
opportunity at the appropriate time. At this point, Ill turn the call over to Lampkin for a more
detailed discussion of the chicken markets and our operations during the quarter.
Lampkin Butts Sanderson Farms President & COO
Thank you, Joe. Overall, market prices for poultry products were lower during the quarter when
compared to our first quarter last year and were lower when compared to our fourth quarter ended
last October. The Georgia dock price for whole birds reflected continued good chill pack demand
during the quarter, and averaged $0.85 per pound, an increase of 3.5% compared to last years first
quarter average of $0.824 per pound. The Georgia dock price reported yesterday was $0.855 per
pound. Georgia dock whole bird price continues to reflect a good balance between the supply and
demand of chill pack product destined for the retail grocery customers.
Bulk leg quarter prices were higher by 2.8% compared to last year, while realized bulk leg quarter
prices were very high during our fourth fiscal quarter when Russia resumed buying United States leg
quarters. Once Russia freezers were full, prices leveled out. Leg quarters averaged $0.354 per the
pound during our first fiscal quarter, compared to $0.344 per pound last year. Final numbers for
calendar 2010 reflected a 5.1% decrease in the volume of export parts, exported during calendar
2010. While we shipped nothing to Russia during the first half of calendar 2010, they bought a
substantial amount of product during our fourth fiscal quarter. Exports to China were down 79% for
the year, while Mexico and Hong Kong were up 20% and 172% in volume respectively.
We believe the export markets are going to be steadied to improve during calendar 2011, the Russia
quota has been set and that important market should be open during the year absent foreseen
circumstances. There is currently a question involving exports to Mexico, but the legal challenges
raised in a recent anti-dumping case brought by Mexican operator will take several months to
settle. The average price for jumbo wings was significantly lower during our fourth fiscal quarter
compared to last year, dropping 37%. Last year, wings had a great run but an excess supply of
chicken caused prices to drop counter seasonally during the fall and through the Super Bowl.
Jumbo wing prices averaged $1 per pound during our first quarter this year, compared to $1.57 per
pound during last years first quarter and are now they are $0.70 per pound today. Boneless
breast prices decreased by 3.1%, when compared to the first quarter a year ago. The boneless market
averaged $1.23 per pound during the 2011 first quarter, compared to $1.26 per pound last year and,
as Joe mentioned, this market continues to be adversely affected by a challenged United States
consumer and weak food service demand. We sold 630.7 million pounds of poultry products during the
first quarter, a 7.9% increase from the 584.3 million pounds sold during last years first quarter.
Our processed pounds were up 10% from 595.8 million to 655.4 million pounds.
The difference between pounds sold and processed reflects changes in our processed inventory. We
expect to process approximately 665.6 million pounds during our second quarter, up from 654.6
million pounds processed during last years second quarter. For the year, if we maintain our
current production targets for the balance of the year, we will process 2.73 billion pounds, which
will be a 6.2% increase over the 2.57 billion pounds processed during fiscal 2010. 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 well
do everything necessary to protect our balance sheet and the integrity of our operations. At this
point, Ill turn the call over to Mike Cockrell to discuss our financial statements.
Mike Cockrell Sanderson Farms Treasurer & CFO
Thank you, Lampkin. Our net sales for the quarter totaled $427.7 million, and that was up from
the $420.1 million during the same quarter last year. Our loss of $1.52 per share during the
quarter compares to a $0.75 per share in income during last years first quarter, and our net loss
for the quarter includes a net charge, as Joe mentioned, of $14.4 million or $0.65 per share to
reduce our inventory values to the lower of costs to market. This charge consists solely of an
adjustment to the value of our live inventories and let me spend a minute talking about that. You
may recall that we went through a similar exercise in fiscal 2008.
At the end of the fiscal quarter, we had approximately 71 million live rollers on the ground across
the company. Approximately 40.5 of those live chickens were destined ultimately for the big bird
de-boning plants and 30.5 million head of those chickens to our retail plants. Some of those
chickens, obviously, were one day old, some two days old, some three, four, five, and so forth up
to 60 days. As of today, many of those chickens
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
have been grown to maturity, processed and sold. Some of those chickens are still on the ground and
will be processed through the balance of February and into March. Normally, we carry our live
inventories at cost and accumulate that costs as birds are fed and grown.
Generally accepted accounting principles require that our live inventory be reported on our books
at the lower of cost for market. With respect to live birds, the GAAP principles require an
assessment of expected cost to finish that inventory and compare that to the expected market values
that will be realized from the processed chickens. The applicable guidelines require us to project
cost to complete and to deduct from that the amount we expect to realize from the sale of mature
inventory. We have a high degree of comfort in what it will cost us to complete the grow out and to
process the live chickens but we have to estimate based on current and expected market conditions
what we will realize when we sell those birds. This exercise led us to believe that the projected
cost of our live inventory at maturity will be greater than the ultimate selling price. And, as a
result of that analysis, we adjusted the cost of our live inventory down by a net of $14.4 million
for that $0.65 per share.
This inventory adjustment will actually have a positive effect on our second fiscal quarter,
because we recognize during our first quarter those losses that were inherent during our live
inventory at January 31. That inventory will be sold during our second fiscal quarter and the loss
that would have otherwise occurred when the product is sold has actually been recognized at the end
of our first quarter. Of course, we cant predict whether or not this will have a positive
whether or not this positive impact on our second quarter will be offset in whole or in part by a
similar adjustments at the end of our second quarter because that will depend on the inventory cost
at the time and the market factors that are presently not known to us.
Absent the inventory adjustment, our cost of sales of poultry products for the three months ended
January 31, as compared to the same three months a year ago, increased 17.5%. This increase is a
result of a 7.9% increase in pounds of poultry products sold in the first quarter compared to last
year and significantly higher feed costs. Our feed cost increased 21% to $0.342 per pound and that
compares to $0.283 per pound last year. While our cost per pound was higher, our sales price per
pound for poultry products actually decreased 4.8%, or $0.32 per pound. This combination resulted
in a significant deterioration of our margins.
SG&A expenses for the first fiscal quarter of 2011 were $4 million higher than the same three
months a year ago. This increase was a result of SG&A expenses related to our Kinston, North
Carolina project, as those expenses were booked as SG&A cost until we began operating the plant in
January. Despite the challenging quarter, our balance sheet remains strong. At the end of the
quarter, our stockholders equity was $609.4 million and networking capital was $195.9 million. Our
current ratio was 3.2 to one.
Our debt at the end of the quarter totaled $63 million, and our debt to cap ratio was 9.2% at
January 31. We spent $18.9 million on CapEx projects during the first quarter, and we expect to
spend $60.5 million on CapEx during the fiscal year. That number, though, includes $11.1 million in
operating leases. Our depreciation and amortization during the first quarter totaled $11.4 million,
and we continue to expect about $48 million for fiscal 2011. We closed and announced this morning a
restatement of our revolving credit facility yesterday, which increased the capacity of our
revolver from $300 million to $500 million.
In addition, we built into that revolver the latitude needed to build the second North Carolina
plant when we believe construction to be appropriate. We also made some changes to our CapEx
limitations to reflect the increased maintenance budget we expect over the next five years as a
result of our growth. The interest rate went up slightly from our previous revolver. We added
several new banks and we extended the revolver for five years through February 2016. The credit
does remain unsecured. At this point, that completes our prepared remarks and, Ruth, you can now
open the call for questions and comments.
QUESTION AND ANSWER
Operator
Yes, sir, thank you.
(Operator Instructions).
Your first question comes from the line of Farha Aslam.
Farha Aslam Stephens Inc. Analyst
Hi, good morning.
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Good morning.
Farha Aslam Stephens Inc. Analyst
First question, you noted that youre increasing production by 6.2%, whereas last quarter you
were thinking production for 2011 would increase only about 3% to 4%. I was just trying to
understand the logic behind the increase in anticipated production.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes. Our live weight was up a little bit in the first quarter, Farha, but were still on the
same schedule we have been on ramping Kinston up. Most of the increase for the year versus last
year is going to be from the Kinston production, obviously.
Farha Aslam Stephens Inc. Analyst
Okay. And, then, in terms of pricing and industry cuts, how much do you think the industry
needs to cut to pass along the higher grain prices?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Farha, I dont have the I dont know that. I know that to breakeven, weve got to get our
prices up $0.105 per pound. That is a pretty steep cut. I do not have my schedule with me, my egg
set schedule. But, let me see just a minute. We are setting 10 million eggs a week more than we
were back in 2000, when we in 2008. Excuse me, the first half of 2009. So, I dont know the
answer to that. It has got to be less than what we have now. This is not matching up with the
demand that is out there, particularly at food service.
Farha Aslam Stephens Inc. Analyst
And, Joe, are you surprised that you havent seen production cuts in the industry yet, and do
you have any thoughts on when you anticipate reduction cuts to kind of start flowing through?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Im not surprised. The industry has made money for two years. The balance sheet are pretty
good shape. The industrys been losing money for maybe three months now. I think theres optimism
and hope that you are going to see some price improvement in the spring and the summer. And, I
think people are going to wait for that. And, I think the last agri stat showed three fourths,
three fourths of the industry losing money. And, I am not surprised. I think theyre going to wait
to see if we are going to get any price improvements. I think their balance sheets are strong
enough to wait for a while. But, ultimately, thats production cuts will happen.
Farha Aslam Stephens Inc. Analyst
Is there a scenario where you would rationalize your production?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Weve done it in the past.
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Farha Aslam Stephens Inc. Analyst
And, are you thinking about, is this bad enough to do it today?Or is there are you
looking for grain markets? Is it a question of timing? What would drive Sanderson, because I know
you are of the most efficient in the industry, to cut production.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Well, we dont anticipate reducing production right now. It would be it would be a hardship
on our growers to do that right now, particularly if we got to this summer and had a bad crop. And,
we were forced to cut back on all of or a good portion of 2012.
Farha Aslam Stephens Inc. Analyst
Right.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
And, we had started cutting now, and we had our growers cut back from, say, this spring. We
would have put our growers in a very difficult position. Our balance sheets good enough that we
dont need to do that. So, Id be very reluctant to put our growers in that kind of position.
Farha Aslam Stephens Inc. Analyst
Understood. And, then, your balance sheet, youve recently increased your credit line. Is the
only taking into account the current situation and North Carolina? Or are you at all looking at
acquisitions? Have there been any assets that have been up for sale that are of interest to you?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
No, we started working on this revolver last fall. More adequately takes into account our
balance sheet. The last revolver we did $300 million, our equity position was $400 million, now our
equity position is $600 million and it does take into were going to have more working capital
needs, obviously. We have the North Carolina plant and we hope the North Carolina plant is not the
last plant were going to build.
Farha Aslam Stephens Inc. Analyst
And, my final question and I will pass it on is have you seen any consumer trading out of
beef and into chicken or any increased future activity into chicken as a result of high beef and
pork prices?
Lampkin Butts Sanderson Farms President & COO
Farha, this is Lampkin. Good morning.
Farha Aslam Stephens Inc. Analyst
Good morning.
Lampkin Butts Sanderson Farms President & COO
We havent really seeing anything that is happening right now regarding that demand. Retailers
theyre talking about the fact that they are going to feature chicken a lot more this spring
because they are anticipating much higher beef and pork prices the further they go into the year.
We have had good steady demand at retail but we have not seen what youre talking about as a shift.
Our retailers are beginning to talk about it or for later in the year.
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Farha Aslam Stephens Inc. Analyst
Great. Thank you very much.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Thank you.
Operator
Your next question comes from the line of Heather Jones from BB&T Capital Markets.
Heather Jones BB&T Capital Markets Analyst
Good morning.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Good morning, Heather.
Heather Jones BB&T Capital Markets Analyst
A couple of quick questions. First, on a detail-ish one, SG&A, I think your Q had remarked
that you dont expect any sort of expense in Q2. Should we expect the $4 million to $5 million
sequential decline there?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes, you should, all else being equal, during January and February, or excuse me, during
November and December, we pushed $4.5 million through SG&A for Kinston. And, now all of the Kinston
expenses will be in cost of goods sold. So, yes.
Heather Jones BB&T Capital Markets Analyst
Okay. And, the 4.8% decline in pricing, that includes the effect of the inventory right now,
correct? So, its not just it wasnt just the deterioration of pricing in Q1 but also
anticipated deterioration on inventories for Q2?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
No. No. The sales number include only those pounds sold during the quarter. All of that
adjustment is separated out in one line item. Going forward, it will be reflected in cost of goods
sold. You can kind of consider that $22.3 million as a reserve and itll flow through the cost of
goods sold going forward because inventory will be lower by that $22.3 million, so itll show up
there. But, no, the sales number, we only that is only on the pounds that were actually sold. We
didnt projects sales out and recognize them in any way during the quarter.
Heather Jones BB&T Capital Markets Analyst
Well, as far as this impact, was the impact adjusted realized on the inventories at the end of
January, so, to your point, you know, there was a broad range of ages. So is it fair to assume that
there is going to be some birds processed during Q2 that were not in inventory at the end of Q1
and, thus, those, the impact of negative pricing, should pricing this negative trend that hasnt
been realized yet.
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8
Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Absolutely. The 70 million chickens that were alive and in inventory at January 31, we have
processed two thirds of those. The rest will be processed as we move into March and then there will
be absolutely new birds that will be processed later and well recognize whatever the loss is on
those birds at the time they are sold.
Heather Jones BB&T Capital Markets Analyst
Okay. And, finally going to your food
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Or profit.
Heather Jones BB&T Capital Markets Analyst
Sorry?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I said, or profit, if the markets get a whole lot better.
Heather Jones BB&T Capital Markets Analyst
That is very optimistic of you. Your commentary on food service. You have been talking about
it being weak for sometime now, but Im just wondering if you can give us some sequential
qualification, commentary. Has it stabilized for you guys? Has improved at all? And, youre just
saying its soft relative to where it was three years ago. Could you just give us more specifics on
what you were seen as far as food service demand more on a year on year basis?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Well, we first described it in May, 2008 and it was a result of $4 a gallon gasoline and that
was a beginning. That was the summer that we didnt run any overtime at our prepared foods plants.
And, it kind of started there for us. And, then, I guess, in the winter of 2008, with the economic,
it was home foreclosures and unemployment starting, and all of that. It just got worse and worse
after that. And, the casual dining stopped. And, boneless breasts went to $1 that winter and the
industry had to make cuts. And but, traffic through restaurants declined and I think it has
stabilized.
I dont think it has gotten any worse but a few high end restaurants have been improving. But,
nobody else has, really. They have been making some restaurants have been making some profits but
the traffic counts are not improving. And, I think, one of our biggest customers is Cisco and you
saw their report recently. This sames true with all of the other distributors. Their box counts
are not there. We dont believe that is going to happen until people get their jobs back. And,
theyre confident that they are going to keep those jobs and they are going to start going to go
back out to eat. And, our foods division, sales are soft.
Our boneless breasts meet sales values, tender values and you can see what happened to wings this
year, and every one of those wings goes to watering holes. We have 5%, 6% 5% more head of
chickens and 7% more pounds and wings are selling right now, actually trading about $1 a pound than
what we were realizing this time a year ago. So, thats what were seeing. We are feeling that and
it is flowing through our P&L, actually. Quite vividly. Along with higher grain prices.
Heather Jones BB&T Capital Markets Analyst
Now, you mentioned that $0.105 per pound price increase to break even. You were referring to
Sanderson or
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes.
Heather Jones BB&T Capital Markets Analyst
So
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
And, let me elaborate on that. We are heavily weighted towards our big bird de-boning. And,
big bird de-boning is in Agri Stats today is not the place to be. Because of the feed costs. Big
bird de-boning is down the page on Agri Stats. Chill pack is next and fast food is next and thats
just the way it is when you get into high feed costs like this.
Lampkin Butts Sanderson Farms President & COO
And, Heather, let me make one point to that, to your point, that $0.105 per pound that is feed
grain cost. Thats what we would need to offset the grain and, at last years margins, that what
offset just the there are other costs. That is just the feed grains.
Heather Jones BB&T Capital Markets Analyst
Oh, I thought Joe was saying you needed that just to break even.
Lampkin Butts Sanderson Farms President & COO
No, thats just to offset all of the higher feed grain cost this year.
Heather Jones BB&T Capital Markets Analyst
To be able to return to last years margins?
Lampkin Butts Sanderson Farms President & COO
Thats correct.
Heather Jones BB&T Capital Markets Analyst
Okay. So, given the situation
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
That would give you back to last years margins. I do not mean break even. Im sorry. That
would just offset the grain cost.
Heather Jones BB&T Capital Markets Analyst
I have to say that was a little alarming. You had mentioned as far as questions, she had
asked you about cuts and you had mentioned going into 2012 if there is problems with the crops
later this summer, is that the reason whyJust wondering if you could elaborate more, is that the
reason
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
why youre not wanting to cut now because you have fears that there could be problems with the
crops and basically you need to save you need to save your ammunition for that?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I dont have fears. I mean, we either are going to have a good crop, a normal crop, or a bad
crop. And, I do not know which one we are going to do. But, if we have a bad crop, my judgment is,
were probably going to cut back. Along with a bunch of other people. I dont want to cut my
growers back right now.
Heather Jones BB&T Capital Markets Analyst
Right.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
And, then cut back in the fall and had them cut back for a good bit of next year, from now
until then. I dont need to. Our balance sheet is strong enough to handle this right now.
Heather Jones BB&T Capital Markets Analyst
Okay. I appreciate it. Thank you.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
You bet.
Operator
Your next question comes from the line of Stephen Share from Morgan Joseph.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Good morning.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Good morning, Stephen.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Hello. I was curious if you could talk a little bit more about volume. Specifically, could you
talk did you guys process more birds? I realize weight went up. But, could you maybe talk about
because I thought you said you had planned production around 600 million pounds and you came in
at 630 million. I was hoping you could help us understand kind of the variance. How much was sales
versus production, how much was higher weights? How much was maybe more birds processed?
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes, we processed 655 million pounds, and last year during our first quarter we processes 596
million. We our live weight was up and that increase is really spread among our big bird plants
and our retail. We had heavier birds and, plus, last years first-quarter, our head count was down.
It was a combination of both did we cut more during the holidays, during last years first quarter
than we did this years first-quarter.
Stephen Share Morgan Joseph & Co, Inc. Analyst
I see.
Lampkin Butts Sanderson Farms President & COO
And is a function of lightweight.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Primarily.
Lampkin Butts Sanderson Farms President & COO
We had ideal growing conditions here until when did it hit
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Until we got into January.
Lampkin Butts Sanderson Farms President & COO
In January, our weights came off because we got into some severely cold weather but we had
perfect growing conditions here all of November and December.
Stephen Share Morgan Joseph & Co, Inc. Analyst
I see.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes, our headcount was up 93 million heads to almost 100 million heads. So, it was but, it
was both, Steve.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Okay. And, then if we kind of look at the balance for the year. Can you maybe just go over
a lot of times you provide what you had plant production weights are?Is it still it was before?
Kind of the 665 for the second quarter, 699 for the third, 711 for the fourth?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Spot on.
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Stephen Share Morgan Joseph & Co, Inc. Analyst
Okay. So, no change there. Its going to be the same. But, you will have some inventory you
do have some meat in inventory?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
That is just depends on when boats fill. We dont have any excess inventory. We dont do
that. It strictly depends on when boats ship.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Got it. And, then one last thing, you mentioned that the cost would be up about $331 million
went in the market and bought all of your feed now. Could you maybe talk about what percentage, you
know, for the quarter and the year, of the feed need you have purchased already?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Not
Stephen Share Morgan Joseph & Co, Inc. Analyst
Priced already, Im sorry.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
We dont have much. We bought the first quarter obviously.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Yes.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
We dont generally give that information. Weve obviously have purchased fourth quarter. We
are pretty much hand to mouth going forward.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Okay. So, that $330 million still has a lot of variance around it.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
It does. Absolutely. That is if we had priced everything Monday afternoon after the market
closed.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Okay. And, you havent done much pricing yet, would be a fair statement?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
That would be fair to say.
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Stephen Share Morgan Joseph & Co, Inc. Analyst
Okay. Great. I will pass it along.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Thanks, Steve.
Stephen Share Morgan Joseph & Co, Inc. Analyst
Thank you.
Operator
Your next question comes from the line of Akshay Jagdale from KeyBanc.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
Good morning.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Good morning.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
I just wanted to, Joe, if I may, talk a little bit about the production cuts. You mentioned
the industry being in a better situation balance sheet wise but you also said that you have not
seen production cuts because people are optimistic about the prices and, I think, on your last
earnings call you had said something like there could be a tale of two halves. So, can you just
help me put those two comments together? Why would the industry be expecting better pricing if
theyre not seen any supply cuts right now, and maybe more than that, if you could just tell us
what your expectations are for pricing in the back half?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I think the industry is eternally optimistic about seasonal pricing. Historically, since I
have been in the business, you get pricing improvements in the spring and summer times. Now, how
much, I do not know. But, after Easter, when you get to Memorial Day, and July the Fourth and you
get to Labor Day, we typically, historically, get to price improvements. Were getting price
improvements right now in dark meat. Our export dark meat. Were not getting were getting price
deterioration in wings, which is seasonal. Whats flat is white meat. But, I think, because of
history, people are expecting white meat to improve after Easter. Thats been our history. Now, if
that doesnt happen in the spring, then thats when you may see some something happen.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
But
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Thats what I was talking about.
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
Right. But, do you in other words, because we havent seen any production cuts yet. Any
recovery or better price movements on white meat is going to have to come from better demand,
right? Is that how you think of that?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I do.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
Okay. Any sense of, where youve been very clear about your views as to employment getting
better, the biggest sign of demand getting better. Is that still your view? Or is there something
else? Last year, I guess, there was some production issues which lead to some increased demand
perhaps? Can you I mean, can you just help me with that? Im still trying to understand where
the demand for white meat could come from the next three months.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I dont think its coming. I dont think its going to be there. I dont see employment
improving dramatically. Nobody weve talked to although GDP is improving, it appears that and
weve seen lower unemployment claims. Most economists believe those people the reason that is
happening is because people are dropping out of the job market. And, whatever the job numbers are
marginal. So, we dont believe that thats were not making this up. We do our homework about
this. We think its just very marginal, job number improvements. So, based on that, we dont
believe there is going to be any significant change in job numbers, job growth. And, therefore, we
dont think theres going to be anything other than maybe a seasonal improvement in demand for
breast meat.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
Right, and so
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Certainly, its not going to cover this cost.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
Right. So, what you have said is that if grain markets move up even higher from here, then you
may see a forced cut back, because, at that point, you will know where the white meat market is.
And, youll have a further head which will stress the economic, such that you will have six months
of perhaps losses, and then future potential for more losses, which will force the industry to cut
back. Is that a fair characterization of the way you are thinking?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes. I just cant pick the date when thats going to happen. But, I think it will happen. You
have the two largest players that are well covered with grain through July, and thats an important
factor in this, too. And, then, there may be some others that may have some coverage, as well. But,
eventually, you have $1.24 breast and $0.70 wings and $1.20 tenders, and $7 corn and $340 meal,
that model will not continue to run.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
One last thing and I can probably follow up with you after the call on this, but what is
all else equal, where to breast prices need to go for you to break even? So, this summer, where do
breast prices need to be for you to break even, given where grain prices are today?
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15
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Where is that? It depends on the leg quarters and wings and tender. Is this the breakeven
model?
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
I can follow-up with you.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Okay. Do that.
Akshay Jagdale KeyBanc Capital Markets Inc. Analyst
Thanks a lot. Ill pass it on.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
You do that. Thank you.
Operator
Well go to our next question from Christina McGlone from Deutsche Bank.
Christina McGlone Deutsche Bank Analyst
Good morning. Can you hear me?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
You bet, good morning, Christina.
Christina McGlone Deutsche Bank Analyst
Good morning. I know weve asked this question a lot. I just want to understand something. To
me, it seems like the chicken market maybe slightly different this time than in the past during
downturns because you do have like you just said, Joe, the two larger players well covered on
grain at least through July, and they have better balance sheets and better operating cost
structure than theyve had in the past. So, Im curious if the cuts now are going to have to come
from the smaller players, to do their fair share relative to what has happened in history and if
that just takes longer?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I dont know. Thats hard to say. I dont have an answer for that. I think I dont think
anybodys going to be losing, you know, if youre paying $7 for corn and $350 a ton for soy. And,
this markets like it is. I think everybodys going to want to make an adjustment, Christina, I
believe.
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Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Christina McGlone Deutsche Bank Analyst
Okay. And, then, just to go into Mexico, I know there is a lot of uncertainty. But, what are
the possibilities there? Is there a date coming up on when the duties would be applied and then
they are analyzing put into place permanently? Or it just several months before anything is put on
and are there other markets that would take the product? How should we think about that, Lampkin?
Lampkin Butts Sanderson Farms President & COO
Well, the only deadline right now its just a registration to be included in this suit which
is Monday. There is nothing, there is no tariff that will happen immediately. We think our
lawyers tell us it will take about six months for this thing to get in front of a court in Mexico.
If it makes it that far. We think we are six months away from seeing any impact, if we were to lose
the suit. And, yes, the product Mexico is a significant market for us. Its a big market. If it
were to close or tariffs were imposed on it, either way, its going to have an impact on us but the
dark meat, it will find a home. It always does.
Christina McGlone Deutsche Bank Analyst
Okay. And, I guess, Joe, Im just curious, given that we have seen this week a big break in
grain, why is it not viewed as a hedging opportunity for you?
Lampkin Butts Sanderson Farms President & COO
It might be. It is something that we talk about everyday. And, as Joe has said before, weve
got advisors that we talk to and we talk about it.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
It might be. I just meal particularly looked more attractive than corn. And, that could
very well be.
Christina McGlone Deutsche Bank Analyst
Okay, and just last question, Joe, whats the discount that breast meat is trading to the
quoted earner bearing price? Has that narrowed at all?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
It has, its 12-15 today.
Christina McGlone Deutsche Bank Analyst
Okay, great. Thank you very much.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Thank you.
Operator
Your next question comes from the line of Lindsay Drucker Mann with Goldman Sachs.
Lindsay Drucker Mann Goldman Sachs Analyst
Hi, good afternoon everyone.
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17
Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Good morning, Lindsay.
Lindsay Drucker Mann Goldman Sachs Analyst
Im wondering, knowing that you cannot look into anyone elses business, if you could maybe
help us understand a bit why your two largest competitors are apparently rather insulated from
challenges that have are flowing through your P&L and what were seeing in Agri Stats. What is
different about the model or what is at hand that is allowing them to weather through this, easier
it seems?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
One, they bought their grain well. They both bought their grain ahead, which is something that
we generally do not do. But, they did a good job buying their grain and their business model is a
good bit different than ours. We are heavily weighted towards big bird de-boning which, over the
past 20 years or since the early 1990s anyway has been the most advantageous and most profitable
business to be in. Today, it is not. Those are the two main reasons.
Lampkin Butts Sanderson Farms President & COO
Lindsay, as weve said before and showed the margins in big bird de-boning versus the other
market segments. This is the environment as we have pointed out before, it happened in 2006, it
happened in 2008 and we went through a quarter or two, to be in a very bad challenging market with
high grain prices, the big bird de-boning model is not an advantage. It is at the bottom of the
cycle, it is where we get that where big bird de-boning doesnt measure up. Everywhere always on
the cycle it does, but not during the environment.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
It happened in 2002, as well, during the Russian embargo.
Lampkin Butts Sanderson Farms President & COO
Yes, it did.
Lindsay Drucker Mann Goldman Sachs Analyst
Got you. And, then as far as the write-down goes, what date did you mark your inventory to
market? Was it just at quarter and?
Lampkin Butts Sanderson Farms President & COO
Yes, at quarter end. We made the valuation at quarter end and then we continued to look at it,
during the quarter and test our assumptions and the number did not really change, but we had to
test our assumptions as we got through the three weeks into the quarter to make sure market price
and cost assumptions were accurate. But, it was as of January 31.
Lindsay Drucker Mann Goldman Sachs Analyst
And is the way to think about that, the birds that are still in inventory, that you havent
processed yet, the one third of those 70 million birds, if you were to process them and sell them
today, and assuming the prices using your assumptions have not changed that they would be gross
profit neutral?
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18
Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Lampkin Butts Sanderson Farms President & COO
Thats correct. If all of our assumptions are exactly correct which, of course, they will not
be but if they were, or are, then yes, you would break even on those birds that have been
processed and sold them.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
You didnt have SG&A in there.
Lampkin Butts Sanderson Farms President & COO
No. That is just on the gross profit line.
Lindsay Drucker Mann Goldman Sachs Analyst
Got you. And, then, just curious, Joe, based on what youre seeing in the grain market and
what your advisors are indicating to you where your bias is on corn and soybean prices from here?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
We still think there is a little fluff in the grain markets. A lot of it may have been flushed
out in the past two or three days, open interest declined. But, we still think grain is going to
remain high. The inventories are going to be low. We think this is the most important crop this
summer. I think Ive said that back on the last conference call that the strategic concern is that
2011 crop. But, we think these prices are I expect half-price grain til the new crop is made,
Lindsay. The inventory carry outs are short.
The demand is strong, particularly for methanol, beef, and hog. Right now chicken that has not
been one flinch in chicken egg sets yet. Perhaps export demand is beginning to let up on corn and
beans with a South American bean crop coming in, but my prejudice is that prices are going to stay
high, absent some event like whats happening in North Africa, in the Middle East right now. We
think prices are going to stay high. And, there may be gyrations, wild gyrations this spring and
summer during the planting season if it is wet or dry. And, the same thing this summer, if it is
wet or dry. I think it could be explosive, all throughout the growing season. Even if its not in
the United States, it could be in Europe, China, it could be anywhere.
Lindsay Drucker Mann Goldman Sachs Analyst
Got you. Thanks.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
You bet.
Operator
Our next question comes from the line of Christine McCracken from Cleveland Research.
Christine McCracken Cleveland Research Company Analyst
Good morning.
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19
Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Good morning.
Christine McCracken Cleveland Research Company Analyst
You had mentioned, Joe, I think, or Mike, that you had a bunch of new banks in your revolver.
I am interested in that from the perspective that there could be new money coming into the
industry. Are these traditional banks that have always been involved in the poultry industry or are
they new guys?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Theyre new to us, Christine. But, when you read the list and we will file our 8-K with the
document tomorrow. And, when we file the 8-K, it will be there. If I had it with me I would read
them to you. They will be familiar to you, they have experience with poultry industry and cycles,
but youre going to recognize the names.
Christine McCracken Cleveland Research Company Analyst
All right. Was there a larger was there more interest this time or
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes, I would say there is.
Lampkin Butts Sanderson Farms President & COO
There was.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
There was a lot of interest and we were very, very pleased with the support and the
subscription. But, we kept it at 500 which is what we asked for. It was well done.
Christine McCracken Cleveland Research Company Analyst
Thank you. And, just in terms of the talents in assets that did get sold recently. I am just
wondering, you know, given some of the struggles that those plants have had, were you surprised
with the price or that they got sold in the manner they did and what do you think that means for
any other potential bankrupt assets in terms of getting sold and not really affecting overall
production levels.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I was unclear I am not clear yet about what was bought in North Carolina. It appeared to
me, if I read properly, that the Ukrainian company bought the inventory and the plant, feed mill,
and hatchery for $20 million something. Is that correct? And I dont know what he bought. That
surprised me. I mean, they had a further processing plant over there, I believe, attached to the
Zeiler city plant. I do not know if they are going to operate that, or if they are going to operate
but it is very low value on a complex it seems to me.
Christine McCracken Cleveland Research Company Analyst
Yes, if that in fact is the assets. I guess the big picture is, if you see these companies
entering bankruptcy, if there is a long line of buyers, potential buyers for these assets, it could
technically limit the industrys ability to kind of force production out. Is that a fair
assumption?
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20
Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes. I agree with that. It depends on what it is and where it is. And, what kind of shape its
in.
Christine McCracken Cleveland Research Company Analyst
Okay.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
But, I agree with what you say. I think they are very limited. I dont think theres going to
be a wholesale closing down of assets.
Christine McCracken Cleveland Research Company Analyst
All right. Just in terms of cuts, are you expecting those cuts to come in a weekly data or is
this a more significant cuts? And, I know no one has really made indications theyre going to cut
but assuming if we have a sustained period of high grain costs, wouldnt you think that you would
see is at the breeder level?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes, eventually. Yes, I do.
Christine McCracken Cleveland Research Company Analyst
Do you expect to see in the weekly data first?
Lampkin Butts Sanderson Farms President & COO
The next pullet report comes out Friday.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I know. But, I do not think you will see pullets right now. I dont think you are going to see
that. You will see it in the egg sets first, and then the pullets. Pullets is a structural change.
Christine McCracken Cleveland Research Company Analyst
Yes. And, then just one last thing. Joe, you had mentioned the impact of higher fuel costs in
the last kind of period of stress, and we have some issues I think that are driving oil prices up
now. Have you had conversations, you know, with your customers in terms of what that might mean for
their business, and or are you see any higher distribution costs in yours?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
We havent. We have not seen higher distribution costs yet. If gasoline continues to go up, we
will. Although, it is not materially relative to what were seeing with grain costs.
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Lampkin Butts Sanderson Farms President & COO
We used more diesel than we do gasoline.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
But, our customers in a casual dining sector and the quick service restaurants, they are
concerned about it.
Lampkin Butts Sanderson Farms President & COO
Christine, when we talked about that before it has primarily been as we said its not a big
cost item for us but we see it in demand at food service. All of us started in 2008 with food
service demand collapsing, when gasoline got to $4 a barrel because people dont go out to eat.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
We put Kinston off when you have $4 gasoline and $8 corn and boneless breast prices started
declining in May, I believe.
Lampkin Butts Sanderson Farms President & COO
Thats right, in the spring of 2008.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
In the spring of 2008.
Lampkin Butts Sanderson Farms President & COO
And, then the export market collapsed in the fall, in the fourth quarter, with the economic
collapse. You saw consumer confidence numbers look a lot better paid and you that a few, as Joe
said in his comments, youve got a few concepts that are starting to get their feet back under
them. We saw some new numbers on traffic this morning that here or there is getting better, but $4
gasoline, well turn that one. You know, it will stress those numbers.
Christine McCracken Cleveland Research Company Analyst
Yes. In California, we are already there.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes.
Christine McCracken Cleveland Research Company Analyst
All right. Thanks.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
You bet. Thank you.
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Operator
Our next question comes from the line of Ken Zaslow with BMO.
Ken Zaslow BMO Capital Markets Analyst
Good morning, everyone.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Good morning, Ken.
Ken Zaslow BMO Capital Markets Analyst
Or good afternoon I guess, we just missed the deadline. A couple quick questions. The credit
line extension, that doesnt have anything to do with the losses; were it not?
Lampkin Butts Sanderson Farms President & COO
No.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
No, weve been working on that for a long time. You may remember historically we had a five
year revolver that we extended every year, we did it annually. Well, we signed this one in May
2008. May of 2009 would have been the time to extend it and that wasnt a good environment to do it
in. May of 2010 was better but still not good. It started to get better and credit terms started
loosening up in the fall. We started talking about it with our lead bank and weve been working on
this for a while. It was to build in the second North Carolina plant and to get the CapEx we
needed.
Ken Zaslow BMO Capital Markets Analyst
Can you in terms of the magnitude of losses, how does this rank if we were to talk about
it, current losses right now, where would you say? Is this in the worst times, kind of not so bad?
How do we put this in some kind of ranking?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
It wasnt as bad as the fourth quarter of 2008. I mean, we wrote down $69 million in
inventory. There was no in 2008, we also wrote off leg quarters in inventory there was no leg
quarter write down on this one.
Lampkin Butts Sanderson Farms President & COO
This was all live inventory, the processed inventory. We didnt have to adjust it, again. So,
it has been weve seen worse.
Ken Zaslow BMO Capital Markets Analyst
Okay. Because when Im trying to get at, not just from your perspective, obviously, we get to
see it relative to your perspective but Im trying to think of it from an industry standpoint.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Let me see that Agri Stat right there. No this. What is this, December?
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Lampkin Butts Sanderson Farms President & COO
Yes. Bottom line.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
This isnt as bad yet all I have is December. It will not show up until it will show up
in February or March, April is when itll show up, my judgment is.
Ken Zaslow BMO Capital Markets Analyst
So February, March, April will be as bad as 2008 or not as bad?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I dont know. Its hard to say. Were bigger now. That is why we have more pounds now than
we had in 2008. Youve got Waco at full production and weve got Kinston coming on.
Ken Zaslow BMO Capital Markets Analyst
And, how far are we away from the 100% industry based that are losing money?
Lampkin Butts Sanderson Farms President & COO
As you know, you have got two they are not the only two that have a good grain buy. Were
not privy to when some of those grain buys roll off for the private companies but we do know, what,
Joe, about 25% of the complexes are reflecting.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes, and I dont know who those are.
Lampkin Butts Sanderson Farms President & COO
So, we dont know.
Ken Zaslow BMO Capital Markets Analyst
Okay. And, if they were cut, which parts of the bird would actually move the first and by the
greatest magnitude?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Leg quarter, boneless or wings.
Lampkin Butts Sanderson Farms President & COO
Do what, now? If there was a cutback, wings might be the one to move the most because theyre
the ones that go first.
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Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
But, you have site export demand. Well, leg quarters leg quarters for March are going to be
at $0.40, that will be the plan. We have already got pretty good demand for leg quarters. Probably,
leg quarters would be one of the first to move.
Ken Zaslow BMO Capital Markets Analyst
Okay. And, then my last question would be, you said that obviously demand is weak. Can you
give us where you kind of any range is kind of you what you think export demand is? What do you
think retail demand is and what you think food service demand is generally speaking? Low
single-digit? Mid-single digits or something like that? Just some sort of parameters would be
great.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Retail demand would be up in the low single digits. Food service demand is flat and exports
for the year are going to be steady to up though percentage numbers.
Ken Zaslow BMO Capital Markets Analyst
Remind me, that is better than it was in 2008 I believe, right?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes.
Ken Zaslow BMO Capital Markets Analyst
Okay, cool. Thanks.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Especially for exports.
Ken Zaslow BMO Capital Markets Analyst
Great. I appreciate it. Thank you.
Operator
Your next question comes from the line of Bob Nicholson with PCC Assessment Management. Asset
Management, Im sorry.
Bob Nicholson PCC Asset Management Analyst
Hi, guys. Thank you for taking my question. I appreciate it.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Youre welcome.
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25
Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Bob Nicholson PCC Asset Management Analyst
Can you just talk a little bit if there has been a difference this call, relative to last
call, on your view of the grain markets. It sounds like you think things are a lot tighter. I am
curious, philosophically, how you guys are thinking about potentially hedging of those costs and
obviously you would be locking in a loss for the year. Things could be worse. So, why not hedge a
portion of it?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Because of what happened this week did you know, corn came down the limit and soybeans came
down the limit. I wouldnt buy at these values. We actually bought some soy meal this week this
week but I didnt load the boat up but we bought some soy meal this week, out front, but we did
not load the boat up. If this revolution and fire spreads over into Saudi Arabia, theres no
telling what is going to happen to the price of oil or the commodity markets here in the US I dont
know whats going to happen if the USDA reports 93 million acres of corn. At these high prices, it
doesnt make sense to me to go out and load the boat up. I just we never have done and we just
dont do that. And, thats my answer.
Bob Nicholson PCC Asset Management Analyst
I guess the thought is, if it continues, given the balance sheet, you can take the loss for
the year.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Yes.
Bob Nicholson PCC Asset Management Analyst
This is somewhat of an anomaly and prices should come down eventually?
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
I believe they will. I believe they are going to be high for the rest of the year though.
Bob Nicholson PCC Asset Management Analyst
Okay. Thank you.
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
Thank you.
Lampkin Butts Sanderson Farms President & COO
Thank you.
Operator
There are no further questions in queue.
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26
Final Transcript
Feb 24, 2011 / 04:00PM GMT, SAFM Q1 2011 Sanderson Farms Earnings Conference Call
Joe Sanderson Sanderson Farms CEO and Chairman of the Board
We thank all of you for being with us here today and we look forward to reporting our second
quarter to you in May. Thank you.
Operator
This concludes todays conference call. Thank you for your participation.
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