EXHIBIT 99.1
TRANSCRIPT OF EARNINGS CONFERENCE CALL
HELD BY SANDERSON FARMS, INC.
ON AUGUST 25, 2003
MODERATOR: JOE SANDERSON
AUGUST 25, 2003
10:00 AM CT
Operator: Good day everyone and welcome to the Sanderson Farms
Incorporated 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
Chairman, President and Chief Executive Officer, Mr. Joe
Sanderson. Please go ahead sir.
Joe Sanderson: Thank you. Good morning and thank you for joining us
today. I would like to welcome you to Sanderson Farms'
third 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,
Vice President of Sales. The purpose of this call is to
review financial results and operating trends reflected in
the third fiscal quarter ended July 31, 2003.
We issued a news release this morning announcing net
earnings of $15.4 million or $1.17 per fully diluted share
for our third fiscal quarter of 2003.
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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 and then turn the call over to
Mike for a more detailed account of the financial results.
Before we make any further comments however, I'd like to
ask Mike to give the cautionary statement regarding
forward-looking statements.
Mike Cockrell: Than you Joe and good morning 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 for the
company.
All forward-looking statements are made pursuant to the
Safe Harbor Provisions of the Private Securities
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, management. 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 the most recent Annual Report on Form 10K and
in 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 10Q filed
with the SEC in connection with our third fiscal quarter
ended July 31, 2003, which form 10Q was filed this
morning.
Joe Sanderson: Thank you Mike. Our financial and operating results for
the third 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 $1.17 per fully diluted share compared to net
earnings of 70 cents per share during last year's third
quarter.
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Market prices for all products improved during the quarter
when compared with our third quarter last year. The
average Georgia dock price during our third quarter was
3.1 percent higher than last year's third quarter, while
market prices for boneless breast meat improved 15-1/3
percent during the quarter compared to the same quarter a
year ago. Bulk leg quarter prices increased 36-1/4 percent
for the quarter compared to last year's third quarter, and
wing prices during our third fiscal quarter improved 34.3
percent when compared to last year's third quarter.
While prices improved during our third quarter compared to
last year's quarter, prices for the first nine months of
the year were actually mixed. For the first nine months of
this year, the average Georgia dock price is only 6/10 of
1 percent above last year. Leg quarter prices are actually
2-1/4 percent lower than a year ago, while boneless breast
meat prices were up 13.8 percent. Our average sales price
per pound was slightly higher through the first three
quarters of the year, and our increased profitability was
also in part due to volume increases and improved
efficiencies. As I mentioned, boneless breast meat prices
during our third quarter were higher by over 15 percent,
and they have continued to move higher. Demand for
boneless breast meat has been firm and the supply side is
encouraging. Today boneless is trading for $1.84 per
pound. Likewise, market prices for bulk leg quarters have
remained firm during August. Bulk leg quarters averaged
23.8 cents during our third fiscal quarter and are now
trading around 28 cents per pound.
While market prices for our poultry products improved
during our third quarter, market prices for feed
ingredients were also higher. Market prices for corn
during our third quarter were up 8.9 percent when compared
to the third fiscal quarter of last year. Soybean meal
market prices for the third quarter this year were also
higher than the same quarter a year ago rising 9-1/2
percent.
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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 effect earnings by $16 to $17 million.
Based on current pricing and the prices we have locked in,
we continue to expect grain prices to cost the company
approximately $17 million more during fiscal 2003 than in
fiscal 2002. These increased costs have been offset,
however, by vitamin litigation recoveries and improved
operating efficiencies.
We are pleased to report that our operating performance
continues to be outstanding. Our processing costs
decreased during the first three quarters 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 and in the field and in sales that we were working
to capture during fiscal 2003. Through the first three
quarters of the year, we have made progress on each of
these opportunities.
Sales at our foods division increased over 32 percent
during the first nine months of fiscal 2003 on new sales
to existing and new customers. The profitability of our
prepared foods division has been negatively impacted
during the first three quarters of the year by higher raw
material costs. During our second fiscal quarter we
replaced our corn dog capacity with a new cook line so
that we can continue our strategy to focus production on
higher margin products and chicken items.
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. All of our production is now focused on larger
bird weights and in the two most profitable market
segments in the industry.
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We also completed our 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 believe the market for our poultry products will be
stronger during our fourth quarter than last year's fourth
quarter, although the market typically adjusts seasonally
following the Labor Day holiday. Both egg sets and breeder
placement numbers remain encouraging, and the expected
supplies of competing meats are also encouraging.
At this point I would like to turn the call over to Mike
Cockrell, Chief Financial Officer.
Mike Cockrell: Thank you Joe. As Joe said, we continue to be pleased with
our financial performance during the third fiscal quarter
and for the full nine months so far this year.
Net sales for the quarter totaled 232.2 million. That's up
from 202.7 million for the same quarter during fiscal
2002. For the first nine months of the year, net sales
increased to 617.5 million from 542.6 million, or an
increase of 13.8 percent. This increase reflects an
increase in the pounds of both poultry and prepared food
products sold. Despite increases in certain market prices
during the third quarter described by Joe, overall market
prices for the three quarters of the year so far still
mixed.
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The $1.17 per share earned during the quarter compares to
70 cents per share earned during last year's third
quarter, while the $2.55 per share earned during the first
nine months of the year compares to last year's $1.66 per
share. Excluding the settlements received during the first
nine months of fiscal 2003 and 2002 of 58 and 12 cents per
share respectively, the net income per diluted share was
$1.97 compared to $1.54 through last year's third quarter.
This performance is particularly gratifying in light of
the fact that for the first nine months of the year we
have operated in an environment of higher grain cost.
Our cost of sales for the three months ended July 31, 2003
as compared to the same three months during fiscal 2002
increased 8.7 percent. The increase is the result of an
increase in pounds of both poultry products and prepared
foods sold during the third quarter this year 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 cash market prices were up 8.9 percent and
9.5 percent, respectively, for the three months ended July
31, 2003 compared to the same three months during 2002.
These increases were offset by operating improvements and
by vitamin litigation recoveries.
For the first three quarters of the year, our cost of
sales increased 10.8 percent as a result of an increase in
pounds of both prepared foods and poultry products sold.
The increase again reflects an increase in the cost of
corn and soybean meal during the first nine months of
fiscal 1993 compared to the same period a year ago.
However, cost of sale was reduced during the first nine
months of fiscal 2003 by $12.2 million, and for the same
period in 2002 by $2.6 million, from the proceeds of
vitamin and (Methionine) litigation. In addition,
processing costs were lower as a result of an increase of
pounds processed and efficiency improvements.
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SG&A expenses for the first three quarters of 2003 were up
$4.9 million compared to the same period a year ago, and
for the third quarter were up $4 million compared to 2002.
These increases are primarily the result of phantom share,
larger bonus and employee benefit accruals and certain
marketing and administrative expenses.
Through nine months, interest expenses decreased to 2
million reflecting lower outstanding debt and lower rates.
Our interest expense during the year will be lower than we
have previously forecast because of lower outstanding
debt. We now anticipate that interest expense will be
approximately 2.5 million for fiscal 2003.
At the end of our third quarter, our balance sheet
reflected stockholder's equity of 183.1 million and net
working capital of 80.6 million. The current ratio was 2.3
to 1. Our debt totaled $41.2 million at the end of our
third quarter, and our debt to cap ratio was 18.4 percent
as of July 31, 2003. Our net debt totaled $19.1 million
resulting in a net debt to cap ratio of 9.4 percent.
We reduced our outstanding debt by $17 million during the
third quarter. Since the end of the quarter, however, we
have paid back an additional $15 million to our revolving
banks rather. And as of today, we have no debt currently
outstanding on our $100 million revolver. Our total debt
as of today stands at 26.2 million. And our net debt to
cap ratio today is below 7 percent.
Through the first three quarters of the year we have spent
$21 million on capital expenditures, or almost all of our
annual budget of $23 million, excluding leases. We have
also spent $3.9 million to retire common stock and had
paid $3.9 million in dividends. For fiscal 2003, we have
increased our capital budget to approximately $31.2
million, which amount includes approximately $8.4 million
in operating leases. Of the total 2003 budget, as we have
earlier reported, $5.6 million of that is related to the
conversion of
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our (Hammond) facility to a larger big bird plant, and
those expenditures were made during our first fiscal
quarter of the year.
Our depreciation and amortization during the first nine
months of the year totaled $18.2 million, and we expect
approximately 24 million for fiscal 2003.
As Joe mentioned earlier, we remained encouraged by
leading production indicators such as (egg sets) and chick
placements. These indicators continue to indicate a
stronger market for our poultry meat during our fourth
fiscal quarter compared to last year's fourth quarter. We
have seen evidence of this better market already during
our fourth quarter compared to last year's quarter as the
Georgia dock has improved during August to 68-3/4 cents a
pound and the market price for boneless breast meat stands
at $1.84.
Based on these factors, we believe the analysts' revised
estimate of $2.60 per share before special items for the
fiscal year is conservative. As you know, we have
typically avoided projecting a single quarter because of
the difficulty of doing that.
At this time we would like to turn the call back over to
(Dana) for the question and answer period.
Operator: Thank you sir. Today's question and answer session will be
conducted electronically. If you'd like to ask a question,
please do so by pressing the star key followed by the
digit 1 on your touch-tone telephone.
If you are using a speakerphone, please make sure your
mute function is turned off to allow your signal to reach
our equipment. Once again, that's star 1 for questions.
And we'll go first to (John Bierbusse) with AG Edwards.
(John Bierbusse): Gentlemen, good morning.
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Joe Sanderson: Good morning (John).
(John Bierbusse): Terrific quarter. Congratulations.
Joe Sanderson: Thank you.
(John Bierbusse): Great to see that. Just a couple questions if I may. On
the foods side of life, Joe you knew I was going to ask
about this.
Joe Sanderson: Sure.
(John Bierbusse): Do you see the run rate of sales here in the third quarter
being more of a normalized trend assuming that maybe there
was a little sell-in that happened in the second quarter?
Or is there price resistance now that, you know, the
market prices are moving up? I mean what do you see going
on there?
Joe Sanderson: Well we are making an effort to continue to try to sell
that plant to capacity. It's not at capacity. We do
believe the - we do believe that sales will continue to
grow and it'll be in - kind of like it's done in the past.
But we think we're going to have good sales for the fourth
quarter. That's part of your question. You didn't say
anything about margins.
(John Bierbusse): Right.
Joe Sanderson: I think...
(John Bierbusse): Assuming you make up for it on the chicken side of life.
Joe Sanderson: Well we do. And we think margins will return seasonally
during the winter quarter as the market softens, that -
but the plant's doing very well and contributing. It's
just not making the margin that it's been used to. And
it's because of higher chicken prices frankly.
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(John Bierbusse): Right, okay. Joe a couple - I wanted to ask you also, a
couple of your competitors in recent conference calls have
talked about net weight programs that they're putting in
place in their tray pack plants.
And I would be interested to get your perspective on that,
whether it's a plus or minus for you, for consumers and
just where you play out on that.
Joe Sanderson: Well it's hard to see when you look at the product in the
marketplace, how it benefits consumers.
(John Bierbusse): Right.
Joe Sanderson: It appears to us that this program was initiated for other
reasons - for reasons other than consumer interest.
Our customer base has not asked us to provide that net
weight packaging to them. We are pleased with that. We
think that it is a marketing position that we're
comfortable with. If others want to do that, I'm sure they
have good reasons for it. But we think it provides us a
comfortable marketing alternative for the future.
(John Bierbusse): Okay. Last question, with the balance sheet the way it is,
and as Mike reported on improvement in the month of
August, what gets first call on free cash flow now?
Joe Sanderson: Well of course we'll evaluate that in October. We're
optimistic about our cash flow and about where our
position is. And we'll look at that in October. But we
have a program of retiring stock and we'll continue to do
that.
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We will of course, look at dividends and be studious about
that in light of new tax provisions. And as you know,
(John), we're all the time, when it's available, looking
at opportunities to enhance our earnings per share.
(John Bierbusse): Got you. Great. Congratulations. Terrific performance.
Joe Sanderson: Thank you sir.
Operator: We'll go next to (Richard Diamond) with Innwood Capital
Partners.
(Richard Diamond): Yes, good morning gentlemen.
Joe Sanderson: Good morning.
(Richard Diamond): There seems to be some concern among investors that the
poultry industry will increase production should protein
prices stay high and should corn and soybeans prove
abundant.
Some analysts have said that production could be increased
at three months; others are saying a year. In your
opinion, how long would it take for the industry to
increase production let's say 5 percent and 10 percent?
And would you also site the constraints to increase
production, let's say starting with multiplier flocks to
placing chicks? Thank you very much.
Joe Sanderson: Sure. Historically, profitability levels like we've
experienced this year - like some in the industry have
experienced - would certainly lead to increased
production, typically not during a winter quarter, but
perhaps beginning in the spring.
There's several things however that would - might - cause
some to pause about that, and might make it less probable
in this situation then it has been in
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the past. And the first thing I would point out would be
the experience the industry had last year and the deep
losses that most in the industry experienced.
I think companies would - might - want to get a little
closer look of what's around the corner before they start
expanding. And then there might be some balance sheets out
there that would not warrant expansion. And there may be
some large operators that feel like they have plenty on
their plate right now, particularly two or three of the
top five.
Another thing that you mentioned, the multiplier flocks,
the breeder flocks for the last six months have averaged
about 100 percent of a year ago. You can get an increase
out of that by holding flocks a bit longer, but you can't
- probably can't - get 5 percent and - well I know you
can't get 10 percent out of it, and I don't believe you
can get 5 percent.
So I think you'd have to - I don't believe it can happen
substantially for a while yet. And the first sign of that
will be an increase in breeder placements which we have
not seen.
(Richard Diamond): Someone said that it would take nine months to increase
the breeder flocks. Is that sort of your thinking in that
matter?
Joe Sanderson: Well it would take - that would take - nine months would
be the time it would take one month's placement to mature
fully. So, you know, I think you can get an increase next
spring by holding breeders a bit longer, but you'd be
looking at a marginal 1 percent or 2 percent increase. And
you'd have to have several months of 4 percent and 5
percent increases in breeder placements to see a
substantial increase in broiler production.
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(Richard Diamond): Thank you very much. It looks very positive, at least for
the next year in the marketplace since it seems that
everyone wants to make money.
Joe Sanderson: Thank you.
Operator: And as a reminder, if you'd like to ask a question, please
press star 1 on your touch-tone phone. We'll go next to
(Alex Lieblong) with Key Colony Fund.
(Alex Lieblong): Hey guys, great quarter.
Joe Sanderson: Thank you. Good morning (Alex).
Mike Cockrell: Good morning (Alex).
(Alex Lieblong): Most of the questions I guess that I had was - have been
answered. On Agristats, is anybody beating you guys?
Joe Sanderson: Well we're very pleased with our position on Agristats.
(Alex Lieblong): I bet. Congratulations.
Joe Sanderson: Thank you (Alex).
Mike Cockrell: Thanks (Alex).
Operator: And we'll go next to (Christine McKracken) with Midwest
Research.
(Christine McKracken): Good morning.
Joe Sanderson: Good morning (Christine).
Mike Cockrell: Good morning.
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(Christine McKracken): Looking and following up maybe on an earlier question,
looking at the chicken and eggs report that came out
Friday that shows the 7 percent increase year over year
and these pullet chicks that have been hatched. Wondering,
does that concern you at all?
Joe Sanderson: Well I think (Christine), you have to average that with
the month before. I don't have that with me. But I believe
the month before was 96 percent or 95 percent or 94
percent.
(Christine McKracken): Yes, 94 percent.
Joe Sanderson: And if you - I would say if I were looking at that, I
would look at like 90 days worth of - 90 days. And if you
- I believe - I don't have that in front of me, but the
last 90 days have averaged about 100 percent, and the 90
days prior to that, probably 95 percent or 96 percent.
And I think if you'll note in there, July and August are
typically historically the largest pullet placements of
the year. So one month would not concern me.
(Christine McKracken): Great. And you're not hearing of anyone really adding a
lot of production at this point?
Joe Sanderson: No, not hearing anything about that.
(Christine McKracken): And in terms of the comments that you made relative to
these two or three guys that are having difficulty...
Joe Sanderson: I didn't say they were having difficulty. I said their
plates were full.
(Christine McKracken): Plate's full. Do you see any consolidation or
competitive - I guess industry movement in terms of
consolidation or change of control...
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Joe Sanderson: See any more coming?
(Christine McKracken): Yes.
Joe Sanderson: Well I would expect that to occur. I would expect that to
occur with - for a lot of different reasons. And I think
it'll continue to go forward as it has. Yes, we believe
there'll be further consolidation.
(Christine McKracken): Do you think that'll help, you know, your position and
maybe the industry as a whole just relative to maybe the
general outlook in terms of maybe having these operations
in stronger hands?
Joe Sanderson: You know, (Christine), common wisdom says that will occur,
that there'll be more discipline. But I don't believe that
actually. I think big companies can, you know, have the -
they're driven by the same things small companies are. And
when the market's calling for more chicken by paying for
it, they're going to respond to that.
I don't think people get smarter as they get bigger.
(Christine McKracken): I wouldn't disagree. And then I guess just the recent
strength in wing prices that we've had, is there anything
unusual happening there or is that just a seasonal issue?
Joe Sanderson: This is a typical seasonal issue. It didn't happen as much
last year as it had happened in the past because there was
so much dark meat on the market. But it's typical. And we
always attribute it to sports bars. And as the football
season starts and as you approach the Super Bowl, you
start getting a stronger and a stronger market for wings.
And we think that's exactly what has happened this year.
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And it didn't hurt that breast prices and breast items
were high. And so that probably meant a little more play
for wings.
(Christine McKracken): Got it. Well great quarter. Thanks.
Joe Sanderson: Thank you (Christine).
Operator: And just as a final reminder, please press star 1 if you'd
like to ask a question.
Mr. Sanderson it appears there are no further questions
sir. I'll turn the call back over to you.
Joe Sanderson: Thank you ma'am. Thank you for spending time with us this
morning. We are pleased with the opportunities before us,
and we look forward to reporting our full fiscal year
results to you in early December. Thank you.
Operator: This does conclude today's conference call. Thank you for
your participation. You may disconnect at this time.
END