EXHIBIT 99.2
SANDERSON FARMS INCORPORATED
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SANDERSON FARMS INCORPORATED
MODERATOR: JOE SANDERSON
FEBRUARY 24, 2004
10:00 AM CT
Operator: Please stand by. We're about to begin. 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 Farm's
first 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 first fiscal quarter
ended January 31, 2004. We issued a news release this
morning announcing net earnings of $19 million or $1.44
for fully diluted share for our first fiscal quarter of
2004. During our first quarter, we reported the
recognition of $177,000 or 1 cent per diluted share for
the company's share of the partial settlement of
litigation against vitamin suppliers for overcharges.
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During last year's first quarter, we recognized $3.8
million or 29 cents per diluted share for similar
litigation. Without these items, our net earnings from
operations were $18.8 million or $1.43 per share for the
first quarter compared to $1,500,000 or 11 cents per share
last year.
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 financial results.
Before we make any further comments, I would like to ask
Mike to give the cautionary statements regarding forward
looking statements.
Mike Cockrell: Thank you, Joe. Good morning, and happy Mardi Gras 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 are being 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
our most recent annual report on Form 10-K and in the MD&A
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
in connection with our first quarter ended January 31,
2004, which Form 10-Q was filed with the SEC this morning.
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Joe Sanderson: Thank you, Mike. Our financial and operating results for
the first fiscal quarter marked a strong start for fiscal
2004 and reflects stronger-than-normal market conditions
during what is usually our weakest quarter. Market prices
for all poultry products were higher during the quarter
when compared to our first quarter last year. The average
Georgia dock price during our first quarter was 11.3
percent higher than last year's first quarter and helped
contribute to an overall 18% increase in the company's
average sales price of poultry products during our first
fiscal quarter when compared to the same quarter a year
ago.
This overall increase was fueled by an increase in both
domestic and export demand for our products. Bulk leg
quarter prices increased 67 3/4% for the quarter compared
to last year's first quarter. This increase in leg quarter
prices reflects strong export demand for poultry meat
during the quarter.
While export data for January are not yet available,
chicken exports during December 2003 increased almost 15%
in quantity and 42.8% in value when compared to December a
year ago. Russia was the top market during the quarter for
the industry increasing its December purchases by 39% in
tonnage and almost 97% in value over December 2002, and we
believe January numbers will reflect a similar trend.
Bulk leg quarter prices averaged 28 3/4 cents per pound
during our first quarter and leg quarters are currently
trading for 37 cents per pound. In addition to a higher
Georgia dock and higher dark meat prices, wing prices
during our first fiscal quarter averaged 99.7 cents per
pound up 90% from the average of 52 and a half cents
during last year's first quarter.
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Boneless breast meat prices during our first quarter were
also higher, increasing 17.9% when compared to the first
quarter a year ago and have continued to show strength
into February. Boneless breast meat averaged $1.53 for the
first quarter, and today the market for boneless breast is
$1.88 per pound. Demand for boneless breast meat has been
firm.
While chicken prices across the board were higher during
our first quarter when compared to last year's first
quarter, the same can be said about grain prices. Market
prices for corn during our first quarter were up 4.7% when
compared to the first fiscal quarter last year. Soybean
meal market prices for the first quarter this year were
also higher than the same quarter a year ago, rising 43%.
As we reported in December, we expect corn and soybean
meal prices to be higher, overall, during fiscal 2004 when
compared to fiscal 2003.
Grain prices have remained volatile through our first
fiscal quarter and are expected to remain so through the
planting and growing season. Because of this volatility,
we are unable to say, with certainty, what these higher
grain costs will be for fiscal 2004.
In addition to favorable market conditions during the
quarter, we are pleased to report that our operating
performance also continued to be strong. Both our
processing divisions and our live grow out continued to
compete very well in the industry. And just as we did at
the beginning of 2003, we have identified opportunities in
our plants, in the field and in sales that we will work to
capture during fiscal 2004, and we look forward to
continued improvement in our overall operating
performance.
The performance of our prepared foods division during the
first quarter was impacted by high input costs. While
sales increased approximately 3%, the profitability of the
foods division declined relative to a year ago. Our foods
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division purchases much of it fresh chicken needs from our
Hammond, Louisiana facility at market prices, and its raw
material costs for the quarter increased over 28% compared
to last year's first quarter.
During our second fiscal quarter of last year, we replaced
our corndog capacity with a new cook line so that we can
continue our strategy to focus production on higher margin
products and chicken items. Our sales efforts in selling
the new production following that conversion was
excellent. But the profitability of foods will continue to
be affected by high input costs.
On the poultry side of the business, we completed our
shift away from small bird production when we temporarily
closed, for one week, our last small bird plant during
Thanksgiving week of 2002 to make the necessary changes to
increase bird size at the Hammond, Louisiana facility. We
completed that transition during January of this year when
our birds hit their target weight for big bird deboning.
All of our production is now focused on larger bird
weights and in the two most profitable market segments in
the industry.
I know all of you have read or heard about the Avian
influenza outbreak in the Northeast recorded in the press
over the last two weeks and in Texas over the last few
days. I will tell you what we know about these outbreaks
and how outbreaks of this nature normally play out,
although I caution you that this outbreak is a bit
different given the press about Avian influenza in the Far
East over the last two months and the highly pathogenic
nature of the outbreak in Texas.
A low pathogenic type of Avian influenza was detected
Friday, February 6, 2004 in a flock of noncommercial
chickens in Delaware. This AI proved to the same low
pathogenic type that has occurred from time to time in the
Northeastern United States over the last few years. It has
nothing to do with
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the highly pathogenic type of Avian influenza reported in
Asia. The low pathogenic Avian influenza problems that
have been prevalent over the last few years in the
Northeast are linked to operations in live bird markets in
New York and other large cities. These markets are
supplied by small scale, individual producers and are not
connected with the commercial industry of vertically
integrating companies of which we are a part.
The initial outbreak in Delaware affected a flock of about
12,000 chickens on a small independent operation that does
not contract with commercial chicken companies. The second
was associated with a commercial chicken company.
In addition to the outbreak in the Northeast, the Texas
Animal Health Commission announced, Friday, that a
noncommercial flock of chickens in Gonzalez County, Texas
tested positive for a low pathogenic strain of Avian
influenza. As was the case with the first reported case in
Delaware, this flock in Texas was owned by a small scale
producer growing chickens for delivery into the live bird
market in Houston.
The Texas Animal Health Commission reported this outbreak
as a low pathogenic strain based on its observations of
the clinical symptoms displayed by the flock. Over the
weekend, further tests were conducted by the USDA, and
Texas Animal Health Commission announced yesterday that
the genetic profile of the virus infecting the Gonzalez
County birds is consistent with highly pathogenic strains
of Avian influenza.
While this strain of Avian influenza has been classified
as highly pathogenic, again it is unlike the highly
pathogenic strain recently found in Asia. Indeed on a
conference call yesterday participated in by the USDA, the
Texas Animal Health Commission and the Centers for Disease
Control and Prevention, the CDC stated that this
particular (H5N2) strain of Avian influenza has never
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been transmitted to humans and that it remains safe to
consume poultry and egg products.
The Texas Animal Health Commission and the USDA are in the
process of testing all flocks of chickens within a 10 mile
radius of the infected flocks in Gonzalez County. All of
our production facilities are located approximately 100
miles north of the affected flock, and none of our flocks
are affected by the testing. However, in light of this
outbreak, we have intensified our biosecurity measures
designed to present a barrier against the spread of
diseases of this kind. Intensified efforts will continue
so long as our veterinarian deems it necessary and
appropriate to protect the health and welfare of our
flocks.
In addition to the stepped up biosecurity measures we
are taking in Texas, we will use this opportunity to
remind all of our personnel and our contract growers
across the company of the importance of strict adherence
to our biosecurity measures to protect the health and
welfare of our flocks.
In response to the outbreak of the low pathogenic strain
of Avian influenza, many of our export customers took
predictable actions. Several temporarily banned the import
of all U.S. poultry and egg products pending receipt of
further information from the USDA confirming that the
outbreak was, indeed, low pathogenic. Some countries such
as Russia and Mexico, temporarily banned the import of
poultry products only from the affected states. Based on
past experience, expectations before yesterday were that
the nationwide ban imposed by some countries would be
regionalized once the outbreak was confirmed permitting
exports from states unaffected by the outbreak.
However, we have not yet received a reaction of all export
customers to yesterday's confirmation that the outbreak in
Texas was a highly pathogenic strain. While these
discoveries can be expected to reduce U.S.
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exports in the short term, the full repercussions of these
AI discoveries will remain uncertain until the reaction of
both importing countries and domestic customers is known
and analyzed.
Looking ahead, we are confident that we will continue to
improve our operating performance and sales execution. In
particular, we have identified opportunities across our
company that, if realized, would allow us to significantly
offset increased cost we will experience from grain price
increases. We look forward to reporting on our last fiscal
year to our shareholders at our annual shareholders
meeting this Thursday. As we will tell them on Thursday,
we are pleased with the record year we had in 2003, and we
are pleased with the start of fiscal 2004. We will
continue to look for ways to improve our operations, ways
to increase value for our shareholders and ways to make
Sanderson Farms a better company.
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 are, indeed, pleased with
our financial performance during the first fiscal quarter.
Net sales for the quarter totaled $226.4 million, and that
is up from $184.2 million for the same quarter during
fiscal 2003. This increase reflects the increase in the
pounds of poultry sold supported by increases in market
prices as described by Joe.
The $1.43 cents per share earned during the quarter from
operations compares to 11 cents earned during last year's
first quarter. Both of these numbers excluded the effect
of partial settlements of our litigation against vitamin
suppliers.
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Our cost of sales for the three months ended January 31,
as compared to the same three months during fiscal 2003,
increased 9.7%. The increase is a result of an increase in
pounds of poultry products sold in the first quarter this
year compared to last year as well as an increase in the
cost of feed grains. As Joe already mentioned, corn and
soybean meal cash market prices were up 4.7% and 43%,
respectively, for the three months ended January 31, 2004
compared to the same three months in 2003.
SG&A expenses for the first quarter of 2004 were up $4.1
million compared to fiscal 2003. This increase is
primarily the result of our new advertising and marketing
initiatives that started during the quarter. We began
running new television, radio and outdoor advertising
during January to support our Sanderson Farms brand of
fresh, all-natural chicken. We have been pleased with the
feedback from this campaign and will continue to monitor
its impact going forward. We expect this program to cost
approximately $12 million for the year over last year's
advertising expenses.
Interest expense decreased $306,000 to $432,000 during the
quarter reflecting lower outstanding debt. We expect our
interest expense during the year to be $800,000 lower than
a year ago or approximately $1.7 million. At the end of
our first quarter, our balance sheet reflects
shareholder's equity of $216.7 million and net working
capital of right at $100 million. Our current ratio was
2.8 to 1, and our debt totaled $25.8 million. Our debt to
total capitalization ratio at the end of the first quarter
was 10.7%. Our net debt was actually less than zero,
resulting in a net debt to cap of a negative number.
We spent $6.7 million on capital expenditures during the
quarter, and that is out of our total capital budget for
the year of $30.5 million. We also spent $1.6 million on
dividends reflecting a higher dividend rate of 12 cents
per quarter.
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During fiscal 2004, we expect to spend approximately $30.5
million on planned capital projects, and that amount
includes $8.4 million in vehicles and other operating
leases. Our depreciation during the first quarter totaled
$6.4 million, and we are on track for approximately $26
million for the full fiscal year.
At its meeting held on January 29, our board of directors
declared a three for two stock split to be effected in the
form of a 50% stock dividend. This dividend, which will be
paid this coming Thursday, February 26, will be paid to
shareholders of record on February 10, 2004 and will
increase the number of shares outstanding to just over
19.6 million.
This increase of over 6 1/2 million additional shares
should ultimately improve the float available in our
stock. Since the stock split will be effected as a stock
dividend of one half share per each share outstanding,
fractional shares will be redeemed in cash at a price of
$18.25 per share.
As Joe mentioned, we remain encouraged by strong market
conditions and trends, although the impact of Avian
influenza on our export markets remains uncertain. Based
on existing factors, however, we are comfortable with the
earnings estimate of $4 per share for the full fiscal
year. As is our practice, we will not provide quarterly
earning guidance.
That's the end of the prepared remarks, and we will now
open up the call for questions and answers.
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 phone. If you're using a
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speaker phone, 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 do have a question from (John Bierbusse) of AG
Edwards.
(John Bierbusse): Gentlemen, good morning.
Joe Sanderson: Good morning, John.
Mike Cockrell: Good morning, John.
(John Bierbusse): Just a couple items, quickly. First, the higher SG&A
relating to the advertising campaign, did you front end
load the $12 million that you're planning on spending on
an increased amount, or - what I'm trying to get at is how
much of that $4 million was due to the branding campaign?
Mike Cockrell: No, John, it's not front end loaded - this is Mike - we
will spread - that $12 million will be spread, evenly,
throughout the year.
(John Bierbusse): Okay. The small net gain for the vitamin settlement, Mike,
that showed up in where, cost of goods?
Mike Cockrell: That's correct, and we also anticipate that will be the
last of that, John.
(John Bierbusse): All right. Thank you. Lastly, do your folks on the retail
side have any feeling as to how consumers are reacting to
all of the AI articles that are showing up in the press?
I mean, has there been any demand implications that you
can talk about?
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Joe Sanderson: John, prior to yesterday - and we don't have any reading
since then - but prior to yesterday our demand had been
unusually strong through January and February with AI in
Asia and the low-path AI in Delaware. So we don't think it
affected us any. Now we don't have any reading subsequent
to yesterday's announcement.
(John Bierbusse): Right. Okay. Very good. That takes care of my list for
now. Thanks a lot.
Joe Sanderson: Thanks to you.
Mike Cockrell: Thanks, John.
Operator: And once again, if you'd like to ask a question, please
press star 1. We'll go next to (Clay Landon), of (The
Colony Fund).
(Clay Lieblong): Mr. Sanderson, this is (Clay Lieblong) at (The Colony
Fund). We were wondering if - are you there?
Joe Sanderson: Yes sir.
(Clay Lieblong): Okay, we were wondering, are the Avian flues that we're
seeing this year happen almost every year?
Joe Sanderson: No, I wouldn't say that. We most - I think scientists
would believe that various strains of Avian influenza
exist particularly in, what we would call, the
nonintegrative commercial flocks that follow practices
different than ours. And I think there's probably some
scientific data out of the Northeast that they go in and
test and I think maybe, in fact, they have been doing
that. But they will find a strain of Avian influenza from
time to time there, and I would suspect that if you tested
any of the live bird markets, you would likely find
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the same thing and we know that AI viruses are carried by
migratory fowl and particularly, ducks, and others such as
that and that it could - exposure to that could transmit
AI in various forms. And there are over 100 - I don't
remember - 135 or some big number of known Avian influenza
strains and but I don't - it's not surprising to someone
in the industry I don't believe.
(Clay Lieblong): And I assume the reason we're having all the press is
because of loss of life in Asia.
Joe Sanderson: I would think, without a doubt, what's in Asia is unusual.
That's the second time it's occurred in Asia. It occurred
in Hong Kong two or three years ago, and with the U.S. -
well, no one out of Asia has ever been affected to that
extent by that; anything like that.
(Clay Lieblong): Well, we appreciate your help on the questions, and I hope
you have a great year this year.
Joe Sanderson: Thank you.
(Clay Lieblong): Yes, sir.
Operator: And a final reminder, star 1 for questions. We do have a
question from (Frank Henson) of Morgan Stanley.
(Frank Henson): Hi Mr. Sanderson. Just a quick question regarding chicken
pricing. I noticed you highlighted that, you know, pricing
has remained firm, you know, in January and early
February, but I was wondering if you could comment, you
know, since, you know, the case of February 6, as well as,
you know, most recently, the past couple of days have you
seen any changes in poultry pricing?
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Joe Sanderson: No, poultry pricing has remained firm. The market, in some
fashion, increased some different parts last week, and
nothing has softened as yet.
(Frank Henson): Okay, and now say, I guess you know, today Mexico banned
U.S poultry and processed chickens. I was wondering, you
know, if you could comment on what your take is if we see,
you know, other trading partners continue to put bans on
U.S. poultry. Do you expect pricing to stay firm, or do
you think you could fall substantially?
Joe Sanderson: No, I would think that if our export customers start
banning U.S. poultry, a predictable situation will occur
where you will have excess product in the U.S. markets and
prices will soften and decline.
(Frank Henson): Okay. I guess the question I'm asking is that, given, you
know, what we're seeing, you know, with Atkins diet, you
know, and protein friendly diets, do you think that the
pricing environment can return to levels that we saw last
year?
Joe Sanderson: Like, what are you referring to about last year?
(Frank Henson): Well if you look at, like, leg quarters, you know, I think
they're up substantially year over year. Do you think,
you know, if let's say Russia comes out and bans, you
know, our chickens, do you think that we could see, you
know, pricing of around $30?
Joe Sanderson: Thirty dollars for...
Man: Thirty cents.
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(Frank Henson): Thirty cents, yes.
Joe Sanderson: Well, I don't know if I can - I can't be specific about
the pricing, but I can tell you there's no doubt in my
mind that if our export customers ban our products,
you're going to have a buildup of supply in the U.S., and
prices are going to decline. Now to what level - I can't
say what level, but it will - the market will decline
relative to where we are right now.
Last year, though, was a good year, but you had export
markets open, primarily, for the last half of the year. So
I think - I don't think the comparison but as a rule, as a
principle, if we lose our export markets, you're going to
see the same thing you saw beginning in the spring of 2002
and that is a buildup of product in the U.S. and declining
and soft pricing.
(Frank Henson): Okay, thank you very much.
Joe Sanderson: Sure.
Operator: And we'll take our next question from (Jim Ford) of
Edward Jones.
(Jim Ford): Good morning, gentlemen.
Joe Sanderson: Good morning.
(Jim Ford): I was curious to know what type of extra biosecurity
prevention measures are being performed at this time?
Joe Sanderson: Well, I'll give you a couple of examples. One of the first
things would be to limit any traffic on a grower's farm;
not allow visitors or screen vendor or someone who might
be selling propane or something like that, sales people;
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keep them off of the farm. What we would do would be every
truck that goes in and out of our mill around our
processing plant, trucks and buses out of hatcheries would
all be washed and disinfected; the tires, wheels
undercarriage of the truck before - when they leave and
when they return. Those are being two of the typical
things you would do, and there's some other things that
are carried on on the farms.
(Jim Ford): Thank you.
Joe Sanderson: Absolutely.
Operator: And gentlemen, we have no further questions at this time.
Mr. Sanderson, I'll turn the call back over to you for
any additional remarks.
Joe Sanderson: Good. Thank you for spending time with us this morning. We
are pleased with our results to date and look forward to
continued progress in fiscal 2004. We are excited about
the opportunities we have as well as the new challenges
before us, and we look forward to reporting our results to
you throughout the year. Thank you.
Operator: And this does conclude today's conference call. Thank you
for your participation and you may disconnect at this
time.
END