EXHIBIT 99.2
SANDERSON FARMS INCORPORATED
Moderator: Joe Sanderson
02-24-05/10:00 am CT
Conference #500024
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SANDERSON FARMS INCORPORATED
MODERATOR: JOE SANDERSON
FEBRUARY 24, 2005
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 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 First
Quarter conference call with shareholders, analysts and
investors. With me on the call today is Lampkin Butts,
President and Chief Operating Officer and Mike Cockrell, Chief
Financial Officer of Sanderson Farms.
The purpose of this call is to review financial results and
operating trends reflected in the first fiscal quarter ended
January 31. We issued a news release this morning announcing
net earnings of $10 million or 50 cents per fully diluted
share for our first fiscal quarter of 2005. This compares to
$19 million or 96 cents per share earned during last year's
first quarter which included 1 cent per share or $177,000 net
of income taxes for the recovery of settlement proceeds from
certain vitamin litigation.
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Moderator: Joe Sanderson
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I will begin the call with some brief comments about general
market conditions and the company's operations and then I will
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 statement regarding forward-looking
statements.
Mike Cockrell: Thank you, Joe, and good morning to everyone. Before
we begin the call this morning, as always we need to caution
you that the call will contain 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 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. Those risks and
uncertainties are described in Item 7 of our most recent
annual report on form 10K and in the MD&A portion found in
Item 2 of Part 1 of the company's quarterly report on form 10Q
filed with the SEC in connection with the first quarter ended
January 31, 2005, which form 10Q was filed this morning.
Joe Sanderson: Thank you, Mike. Our financial and operating results for the
first fiscal quarter marked a strong start for fiscal 2005 and
reflect a poultry market that improved as the quarter
progressed and input costs have steadily decreased throughout
the quarter.
Market prices for poultry products were mixed during the
quarter when compared to our first quarter last year although
they were higher across the
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Moderator: Joe Sanderson
02-24-05/10:00 am CT
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board when compared to our last quarter. The average Georgia
dock price during our first quarter was 7.4% higher than last
year's first quarter. The Georgia dock price is currently
73-3/4 cents per pound which compares to 72 cents per pound
for the same week last year. To put the current market price
in perspective, the average dock price for the two previous
years for the week of February 24 was 63 cents per pound.
While bulk leg quarter prices were steady for the quarter
compared to last year's first quarter increasing less than 1%,
the market for leg quarters reflects good export demand. While
export data for January are not yet available chicken exports
during December of 2004 increased 22.7% in quantity and 16.8%
in value when compared to December a year ago, continuing the
improvement we began seeing last fall.
Exports to Russia, which was the top market during the quarter
for the industry, reflected more normal levels during December
2004 when compared to the relatively low levels of 2003,
increasing by 92% in tonnage and 85% in value.
Bulk leg quarter prices averaged 29 cents per pound during our
first quarter and leg quarters are currently trading for 31
cents per pound. Wing prices during our first fiscal quarter
averaged $1.05 a pound, up a bit over 5% from the average of
99-3/4 cents per pound during last year's first quarter.
Boneless breast meat prices during our first quarter however
were lower falling by 9.69% when compared to the first quarter
a year ago. While lower for the quarter, boneless prices
strengthened as the quarter progressed reaching a high of
$1.66 in January. Boneless breast meat averaged $1.38 during
the first quarter and today the market for boneless is $1.48
per pound.
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All this said, the overall average selling price for poultry
products decreased 2% for the quarter compared to last year's
first quarter.
While chicken prices were mixed during the first quarter when
compared to last year's first quarter, the same can be said
about grain prices. As we reported in December, our operating
costs during our first fiscal quarter reflected the higher
grain prices we incurred during the second half of fiscal
2004. Although we began paying lower prices for corn and
soybean meal delivered to our mills in November, the chickens
processed and sold during the first half of the quarter still
reflected the higher price grain bought prior to our fiscal
year-end.
By the end of the quarter we began to realize significant
savings in our cost structures. We have already contracted for
a portion of our feed grain needs for the balance of our
fiscal year and we still expect to realize savings of between
$60 million and $65 million during fiscal 2005 compared with
fiscal 2004.
We are pleased to report that our operating performance also
continued to be strong. We were particularly pleased with the
strides made at our Hammond processing division which
completed its shift to the big bird market during 2004. Both
our processing division and our live grow out continue to
compete very well in the industry.
Just as we did at the beginning of fiscal 2004, we have
identified opportunities in our plants in the field and in
sales that we will work to capture during fiscal 2005 and we
look forward to continued improvement in our overall operating
performance.
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The performance of our prepared foods division during the
first quarter improved over last year's first quarter as it
paid less for raw materials than a year ago. While sales
decreased approximately 7.6% the profitability of the foods
division improved relative to a year ago. Our foods division
purchases much of its fresh chicken needs from our Hammond,
Louisiana, facility.
As most of you know, Winn-Dixie, a customer of ours for many
years, filed for protection under Chapter XI of the U.S.
Bankruptcy Code early Tuesday morning. Our exposure at the
time of the filing was not material to our financial
statements and we will take all possible steps to recover the
pre-petition receivable.
Going forward we will continue to supply Winn-Dixie and do all
we can to support their efforts to successfully reorganize
their business. Looking ahead we remain confident that we will
continue to improve our operating performance and sales
execution. While we don't expect the peak market prices for
poultry products we enjoyed during 2004, the market appears
balanced. With projected improved export demand the market
should manage to project a 2-1/2% to 3% increase in poultry
supplies.
We remain on schedule to begin operations at our new South
Georgia poultry complex during our fourth fiscal quarter. We
have live chickens on the ground in Georgia and construction
at all three facilities - our feed mill, hatchery and
processing plant - remains on schedule.
At this point I'd like to turn the call over to Mike for
financial statements.
Mike Cockrell: Thanks, Joe. As Joe said we are pleased with our financial
performance during the first fiscal quarter. Net sales for the
quarter totaled $233.3 million, up from $226.4 million for the
same quarter a year ago. The 50 cents per share earned
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during the quarter from operations compared to 96 cents
earning during last year's first quarter and as Joe said, that
96 cents reflects a 1-cent per share recovery on the partial
settlement of litigation against vitamin suppliers.
Our cost of sales for the three months ended January 31, 2005,
as compared to the same three months of fiscal 2004, increased
10.9%. The increase is a result of the increase in pounds of
poultry products sold in the first quarter compared to the
same quarter a year ago as well as an increase in the cost of
feed grains recognized in cost of sales. As Joe already
mentioned we experienced higher feed grain costs during the
first half of the quarter compared to last year but expect to
enjoy lower costs for the balance of the year.
SG&A expenses for the first fiscal quarter were up $1.8
million compared to last year. This increase is primarily the
result of an increase in marketing expenses and an increase in
administrative costs associated with the constructions and
startup of the new Georgia facility.
Interest expense during the quarter decreased $114,000 to
$318,000 during the quarter reflecting our lower outstanding
debt.
At the end of our first quarter our balance sheet reflects
stockholders equity of $287.6 million and net working capital
of $149 million. The current ratio was 3.74 to 1. Our debt
totaled $15.2 million and our debt to total capitalization
ratio was 5% as of January 31, 2005. Our net debt was less
than zero resulting in a net debt to cap ratio of a negative
amount.
We spent $15.5 million on capital expenditures during the
quarter of our total annual budget of $127 million and that
included $10.5 million in Georgia. We also spent $2 million on
dividends reflecting our higher dividend rate of 10 cents per
quarter.
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During fiscal 2005 we expect to spend $127 million on planned
capital projects which amount includes approximately $7
million in vehicle and other operating leases, $13 million on
our new general office building, $18 million on maintenance at
existing facilities and $89 million in Georgia.
Our depreciation and amortization during the first quarter
totaled $6.3 million and we expect approximately $26 million
for fiscal 2005.
That ends our prepared remarks and we will now open up the
call for questions and hopefully answers.
Operator: Thank you. The question and answer session will be conducted
electronically today. If you'd like to ask a question please
signal by pressing the star key followed by the number 1 on
your touchtone telephone. If you're using a speakerphone make
sure that your mute button is turned off to allow your signal
to reach our equipment.
Again it is star 1 if you'd like to ask a question. We'll
pause just a moment.
We'll take our first question from (Christine McCracken) with
(FTN).
(Christine McCracken): Good morning.
All: Good morning, (Christine).
(Christine McCracken): Just looking at again your outlook for feed
obviously much better for the balance of the year as we
move into some of this lower cost grain and oil seed
specifically, I'm wondering, you know, we've kind of seen
the bottom. Prices are starting to move up. Why haven't
you been more
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aggressive at locking in these very low feed costs than, you
know, you mentioned in your comments?
Joe Sanderson: We did not mention how aggressive we had been.
(Christine McCracken): Okay.
Joe Sanderson: We've been fairly aggressive however, relatively speaking, and
we don't know, we think what's happened in the last 10 days
has been a weather scare out of South America.
(Christine McCracken): Right.
Joe Sanderson: And had we priced out yesterday or the day before when the
prices were higher we still would have been in that range that
I told you about. Our advisors believe that we have not seen
the bottom in grain values.
(Christine McCracken): Fair enough. I guess we all need a crystal ball
for that. Also looking at the egg set and chicks, at the
hatchability I guess numbers lately, it seems like we've seen
slightly better hatching rates lately. I'm wondering if you
could comment on that and to what extent that's going to
impact total production going forward.
Joe Sanderson: Well, the comments are that from people watching that say that
we are getting a little better hatch and my guess is that
compared to a year ago the flock is younger. Probably a year
ago people were holding older hens a bit longer to get eggs
and as a result of that you might have seen a lower hatch
rate.
I think the flock if you look back over the last 12 months the
breeder flock is up 1% and I just think you've got a normal
aged breeder out there. I think
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you're going to see weeks ahead where you have 2% and 3% and
4% more head coming on the market. I think it'll average close
to 3% at the end of the day and we believe the market can
manage that.
(Christine McCracken): And so really the increases that we're seeing
from production this year, part of it is really tied to a more
productive bird and probably slightly heavier weights given
the low cost feed and not really expansion on the part of the
producer.
Joe Sanderson: Right. That's what we think. And we think that because of
breeder placements.
(Christine McCracken): Sure.
Joe Sanderson: You can't make that many more chickens out of 1% more hens.
(Christine McCracken): I hear you. And then just on Georgia it sounds
like things are moving along there quite well and you did
mention I think that you had birds on the ground so it seems
like production data out today would already incorporate kind
of your increases that you're expecting to make there?
Joe Sanderson: Yeah. We've placed breeder stock there in November, December,
January and have we placed February? And February. And those
pullets are in the reported numbers as far as we know. The
primary breeders report those numbers and I feel certain they
were included, they're included.
(Christine McCracken): That's good to hear. With regard to that, you
know, obviously we're looking at the cost of construction
going up pretty considerably. We're working on a house and
certainly our costs have gone up relative to expectations. Now
how do you avoid that with the cost of steel being so high,
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concrete especially in the Southeast? How do you avoid higher
costs than expected?
Joe Sanderson: Well, you know, when we - I'm trying to think about our
timetable. When we were doing this we knew when we were
planning and when the contracts were let in Georgia, what the
costs were going to be and we have fixed price contract and
those contracts reflected higher cost concrete, steel. We also
saw that in the construction of poultry houses and at the time
lumber was higher than it is today.
But when we looked at the overall package it was something
that didn't, you know, we felt like we could manage and for
the growers it's reflected in their contract pay and what
we're paying over there is the same thing we're paying in
Mississippi and Texas for that matter.
Mike Cockrell: You might remember, (Christine), that when we first announced
the Georgia project we estimated what it would cost and then
on the next call we increased that once the contracts were let
and once we got everything, we got on the ground over there
and got the contracts in place.
Joe Sanderson: It was $8 million or $9 million more dollars.
Mike Cockrell: Yeah, about $8 million more from the first announcement to the
second.
(Christine McCracken): You're not going to come up with the same surprises my
contractor will.
Mike Cockrell: You building a chicken house or...?
(Christine McCracken): Oh, no.
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Mike Cockrell: Oh.
(Christine McCracken): In any event, and then just relative to your
expectations from Georgia, are you selling that product
already into the market? Are you preparing customers for that
product so that, you know, day 1 you kind of have a place to
go with that chicken or is it a gradual process that you'd
expect? Can you give us any insight on that?
Joe Sanderson: Well, I'm going to tell you what I think. We'll plow ground
and have salesmen out making calls just as we do every day but
none of that product is really going to be sold until it's on
the back dock, packaged and ready to go. But we feel like that
that plant in particular is going to be in pretty good sales
shape when we crank up over there and we'll crank up gradually
over a six-month period and we feel like that'll be sold well
enough.
(Christine McCracken): All right. So it's not the production that you're
putting in I would assume. You're not say putting in, you
know, full capacity - expectations for full capacity day 1
obviously and the birds that you're putting in are probably a
small percentage of what you'll end up having over time.
Joe Sanderson: Yes, it'll represent about a 20% increase in our production
and it'll be probably May or June of 2006 before you're at
full capacity at that plant.
(Christine McCracken): Good to have that timeline. Thanks a lot.
Joe Sanderson: Good. Thank you.
Operator: Once again it is star 1 if you'd like to ask a question.
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There are no other questions at this time. A final opportunity
- it is star 1 to ask a question.
We have a follow up question from (Christine McCracken).
(Christine McCracken): I can ask another question.
Joe Sanderson: All right.
(Christine McCracken): Not to dominate the conversation but, you know, there
was some articles out this weekend about the WHO meetings and
the potential for avian influenza to spread, possibly, you
know, some concerns there. What's your take on that? Do you
think that there's any realistic way that it'll spread, you
know, beyond kind of what we've seen so far and what steps
does the U.S. take? Maybe you can kind of give us some
perspective. On that relative to being able to control AI, how
does it differ here and why should we not be concerned about
this as a major issue for you?
Joe Sanderson: Right. Well, first of all I would defer to the comments that
the leader of WHO made and Dr. (Gerberding). I know in that
area they're much more equipped to comment than I. But there's
a significant difference.
First of all in the industry in the United States and the
existence of birds - turkeys, ducks, chickens - in Asia and
there's a difference in housing. As a matter of fact a lot of
the birds over there are not in housing. They roam and they
mix with other animals and it's a totally different situation.
The type of virus that they have seen in Asia has never been
seen in the United States. And in the United States almost all
the commercial industry,
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the birds are housed; they're confined and they're under
bio-security programs.
And secondarily I would say that the response of industry, the
industry that serves us with medications and vaccine would
likely once the virus is identified, respond quickly, much
differently than it could be done in Asia and in the countries
that are effected over there.
(Christine McCracken): That sounds like we're a little bit prepared,
more prepared and given the structure of the industry, we
wouldn't see the same spread of the virus as they've seen in
Asia.
Joe Sanderson: You wouldn't see it done in the same way because a lot of the
fowl over there roam. They're not confined. And I think most
of their comments were concerned with bird to human and then
human to human.
(Christine McCracken): Right.
Joe Sanderson: And, you know, I would never - if they believe that's going to
happen I would defer to their judgment and I think they would
know how to - you know, we're going to confine our birds,
we're going to practice bio-security, we're going to be
vigilant. We test all the time for avian influenza virus in
our flocks and I now a lot of other processors do. And I'm
sure that does not happen with backyard birds and roaming
birds in Asia.
Mike Cockrell: (Christine), it's also, you know, as we said last year when
the same issue was raised after some avian influenza was
detected in the United States, it's important to remember that
the particular strain in Asian that has effected poultry and
some humans over there, there's no history of that highly
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pathogenic strain of avian influenza in the United States. We
haven't had it and don't have it now.
(Christine McCracken): Correct. Good stuff. Unless they come over on a plane
or something I guess we're pretty safe.
Joe Sanderson: Well, you know, at one time it was attributed to migratory
waterfowl and other birds over there. I don't know and I guess
someone knows if there's a chance that there would be some
co-mingling of migratory birds that would somehow get into
North America. But it hasn't happened thus far.
(Christine McCracken): But in any event it seems like there's some checks in
place to keep that from spiraling out of control.
Joe Sanderson: I would think so, yes. It's much better prepared than Asia
would be.
(Christine McCracken): And then just if I could on breast meat prices lately
obviously they've been trending down here since the first of
the month. You know, looking at cold storage numbers it seems
like we're working down some of those inventories. You had
mentioned that exports still pretty strong and that's pretty
nice dark meat market. Wondering, if you could, just comment
on why the weakness in breast meat prices and if you expect it
to turn around at any point?
Lampkin Butts: (Christine), this is Lampkin Butts. We did see a little
softening of the breast market in February but it has
stabilized now and seems to have leveled out. We expect to see
seasonal price increases for white meat, for boneless breast,
particularly after Easter and through the summer.
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We don't expect to see the spikes that we saw last year. Not
expecting those kind of prices but we think that once we get
the Easter season behind us that those prices will trend up
and move up probably slowly through the summer and this year
maybe through Labor Day where last year they began coming down
right after the fourth. We think maybe it'll be better demand
through the summer till Labor Day.
(Christine McCracken): Fair enough. And you did mention strong export demand.
You know, Russia's I guess opened up to Brazilian imports. Any
comments on competition from Brazil?
Joe Sanderson: Well, as you said the export market and the demand for that
dark meat is good. We're not feeling the competition from
Brazil and barring any unforeseen political disaster we're
expecting Russia to (fill) that quota this year.
Mike Cockrell: Yeah.
Joe Sanderson: Brazil has a quota as well.
(Christine McCracken): Right.
Joe Sanderson: And so those numbers are set.
(Christine McCracken): Right. And it seems like they're exporting a slightly
different product in any case so that's good stuff. Thanks.
Joe Sanderson: Thank you, (Christine).
Operator: And next we'll go to (Hewitt) (Unintelligible) with (Romani.
com).
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(Hewitt): Gentlemen, I wanted to ask if you've given any further thought
to the item in the proxy regarding executive compensation.
There are if I recall about 31 different data points that the
managers might be evaluated on and I'm wondering if with all
those data points that might create a problem in terms of
deciding which data point to use in any given year.
Mike Cockrell: This is Mike. The board, the shareholders last week at the
annual shareholders meeting did approve the omnibus stock
incentive plan that you're referring to. And although that
plan is an omnibus plan that the compensation committee on
advice of advisors and experts that they hired, recommended
that the full board approve and ask the shareholders to
approve - that plan is a long-term plan that the compensation
committee of the board tried to anticipate the future and put
in place a menu of options that they would have available to
them going forward.
No, there's not been any concrete - the compensation committee
and the board has not put in place any specific plan that
utilizes those various options that they have available to
them. You know, there are many options and they're available
on how to measure the executive compensation but they have not
put in place anything concrete yet.
Joe Sanderson: Historically we have two that we've used forever and we will
continue to use those two and one of those is earnings per
share and the other is our relative position in our industry,
our competitiveness.
(Hewitt): Great. And Mike, thanks for that. And one other item just to
refresh my memory. The one-time gain in the Q1,'04, results
for the vitamin supplements.
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Mike Cockrell: Right.
(Hewitt): That added how many cents per share to your earnings?
Mike Cockrell: Last year in the first quarter it added 1 cent.
(Hewitt): One cent.
Mike Cockrell: Gosh, over the last four years I don't recall the exact
number.
(Hewitt): I was just curious versus, you know, '05 versus '04, you know,
Q1, '05, versus Q1, '04.
Mike Cockrell: Just the 1 cent and there's no more for the rest of the year.
And we don't expect anymore out of that particular vitamin
settlement either. But for the year there was 1 cent and it
happened in last year's first quarter. So going forward there
will be none.
(Hewitt): If I could just get back to the executive compensation for a
second, just emphasize if I think return on capital is always
a good metric to use and so I would suggest that it might be
worth adding as one of the factors you look at. And by the way
I think your return on capital figures are good so it's not
like I'm trying to introduce a tougher metric.
Mike Cockrell: We certainly look at it internally frequently and appreciate
that and we do, you know, every year when we set our goals we
do take that into consideration and appreciate that. But it
has never been used specifically by the compensation committee
although, as you know from looking at the proxy, they now have
that available to them if they want to.
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(Hewitt): Right. Could I ask another question?
Mike Cockrell: Sure.
(Hewitt): Someone on one of the discussion boards on the Internet
suggested it might be cheaper for you or more advantageous if
you bought an existing chicken facility rather than building
one from scratch. Can you just talk about sort of the
economics or the thought process of first of all, is that
possible and second, what sort of economies do you expect from
the brand new facility versus say buying someone else's
facility if in fact, you know, it's even possible to do that?
Joe Sanderson: We've done that throughout our history. The Hazlehurst plant
was bought, the Laurel plant was built, the Collins plant was
bought, the Hammond plant was bought, the McComb plant was
built. The prepared foods division was bought.
So we've utilized both methods - Greenfield construction or
acquisition -and we evaluate them all, all of the time. During
the year of 2003 there were a number of assets available that
we looked at across the country and at the end of the day for
whatever reasons, that didn't work out and we ended up
building the plant in Georgia. So to us either one works.
If it's in the right place, it has marketing advantage and
that's our first - our first deal is market. Access to a
market or participate in a market segment, acquire customers
in a market segment and our first step consideration is
marketing. And if that can be achieved with an acquisition,
fine. If it can be achieved with building we'll do that too.
(Hewitt): Great. I think the comment was suggesting that with your stock
price performing terrifically over the last several years that
you might be falling in
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love with the idea of brand new plants rather than a
philosophy of really monitoring every penny that you spend.
Mike Cockrell: No. Yeah, as Joe just said, you know, we look at both and I
don't think that's - that's not true. You know, we'd evaluate
every opportunity on its own merits and make a decision but
certainly the construction during the `90s has paid off well
for us. Those plants we're building from Greenfield have done
well but the other plants are operating well too.
(Hewitt): Right. Thanks, gentlemen.
All: Thank you.
Operator: There are no further questions at this time. Mr. Sanderson,
I'll turn things back to you for any closing comments.
Joe Sanderson: Thank you. Thank you for spending time with us this morning.
We're pleased with our results to-date and look forward to
continued progress in fiscal 2005. We look forward to
reporting our results to you throughout the year.
Thank you very much.
Operator: That does conclude today's conference call. Again, thank you
all for your participation and have a great day.
END