EXHIBIT 99.2
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SANDERSON FARMS, INCORPORATED
MODERATOR: JOE SANDERSON/MIKE COCKRELL
FEBRUARY 28, 2006
10:00 AM CT
Man: After the tone please record your name, affiliation and
phone number followed by the pound key.
Operator: Please stand by. We're about to begin. Good day and
welcome to the Sanderson Farms, Inc. 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.
Joe Sanderson: Good morning welcome to Sanderson Farms' First Quarter
conference call. With me on the call today are Lampkin
Butts, our President and Chief Operating Officer and
Mike Cockrell, Chief Financial Officer of Sanderson
Farms.
We issued a news release this morning announcing a net
loss of $8.6 million or 43 cents per fully diluted
share for our first fiscal quarter of 2006. This
compared to net earnings of $10 million or 50 cents per
share during last year's first quarter.
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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 Lampkin and Mike for
a more detailed account of the quarter.
Before we make any further comments, I will ask Mike to
give the cautionary statement regarding forward-looking
statements.
Mike Cockrell: Thank you, Joe and good morning to everyone Before we
begin the call this morning I need to caution you as
always 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 Securities
Litigation Reform Act of 1995 and are based on
management's current expectations or beliefs as well as
assumption made by and information currently available
to management.
The actual performance of the company could differ
materially from that indicated by 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
management's discussion and analysis of financial
condition and results of operation 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 fiscal
quarter ended January 31, 2006.
Joe Sanderson: Thank you, Mike. Our financial results for the first
fiscal quarter reflect a very difficult poultry market.
Lingering inefficiencies caused by reduced volume
resulting from Hurricane Katrina during November and
the expected impact on our earnings cost by the
continuing startup of our new Georgia complex.
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As Lampkin will describe in more detail, market prices
were lower across the board for all poultry products
during the quarter. Most believe these market
conditions are in part the result of depressed export
demand caused by international concern over avian
influenza.
In addition to the external factors affecting the
industry during the quarter, two internal factors
continued to affect Sanderson Farms. As we reported in
December our volumes in Mississippi and Louisiana were
lower during the first part of the first quarter as a
result of Hurricane Katrina related losses.
All of our Mississippi and Louisiana processing plants
were down a number of days in November because of the
loss of live inventories during the storm. As Mike will
discuss, our operating income was reduced during the
quarter by $3 million in losses and expenses incurred
but not yet recorded as an insurance receivable under
applicable accounting rules.
In addition to Hurricane related losses, operating
losses related to our Georgia facility totaled
approximately $4.4 million for the quarter. This impact
from Georgia was expected and inefficiencies at that
facility will continue until it reaches full production
this summer. I am pleased however with the progress in
Georgia and the plant remains on schedule to be at full
production by July 31. Our cost of feed grains will be
in line with the expectations we expressed on our
December call.
We have priced much of our needs for fiscal 2006 and
our unit cost for soybean meal and corn will be only
slightly higher during fiscal 2006 than fiscal 2005.
Also the first quarter marked the completion of the
initial planning stages and sight selection for the
next phase of growth for Sanderson Farms.
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On January 12 our Board of Directors approved Waco,
Texas as a site of a new big bird deboning facility for
Sanderson Farms. At full capacity this new processing
plant and hatchery will have the capacity to process
1-1/4 million birds per week.
Engineering continues on the new plant and we expect
construction to begin soon. Initial startup of the new
facility is scheduled for May 2007 with production to
phase in through 2008. This plant will allow Sanderson
Farms to continue its pattern of growth through 2009.
I recognize there is some anxiety among those who
follow our industry regarding the possibility of
overproduction and a supply side driven down cycle and
market prices. However I do not believe there have been
bricks and mortar put in place in the industry to
trigger a concern about overproduction over the long
term. And this is supported by the leading indicators
of production. At Sanderson Farms we have plenty of
factors we can control to focus on during 2006 and we
will remain focused on those items.
At this point I will turn the call over to Lampkin for
a more detailed discussion of the market and our
operations during the first quarter.
Lampkin Butts: Thank you, Joe. As Joe mentioned, market prices for
poultry products were lower during the quarter when
compared to our first quarter last year and when
compared with our last quarter. The average Georgia
dock price during our first quarter was 3.2% lower than
last year's first quarter. The Georgia dock price is
currently 69 cents per pound which compares to 73.75
cents per pound for the same week last year.
Bulk leg quarter prices were lower for the quarter
compared to last year's first quarter, decreasing more
than 10% reflecting weak export demand. While
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export data for January are not yet available, chicken
exports during November and December 2005 decreased 5%
and 28% respectively in quantity when compared to the
same two months a year ago.
As Joe mentioned, most believe this demand reflects the
international concern over AI. Bulk (earnabury) leg
prices averaged 25.89 cents per pound during our first
quarter and leg quarters booked for export to Russia
and Eastern Europe are currently trading from 14 to 15
cents pound delivered to the port.
While the (earnabury) market price is 19 cents, going
into the export market is often sold at negotiated
prices that may be lower than that (earnabury) market
price.
Wing prices during our first quarter averaged 87 cents
per pound, down 17.6% from the average of $1.05 per
pound during last year's first quarter. Wings are
currently trading at 96 cents per pound.
Boneless breast prices dropped sharply during our first
quarter following by a 21.23% when compared to the
first quarter a year ago. Boneless breast averaged
$1.09 cents per pound during the first quarter and
today the market for boneless is $1.13 per pound.
All of this said, the overall average selling price of
poultry products decreased 9.7% for the quarter
compared to last year's first quarter. While chicken
prices were lower during our first quarter when
compared to last year's first quarter, the cash market
prices for feed grains were slightly higher.
The cash market prices of corn and soybean meal were
2.5% and 14.6% higher during our first quarter compared
to the same quarter last year. And the
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cost of corn and soybean meal delivered to our feed
meals were slightly higher during our first quarter
when compared to a year ago.
As we reported in December we expect feed costs during
fiscal 2006 to be only marginally higher than in fiscal
2005. Our operating performance during the quarter
continued to reflect certain inefficiencies caused by
reduced volumes resulting from Hurricane Katrina. We
processed reduced volumes at all of our Mississippi
plants and our Louisiana plant during November but
those reductions are now behind us and we expect no
lingering effects of Hurricane Katrina.
Our Collins, Mississippi plant was also idle for a week
during January as we completed this conversion from a
mix of chill pack and big bird deboning to all big bird
deboning. That conversion is now complete and we remain
on schedule to add 150,000 head per week to get the
plant to full production by July 31.
All totaled with Hurricane related reductions and the
plant downtime at Collins, the company processed 17.9
million less pounds of chicken during the first quarter
than it would have had those reductions not occurred.
Both our processing division and our live grow out
continue to compete well in the industry. However we
have many opportunities to improve items we can
control. Just as we did at the beginning of 2005 we
have identified opportunities in our plants, in the
field and in sales that we will work to capture during
2006. And we look forward to continued improvement in
our overall operating performance.
We continue to work on the performance of our prepared
foods division during the first quarter. This plant was
also idle for a week in January as we
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made the first of several changes to the plant designed
to increase its capacity to cook chicken. We will
continue to upgrade equipment in the plant over the
next 18 months and will double our capacity to cook
chicken when that process is complete.
Looking ahead we remain confident that we will continue
to improve our operating performance and sales
execution. While current market conditions are
difficult we remain optimistic about the future of our
industry and this company.
Like Joe, I am looking forward to our new project in
Texas. The new plant will provide an opportunity to
continue the history of growth this company has
experienced over the past ten years. Also the changes
at our foods division which will be complete as we
bring the new Texas plant online would allow us to
place about half of the new production of boneless
breast the Texas plant generates into the further
processed market.
At this point I would like to turn the call over to
Mike Cockrell, Chief Financial Officer.
Mike Cockrell: Thank you, Lampkin. Our financial results during the
first quarter reflect a very different market
environment described by Joe and Lampkin. Our net sales
for the quarter totaled $222.1 million, down from the
$233.3 million for the same quarter during fiscal 2005.
The 43 per share - cents share per share lost during
the quarter compares to 50 cents earned during last
year's first quarter.
Our cost of sales for the three months ended January 31
as compared to the same three months during 2005
increased 9.3%. The increase is a result of an
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increase in the pounds of poultry products sold during
the first quarter this year, compared to the same
quarter a year ago.
SG&A expenses for the first quarter of 2006 were flat
when compared to 2005. Our SG&A expenses going forward
should trend below a year ago in the absence of
administrative costs associated with the construction
and start up of our new Georgia facility.
Interest expense decreased from $318,000 to $76,000
during the quarter, reflecting lower outstanding debt
and the capitalization of $227,000 of interest incurred
to the cost of construction projects.
At the end of our first quarter our balance sheet
reflects stockholders equity of $336 million and net
working capital of $91.1 million. The current ratio was
2.3 to 1. Our debt totaled $20.8 million and our debt
to cap ratio was 5.8% as of January 31, 2006.
We spent $22.8 million on capital expenditures during
the quarter out of our expected capital expenditures of
right at $100 million. We also spent $2.5 million on
dividends reflecting our higher dividend rate of 12
cents per quarter.
The company's balance sheet at January 31 reflects a
receivable from our company's insurance carrier of
$12.9 million. This receivable reflects that amount of
the company's claims submitted to date that the company
believes is probable less $5 million that the company
received in January from its insurance carriers.
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The company's total insurance claim through January 31
for property damage and expenses incurred related to
the hurricane totaled $26.3 million which is net of the
applicable deductible of $2.75 million.
During the first quarter operating income was reduced
by incurred by unrecognized lost profits of
approximately $3 million. These unrecognized items are
the direct result of Hurricane Katrina and the company
intends to pursue reimbursement of these items from its
carriers.
However under applicable accounting rules lost profits
cannot be recorded as a receivable and recognized as
income until payment of those items becomes imminent.
When adding to incurred but unrecognized losses in the
fourth quarter, our total reduction in operating income
as a result of the storm totals $8.1 million.
During fiscal 2006 we expect to spend approximately
$100 million on capital projects and this includes
approximately $13 million in vehicle and other leases,
$10 million to complete the general office building,
$4.8 million for improvements at our foods division
that Lampkin described, $27.4 million to complete the
feed mill, hatchery and processing plant conversion at
Collins and $17 million on other maintenance items.
While the Executive Committee has not yet approved a
2006 budget for the new Waco facility and will not so
until the engineering of hat project is complete we
expect that amount during 2006 to be approximately
$32.8 million.
Our depreciation during the quarter total $6.4 million
and we expect approximately $29 million for fiscal
2006.
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On November 17, 2005 the company entered into a new
revolving credit facility. This new facility among
other things added two new banks, increased the
available credit to $200 million, lowered that interest
rate spread and added the flexibility needed to pursue
the Texas plant. The revolver remains unsecured.
At this point that concludes our prepared remarks for
the morning and we will now open up the call for any
questions that you may have.
Operator: And if you'd like to ask a question today please press
star 1 on your touchtone telephone at this time -- star
1 to ask a question today. And we would remind you that
if you're on a speakerphone make sure your mute
function is turned off to allow your signal to reach
our equipment. Once again everyone star 1 to ask a
question today. And we will pause for just a moment to
allow everyone a chance to signal.
Our first question comes from (Farah Ozlund) with
(Stephens).
(Farah Ozlund): Hi, good morning.
Man: Good morning.
Man: Good morning.
Man: Good morning.
(Farah Ozlund): It's tough out there.
Man: I agree.
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(Farah Ozlund): How long do you think it's going to be tough? Do you
think you go into positive territory into your second
quarter or kind of do you think the issues in your
first quarter are going to continue into the April
quarter?
Joe Sanderson: (Farah), this is Joe. And we -mainly the market is what
we - Georgia is going itself out. The - we're back to
normal volume in our plants now and our efficiencies
will return across the board and Georgia has been fine.
And the thing that we are watching and the thing that
has affected us primarily has been the market.
(Farah Ozlund): Uh huh.
Joe Sanderson: Now we do not know how many more reports of avian
influenza or in birds are going to be reported in wild
swans or domestic flocks. There's another migration
that will take place this spring as they head north the
birds - the wild birds head north we don't know.
Hopefully there will be - people will be better
prepared in Europe and have - will have housed a lot of
those birds and made preparation to protect their
flocks.
But absent that, it seems to me that some time in our
third quarter, April, May, June, should be enough time
to work inventories down in those places where, like
Russia, where large inventories exist and maybe get
back to something approaching normal on export. I think
that depends on how many more reports we get over the
next 90 days of outbreaks of avian influenza.
(Farah Ozlund): So you think it's going to be really June forward
before we really see a recovery in the export market,
not kind of between - last call you'd say maybe kind of
into that April-May timeframe.
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Joe Sanderson: Well I would think now with reports - in the last 30
days there have been identifications in 20 countries.
(Farah Ozlund): Right.
Joe Sanderson: And with that I think it's going to push it back just a
bit.
(Farah Ozlund): Okay that's fair. And now looking at the domestic
market could you - what's your read on demand for
breast meat going into the summer season and your
thoughts of where breast meat pricing can go into that
peak usage period?
Lampkin Butts: (Farah), this is Lampkin. Really our demand - the
demand that we see from retail and food service is, I
would say, normal for this time of year. There's
obviously a lot of supply and enough supply to keep the
prices depressed. But when we look at - really when we
look at the marketplace past Easter we think it should
be a better trading - the trading should be better
after Easter going into the summer. I'm not ready to
put a number on that. I don't think we're going to see
real expensive breast this summer but I think it'll be
a better marketplace for boneless breast meat.
(Farah Ozlund): Okay. And then in line with last year or do you think
it's going to be more challenging than last year, this
level, breast meat?
Man: Breast meat prices.
Man: Breast meat prices.
(Farah Ozlund): Breast meat prices.
Joe Sanderson: You know, I think - I would look for breast meat to
return to historical norms.
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(Farah Ozlund): Okay.
Joe Sanderson: If we see a 2% increase in production and another 1%
due to weights we ought to see something returning to
historical levels. However that will be impacted by
meat inventories in the US.
(Farah Ozlund): Okay.
Joe Sanderson: And I think those frozen inventories are going to have
to clear before you see any optimism and vigor in the
market.
(Farah Ozlund): Okay. And the most recent kind of exit numbers showed
kind of a down 1% number in the latest week reported.
Do you think the poultry industry is starting to
moderate the amount of poultry produced in the US?
Joe Sanderson: No you need to - if you'll remember the first quarter
last year compared to the period of 2004 we were
showing 3% and 4% and 5% for the first couple of months
of the calendar year.
(Farah Ozlund): Uh huh.
Joe Sanderson: And I think you're just seeing these against those
comparisons. I don't - we're not looking for a large
expansion in the industry this year. Those last couple
of weeks also, (Farah), sometimes there is an Easter
cutback.
(Farah Ozlund): Okay.
Joe Sanderson: A little lighter, slaughter schedules just prior to
Easter and that could be what you're looking at there.
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(Farah Ozlund): So the industry is right now not really materially
cutting back the supply that it's producing.
Joe Sanderson: No.
(Farah Ozlund): Or in reaction to the cold storage numbers.
Joe Sanderson: Okay.
(Farah Ozlund): Okay. And my final question just focuses on grain. Kind
of in the December call you said that total grain cost
you anticipate being up around $10 to $12 million for
the year. Is that kind of still what you're thinking
including that Georgia plant where it's going to be?
Joe Sanderson: Yes. Matter of fact - well I don't have it. Where is
it? Here it is, yeah. If we - this is something we tend
to - with what we have bought had we priced the rest of
our grain out yesterday, our increased cost would have
been $12,171,000 and that reflects the volume through
Georgia and the new Collins feed mill.
(Farah Ozlund): Okay. So the increase in cost of goods sold in this
quarter was it related really to Georgia and the
inefficiencies rather than a materially higher grain
price?
Joe Sanderson: It was not...
Man: Yeah.
Joe Sanderson: Our grain was about the same.
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Mike Cockrell: Yeah. Our grain was - this is Mike. The grain through
our cost of goods sold and I'm sorry for any confusion
there. The numbers that we report to give the market a
feel for what cash market prices have done...
(Farah Ozlund): Right.
Mike Cockrell: As you know, we carefully guard and what we've actually
priced for competitive reasons but our - the cost of
grain through our cost of goods sold was very similar
to last year's first quarter. So that increase in cost
of goods sold was strictly volume. You know, the
additional pounds - Lampkin described that had we run
all of our plants full we would have had $18 million
more pounds than we had but we still had between 3% and
4% more pounds because of Georgia. And that's what
attributed to the increase in cost of goods sold.
(Farah Ozlund): Okay great. Thank you very much. I'll pass it on.
Man: Thank you.
Man: Thank you.
Man: Thank you, (Farah).
Operator: Our next question comes from (Christine McCracken) with
(FTN Midwest).
(Christine McCracken): Good morning.
Man: Good morning.
Man: Good morning.
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Man: Good morning.
(Christine McCracken): Just to expand a little on your volume when you talked
about I guess an absence or a loss of volumes tied to
some of the startup in your plant. Can you give us an
indication of where your total volume was for the
quarter? I think you said it was up 3% to 4%
year-on-year. Is that...
Mike Cockrell: That - this is Mike. Our total poultry pounds were up
3.74%.
(Christine McCracken): Okay.
Mike Cockrell: For the quarter. And that was - that of course includes
Georgia and it includes the additional pounds we had
during the first quarter compared to a year ago as
Georgia. But it would have been higher. It would have
been higher by another by $17.9 million during the
quarter had we run our plants full.
(Christine McCracken): And next quarter you're looking at adding, you know,
probably, you know, the 20 plus million pounds. Is that
a fair assumption or would it be greater than that next
quarter as you ramp up...
Man: Are you talking about February, March, April?
(Christine McCracken): Yeah.
Man: Well in February, March, April, I haven't calculated
it. You'll have the increased pounds at Collins from
the conversion...
Man: From the bigger from the...
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Joe Sanderson: And you will have Georgia annualized and you'll - in
March we begin - next week actually begin the third of
four lines at the Georgia plant. But I have no
calculated the increase in volume for the quarter.
(Christine McCracken): And then you're still shooting for in your third
quarter to be kind of up to full capacity at Georgia.
Man: July 31.
Man: Well it will be the end of the quarter.
(Christine McCracken): End of the quarter, okay.
Man: Yeah.
Joe Sanderson: We'll be - we should have Collins and Georgia both at
capacity by July 31 so that for our fourth quarter our
volume will be up 26% over our fourth quarter of 2005.
(Christine McCracken): Okay. And just in terms of your comments
(unintelligible) your expectation I guest that we're
not going to see any significant expansion and yet all
of the new production including your own continues to
be added - that continues to be added is big bird
deboning. And with that shift it seems like your
expectations for production weight gains of 1% are a
little low. Can you explain, you know, why you have the
view that you'd only get 1% weight gain?
Joe Sanderson: Well I'll give a - give you a stab at it. The
production announcements we know of include Perdue at
(Perry), Georgia that was supposed to come over a
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two or three-year concluding in '09 and to my knowledge
that it not big bird deboning at that plant. Is that
correct?
(Christine McCracken): Correct.
Man: That's right.
Joe Sanderson: I don't believe...
Man: That's correct.
Joe Sanderson: The other was Gold'n Plump in Minnesota and Wisconsin.
They're a trade packer to my knowledge and they will
not be doing big bird deboning. Has there been another
announcement by anyone that's doing bid bird deboning?
Man: (Mountain Air) is the only big bird deboning
expansion...
Joe Sanderson: And...
Man: That I'm aware of.
Joe Sanderson: Well we think (Wayne) too.
Man: Yeah (Wayne). That's true.
Joe Sanderson: And both in - neither one of those - both of those will
be big bird deboning. And those are not public
announcements and those are just reports we're heard.
And both of them experienced a significant growth this
past year. But I don't know if - the only three
announcements are us and Perdue and Golden Plump. And
two of those are not big bird deboning.
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I think a normal increase in weight is about 1% and
that's what you see from the genetics of the breeds
typically. And I think we've had heavier weights this
last quarter. Where is that thing (Bob) got for me?
Fifteen for the month of December in (aggre stats)
which does not represent the entire industry but the
vast majority of the industry, probably 70% of the
production.
Our weights were up .05. The industry was up .17 and we
don't think that the majority of that was by design.
And we think the majority of that was a result of the
mild weather during the month of December. But, you
know, it may be 2%. I don't know but 1% to 2% anyway.
(Christine McCracken): Okay fair enough. And then if you could just talk
about, you know, the industry now it seems has been
operating for a few months at a loss probably or close
tied to some of the weakness in these export markets.
Typically at the bottom of the cycle there's some
consolidation and yet we haven't really heard much to
date about potential strategic actions. Can you talk
about the environment out there and whether or not, you
know, you'd be involved in anything in terms of
consolidation?
Joe Sanderson: You know, we always look and evaluate and review when
it's presented to us so we've grown by acquisition and
we've grown by building in our history. And we're glad
to do either one if the opportunity presents itself. I
think it's - I think most people in the industry have
good balance sheets right now. I don't think anybody
has been hurt badly.
Probably we saw some - we had information I guess maybe
in October and in November that a few people started
seeing some losses. And - but the losses hadn't been
deep and they hadn't been long and I think most people
believe
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that this export market is going to resolve itself. And
I don't think there is any rush right now toward any
consolidation.
(Christine McCracken): All right fair enough. Thanks.
Joe Sanderson: Good, thank you.
Operator: Our next question comes from (Philip Costa) with (Dean
and Company).
(Philip Costa): Hi. I'm just trying to get a handle on the gross
margin. It's been quite a while since you're margins
have actually - gross margins have hit 0% and we have
to go back to 2000 or 2001. And we were expecting
something closer to 5% to 8%. A lot of that is the $3
million insurance and the $4 million new plant. But
just a question about the feed cost.
My understanding is that a year ago quarter you had
abnormally high feed costs because your hedge was still
a hedge you put in place at higher prices but still
feeding off. So I'm just trying to understand how your
feed costs were higher this quarter than the year ago
quarter and (unintelligible).
Man: You've quoted, yeah that's - our feed costs were not
higher.
Mike Cockrell: Right. Let me repeat what I said earlier about that and
I'm sorry for that confusion. The numbers that are in
our press release and that we've put in the 10-Q and
actually that Lampkin talked about are cash market
prices. That is the price if you looked at the Chicago
Board of Trade what the price of corn and soybean is or
was, excuse me, for this year's first quarter versus
the same quarter a year ago. We don't - we actually
don't disclose exactly what our costs are.
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We provide those numbers for people who follow the cash
market price. But the price that we reported in cost of
goods sold which were - which is the price of corn and
soy that the chickens ate and that we processed during
the first quarter was actually slightly lower than a
year ago. It was very close to the same, although the
cash market price was higher. I apologize for that
confusion.
(Philip Costa): And that's why you were lower on a unit basis or a...
Mike Cockrell: That's correct, on a per pound basis.
(Philip Costa): Okay. Switching to the price question and particularly
the dark meat. Is - the quarter started with I guess
leg quarter prices in the high 30s and ended the
quarter obviously down very low. You quoted something
like 14 cents. Did you start to deviate from
(earnabury) just in the last month or is that just an
ongoing thing where your prices tend to be lower than
(earnabury) throughout the period?
Man: That's an ongoing thing. It's - that has not been a
change. The export market is more of a (quoted) market
strictly based on supply and demand for that shipment
and it's not always the same as (earnabury). It can go
up and it can be above or below. It's not always the
same.
(Philip Costa): Okay. Can you give a number for roughly where you
entered the quarter at for leg quarters?
Man: We for November we were about 39 cents and we ended in
January of about 22.
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(Philip Costa): Okay.
Man: And the (earnabury) average for those three months
was...
Man: Twenty-six.
Man: Between 25 and 26 cents a pound.
(Philip Costa): All right. Okay thanks a lot.
Operator: Our next question comes from (Andrew O'Connor) with
(Wells Capital Management).
(Andrew O'Connor): Gentlemen.
Man: Good morning.
Man: Good morning.
Man: Good morning.
(Andrew O'Connor): How would you suggest we think about the economic
return that you hope to derive from the Waco project
relative to the economic return you're anticipating
from the new Georgia facility?
Joe Sanderson: I think you would expect over time on that for a 20%
return on equity and something in excess of 10% return
on invested capital.
(Andrew O'Connor): Okay. You know, is it possible to compare and contrast
the two projects this way, again the economic return
from one relative to the other?
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Joe Sanderson: Well it - based on history the Waco project ought to
return more money because it's going to have more
volume by some 33% and secondarily historically and the
industry the big bird has returned more per head. So
you would think your margins, your corporate margins
would expand with the Waco facility.
(Andrew O'Connor): Okay fair enough. Thanks very much.
Joe Sanderson: Thank you.
Operator: Our next question comes from (John Color) with
Oppenheimer.
(John Color): Good morning or good afternoon.
Man: Good morning.
Man: Good morning.
(John Color): Two quick questions. The benefit from the insurance
gain where there one in quarter one $5 million. Am I
reading that right?
Mike Cockrell: No, the $5 million is what we - was incurred but
unrecognized lost profits during the fourth quarter and
then $3 million during the first quarter for a total of
$8.1 million of unrecognized lost profits that we will
recognize when the money is actually received. The
amount that we've recognized and that is reflected on
the balance sheet in the insurance receivable are
primarily expenses incurred and payments made for
repairs and other things, gasoline and things that we
had to do after the storm.
Page 24
(John Color): Uh huh.
Mike Cockrell: And the accounting rules there provide that if you
believe those recoveries are probable you can go ahead
and book them and offset the expense that we paid.
However the rule is different for lost revenue and lost
profits and you cannot book that until the money is
actually received. And we disclosed $5.1 million during
the fourth quarter and $3 million during this quarter
in lost profits and revenues that we have not yet been
able to book.
(John Color): Okay so the quarter one income statement does not
reflect anything insurance-wise.
Man: It reflects - no, not in lost profits, no.
(John Color): Okay. So there is $7 million in what we would classify
as unusual expenses pre-tax.
Man: I'm sorry, no $3 million.
(John Color): Three million.
Man: Yeah it's the only thing that's not...
Man: (Unintelligible).
Man: Recognized in this quarter.
(John Color): Okay. And then there's $4 million from the Georgia
facility.
Man: Oh I'm sorry, yes.
Page 25
(John Color): So you have $7 million.
Man: Yeah.
Man: Yeah very good. I'm sorry
(John Color): Okay. No no that's great. Also I don't know if you
happen to read the New York Times. There's an article
regarding demand in France. I was wondering if we look
at what we're seeing there do you believe that the
export market is going to come back? If we see
additional demand destruction how long or what impact
is that going to have as far as you guys can tell?
Joe Sanderson: Well we have experience with this from - was it '97 or
'98 the (ruble) was devalued?
Man: Ninety-eight.
Joe Sanderson: And then in 2002 and 3 you had the steel embargo and
the resulting chicken embargo and in both of those
cases it was 18 months.
(John Color): Okay.
Joe Sanderson: And, you know, another way - I just have no way of
evaluating how this is going to play out with this
avian influenza. But it -I think reasonably over time
when people get used to hearing these reports of wild
birds and so far there hasn't been any infection in
people in France...
(John Color): Uh huh.
Page 26
Joe Sanderson: I believe that over time that will resolve itself. But
I do think there's going to be an interim of emotional
reactions to it.
(John Color): Right.
Joe Sanderson: One of the things I would point you to also is in the
United States when the year 2003 - was it December 2003
when they found the BSE calf?
(John Color): Uh huh.
Joe Sanderson: And then another one in Texas after that.
Man: Yes.
Joe Sanderson: And then another one, maybe two or three animals. There
hasn't been - it doesn't seem to me there's been any
reaction to in the American consumer and the demand for
beef, so I don't know. It's...
(John Color): Okay. Is it possible and this will be my last question
- is it possible that you guys could see a benefit if
we look at an infection or something happening to some
flocks in France and you have destruction of some of
the flocks over there, could you see an actual
improvement in demand and higher prices? It seems to be
something no one's talking about.
Joe Sanderson: You could - we thought when Thailand and China both
depopulated significant numbers of their domestic
flocks we saw an increase in demand out of the Pacific
rim as a result of that. And France is a huge exporter
of chicken.
(John Color): Uh huh.
Page 27
Joe Sanderson: And that might shift around over time, certainly if
they destroy their flocks or the poultry exports were
banned. Brazil would also benefit and we'd compete more
head up with Brazil probably at that point.
(John Color): Okay great, thank you.
Joe Sanderson: Uh huh.
Operator: Our next question comes from (Matt Serovich) with
(Scopia Capital).
(Matt Serovich): Hi good morning. Thanks for taking my call.
Joe Sanderson: Good morning.
Man: Good morning, (Matt).
(Matt Serovich): Just a quick follow up to the last caller, can you
export to the European union?
Joe Sanderson: No.
(Matt Serovich): Okay.
Joe Sanderson: Currently we don't. Currently...
(Matt Serovich): Okay, that was my understanding but you haven't been
able to export there since the 1960s or something like
that, right.
Man: Right.
Page 28
Man: (Unintelligible).
Joe Sanderson: What I was talking about France is a huge exporter of
chicken and you would - you might compete for their
export market.
(Matt Serovich): Right right, now that makes sense. One just clarifying
question. I missed what the leg quarter average price
was for you for Q1.
Joe Sanderson: Twenty-six something you quoted.
Mike Cockrell: Well the earning for the first quarter the average
(earnabury) was (25.87) I think.
(Matt Serovich): But your average realized price.
Man: For the first quarter was (29.84).
(Matt Serovich): Okay. And current levels...
Man: And currently we're booking exports below the
(earnabury).
(Matt Serovich): Right.
Man: But during that quarter we - because we had stuff
booked out in front and (earnabury) was dropping we
actually netted more than (earnabury) during that
quarter.
(Matt Serovich): That's a good thing. A question on the capacity
expansion. Given the record inventories that have been
built worldwide and, you know, it seems like they're
continuing to build, some of your resilient competitors
you just talked
Page 29
about seem to be expecting a pretty prolong downturn in
worldwide prices. It seems like at least several
quarter and some of them are beginning to shut
capacity. Why at this point does it make sense for you
to continue to build capacity and does it make sense to
think about actually taking capacity out?
Man: Are you talking about us as a company or industry?
(Matt Serovich): Both.
Joe Sanderson: I think - I don't think the US industry depends on
exports to the extent that Brazil does. I think Brazil
exports a higher percentage of their production and
they - because of that they would be more sensitive to
it.
I think in the US two things, I don' think people have
been hurt at this point and I think they think there's
a possibility that this particularly the Russian market
will resolve itself. I would like to pose the
possibility that in Russia in particular there might be
something else other than a reduction in consumer
demand affecting hat market.
And what I believe that to be would be importers in
Russia and the local Russian industry fearing a
downturn in demand precipitated this drop. They would
have - they were in a position with leg quarters in
their inventory of 45 or 48 cents or higher I guess
with ocean freight and when bird flu broke I'm sure it
put a great deal of fear in them about their
inventories.
It's hard for me to believe that where the bird flu
outbreaks occurred in Russia east or the (Euro)
mountains mainly that that affected the demand in
Moscow and St. Pete and other places. I think there is
a factor, particularly in the Russian market of
importers and the local industry trying to avoid a big
loss on their inventories.
Page 30
And I think they're not ordering. I think they're
shutting down. I think they're buying down to lower the
cost of their inventory and I think that's a factor as
well as perhaps a reduction in domestic demand. And
that's why I think that once they get to that point
where they either minimize their loss or don't take any
that there's a possibility for the Russian market to
resolve.
(Matt Serovich): Except that right now it seems, you know, inventories
there have just continued to build from the data I have
seen.
Joe Sanderson: Yes absolutely. And I think part of that is buying down
to lower the cost of their inventory.
(Matt Serovich): Just sort of a follow up, I mean it just seems like a
fairly unusual time given the turmoil in the industry
to be something around $5 a share in CAPEX this year
with more to come in fiscal year '07. If market
conditions don't improve over the next several quarter
which sounds like, you know, it's at least the
expectation of the Brazilians...
Joe Sanderson: Well...
(Matt Serovich): Will you halt the Texas project?
Joe Sanderson: No, we will not. We do not know what next month, next
quarter or next year are going to be in the poultry
market. And we do not - we have never had that
foresight. We build the plant when our balance sheet
says we can. We know our primary responsibility is to
increase the value of our stock. And to do that we
believe we must grow revenues and earning. And, you
know, if a balance sheet says not to do it we never
have and never would.
Page 31
We have one of the most conservative track records in
the industry with our balance sheet historically going
back 40 years. We feel like this is a good time for us
to do that. When we build these we build it in our
plants or we have plants that have been in operation 50
years now.
(Matt Serovich): Yeah.
Joe Sanderson: We take that kind of outlook and not next month or next
quarter.
(Matt Serovich): Yeah. Now it's a very, yeah, it's a very reasonable
contrarians attitude and I'm generally all for a
contrarian viewpoint. But, you know, just another sort
of follow up, in terms of it being big bird deboning
capacity there adding in Waco my understanding is the
big bird deboning while it was a terrific place for,
you know, for the first part of this decade and you
benefited from it is actually the worst place - the
worst and most oversupplied segment of the market right
now. Why would you add more capacity to an already
oversupplied situation?
Joe Sanderson: Well if you'll look at the last two years I think you
could make the argument that there may be an oversupply
of the boneless breast market. I do not think you can
say the same thing for wings. Wings are 90 some odd
cents today. And up until November this past year you
certainly couldn't say that about leg quarters. I will
also tell you that through probably November - huh.
Man: October.
Joe Sanderson: Through October the big bird deboning market with
breast at $1.20 was still the most profitable market
segment in the industry. It's been not that for maybe
60 days.
Page 32
(Matt Serovich): But I guess what I'm bringing up is just if things stay
where they are now which is that the industry generally
is not in great shape and big bird deboning doesn't
seem like a good place to be would you consider down
the road changing your plans with respect to Waco?
Joe Sanderson: Oh absolutely. We've done that before too. We changed
our product mix entirely in the late 90s. We'll go
where the money is.
(Matt Serovich): You won't consider not building it though.
Joe Sanderson: No.
(Matt Serovich): No. Okay last question, insurance costs given the
losses that you had last year what do - how much do you
expect those to go up next year?
Mike Cockrell: They're already actually -- this is Mike -- the
increase in our property insurance is already reflected
in prepaid expense on our balance sheet. We pay our
premiums in November and then amortize those out
through the year. And they went up a little over $1-1/2
million.
(Matt Serovich): A million and a half for...
Matt Cockrell: Uh huh.
(Matt Serovich): This year.
Matt Cockrell: For this year, for fiscal 2006.
(Matt Serovich): Okay.
Page 33
Matt Cockrell: I think that...
Joe Sanderson: But that includes Georgia, doesn't it?
Mike Cockrell: Yeah it does.
Joe Sanderson: So it includes everything.
Mike Cockrell: Yeah.
Joe Sanderson: It included all of our coverage, right.
(Matt Serovich): But your rates...
Man: That's correct.
(Matt Serovich): Would you expect them to go up again in fiscal year '07
because (unintelligible)...
Man: No. I don't anticipate that, nothing material. From
what I know about the market I - the insurance market
is not my expertise but from what we're hearing from
our insurance carriers the market is going to be fine
next year. That's absent a catastrophe in the hurricane
season or something else worldwide. You know, whether
it's a tsunami or a hurricane, no matter where it is it
impacts all of us now and that's absent anything like
that.
(Matt Serovich): Okay. And I'm sorry, you said your renewal was November
1 renewal.
Mike Cockrell: That's right.
Page 34
(Matt Serovich): Okay thanks very much for that answers.
Joe Sanderson: Thank you.
(Matt Serovich): Good luck.
Operator: Once again ladies and gentlemen it is star 1 to ask a
question today -- star 1 on your touchtone phone to ask
question.
We'll go next to (John Bostler) with (Dominick and
Dominick).
(John Bostler): Yes gentlemen, just to go back on the linked quarters,
I think you said - what was your price in the previous
quarter? Was that 29 cents a pound?
Man: In the first quarter the (earnabury) was 25.87 I think.
And our price was 29.84.
(John Bostler): And what is your price currently today on sales of the
product?
Man: Well as I mentioned earlier product that's booked for
export to Russia and Eastern Europe delivered port is
14 to 15 cents a pound.
(John Bostler): And what is it domestic?
Man: (Earnabury) is 19.
(John Bostler): Okay.
Man: That's a daily quoted market it's (earnbury).
Page 35
(John Bostler): And how much capacity on the Georgia plant does that
add net to your individual capacity?
Joe Sanderson: Just Georgia.
Man: Fourth quarter...
(John Bostler): The Georgia plant that's coming on.
Joe Sanderson: The Georgia plant annualized?
(John Bostler): Yes.
Joe Sanderson: Georgia is going to do 300 million pounds when its full
capacity is there. And that's 15%-18% - probably 18%.
Between the - for the fourth quarter between Collins
and Georgia our volume is going to be up 26% in the
fourth quarter compared to the fourth quarter of 2005.
(John Bostler): And I guess just going back to the last gentleman's
question, I mean, you know, so your capacity is going
to be up 26% and you're kind of unwavering on doing
anything about that. And yet pricing as you admit is
challenging at best and not going to be better in the
foreseeable future and your cost of grain is going to
be, if anything, higher and not lower. I'm just trying
to understand the economics and how this works for the
shareholders.
Joe Sanderson: Well we do it by multiplying pounds times an average
market price and come out with more earnings because of
more pounds and multiply that times 10, 11 or 12 and
you come out with a higher share price. Now I mean it's
strictly about increasing revenues and earnings. We do
not know and no one knows if that's going to happen in
June of '06 or June of '07. We hope it occurs in June
Page 36
of '06. We do know that over the long term it is going
to work in favor of the shareholder.
Mike Cockrell: And, you know, you this -- this is Mike again -- you
have to - obviously you have to have confidence in the
industry and have confidence that the environment that
we're in now which we have seen before and we've seen
worse. In 2002 we were selling leg quarters for below
10 cents a pound and in fact some people in the
industry were rendering leg quarters because you
couldn't sell them.
And yet we were expanding our abilities and our
capacity at that time as well because we had confidence
that the market would turn, which it did and we made
record numbers in 2003 and 4, excuse me, 4 and 5. And,
you know, we've been planning this project in Texas for
over a year. And the dynamics of the industry with
grow-out capacity and hatchery capacity it's not - the
industry is not susceptible to just stopping and
cutting back.
Joe Sanderson: And you wouldn't - you would not make a decision to
invest $100 million in Georgia or $75 million in Texas
based on current market condition. You would make it
based on what's going to happen over the next 10 to 20
years. And because I mean that market condition can
change overnight in one day that's what happened in
2002 with the embargo.
(John Bostler): Right. But what is the demand situation been in the US
here over the last couple of years and how much
capacity in your opinion can the market bear?
Joe Sanderson: Well the demand in the US has been outstanding for
everything except breast meat. And I guess it was 18
months ago - 20 months ago breast meat was - it was 2
years ago was selling for $2.56 a pound. I mean we had
- we just closed
Page 37
the second most profitable year in the history of the
company in October. The market has been bad for 60
days, maybe 90 now.
(John Bostler): Right. So how - getting back to the question, how much
capacity, in your opinion, can the market bear based
upon your estimates of future growth?
Joe Sanderson: You know, I don't have any idea about that.
Man: You know, population growth is what? Between 1-1/2% and
2% a year and the...
Man: Domestic demand in the casual dining markets which is
really the fastest growing of chicken demand and
further processed meat is primarily boneless breast
meat. And that particular segment has been the most
rapidly growing over the last few years.
Man: And if the population grows and demand grows that much
the growth that we're forecasting is a fraction of
that, a fraction of total output for the industry.
(John Bostler): Okay great. We'll stay tuned. Thanks gentlemen.
Man: Thank you.
Man: Thank you.
Operator: We'll go next to (Jacques Shonins) with (Great Gable
Partners). Sir, your line is open. Please go ahead.
(Jacques Shonins): Sorry. Can you hear me?
Page 38
Man: Yes.
(Jacques Shonins): One more question (unintelligible) you mentioned
(unintelligible) in the planning process for about a
year assuming since (unintelligible) today that it's
pretty far long and (unintelligible) been approved by
the Board and what does the Board do to approve the
process?
Joe Sanderson: What does the Board do during this approval process for
our project like Waco? Is that what you're asking?
(Jacques Shonins): Well no you mentioned the Board has yet to approve...
Joe Sanderson: Oh no I'm sorry. The - no the Board has approved the
project. The Executive Committee will approve the
capital budget number for fiscal 2006 once the
engineering is complete. We're estimating $32.8 million
that we will spend on that project this year but that
number is subject to final approval by the Executive
Committee. They're wrapping up the engineering on that
plant. And, you know, the site has been located and
everything.
But until they finally complete that engineering we
won't have a hard number to put on that Waco facility
when - and the Executive Committee will approve that.
The Executive Committee is a management committee of
managers in the company and they're not the Board.
(Jacques Shonins): Okay thank you.
Joe Sanderson: Thank you.
Page 39
Operator: And at this time ladies and gentlemen we have no
further questions. I'd like to turn it back to Mr.
Sanderson for any closing remarks.
Joe Sanderson: Good, thank you. 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 2006.
We look forward to reporting our results to you
throughout the year. Thank you.
Operator: This does conclude today's conference call. Once again
we do thank you for your participation and you may
disconnect at this time.
END