EXHIBIT 99.1
TRANSCRIPT OF EARNINGS CONFERENCE CALL
HELD BY SANDERSON FARMS, INC.
ON MAY 27, 2003
SANDERSON FARMS, INC.
MODERATOR: JOE SANDERSON
10:00 AM CT
Operator: Good day everyone and welcome to the Sanderson Farms,
Incorporated quarterly 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 the Chief Executive Officer,
Mr. Joe Sanderson. Please go ahead sir.
Joe Sanderson: Good morning and thank you for joining us today. I would
like to welcome you to Sanderson Farms' second quarter
conference call with shareholders, analysts and investors.
With me on the call today is Mike Cockrell, Chief
Financial Officer of Sanderson Farms, and Lampkin Butts,
our Vice President of Sales.
The purpose of this call is to review financial results
and operating trends reflected in the second fiscal
quarter ended April 30, 2003.
We issued a news release this morning announcing net
earnings of $12.8 million, or 98 cents per fully diluted
share, for our second fiscal quarter of 2003. During our
second quarter we reported a recognition of $3.8 million,
or 29 cents per diluted share, for the company's share of
the partial settlement of lawsuits against vitamin
suppliers for overcharges. Without this item, our net
earnings from operations were $9 million, or 69 cents per
share, for the
second quarter. Each of you should have received a copy of
the release and accompanying financial summary.
I will begin the call with some brief comments about
general market conditions and the company's operations. I
will then turn the call over to Mike for a more detailed
account of the financial results.
Before we make any further comments, I would like to ask
Mike to give the cautionary statement regarding
forward-looking statements.
Mike Cockrell: Thank you Joe and good morning to everyone.
Before we begin the call this morning I need to caution
you that the call will contain certain forward-looking
statements about the business, financial condition, and
prospects of the company. All forward-looking statements,
as always, are made pursuant to the safe harbor provisions
of the Private Security Litigation Reform Act of 1995 and
are made based on management's current expectations or
beliefs, as well as assumptions made by and information
currently available to us. 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 Item 7 of
our most recent Annual Report on Form 10-K, and in the
management's discussion and analysis of financial
conditions and results of operations found in Item 2 of
Part 1 of the company's quarterly report on Form 10-Q
filed with the SEC this morning in connection with our
second fiscal quarter ended April 30, 2003.
Joe Sanderson: Thank you Mike.
Our financial and operating results for the second fiscal
quarter reflect continued solid operating performance for
fiscal 2003, and also reflect an improving market for our
fresh chicken products. We posted net earnings of 98 cents
per fully diluted share compared to net earnings of 58
cents per share during last year's second quarter.
Excluding vitamin settlement recovery from both quarters,
we earned net income of 69 cents per share this year
compared to 46 cents per share during the second quarter
of fiscal 2002.
Market prices for certain poultry products improved
slightly during the quarter when compared to our second
quarter last year, while other prices were lower. The
average Georgia dock price for our second quarter was 1%
higher than last year's second quarter, while market
prices for boneless breast meat improved 17.8% during the
quarter compared to the same quarter a year ago. Leg
quarter prices decreased 1-1/2% for the quarter compared
to last year's second quarter and wing prices during our
second fiscal quarter were also lower, decreasing 4% when
compared to last year's second quarter.
As I mentioned, boneless breast meat prices during our
second quarter were higher by 17.8% when compared to the
second quarter a year ago and have continued to move
higher. Demand for boneless breast meat has been firm and
the supply side is encouraging. Today boneless is trading
for $1.72 per pound compared to a dollar and a half at the
end of the second quarter, and the market is well
balanced.
Market prices for corn during our second quarter were up
18% when compared to the second fiscal quarter of last
year. The increases in feed grain prices we saw at the end
of last year have continued when compared to the same
period a year ago, and we expect volatility to continue
until the 2003 crop begins to come into focus. Soybean
meal market prices for the second quarter this year were
also higher than the same quarter a year ago, rising
12-1/2%.
We reported in December that we expected corn and soybean
meal prices to be higher overall during fiscal 2003 than
fiscal 2002 and stated at that time we expected these
higher costs to affect earnings by $16 to $17 million.
Based on current pricing and the prices we have been able
to lock in, we continue to expect grain prices to cost the
company approximately $17 million more during fiscal 2003
than fiscal 2002. These costs have been offset, however,
by the vitamin recoveries and improved operating
efficiencies.
We are pleased to report that our operating performance
has continued to improve. Our processing costs decreased
during the first half of fiscal 2003 compared to fiscal
2002 on volume increases and plant efficiency
improvements. Live grow-out also continues to perform
exceptionally well.
We have reported on our last two calls that we have
identified opportunities in our plants, in the field, and
in sales, that we are working to capture during fiscal
2003, and through the first half of the year have made
progress on these opportunities.
Sales at our prepared foods division increased over 42%
during the first half of fiscal 2003 on new sales to
existing and new customers. The profitability of our
prepared foods division also improved slightly during the
first half of the year reflecting better sales mix and
improved efficiencies. During our second fiscal quarter we
replaced our corn dog capacity with a new fry line so that
we can continue our strategy to focus production on higher
margin products and chicken items. Sales margins at our
foods division, while still strong, are being pressured by
price increases for boneless breast meat and tenders.
On the poultry side of the business we completed our shift
away from small bird production when we shut down our last
small bird plant last fall to make
the necessary changes to increase bird size at the
Hammond, Louisiana facility. The transition continues to
go well and we expect this shift to further improve our
sales mix during fiscal 2003. All of our production is now
focused on larger bird weights and in the two most
profitable market segments in the industry.
We also completed the planned increase in production at
our Collins, Mississippi complex during May. We increased
production by 150,000 head per week on the night shift at
Collins, moving that plant closer to capacity and more
fully utilizing that asset.
Looking ahead, we remain confident that we will continue
to improve our operating performance and sales execution.
In particular, we are very pleased that as we have
realized sales and operating opportunities in all areas of
our business, we have been able to offset the increased
cost we have experienced as a result of higher priced
grain.
We remain optimistic also that we should benefit from an
improved market for our poultry products during the second
half of fiscal 2003. As I described earlier, market prices
for all of our major fresh chicken products have improved
since the end of the second quarter. In addition, both egg
sets and breeder placement numbers remain encouraging, and
the expected supplies of competing meats are also
favorable.
At this point I would like to turn the call over to Mike,
Chief Financial Officer.
Mike Cockrell: Thank you Joe.
We continued to be pleased with our financial performance
during the second fiscal quarter and the first half of
this year. Net sales for the quarter totaled
$201.2 million, up from $175.4 million for the same
quarter during fiscal 2002. For the first half of the year
net sales increased to $385.4 million from $339.9 million
or an increase of 13.4%. This increase reflects an
increase in both pounds of poultry and prepared food
products sold.
Despite increases in certain market prices during the
second quarter as described by Joe, overall market prices
for the first six months for the year were still lower
than during the first half of fiscal 2002. The 98 cents
per share earned during the quarter compares to 58 cents
earned during last year's second quarter, while the $1.40
per share earned during the first half of the year
compares to last year's 98 cents.
As Joe mentioned earlier, excluding the settlements
received during the second quarter of fiscal 2003 of 29
cents a share, the net income per diluted share was 69
cents compared to 46 cents a year ago. For the first half
of the year net income per share, excluding the settlement
money, was 80 cents per share compared to 85 cents a year
ago. This performance is particularly gratifying in light
of the fact that for the first six months of the year we
were operating in an environment of higher costs and lower
market prices than during the same six months a year ago.
Our cost of sales for the three months ended April 30 as
compared to the same three months a year ago increased
11.1%. The increase is a result of an increase in pounds
of both poultry products and prepared foods sold during
the second quarter as compared to the same quarter a year
ago, as well as an increase in the cost of feed grains.
As Joe already mentioned, corn and soybean meal market
prices were up 18 and 12.6%, respectively, for the three
months ended April 30, 2003 compared to the same period
last year. These increases were offset by the collection
during the second quarter of $6 million as partial
settlement of the lawsuit
against vitamin and methionine suppliers, as well as by
operating improvements.
For the first half of the year our cost of sales increased
12.1% as a result of an increase in the pounds of both
prepared foods and poultry products sold. The increase
again reflects an increase in the cost for corn and
soybean meal during the first six months of fiscal 2003
compared to 2002. However, cost of sales was reduced
during the first six months of the year by $12.2 million
and $2.6 million, respectively, from the proceeds of the
vitamin and methionine litigation. In addition, processing
costs were lowered as a result of both increased pounds
processed and efficiency improvements.
SG&A expenses for the second quarter of 2003 were up
$600,000 compared to fiscal 2002, and were up $900,000 for
the first six months of the year. These increases are
primarily the result of larger advertising and marketing
costs. Through six months, interest expense decreased
$522,000 to $1.4 million reflecting lower outstanding debt
as well as lower interest rates. We continue to expect
that our interest expense during the year to be $1 million
lower than a year ago, or approximately $3 million.
At the end of our second quarter, our balance sheet
reflected shareholders equity of $168.6 million and net
working capital of $83-1/2 million. The current ratio was
2.8 to 1. Our debt totaled $58.2 million and our debt to
total capitalization ratio was 25.7% at April 30, 2003.
Our net debt totaled $40.9 million, resulting in a net
debt to cap ratio of a healthy 19.5%.
We reduced our outstanding debt by $7 million during the
second quarter and have paid back an additional $5 million
since May 1. Through the first half of the year we have
spent $18 million on capital expenditures, or almost all
of our total annual capital budget of $21.4 million
excluding leases. We also
have spent $2.9 million to retire common stock, and $2.6
million on dividends.
Our strategy for the balance of the year will be to
aggressively reduce debt. Our $100 million revolving
credit facility currently has an outstanding balance of
$23 million, and with our capital budget expenditures for
the fiscal year substantially complete, we believe we can
get that knocked out by year end.
For fiscal 2003 we have increased our capital budget to
approximately $29.7 million, which amount includes
approximately $8 million in operating leases. Of the total
2003 budget, as we have mentioned before, $5.6 million was
spent during the first quarter to convert our Hammond
facility to a larger bird plant.
Our depreciation and amortization during the first half of
the year totaled $12.1 million, and we expect
approximately $24 million for fiscal 2003.
As Joe mentioned earlier we remain encouraged by leading
production indicators such as egg sets and chick
placements. These indicators continue to indicate improved
future market conditions for poultry meat, and the supply
indicators for competing meats are encouraging as well. We
have seen evidence of an improving market through the
first three weeks of the current quarter as market prices
have strengthened substantially since May 1. Based on
these factors, we remain comfortable with our expression
of comfort with an earnings estimate in the range of $2.40
to $2.50 per share for the current fiscal year. As is our
practice, we will not provide quarterly earning guidance.
We will now open up the call for a question and answer
period.
Operator: Thank you.
At this time if you'd like to ask a question please press
star one on your touch-tone telephone. Once again if you'd
like to ask a question press the star key followed by the
digit 1 on your touch-tone telephone.
And we'll take our first question from John Bierbusse with
AG Edwards.
John Bierbusse: Gentlemen, good morning.
Joe Sanderson: Morning John.
Mike Cockrell: Morning John.
John Bierbusse: Oh I can almost see Joe sitting there smiling this
morning. It's always good to be embarrassed on the up
side.
I guess my question first is on the cash side of the
business Mike. You reported cash at the end of the quarter
of about $17 and some odd million.
Mike Cockrell : Yes.
John Bierbusse: And then you said you have used some of that for debt
retirement since the close of the quarter, correct?
Mike Cockrell : Yes, we've paid back $5 million since the quarter began.
John Bierbusse: Okay and then your comment about having $23 million on the
revolver to go, that's after the 5 million has been paid
down?
Mike Cockrell : That's correct.
John Bierbusse: Okay, all right, good, good. I'm just curious Joe, from
your perspective, is this the time, given the health of
your business and the prices in the market right now, and
the fact that your competitors seem to not be putting up
numbers anywhere close to this as evidenced by their
quarterly earnings numbers, to put a little more money
into the marketing side of your business? And, you know,
build your sales relationships, your marketing
relationships, a bit more this summer.
Joe Sanderson: I would think that that would be a reasonable thing to do
with - where our balance sheet is and where our
penetration is with the retail markets, and we're looking
at that right now John.
John Bierbusse: Okay.
Joe Sanderson: ...actually.
John Bierbusse: All right, all right. And can you fill us in a little bit
more on foods' story, I mean, I can appreciate that it's a
good news, bad news situation, when you have the margins
pressured a little bit for all the right reasons I'm
guessing.
Joe Sanderson: Yes, we started thinking that was going to happen last
summer and it was really November, December, and January
before the new sales took hold and gained traction and
they've done quite well. However, as you well know, they
had very strong margins up there and those margins are
down a bit because of boneless breast meat costing $1.70 a
pound rather than $1.35.
John Bierbusse: That's not the worst problem on earth to have though.
Joe Sanderson: It's not too bad and there's still - they still do quite
well.
John Bierbusse: Right.
Joe Sanderson: Their margins are under pressure and then there was the
corn dog business we have, we had, that was profitable. It
was good and so that impacted it one month when that came
off, primarily in April I believe. But all of those sales
have been made up with further processed poultry sales.
John Bierbusse: Okay. Is their volume continuing through the end of the
summer? You're at that sort of rate of growth?
Joe Sanderson: Sales volume?
John Bierbusse: Yes.
Joe Sanderson: Yes, yes, and the rate of growth is not going to be - well
it will be 40% probably for the balance of the year.
John Bierbusse: Got you, okay, great. Well terrific April quarter report.
Joe Sanderson: Thank you.
John Bierbusse: Very impressive.
Joe Sanderson: Thank you.
Operator: And we'll go next to Alex Lieblong with Key Colony Funds.
Alex Lieblong: Hey guys. Great quarter. Couple things with what - and I
don't - I'm trying to say this nicely I guess.
Joe Sanderson: Say it nicely Alex.
Alex Lieblong: Okay yes. No as I - with what could be going on in the
beef industry and we don't want that to happen but let me
- and what's happened with egg sets and everything over
the last six or nine months, if the demand for chicken
picked up dramatically because of an outside influence I'm
going to say, how long do you think it would take the
industry to be able to respond, to be able to produce the
amount needed? Are you following my question?
Joe Sanderson: The answer is three months.
Alex Lieblong: Okay.
Joe Sanderson: That is to set eggs three weeks there, and seven weeks to
get them slaughtered and get them into the pipeline. In 90
days the industry could increase production substantially
over where it is right now.
Alex Lieblong: Even if - has the breeder - what's going on in the breeder
side of the business, I mean, is that...?
Joe Sanderson: We've had - I think we've had eight, seven or eight
months, going back to last fall, of reduced breeder
placements, probably, I'm going to say, averaging 2 to 4%
below breeder placements the year prior.
Alex Lieblong: Yes.
Joe Sanderson: I mean people can - it indicates no planned increases in -
above where we are right now. However, I will caution that
people can hold hens back; the efficiencies decline,
number of eggs, and hatchability, but our industry - if
there's a huge demand, the industry will find some way to
respond to it.
Alex Lieblong: Okay. Again fantastic numbers and I guess on AgriStats and
I know you all don't know exactly where you are but you
have a pretty good idea. You've still got to be right at
the top, I presume, if not the top?
Joe Sanderson: Well we're competing favorably.
Alex Lieblong: Congratulations. Excellent quarter.
Joe Sanderson: Thank you.
Operator: And once again press star one for any further questions.
And we'll go next to Richard Priory with Delphi
Management.
Richard Priory: Yes good morning. What sort of program do you have in
place to lock in feed prices?
Joe Sanderson: Well we don't hedge. When we think - when this past
December we indicated that we had priced a lot of our
grains for the year because we believed with short
inventories and carry outs the market would be volatile
and we did that. We also see opportunities, when grain is
cheap like it has been the two years prior, we buy it, we
own it, and we did that - so for at least those two
reasons when we see a good buy we take ownership.
Richard Priory: All right and in this environment if you could take out
the legal cost what sort of gross margin do you think you
can run going forward because it looks as though the gross
margins were helped by the legal settlement?
Mike Cockrell : Oh they were. You're right. The legal settlements come out
of cost of goods sold.
Richard Priory: Right.
Mike Cockrell : And have since we started collecting those and we even -
we collected our first one during the second quarter a
year ago.
Richard Priory: Okay.
Mike Cockrell : And we've collected some every quarter but one since, so
I'm not sure I follow what your question is.
Joe Sanderson: He wants to know...
Richard Priory: If you didn't have the legal settlement.
Joe Sanderson: We would - I don't know what the gross margin was but you
would expect at least that for this quarter.
Mike Cockrell: Yes operating income for the quarter and the six months
ended April 30 were $15 and $18 million, respectively.
Richard Priory: All right.
Mike Cockrell: That's taking out - that takes out the settlements for
both quarters or for the second and our first quarter of
this year.
Joe Sanderson: Yes.
Richard Priory: Okay. Thank you very much.
Joe Sanderson: Thank you.
Operator: And at this time we have no further questions. I'd like to
turn the call back over to our speakers for any additional
or closing comments.
Joe Sanderson: Good - very little comments.
Thank you for spending time with us this morning. We are
pleased with the opportunities before us and look forward
to continued progress in fiscal 2003. Thank you very much
and have a good day.
Operator: This concludes today's conference and we thank you for
joining us.
END