SANDERSON FARMS, INCORPORATED
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EXHIBIT 99.2
SANDERSON FARMS, INCORPORATED
MODERATOR: JOE F. SANDERSON
DECEMBER 7, 2004
10:00 AM CT
Operator: Please standby, 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 F. Sanderson: Thank you. Good morning and thank you for joining us
today. I would like to welcome you to Sanderson Farms
Fourth Quarter and Year End conference call with
shareholders, analysts and investors. With me on the call
today is Mike Cockrell, Chief Financial Officer, and
Lampkin Butts, President and Chief Operating Officer of
Sanderson Farms.
The purpose of this call is to review financial results
and operating trends reflected in the fourth fiscal
quarter in the year ended October 31, 2004. We issued a
news release this morning announcing net earnings of $5.1
million or 25 cents per fully diluted share for our fourth
fiscal quarter of 2004. During the fourth quarter of
fiscal 2003 we earned $20.5 million or a $1.04 per
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diluted share.
For the year ended October 31, 2004, we reported net
income of $91.4 million or $4.57 per diluted share, which
included $177,000 for recoveries under certain vitamin
lawsuits. For fiscal 2003 we reported net income of $54.1
million or $2.75 per diluted share, which included $7.6
million or 38 cents per diluted share for vitamin
recoveries.
Each of you should have received a copy of the release and
accompanying financial summary. I'll 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. Good morning and happy holidays to
everyone.
Before we begin the call this morning I need to caution
you that the call will contain forward-looking statements
about the business, financial condition and prospects of
the company. All forward-looking statements are made
pursuant to the Safe Harbor Provisions of the Private
Security and Litigation Reform Act of 1995 and are 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 report on Form 10K, and in management's
discussion and analysis of financial conditions, and
results of operation found in Item 2 of Part 1 of the
company's quarterly report on Form 10Q filed with the SEC
in connection
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with our third fiscal quarter ended July 31, 2004. Our
annual report on Form 10K for the year ended October 31,
2004, will be filed with the Securities and Exchange
Commission before the end of this month.
Joe F. Sanderson: Thank you Mike. While the overall chicken market softened
substantially during our fourth fiscal quarter when
compared to the first three quarters of the year, our
financial and operating results for the fourth quarter
continued to reflect solid operating performance for
Sanderson Farms and completed another record year for your
company.
Our fourth quarter net earnings of 25 cents per fully
diluted share compares to a $1.04 for the same quarter
last year. The quarter contributed to annual earnings from
operations of $4.57 per share, a record year for the
company. Our earnings were achieved on net sales of a
$1.052 billion, another record.
I am very proud of the people of Sanderson Farms who
contributed to this very successful year. Everyone
associated with Sanderson Farms, our board, managers, our
employees and our contract producers, worked tirelessly
over the past decade to execute a growth plan to triple
the size of this company. These same people ought to be
congratulated for a performance during 2004 that once
again saw the company operating at the top of our
industry, and more importantly, contributing to results
that continued to create value for our shareholders.
While market prices for poultry products were higher
during our fourth quarter when compared to our fourth
quarter last year, they've dropped significantly during
the quarter from the highs we experienced during our third
quarter. The average Georgia dock price during our fourth
quarter was 13% higher than last year's fourth quarter and
was 15% higher for our 2004 fiscal year when compared to
last year. Bulk leg quarter prices increased 7.2% for the
quarter compared to last year's fourth quarter and
increased 41% for
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the year. Boneless breast meat prices during our fourth
quarter were higher by 1/10 of 1% when compared to the
fourth quarter a year ago and were 22% higher for the
year. Finally, wing prices during our fourth fiscal
quarter averaged a $1.03 per pound, up 50.6% from the
average of 68 cents during last year's fourth quarter.
All this said, our average sales price for poultry
products during fiscal 2004 was over 9 cents per pound
above last year, increasing 17.3 % for the year ended
October 31, 2004, when compared to the year ended October
31, 2003. These higher prices more than offset higher
grain costs we experienced during the second half of our
fiscal year, and our bottom line operating performance for
the year improved on the strength of our operating
performance, our sales mix and volume increases.
While cash market prices for corn and soy bean meal
dropped during our fourth fiscal quarter, the company's
costs of these commodities increased when compared to our
cost during our last year's fourth quarter. For corn this
increase was 16.4% and for soybean meal was 74.2%.
Current corn and soybean meal prices are down
substantially compared to a year ago, and we expect these
lower prices to continue for the foreseeable future. Based
on current pricing and the prices we have been able to
lock in for fiscal 2005, we expect feed grain costs for
the company during fiscal 2005 to be lower by between $60
and $65 million when compared to fiscal 2004.
We're obviously pleased that our operating performance has
continued to improve. Our plant cost during fiscal 2004
continued to be among the lowest in the industry. And our
live grow-out performed exceptionally well during fiscal
2004. Just as we did at the beginning of 2004, we met with
our managers two weeks ago to identify opportunities in
our plants, in the field and in sales that we will work to
capture during fiscal 2005, and we expect
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our overall operating performance to continue to improve.
Our sales program carried the momentum established during
the second half of fiscal 2003 into 2004, and we will work
hard to build on that momentum in 2005. We were very
pleased with the acceptance of our fresh chicken
advertising program we kicked off in all of our markets
beginning in January 2004, and we will continue and expand
that program with new ads and in new markets during fiscal
2005. This program will cost approximately $16 million
during fiscal 2005 compared with $14 million during 2004.
Looking ahead we remain confident that we will continue to
improve both our operating performance and sales
execution. As I mentioned, we have identified sales and
operating opportunities in all areas, that if realized,
will allow us to solidify our position at the top of our
industry. As we have previously reported, the construction
of our new poultry complex in South Georgia remains on
schedule to begin operations during the fourth fiscal
quarter of 2005.
While grain prices continue to move lower, and we have
been able to lock in a material portion of our fiscal 2005
needs at favorable levels, the chicken market is a little
more difficult to predict. It is encouraging to note that
the Georgia dock price currently stands at 74 cents per
pound versus 69 cents a year ago. Boneless breast meat has
moved from its high of $2.57 per pound to a more
seasonally normalized price in the low $1.30s. While
wing prices remain strong, we expect a more typical market
for wings as we move into 2005. Leg quarter prices remain
strong and the USDA is predicting higher exports during
2005, which should provide support for dark meat prices
and to some extent the market for all chicken.
As many of you know exports were erratic during 2004 in
response to various outbreaks of avian influenza during
the year. Some of our export customers
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closed their borders to United States poultry products
during the year. The longest lasting of these closures was
the Chinese market. China has now resumed trade and last
week Russia lifted its ban on Texas poultry that had been
imposed following an outbreak of AI in that state.
Exports over the last two months have been strong and the
USDA's prediction of stronger export during 2005 appears
well-founded. The USDA is also predicting a modest
increase in chicken production during 2005, which is
supported by leading indicators such as egg sets and
pullet placements. The consensus appears to be for a 2 to
3% increase in production for calendar 2005 compared to
2004.
As I stated at the beginning of the call, fiscal 2004 was
a record year for Sanderson Farms. I'm proud of the
company and of what it has done for our shareholders.
Those of you who know us and have followed us for some
time know, however, that it is not in our nature to stand
still. We will work during 2005 to realize more
efficiency, capture new customers and markets,
successfully bring the new Georgia complex on line and
seek additional ways to create value for our owners who
have demonstrated confidence in us.
At this point I would like to turn the call over to Mike
Cockrell, Chief Financial Officer.
Mike Cockrell: Thank you Joe. And as Joe said, we continue to be pleased
with our financial performance during the fourth quarter.
Net sales for the quarter totaled $259.2 million and
that's up from $254.7 million for the same quarter during
fiscal 2003. This improvement reflects the higher market
prices described by Joe and an increase in the pounds of
poultry product sold by 4.6%, which resulted primarily
from increased live weights compared to the fourth quarter
of fiscal 2003.
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The 25 cents per share earned during the quarter compares
to $1.04 earned in last year's fourth quarter and resulted
in annual earnings of $4.57 per share compared to $2.75
per share during last year.
For the fiscal year net sales, as Joe said, totaled $1.052
billion for a 21% increase over the $872.2 million for
fiscal 2003. Cost of sales for the year increased 13.6%
compared to a year ago and totaled $842.3 million. While
the average sales price for poultry products during fiscal
2004 was up 17.3% compared to a year ago, our average cost
per pound in the poultry business increased 8.3% compared
to last year.
Our cost of sales for the three months ended October 31,
2004, as compared to the same three months during fiscal
2003, increased 13.2%. This is primarily a result of an
increase in the cost of corn and soybean meal for this
year compared to the same quarter a year ago. As Joe
already mentioned, corn and soybean meal costs were up for
this company 16.4% and 74.2% respectively for the quarter
ended October 31, 2004.
SG&A expenses for fiscal 2004 were up $19 million compared
to fiscal 2003. This increase was primarily due to the
cost of the company's advertising program and increased
contributions to our ESOP. I am pleased to report that the
company met both its earnings per share target and most of
our operational goals necessary for our employees to earn
significant bonuses for fiscal 2004. Also our board of
directors voted in October to contribute a record amount
of $7 million to our ESOP, which benefits all employees at
Sanderson Farms. This contribution was made during October
and is reflected in our 2004 results.
The company's operating income for the year increased from
$90.5 million to $150.2 million. This operating margin
reflects continued strong operating
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performance in our chicken business, which offset the
reduced profitability of our prepared foods division. Our
operating margin of 14.3% compares to an operating margin
of 10.4% a year ago and continues to be among the top in
our industry.
At the end of our fiscal year our balance sheet reflected
stockholders' equity of $279.3 million and net working
capital of $150.6 million. The current ratio was 3.3 to 1.
Our total debt at year end was $15.3 million and our debt
to total capitalization ratio was 5% at October 31, 2004.
Our net debt was less than zero. For the year we reduced
our long term debt by over $10.7 million. We spent $27.5
million on capital improvements, and we paid $10 million
in a special dividend.
In light of our strong cash flow during fiscal 2004 our
board of directors declared a special dividend of 50 cents
per share that was paid in October. And they also
increased our regular quarterly dividend rate from 8 cents
per share to 10 cents per share going forward.
For fiscal 2004 interest expense was $1.6 million, a 36%
decrease from the $2.5 million we paid in interest during
fiscal 2003 and reflects our lower outstanding debt.
During fiscal 2004 we spent approximately $27.5 million on
planned capital projects. We expect to have capital
expenditures for fiscal 2005 that will be approximately
$125 million and will be funded by cash on hand,
internally generated working capital and cash flows from
operations. If needed, the company has a $100 million
revolving credit facility available to it.
The $125 million capital budget includes approximately
$7.2 million in operating leases, $13 million to begin
construction of a new general office building and $88.3
million on the new Georgia facility. Without these items
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our maintenance budget for fiscal 2005 is $16.5 million.
Our depreciation and amortization during fiscal 2004
totaled $26.3 million, and we expect about $26.5 million
during fiscal 2005.
As Joe already discussed, we expect to experience lower
cost for feed grains during fiscal 2005 compared to 2004,
and we have also identified costs savings and sales
opportunities in all phases of our business. That
completes our prepared remarks, and we will now open up
the call for our question and answer period.
Operator: Thank you. The question and answer session will be
conducted electronically. If you would like to ask a
question today, please do so by pressing the star key
followed by the digit 1 on your touch tone telephone. If
you are using a speaker phone, please make sure your
reflection is turned off to let your signals reach our
equipment.
Once again, if you do have a question, please press star 1
now.
We'll take our first question from (Patrick Stouwet),
Priority Capital.
(Patrick Stouwet): Good morning guys and congrats on a heck of a year.
Mike Cockrell: Thank you.
(Patrick Stouwet): I was hoping to get through a couple of things with you if
I can. First, on the grain. Can you tell us what
percentage of total cost feed represented in the fourth
quarter in the fiscal year? I guess it's just been so
volatile that kind of rule of thumb is hard to track.
Mike Cockrell: (Patrick), we don't have that available. (Patrick), it
will be in our 10K that we file at the end of the year.
It's going to be in the mid-40% range.
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(Patrick Stouwet): Okay, all right, that's great. And with the $60 to $65
million in savings looking forward into '05. Am I thinking
about that correctly? And I could just look at cost of
sales in '04 and take $65 million bucks off of that? Or is
it more of a comparison to the run rate of the fourth
quarter?
Mike Cockrell: It's not compared to the year.
Joe F. Sanderson: No, no, it's compared to the year without any other
variances such as energy cost or increased volume. You
could do that.
(Patrick Stouwet): Okay. And in arriving at that number, can you give us a
little more detail as to where you guys are currently on
your feed supply?
Joe F. Sanderson: Well we - as you know, we booked in May and June our grain
through October, our fiscal year end. So we began November
1 with new grain coming into our feed mills. And we have
been, you know, we have a purchasing program with certain
targets on various contracts in meal and corn. And we've
purchased the material portion of our fiscal 2004, basis
and flat price on both items - 2005, I'm sorry.
(Patrick Stouwet): Okay so, you know, you prepurchased through the first two
quarters or is that a good way to look at it? Fair way?
Joe F. Sanderson: No. We purchased the material portion of our meal and corn
deep into our fiscal year.
(Patrick Stouwet): Okay, okay. So, enough to have clarity and make an
estimate on cost savings I guess.
Joe F. Sanderson: Yes.
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(Patrick Stouwet): Okay. Well I guess the feed benefit is fairly clear. I
guess the moving target then is chicken prices in '05.
Joe F. Sanderson: I think you're right.
(Patrick Stouwet): I guess we all kind of see the same supply indicators and
have all seen the improvement in the exports. Can you give
us a little color, you know, at least you guys' thoughts
on chicken prices as we're, you know, were currently in
this low feed price environment and also in terms of kind
of industry capacity. You know, you guys are expanding. Do
you see anybody else doing that?
Joe F. Sanderson: Well greater placement numbers, for whatever they
represent, whether they're exactly perfect each month or
you have to look at two and three and six months together,
and I do.
(Patrick Stouwet): Right.
Joe F. Sanderson: I think you're looking at the first six months of the
year, calendar year. You're looking at a greater flock
increase of 1 to 2%, which would indicate 1 to 2% more
head probably and maybe some increase in pounds as well --
heavier live weight.
(Patrick Stouwet): Sure, sure.
Joe F. Sanderson: So I'm comfortable kind of looking at a supply of, for the
first six months anyway, of 2 to 3%. Probably 3%. And I
think some of that will be offset by some better exports
during the first six months than we had the first six
months of last year. Past that the picture is a little
fuzzier, and I hesitate to comment past that. But we'll
need to look at some two, three or four months of breeder
placements to see what that's going to look like for the
second half of
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the year.
(Patrick Stouwet): Right.
Joe F. Sanderson: And I think right now with what we know we're expecting
some improvement in export. Along - USDA is and I would
too.
(Patrick Stouwet): Right. I guess, you know, you're all thinking - I've heard
you say you've always heard that cheap grain equals cheap
meat. And, you know, I guess just looking forward would
you be surprised if you saw those breeder numbers starting
to get bigger in this grain environment?
Joe F. Sanderson: I would not be surprised but I will also note, just a
footnote, that in the last two years there have been five
poultry plants that have been closed and another scheduled
to close in Maryland. So I do think they're - I don't know
what the number is but I do think there is some constraint
on hatcheries, maybe feed mills and processing plants, of
right now for any rapid year-over-year expansion in the
industry.
(Patrick Stouwet): Well that's very positive for you guys. One more if I can
and then I'll turn it over. It's been interesting kind of
tracking the different portions and seeing them move in
different directions and it, you know, it seems like, and
it would make sense, that you guys' top line must closely
track the skinless, boneless breast. I guess, given the
big boning plants you have. Is that safe to kind of assume
going forward? I mean that's the key piece for you guys?
Joe F. Sanderson: It's a significant piece and it is because that market has
bigger movements in it.
(Patrick Stouwet): Yeah, that was kind of my question, is why is that portion
so much more volatile than anything? Or it seems to be.
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Joe F. Sanderson: There's just a market price range of that from a $1.20 to
$2.60 basically, is what you have. And leg quarters
typically trade in a maybe a dime range and the Georgia
dock is normally in a dime range. Wings may be in a 40
cent range. But boneless breasts we've seen in the last
six months from basically $1.20 to a $2.60 and that's just
market.
(Patrick Stouwet): Is it because there's more supply of that portion? I mean,
you know, you guys kind of, I guess, made up a strategic
shift to focus on the big bird -- deboning it. Is there
maybe more supply of that portion as apposed to whole
bird? I mean the Georgia dock price stays so constant. Or
is that just kind of a market dynamic that always has been
and always will be?
Joe F. Sanderson: It's market dynamic.
(Patrick Stouwet): All right. Well thanks for you time and good luck in '05.
Joe F. Sanderson: Thank you much.
Mike Cockrell: Thank you (Patrick).
Operator: We'll go next to Christine McCracken at Midwest Research.
Christine McCracken: Morning.
Joe F. Sanderson: Good morning.
Christine McCracken: Just looking at the outlook here, a lot of it depends on
exports I think in terms of ongoing demand strength. I'm
wondering, you know, we saw a big impact on exports this
year relative to AI. I'm wondering, do you anticipate no
recurrence of avian influenza this year? Or is it tough to
say? It seems like
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with AI in the wild bird, kind of flock, it seems like we
might see another occurrence. And has there been any
change relative to our customer base in those export
markets? Maybe changing their views on how we control
that. It might help. Maybe not shut down those markets in
this year.
Joe F. Sanderson: Christine, I think it would not be prudent to assume that
there could not or would not be an avian influenza
outbreak or identification. More likely low pathogenic
rather than high path. We do think the USDA has moved
aggressively as much as they can to monitor these live
bird markets and track birds. But that is not possible to
do that totally.
I also think that the USDA is aggressively pursuing a
distinction with our trading partners between low path and
high path. And I think maybe some of that would be
reflected such as instead of shutting down the whole US
export market, addressing it on a state by state basis.
But I would just factor that in as a possibility and see
what happens when it comes up. You've got to wait 30/40
days to see how the trading partners are going to react.
But it is a material factor in creating a model for the
industry in 2005.
Christine McCracken: Fair enough. Looking again, I guess backing up to the
prior question on boneless prices -- breast meat prices
being so weak -- you know, is it your expectation that
they stabilize given the production trends here over the
next couple of months? And maybe get a little better as we
head into your next fiscal year?
Joe F. Sanderson: You know, I think they will. I do. I think supplies -
chick placements are indicating that we're going to have 4
to 5% more meat compared to a year ago through December.
After December it looks like we're looking at 1%, 2% more
meat. So I would think that with the economy as it is that
we would look for some improvement in that market maybe
beginning second half January or in January and February.
And I would, you know, we think we're probably not
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going to see the peaks in 2005 we saw in 2004. But we
think we're going to see - got more of a normal seasonal
pattern like we've seen in the past.
Christine McCracken: Right, fair enough. And then just in terms of your feed
costs, you know, it takes awhile to feed a chicken. Is it
possible that the feed in the bird today is still on kind
of that hedge feed that you...
Joe F. Sanderson: Yes, yes.
Christine McCracken: You may not see the full benefit of the cost in the first
quarter.
Joe F. Sanderson: Right. Probably we won't. The birds - we fed birds in
October that we process in November and December with that
high price feed. And when you see a movement - but you
won't realize the full benefit of that probably until
January and not fully for a quarter until the second
quarter.
Christine McCracken: And in terms of these contracts that you've locked in for
meal and corn. For this next fiscal year, could you give
us some indication, I mean, did you lock them in really
early? Or did you wait kind of for these prices to come
down? Just on a relative basis. I mean I don't...
Joe F. Sanderson: We locked them in at what we think are really attractive
prices for our shareholders. So we didn't jump at the
first down. We have a program. And in a typical program
you have a step-down target. And so you would buy over
time, not all of it at one time.
Christine McCracken: Good. And then just on the new plant. Is it your
expectation that you'll have relatively limited volumes
coming out of that in the fourth quarter? And really
should be fiscal '06 before you see the volumes really
pick up?
Joe F. Sanderson: Yes, I don't think, you know, we're going to wait. Right
now we're still on
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schedule for the fourth quarter. We don't know what the
weather is going to be over the next 60 to 90 days and
that could push back. And even if it doesn't push back,
we'll take six weeks with limited numbers of head going
into that plant to train employees. So, we'll have minimal
effect on volume from Georgia in 2005.
Mike Cockrell: Christine, this is Mike. As we get closer to that fourth
quarter in our next couple of calls, we'll try to quantify
that for you as best we can as we get closer and get the
schedule. As Joe said, as we get closer to the date we can
get you some numbers on that.
Joe F. Sanderson: And there will be some costs associated with Georgia with
training and the salaried personal, and we'll quantify
that on later conference calls.
Christine McCracken: In terms of the costs relative to construction on that
plant. I would assume you take that out of your current
cash holdings. As you work those down I expect interest to
fall over, interest income to fall over the balance of the
year. Could you give us some indication as to when you
expect those expenses to hit?
Mike Cockrell: Yeah, we've already started paying some capital
expenditures in Georgia and we'll continue to pay, as we
said, about $88 million for fiscal 2005. And most of -
well no they'll be fairly evenly dispersed through the
year Christine. As you said, we'll work down our existing
cash on hand but the interest that we're earning on that
is certainly not material.
Christine McCracken: Great. Good enough, thanks.
Joe F. Sanderson: Thank you.
Operator: We'll move next to John Rosenberg at Geneve Capital Group.
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John Rosenberg: Yeah, good morning. Two questions. One question regarding
the grain and then something else. Not to belabor your
grain purchasing which you've talked about a great deal. I
just want to kind of clarify one more thing. You guys have
said in the past that your grain purchasing is fairly
opportunistic. Sometimes you buy spot, sometimes you buy
Forbes. If I'm correct on that, and please correct me if
I'm wrong.
Joe F. Sanderson: That's correct.
John Rosenberg: Do you get any feeling - one question out of that would
be, is the Georgia facility at all going to influence your
grain buying methods or practices?
Joe F. Sanderson: No.
John Rosenberg: No, not at all. So it will continue to be on an
opportunistic basis?
Joe F. Sanderson: Yes.
John Rosenberg: Okay. My next question is regarding potential. Have you
guys contemplated a stock repurchase perhaps? Perhaps the
next fiscal year is not the best time for it given your
capital expenditures for Georgia. But in the past you guys
have generated a great deal of cash. You've returned it to
shareholders in various means through increased dividends
and, of course, the special dividend. Have you ever
thought about starting a repurchase program or authorizing
that?
Mike Cockrell: Well our - this is Mike. The board of directors currently
have authorized the officers to buy up to 1.2 million
shares from time to time in the open market as shares are
offered to us -- under the applicable rules of the SEC
that we have to repurchase shares under. And we are
currently authorized to do that. And as you mentioned we
have other opportunities for our cash right now, but
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we also have a very strong balance sheet and if we see an
opportunity, we have the authority to do it.
Joe F. Sanderson: In the past we repurchased -- I can't tell you the exact
time period, but we purchased back in and retired
1,700,000 shares.
Mike Cockrell: Over the last two years.
Joe F. Sanderson: Over the last two years.
Mike Cockrell: But that program is still authorized by the board and we
can. And as I mentioned there in our prepared remarks, the
ESOP, which as everyone knows is primarily invested in
Sanderson Farms stock, currently has a substantial amount
of cash available to it as well.
John Rosenberg: I see, thank you. I just want to be clear on one point
though. You said in the open market if people offer you
shares. I'm a little confused on that.
Mike Cockrell: We do not have a program and are not allowed to go out and
ask people to accumulate shares for us and bring them to
us. The company - this buyback program operates under the
rules. And if somebody calls and offers us a block we'll
evaluate that. But we don't go out and ask people to
accumulate shares for us.
John Rosenberg: Or you don't buy them in the open market regardless of...
Mike Cockrell: We will buy them in the open market if somebody calls and
makes an offer to sell them to us.
John Rosenberg: Okay. All right. Well thank you very much.
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Joe F. Sanderson: Thank you.
Operator: And again as a reminder if you have a question, press star
1 now.
We'll go next to (Matt Sorovich) at (Scovia) Capital.
(Matt Sorovich): Hi, congratulations on another great year.
Mike Cockrell: Thank you.
(Matt Sorovich): I apologize. I'm fairly new to the names so I'm going to
ask some very simple questions. But in terms of guidance,
I guess I can understand that you wouldn't give guidance
for next year given the unpredictability of chicken prices
that's been alluded to in other questions. But if I could
just walk through some theoretical math it might be
helpful to me and maybe there are a couple others.
Given the feed guidance -- if you can call it guidance --
of $60 to $65 million less cost next year, if I look at
current chicken prices, you know, relative to last year it
seems like the revenue decline that you could experience
without the new plant coming on is something like a $125
million of less revenue given the same volume. So that
with the feed cost decline you actually still could make
over $2 a share next year even if chicken prices don't
rebound.
If you could, you know, just address those numbers or talk
about, you know, where chicken prices are now? And if they
stayed here what it would look like for your revenue line?
That would be great.
Joe F. Sanderson: Mike do you want to try that.
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Mike Cockrell: Well you're right that our decision not to issue guidance
at this time was primarily driven because of the lack of
vision going forward. Or visibility rather, not vision.
Visibility of where the chicken markets are going to be.
We've run numerous scenarios using pricing that - using
market expectations that we have gotten from various so
called experts, from our own sales people. And under those
scenarios the range of profitability for the company
obviously is significant.
You know, it's significant from one scenario to the next
and there are estimates out there that we have run using
reasonable market expectations to reach those numbers. But
we just don't have visibility yet. But I guess - I'm not
sure if that answered your question or not. You mentioned
we could make $2.00 a share.
(Matt Sorovich): It seems like you could, I mean even if chicken prices
just stayed where they are.
Mike Cockrell: Right, yeah...
(Matt Sorovich): (Unintelligible) at two dollars a share.
Mike Cockrell: Right, Joe reported that we're going to save between $60
and $65 million on grain. That's two dollars a share net
right there in cost savings that we will experience. So we
could clearly at $4.57 a share, this year we can give back
$2 a share in the chicken market and make the same thing
we made this year. As Joe said, we don't expect that. We
don't expect a peek pricing next year. But we're just not
prepared right now to quantify that below but except for
on the cost side right now.
(Matt Sorovich): Couldn't you just look at current prices and just make
that very basic assumption and walk us through the math of
what that would be like?
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Mike Cockrell: The problem with that is right now currently you've got
boneless breast meat in the low dollar 30s. If we made a
model at a $1.30 and 28 cent boneless...
Joe F. Sanderson: Leg quarters.
Mike Cockrell: ...or 28 cent leg quarters and a $1.10 wings and a 74%
Georgia dock, I think it would be a little bit
disingenuous for us to run that model when we know that's
not what the market is going to be for fiscal 2005. We
clearly expect, as Joe said, boneless breast meat to
average above $1.30 where it is now. Leg quarters, maybe
we expect to be stable as Joe said, the variation there is
going to be plus or minus 2 or 3 cents around 28 cents a
pound. The Georgia dock right now, going into the
holidays, typically will move up there in the summer. And
running a model based on today's numbers just really, that
just wouldn't - that to us is not necessarily a reasonable
scenario.
(Matt Sorovich): Okay, because you feel confident that prices are going to
rebound.
Mike Cockrell: Yeah.
Joe F. Sanderson: Well we expect boneless breast meat prices to rebound. But
you would also if you - in my remarks I said that wings
were going to follow a more normal pattern this year we
think. And that means you wouldn't run wings at a $1 -
what are they now? A $1.04 or something? A $1.00. You
wouldn't run any model wings - we wouldn't - at a $1.00
for the year. You'd take and, you know, at $1.00, a $1.05,
$1.10 maybe through the first quarter. And then they would
come back to normal levels by the summer which is closer
to 60 to 70 cents a pound. Last year they were a $1.20,
and they were a $1.20 in the summer time till July.
But you wouldn't - I think it - I wouldn't, if I were
making a model I don't
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think I'd use, you know, $1.00 wings for the year. I
wouldn't use a $1.30 for boneless. I don't think I'd use
74 cents for the Georgia dock for the year. And we believe
that last year, 2004, was a peak spike year that happens
from time to time in our industry when a lot of the stars
line up. We think it's an unusual occurrence. And we would
think 2005 would be a more typical year.
(Matt Sorovich): And a more typical year -- just based on the numbers that
I've looked at -- seems like prices overall, and I'm
looking at all parts of the chicken, combined to maybe to
be 20% off of these levels. and I guess the point I was
just trying to make, if it even - if it comes back to
normal levels of say 20% below 2004 levels, that you still
- you ought to be able to make something like $2 a share
given the lower feed prices.
Joe F. Sanderson: Well I hadn't done the math, but you're suggesting with
20% or 19% of last year. But I would think with a normal
year you would certainly think $2 a share was doable.
(Matt Sorovich): Right. Okay. I appreciate it.
Joe F. Sanderson: Thank you.
(Matt Sorovich): Thank you.
Operator: Over next to (Jeff Burchell) at (Poor).
(Jeff Burchell): Hi, actually my question - I had similar questions about
some of the math and the guidance (unintelligible) plan. I
guess I would wonder if as we move further into the fiscal
year, will you guys be providing some sort of guidance
with respect to the top line. Because that is the wild
swing factor that causes so much trouble in trying to
figure out the pluses and minuses.
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Joe F. Sanderson: We will obey with it as we go forward. As the year becomes
more visible certainly it would be more - it would be
reasonable for us to do that, yes. But we're just - we're
going to wait and get into the year and see how the
markets act and then make a call on that.
(Jeff Burchell): Okay, because we appreciate the - we, you know, we
appreciate the...
Joe F. Sanderson: We understand the difficulty, and what you all are faced
with is the same thing we are. And as I mentioned, we've
run many different models assuming various scenarios. And
depending on what day it is and who you're talking to they
all appear reasonable. So, you know, you could say, "Well
if this happens this is reasonable." And as Christine
mentioned, you know, what one factor out there is what's
the export market going to do? And that depends in part on
whether you have AI. And if you have AI, is it high path
or low path. If it's low path, which countries embargo
which states? And that will have a material impact on the
market and how do you guess that? And that's one reason
why we'd like to get into the year a little bit and see
how the markets react before we step off and do that.
(Jeff Burchell): All right, well fair enough. Well one thing on the new
facility you're building. If you had to sort of pin it
down to a percentage of capacity, could you just help me
understand how big this is relative to what you produce
now?
Mike Cockrell: When it's at full capacity, which it will be here in
sometime during the first half of 2006, it will represent
a 22 or 23% increase in production capacity for the
company. But I hasten to note that that won't be until
it's at full double shifted capacity. And that won't
happen until probably the second quarter of 2006.
Joe F. Sanderson: Third quarter 2006.
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Page 24
Mike Cockrell: Excuse me, third quarter 2006.
(Jeff Burchell): Okay, and then I guess we're on macro industry
perspective. There's some capacity reference being taken
out. What with - is this facility so small it doesn't
matter on the, you know, on the national scene? Or does it
matter in terms of, you know, supply and demand.
Mike Cockrell: It's less than one percent.
(Jeff Burchell): Okay, well that's great. Thanks a lot.
Joe F. Sanderson: Thank you.
Operator: We'll move next to (Margaret Johnson), ACI Capital.
(Margaret Johnson): Hi, I'm also new to this story. I just had a quick
question. In terms of I guess overall volume of pounds of
boneless meat, I guess per year, how much are you guys
producing?
Mike Cockrell: Boneless breast meat?
(Margaret Johnson): Yeah.
Mike Cockrell: Little over, that's bulk, doesn't include any of the
tri-factors.
Joe F. Sanderson: More at 4.5 million a week.
(Margaret Johnson): Four and a half million a week?
Joe F. Sanderson: Wait a minute.
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Mike Cockrell: Let me just distinguish one thing for you. If you're
trying to identify for purposes of a model, how many
pounds are sold on the spot market using the
(unintelligible) boneless breast meat quote. We had some
conversation about this on our last call. That amount is 3
million pounds a week.
(Margaret Johnson): Okay. And what about just in terms of, you know, wings or
quarters?
Joe F. Sanderson: That number is closer to 3.5 to 4.
(Margaret Johnson): Okay.
Joe F. Sanderson: On the - if you're doing a sensitivity deal then the
balance of the 4.5 million are sold in upgraded form for
further processing.
(Margaret Johnson): Okay. In terms of, I guess, what is your overall
production per year?
Mike Cockrell: One point five billion pounds.
(Margaret Johnson): Okay. Thank you.
Mike Cockrell: Thank you.
Operator: And our next question comes from (Collin Savage).
(Collin Savage): Hi, congratulations on a great year.
Mike Cockrell: Thank you.
(Collin Savage): I was curious about the decision in financing the new
plant and the thought process you all went through in
terms of using the cash, taking on debt, etc.
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Joe F. Sanderson: I'm sorry, what's the question?
(Collin Savage): The question was really in financing the Georgia plant and
if there's any consideration taking on debt and using the
cash for other purposes? Or the process in using the cash
you built up last year for that plant?
Joe F. Sanderson: No. We had the cash and we didn't see another use for it.
And we didn't give any consideration to taking on debt.
(Collin Savage): And one other question. I was curious to hear a bit more
about the new corporate offices you're constructing. You
mentioned $13 million.
Mike Cockrell: Yeah, that's correct.
Joe F. Sanderson: Yes.
(Collin Savage): And these are in Laurel? I wonder if you can you give me
any sense of what that project involves? I think I have a
sense of what the Georgia facility involves.
Joe F. Sanderson: It's no - it's a 90,000 square foot, two story office
building that will have our computers and all of our
general office folks with some room to grow.
Mike Cockrell: And yes, it will be Laurel, Mississippi.
Joe F. Sanderson: Yes.
(Collin Savage): Right. All right. Well thanks very much.
Joe F. Sanderson: Thank you.
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Operator: And gentleman there are no further questions at this time.
I'll turn the conference back over to you.
Joe F. Sanderson: Thank you for spending time with us this morning. We're
pleased with the opportunities before us, and we look
forward to continued progress in fiscal 2005. On behalf of
everyone at Sanderson Farms we wish you all a very happy
holiday season and a happy prosperous and peaceful new
year. Thank you for joining us.
Operator: And that concludes today's conference. Again thank you for
your participation.
END