exv99w2
Exhibit
99.2
Conference Call Transcript
SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Event Date/Time: May 24, 2011 / 03:00PM GMT |
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Final Transcript
May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
CORPORATE PARTICIPANTS
Joe Sanderson
Sanderson Farms, Inc. Chairman and CEO
Mike Cockrell
Sanderson Farms, Inc. CFO
Lampkin Butts
Sanderson Farms, Inc. President and COO
CONFERENCE CALL PARTICIPANTS
Christina McGlone
Deutsche Bank Analyst
Akshay Jagdale
KeyBanc Capital Markets Analyst
Heather Jones
BB&T Capital Markets Analyst
Vincent Andrews
Morgan Stanley Analyst
Tom Pulche
Castle Hill Analyst
Stephen Share
Morgan Joseph Analyst
Ken Goldman
JPMorgan Analyst
Christine McCracken
Cleveland Research Company Analyst
Ken Zaslow
BMO Capital Markets Analyst
PRESENTATION
Operator
Good day, everyone, and welcome to the Sanderson Farms, Inc. second-quarter 2011 conference
call. Todays call is being recorded. At this time for opening remarks and introductions, I would
like to turn the call over to Mr. Joe Sanderson. Mr. Sanderson, please go ahead, sir.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Thank you. Good morning and welcome to Sanderson Farms second-quarter conference call. We
issued a news release this morning announcing a net loss of $16.3 million or $0.74 per share for
our second fiscal quarter of 2011. This compares to net income of $35.1 million or $1.62 per share
during last years second quarter. The $16.3 million loss for the second quarter included an
adjustment of $4 million net of income taxes or $0.18 per share to our live inventories to reflect
the value of those inventories at the lower of cost to market.
I will begin the call with some general observations. But before I do, I will ask Mike to give the
cautionary statement regarding forward-looking statements.
Mike Cockrell - Sanderson Farms, Inc. CFO
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Thank you, Joe, and good morning to everyone. This mornings call will contain forward-looking
statements about the business, financial condition, and prospects of the Company. 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 our most recent annual report on Form 10-K and in
the Companys quarterly report on Form 10-Q filed with the SEC this morning in connection with our
second fiscal quarter ended April 30, 2011. You are cautioned not to place undue reliance on
forward-looking statements made this morning and each such statement speaks only as of today. We
undertake no obligation to update or to revise our forward-looking statements.
External factors affecting our business such as grain costs, market prices for poultry meat, and
the health of the overall economy, among others, remain up volatile. And our view today might be
very different from our view a few days from now.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Thank you, Mike. Three general factors drove our results for this quarter. First, our sales
volume of fresh chicken was up slightly compared to last springs volume and reflected our new
production in North Carolina. And our inventory of processed poultry increased as a result of our
timing of export shipments.
Second, our feed cost per pound for fresh chicken rose significantly during the quarter compared to
last years second quarter. And finally, our net sales price per pound of fresh chicken sold with
lower by just under $0.01 per pound during this years second fiscal quarter when compared to last
years.
While lower overall, market prices for fresh chicken were mixed during the quarter. The average
Georgia dock price was slightly higher during the quarter than last years, reflecting continued
strong retail demand. Export demand during the quarter was improved compared to last year when US
poultry meat was banned from Russia. And as a result, leg quarter market prices improved.
Prices for boneless breast meat, wings, and tenders from our food service plants, however, were
much lower during the quarter than during last years second quarter. Most all of the fresh white
meat produced at our Big Bird plants is consumed away from home and demand for that product
continues to be soft and theres simply too much supply of that product on the market relative to
demand.
Furthermore, it is difficult to imagine how food service demand could change materially in the face
of continued high unemployment and high-priced gasoline.
Cash market prices for corn were much higher during the quarter than during last years second
fiscal quarter and were higher than during our first fiscal quarter of this year. Likewise, our
feed costs and flocks sold were also higher. The increase in corn costs were in addition to higher
soybean meal prices. While the March planting intentions report indicated a near record number of
corn acres and only slightly fewer soybean acres for this year compared to last year, planting
progress reports indicate that weather has slowed planting progress.
In addition to slow planting progress and floods along the Mississippi River are raising concerns
that actual acres planted in corn could be lower than what farmers intended to plant. Weather
concerns will likely contribute to even higher than normal volatility this summer as there is no
room for error in this years grain crops.
We indicated during our first-quarter conference call in February that our grain needs remain
largely unbought. As many of you will recall, the grain markets dropped significantly following the
tragic earthquake and resulting tsunami in Japan in March. During that time, we priced much of our
corn and soybean meal needs through July. However we have little priced past July.
Given what we priced in March and where futures prices closed yesterday on the Chicago Board of
Trade, had we priced all of our needs through the end of the fiscal year yesterday, cash, corn, and
soybean meal prices during fiscal 2011 would be $338.7 million higher than a year ago. This price
includes the additional volume of grain we will need to purchase this year to feed the additional
chickens we have on the ground in North Carolina. These higher costs would translate into an
increase in the cost per dressed pound of poultry of just over $0.11 per pound for the year.
In addition to our costs, we will be closely watching the chicken markets and production numbers.
Until two weeks ago, egg sets have trended above a year ago but remain below historical averages.
Egg sets have been slightly lower than a year ago for the past two weeks. Given continued
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
high
unemployment and the fact that American consumers are spending much of their extra cash to fill up
their gasoline tanks with $4 gasoline, I expect continued weakness in food-service demand.
I am pleased to report that progress continues at our Kinston, North Carolina facility. We began
processing chickens at the plant in January and the plant is currently operating at 25% capacity.
We began processing on the second line last week and we remain on schedule to reach full capacity
in January 2012.
We also remain committed to the second plant in North Carolina, which will be a Big Bird deboning
plant. However, our plans for that second plant remain on hold pending better visibility on market
conditions.
At this point I will turn the call over to Lampkin for a more detailed discussion of the market and
our operations during the quarter.
Lampkin Butts - Sanderson Farms, Inc. President and COO
Thank you, Joe. As Joe mentioned, market prices for poultry products were mixed during the
quarter when compared to our second quarter last year. The average Georgia dock price during our
second quarter was 2% higher than last years second quarter, averaging $0.859 per pound during the
quarter compared to $0.842 per pound last year.
The Georgia dock price for this week is $0.865 per pound which compares to $0.8675 per pound for
the same week last year. The Georgia dock price reflects continued strong demand for fresh chicken
in retail grocery stores.
Bulk leg quarter prices were higher for the quarter compared to last years second quarter. Export
volume to Russia was nonexistent during the second quarter last year and the resumption of exports
to that important customer contributed to an overall 3.6% increase in exports of broiler parts for
the calendar year through April for our industry.
Bulk leg quarter prices averaged $0.414 per pound during our second quarter this year compared to
$0.352 per pound last year, an increase of 17.7%. Urner Barry bulk leg quarters are currently
quoted at $0.48 per pound.
Prices for jumbo wings remained very weak during our second fiscal quarter. Jumbo wings averaged
$0.712 per pound, down 45.5% from the average of $1.31 during last years second quarter.
Boneless breast prices were also lower during our second quarter, decreasing by 10.6% when compared
to the second quarter a year ago. This years average Urner Barry price of $1.34 per pound compares
to an average of $1.50 per pound during last years second quarter. Today the Urner Barry quoted
market for boneless breast is $1.32 per pound.
The overall results of these market price changes was a decrease of $0.009 per pound and our
average sales price per pound of chicken sold. While market conditions are challenging, our
operating performance during the quarter was solid and I am pleased with the performance of our
growers, managers, and employees.
We sold 670.7 million pounds of poultry during the second quarter, a slight increase from the 669.9
million pounds sold during last years second quarter. We processed 679.8 million pounds of dressed
poultry during the quarter, up 3.8% from the 654.6 million pounds we processed during last years
second quarter. That is higher than our previous guidance and reflects higher bird waste than we
had estimated.
For the first six months of the year, we sold 1.3 billion pounds of poultry products compared to
1.25 billion last year and processed 1.34 billion pounds this year compared to 1.25 billion last
year. We now expect to process approximately 2.74 billion pounds of fresh chicken this year, an
increase of approximately 7% compared to 2010.
We estimate we will process approximately 699 million pounds in our third quarter and 711 million
pounds during our fourth quarter. Both estimates could be impacted by weather, bird performance,
and other factors.
Sales at our prepared foods division during the second quarter continued to reflect the weak food
service market. We sold 27.1 million pounds of processed chicken from our foods division through
the first half of this year compared to 29.2 million pounds through the first half of last year.
The average sales price also fell from $2.02 per pound last year to $1.97 per pound this year.
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Despite the challenging market conditions we face and will continue to face for the short term, we
remain confident in our strategy and our operations. We have a strong balance sheet that will see
us through this cycle and seasoned managers who have our confidence to provide operational
excellence.
At this point, I will turn the call over to Mike Cockrell.
Mike Cockrell - Sanderson Farms, Inc. CFO
Thank you, Lampkin. The 1.6% decrease in net sales for the quarter to $479.3 million from
$487.1 million last year was the result of a decrease in our sales price per pound of $0.009 per
pound or 1.3% and that was offset very slightly by an increase in pounds of poultry products sold.
As Lampkin mentioned, our inventory of processed poultry increased significantly during the
quarter. The value of processed inventory at April 30, 2011 was $19.2 million more than at October
31, 2010. Approximately 63% of that increase was attributable to the timing of export sales and
approximately $778,000 of the increase was the result of added volume at Kinston.
As Joe indicated, our net loss for the quarter included a net charge of $4 million or $0.18 per
share to reduce our live inventory values to the lower of cost or market. This charge consists
solely of an adjustment to the value of our live inventories.
I remind you that generally accepted accounting principles require that our live inventories be
recorded on our books at a lower cost or market. As we did at the end of the first quarter, we
estimated the expected cost to finish our live inventory and compared that cost to expected market
value of the end products. This exercise led us to believe that the projected cost to complete our
live inventory to maturity would be greater than the ultimate sales price.
We made a similar adjustment at the end of our first quarter that ran through our cost of sales
during the quarter as a reduction in our beginning inventory. Absent that inventory adjustment, the
16.3% increase in our cost of goods sold for the three months ended April 30 as compared to the
same three months during fiscal 2010 was a result of an increase in feed cost per pound of poultry
products sold of $0.113 or 41.3%.
Feed costs accounted for 54.5% of our poultry products cost of poultry products sold during the
quarter and that compares to 47.6% last year. Our non-feed related cost of poultry sales increased
$0.022 per pound and that was the result of our higher cost of sales at our Kinston, North Carolina
plant.
Absent the higher cost at Kinston, which of course will continue until that plant reaches full
production, our non-feed related cost of poultry sales per pound would have been flat with last
years second quarter and actually down slightly for year-to-date numbers.
The $1.6 million increase in SG&A expenses for the first half of the year reflects an increase of
$3.4 million in administrative cost at Kinston, which costs were booked as SG&A until the plant
began operating in January. That was offset by the absence of any accruals for an [ESOP]
contribution in this years numbers which were present in last years numbers.
Interest expense increased from $1.2 million to $1.5 million during the quarter. The Companys
effective tax rate for the quarter and for the first six months ended April 30, 2011, was 31.8% and
34.3% respectively. And for the balance of the year, we expect a tax rate of 34.3%.
During fiscal 2011, we now expect to spend $50.6 million on CapEx projects and that includes $14.3
million for our new Kinston facility. Our depreciation and amortization during the first half of
the fiscal year totaled $24.2 million and we are on pace to meet our approximately $49 million in
depreciation and amortization for the full fiscal year.
Rufus, thats completes our prepared remarks for this morning and we will now open the call for
questions.
QUESTION AND ANSWER
Operator
(Operator Instructions) Christina McGlone, Deutsche Bank.
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Christina McGlone - Deutsche Bank Analyst
Good morning. Can you hear me? Joe, I guess first question, when you talked about a bit higher
production in the quarter than what you had guided because of weights, was that I guess what
happened there? Why were weights higher than you expected?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
It was just spraying, growing excellent growing conditions. It was nothing that we
particularly targeted. We just had March and April, the birds were just a little bigger than they
were during the winter quarter.
Christina McGlone - Deutsche Bank Analyst
Is that will that come down now or is that going to thats the new run rate?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I think it will come down as soon as we get hot weather. Weve already seen it come down I
believe Texas, Waco has already are the weights off in Waco yet? Well, as soon as we get hot
weather, probably June, July, and August, our weights will come off.
Christina McGlone - Deutsche Bank Analyst
Okay and then if I look at where spot prices are for chicken now and think about seasonal
trends and then look at the corn and soybean meal futures curve, it looks like there will be
another year where I would be projecting losses based on that trend. And usually when you have
these cycles theres a year of losses and a year of recovery, but it doesnt seem that the
recovery, from what we can see today is happening. So I guess when you talk about adhering to your
long-term strategy, how much pain can you take before it would jeopardize your ability to execute
your long-term strategy?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Well, we are not going to challenge our balance sheet. But if youll note our balance sheet,
we had right at $600 million equity and $400 million on our revolver. So we dont we are not
changing anything as of today. My judgment is that we are not going to be foolish with our balance
sheet, first, thats rule number one for us.
Number two is my judgment is that there will be some others that are going to have to make some
adjustments that I believe cuts will be forthcoming in our industry based on the losses we see in
Agri Stats. But just like we put this second Carolina plant on hold, we did that so we wouldnt
challenge our balance sheet and it will stay on hold until we are confident that we can execute
that strategy without challenging our balance sheet.
Christina McGlone - Deutsche Bank Analyst
Okay, thank you. I guess to that point about the industry and Agri Stats, why do you think
chicken prices havent seasonally come up, especially with beef and pork, especially pork prices
being high? What is holding it back relative to the other meats?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I think theres ample supply of poultry meat out there. I think headcount is up 1% or 2% and
pounds are up 2% or 3%. When you put that together and you put a struggling consumer, one thats
with the 13 million or 14 million people out of work and some underemployed and I have said this
from the beginning, I believe people are going to I never believed that people were going to buy
all chicken. Theyre going to buy some beef, some pork, and some chicken. And we still face weak
food service and we have said that from the beginning and I still believe that.
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
If youll look at the inventory, what happened with frozen food frozen inventories, I guess it
was the last month or the last couple of months April, youve still got a huge inventory of
wings in the freezer and breast and leg quarters in the freezer.
And I dont think food service is going to improve and that means breast meat and tenders and wings
until people go back to work. And we have said that I think since May of 08.
Christina McGlone - Deutsche Bank Analyst
Okay, I guess last question, theres a lot of weird activity with basis going on now I guess
with the rivers and Im curious if we should be pumping up our basis assumption for your corn from
here on out until we get the new crop?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Actually I dont have the date, but we bought 90% of our basis for corn and soybean meal for
the year back in the fall. I dont know exactly what when we bought it, but we bought it early
on. Maybe it was was it in the fall? November, December. We bought all of our basis for 90%
of it back early on, so we are not affected by that.
Christina McGlone - Deutsche Bank Analyst
Okay, perfect. Thank you.
Operator
(Operator Instructions). Akshay Jagdale, KeyBanc Capital Markets.
Akshay Jagdale - KeyBanc Capital Markets Analyst
Good morning. Joe, I just wanted to ask you about your expectations for production costs. You
said that on the call today and publicly a few months ago as well I believe, what makes you feel
confident that we are going to see cutbacks? We have seen losses in the spot calculation that we
track. And you are saying you see it in Agri Stats, but has it taken longer than you expected and
can you help me understand when you expect these cutbacks to come?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
It has not taken longer. We think people want to historically we get an improved market in
June and July and I think people, industry participants expected that and I think they wanted to
carry their production into June and July and see if the market would reward them for that it
appears right now. We were very conservative on this inventory adjustment. We do not see right now
today as of yesterday and today very much of a and our inventory adjustment is only for May and
June. Broilers on the ground as of April 30.
Based on what we can see as of yesterday and today, we do not see much of a market recovery into
June, past June we dont know. But my judgment is people were expecting the market to recover, to
improve, not recover, improve, which it normally does in June and July. If that does not happen
and if youll look at egg sets, last May egg sets started going up in May. They havent this year
and I dont expect them to. I think 207, 208 is the number and I think they are going to keep them
at that number.
And then once you get past July 4, if I think then you will start seeing reduced egg sets.
Whether or not thats going to be enough to cover $7 corn and $350 meal, I dont know. Typically in
my experience the first cut is not enough and you go back and look at 2008, I think the industry
started cutting back maybe in June and that cut back was not enough and then they made another cut
in the late fall and I believe the industry became profitable in January.
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Dont hold me to that, but I believe thats what happened. I expect a cut sometime this summer and
it may not be enough to cover our costs, but then there will be another cut that will and it will
happen because of bankers and balance sheets.
Akshay Jagdale - KeyBanc Capital Markets Analyst
Thats helpful, very helpful, Joe. Just if I may just follow on on that thought, how do you
think of the magnitude of the cut back that we need, that the industry needs to recover costs? The
data suggests that costs per pound are going to be up $0.12, $0.10 to $0.12 a pound, so that would
imply revenue per pound would need to be up double-digit next year, which is kind of unprecedented
for the industry. So would it be fair to assume that you would need a pretty significant cut back?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I think you will need a significant cut back, but, you know, if you look at the numbers where
we are right now, the only the big lick would have to be the Georgia dock.
Moving wings up significantly, moving boneless breast meat up significantly from these levels would
not be a hard thing to do. I dont think you would get I dont think you would get the I
dont think you would get consumer resistance. The Georgia dock would be the one that moving it
from 86 to I dont know what the losses are running in do you have sensitivity chart over
there?
I dont really know what you would need to get on the Georgia dock but the one that would be
problematic to me would be probably the Georgia dock to get to levels where they get to 2010
returns, for example, which is what you need to do to put this year behind you and repair balance
sheets.
But to get boneless breasts to $1.80 and to get leg quarters $0.48 and $1.20 wing, Im not sure
that those numbers work out. Dont hold me to that. Im just giving you numbers off the top of my
head. I dont think those numbers are somewhere near there and Im talking about average that for
the year. I dont think you meet consumer resistance at those numbers.
Akshay Jagdale - KeyBanc Capital Markets Analyst
To you, what is significant just round numbers? What kind of production cut back would you
consider significant?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I dont have the I dont know a number. My feeling is are you going to have the industry
would do one cut back and its probably not enough and then they do another one. And thats
typically how it works.
Akshay Jagdale - KeyBanc Capital Markets Analyst
And when would you decide to change your production plans? You have said that you would wait
until the summer and typically you dont like your debt levels to I look at net debt to total
cap. You dont like those to get into 30% range. So if you have a similar loss like you did this
quarter next quarter, you could be getting into that range where you feel uncomfortable. Am I
reading that wrong?
Mike Cockrell - Sanderson Farms, Inc. CFO
Akshay, this is Mike. Just one observation about that. A good bit of what we borrowed this
quarter was to fund the significant increase in our working capital needs, to fund the inventory
increase. Absent another leg up in grain, that is kind of done just when you are calculating,
modeling
out how much we would borrow to fund losses, this quarter we also borrowed to fund those
significant inventory and working capital needs. Thats kind of a one-off deal. So just factor that
in. Im sure you did, but now I will let Joe answer your question.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Well, your losses it isnt what you right now. Its what you anticipate going forward is
what you would be would determine. It would be your outlook would determine what your cut back.
We have the cut back coming which will start, I dont know when you start a normal fall cut back
will be coming up in October, I guess, eggs at September? We will do that first.
We wont think about a big production cut until maybe September-October, and that would be for
January. But ours is going to be covered up by Kinston. So ours is not going to be meaningful
anyway. Ours would be we are not anywhere our balance sheet is not threatened in any manner
right now. We are at 20% debt to cap and were not going to be anywhere near 30% I dont believe at
the end of this quarter.
Akshay Jagdale - KeyBanc Capital Markets Analyst
Perfect, I will pass it along. Thank you very much.
Operator
(Operator Instructions). Heather Jones, the BB&T Capital Markets.
Heather Jones - BB&T Capital Markets Analyst
Good morning. I wanted to clarify, so you are saying that Sanderson specifically will do their
normal seasonal cut back in September and that maybe in October, November you will do a deeper cut
but that may be masked by Kinston?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
No, we will do our regular our cuts occur in November and December, so our egg sets start
in August and September. But you wont notice it because it will be Kinston will be youll
put on your fourth line in Kinston in about October or November, something. I dont know.
Lampkin Butts - Sanderson Farms, Inc. President and COO
The fourth line, the last leg starts in the middle of November.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
So we are cut back. You might notice it a little bit. We will make a decision. If we were
going to make a production cut, that cut, we will make that decision in September or October for
January.
Heather Jones - BB&T Capital Markets Analyst
Okay. I apologize but I am not following your commentary on regarding how you think you could
get that it wouldnt be difficult to get boneless skinless wings, etc. to prices to return to
2010 returns, but that Georgia dock would be the problem. So Im wondering if you could elaborate
for us, explain that. Because I apologize. Im not following you as to why the Georgia dock would
be the more difficult piece.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Okay, I dont have any real numbers here in front of me, so it is a little difficult to do
this. But we calculated at one point this was back in the first quarter I guess and its more
now. To get back to 2010 margins, we had to get $0.10 a pound on all products. Now its more than
that. Its you probably got to get $0.15 a pound on all products. Youve got $0.11 a pound
increase?
Mike Cockrell - Sanderson Farms, Inc. CFO
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Yes, not quite that much, but in the ballpark.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
In the ballpark. Youve got to get $0.15 a pound on all product. You are not going to get
$0.15 a pound on backs and necks and livers and gizzards and so $0.25 a pound, you are not going to
get they are going to go unchanged. So youve got to get more on your primal products. Youve
got to get it on breasts, tenders, wings, and leg quarters.
So thats easy to see on boneless breasts, tenders, wings, not so much youre probably not going
to get $0.15 a pound on leg quarters. They are at $0.48 and they kind of hit a wall at $0.50. So
youve got to get it on wings; they are at $0.75 roughly. And I dont think you go to $1.20 if you
have less production, $1.20, you are fine. Wing boneless breasts at $1.80 or $1.75 and tenders
at $1.75, those dont run customers off. (multiple speakers) get consumer resistance there.
But to take the Georgia dock from $0.86 and move it up $0.15 to $1, we have never been there
before.
Heather Jones - BB&T Capital Markets Analyst
Okay, I get what youre saying.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Thats my point. You might could move boneless breasts in a tray up, split breasts, drums and
thighs and wings, you might could move those products up to $0.15. But the Georgia dock has never
been to $1. That was my point I was making.
Heather Jones - BB&T Capital Markets Analyst
Okay, Ive got another question. Wondering if you have a sense and I dont know if you can get
this exact but if you have a sense of how much of the weakness in boneless skinless pricing is
attributable to the weak food service demand and how much is attributable to just greater big bird
production in general in the industry?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I think its some of both. I think the food service demand is the key, though. I mean, this
weak food service demand has been with us for three years now and we just dont see any change in
it either from a prepared foods plant or mainly from our fresh. We just havent seen one bit of
improvement there. And then on top of that, we know we have more pounds. I have not seen Aprils
production. Have you all seen April yet?
Mike Cockrell - Sanderson Farms, Inc. CFO
No.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
The USDA comes out today or tomorrow, but we havent seen it. But every month we have had 1%
or 2% more head and some more live weight increase, so its some of both.
Heather Jones - BB&T Capital Markets Analyst
Right, and I know this is speculative, but lets assume the economy recovers and food service
demand returns. Given this greater production of big birds, do you believe that quote unquote
normalized profitability for big birds is not impaired in the sense of its low but impaired
relative to the levels it enjoyed a few years ago?
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I would like to do what I did last year.
Heather Jones - BB&T Capital Markets Analyst
Right Im talking normalized (multiple speakers)
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Last year was spectacular. I mean and 2009 was spectacular and this year we just got a
little a few more pounds and its not even where of course, we got grain. But the demand is
the boneless, the price for boneless breast meat I believe is down $0.30 a pound from where it
was a year ago in this month right now.
I think it was $1.59 average in May and $1.69 average in June of last year on the board down there
in the sales office. And we are at $1.32. I think Im right or Im within $0.10 a pound of it. And
that continued demand is no worse I dont think. Weve got 3% or 4% or 5% more pounds.
I dont think theres 1% or 2% more head, which ought to that population growth and
everything but youve got I dont know how many more pounds there are.
Lampkin Butts - Sanderson Farms, Inc. President and COO
This increase in birth weight we dont think is the result of a lot of people converting
plants to that. There has been a Pilgrim cranked up that one in Georgia but the rest of it is
people in that people that are already in big bird raising a heavier bird. Its not plants
converting to that.
Heather Jones - BB&T Capital Markets Analyst
Right, right but given but if theres a greater proportion of production now thats big
bird and Im saying like in a normal year, do you think big bird profitability is maybe, I dont
know, $0.02 or $0.03 a pound less than it used to be, say, five years ago?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
No, no.
Heather Jones - BB&T Capital Markets Analyst
Okay and my final question is last year around July through September, boneless skinless went
crazy because of the extreme heat in the Deep South.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
August and September
Heather Jones - BB&T Capital Markets Analyst
Okay, August (multiple speakers) So given higher production, given what seems to be weaker
demand and then those comparisons, are you anticipating pretty substantial year-on-year declines in
boneless skinless pricing later for August and September?
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
It depends on the heat and we it looks like to me based on egg sets and what I think is
going to happen on egg sets, we might have 2% fewer head if these egg sets keep running just 200
have you last year the industry was putting out setting 210 million, 211 million head in May
and I think we are running 207 million, 208 million. Youre going to have 1% or 2% fewer head I
believe in August and September than you had a year ago.
Heather Jones - BB&T Capital Markets Analyst
So it might offset the comparison issue with the heat?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Well, not totally. Its been just I dont know what the heat is going to do. It hadnt
gotten we are at 91 degrees, 92 degrees down here right now, which we can handle. But last year
beginning in July, we were running 100 degrees every day and 105 in Texas. And 100 North
Carolina was even hot last year running 100 degrees. So it got everybody but thats just totally
dependent on the weather.
Heather Jones - BB&T Capital Markets Analyst
Okay, thank you.
Operator
Vincent Andrews, Morgan Stanley.
Vincent
Andrews - Morgan Stanley Analyst
Thank you and good morning, everyone. Joe, I wanted to ask you just on some of your comments,
you made it sound like the first cut was going it would come. It wouldnt be enough. The second
cut would get the industry back to breakeven. Now is there a third cut that comes after that that
gets you to those 2010 levels?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
What I meant was the first cut is typically not enough. They dont nobody knows what the
right number is and they just the first cut is not enough. It takes the second cut usually to
get you where you are going. I didnt mean it gets you back to breakeven. If I said that, I
misspoke. Generally the first cut is nobody knows what the right number is and you make that
first cut and I think let me look at this just a minute.
I think if you look at egg sets back in 2008, the first cut, that was when the grain was so high.
The first cuts came in June and egg sets dropped from 218 million down to 210 million. And then the
next set of cuts came in the fall, in September, and they went from 210 million down to 190 million
and this was September they dropped down to 193 million, 198 million, and I guess those were
Christmas, but you got down to 200 million eggs by December. And it took two rounds and I think the
industry started making money in January.
But there were kind of two rounds of cuts going on. That was a radical situation and plants were
closing and a lot of different things were going on at that time that are not happening now. But I
think I just think there will be nobody knows what that number is going to be. But I misspoke
if I said it would take you to breakeven.
Vincent Andrews - Morgan Stanley Analyst
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Fair enough. I guess what I am really trying to get at is do you think if you assume $7 corn
and $3.50 meal, do you think the industry can get back to those normalized levels of profitability
given that weights are probably higher this summer with the weather, pork and beef prices are
coming down, theres some risk we dont have a football season or we have a shortened season?
Do you really believe that next year we can get back to those 2010 levels of profitability if
commodity prices stay where they are? Or do we need to see people exit the business? Does something
larger need to happen than what typically happens with two rounds of cuts?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Yes, I think you if you dont, people cant stay in business.
Vincent Andrews - Morgan Stanley Analyst
Well, they can stay in business if they are EBITDA breakeven, right?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Well
Vincent Andrews - Morgan Stanley Analyst
That seems to be a level where the industry gains comfort. I guess thats my concern.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I just think balance sheets, theres some balance sheets out there that are so far along right
now that I think you have to return to some profitability. And I think as people exit or go
bankrupt and refinance or something, something is going to have to happen and its going to take
some cut back under this scenario and if we are I dont know what the grain market is going to
do, but it looks like its setting up for high-priced grain for next year based on these late
plantings and probably losing a little bit of acreage.
And if thats so, then there will have to be cut backs. And yes, I think you can get back to 2010
profitability levels.
Vincent Andrews - Morgan Stanley Analyst
Okay, thank you very much. Ill pass it along.
Operator
[Tom Pulche], Castle Hill.
Tom Pulche - Castle Hill Analyst
Could you just clarify what you you mentioned working capital build up was one time. So
just of the $160 million of cash you used in the first half, how much of that was devoted to what
you would consider a one-time investment in working capital in the new plant?
Mike Cockrell - Sanderson Farms, Inc. CFO
Our inventories were up $60 million through the first half of the year. And as I mentioned in
the prepared remarks, most of that is because of live inventory increases. And when I say its
one-off, I mean if corn and soy
have leveled out, and as Joe mentioned, we have got our corn and
soy
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
priced at least through July, if they dont leg up again, you wont have to refund that. That
is what it is. So $60 million of it funded the inventory increase.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
You had two how much what was Kinston? 700 million I mean $700,000. Its all live
inventory.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Yes, thats all thats live inventories and it just reflects the higher priced grain that
those chickens are eating.
Tom Pulche - Castle Hill Analyst
How much was Kinston (multiple speakers)
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
You will have some growth in live inventory in Kinston, but it wont be it will be nominal
and you will have some growth in receivables. But it will be nominal.
Tom Pulche - Castle Hill Analyst
Okay, can you tell us what the draw on the RC is now, the credit facility is now, and your
cash?
Mike Cockrell - Sanderson Farms, Inc. CFO
Yes, so far this year, we have borrowed $92 million through the end of the first excuse me
through the end of the second quarter we have borrowed $92 million on the revolver and of course
at the end of last fiscal year, we had nothing outstanding on the revolver. So all of that is this
year.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
You have right at $400 million left on the revolver.
Tom Pulche - Castle Hill Analyst
Got you, and that went up a little bit I guess. According to the Q, its up like to 118 in
May?
Mike Cockrell - Sanderson Farms, Inc. CFO
Thats correct, since the end of the quarter.
Tom Pulche - Castle Hill Analyst
Is your cash pretty much near that $1.7 million or $1.1 million?
Mike Cockrell - Sanderson Farms, Inc. CFO
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Yes, yesterday we had $7 million I think in the bank.
Tom Pulche - Castle Hill Analyst
Okay. Thank you very much.
Operator
Steven Share, Morgan Joseph.
Stephen Share - Morgan Joseph Analyst
Good morning. Just a question for you, Mike. On the $92 million, can you remind us what the
terms on that are? What the terms are?
Mike Cockrell - Sanderson Farms, Inc. CFO
Yes, its a five-year committed revolver that we entered into last spring. The revolver
interest rate floats off of LIBOR depending on what our debt to cap is. There is a $60 million
CapEx limitation this year plus a $10 million carry over, so $70 million this year and then it goes
down to $55 million plus in the carry over going forward. Theres a debt to cap requirement that
requires us to keep our debt to cap fewer than 55%. And we have a one-time right to increase that
by 5% for four quarters.
Stephen Share - Morgan Joseph Analyst
And as far as kind of where we exit the quarter, could you put me in the ballpark as far as
what the rate ended up being, what the rate is now?
Mike Cockrell - Sanderson Farms, Inc. CFO
I will get it for you. I dont have it in front of me. Im sorry.
Stephen Share - Morgan Joseph Analyst
Okay. Then the question I want to talk a little bit more about was kind of the pounds
produced. Youre talking about 699 in the third quarter and 711 in the fourth. I am curious what
how you come up with your weight assumption for that. Do you just assume last years weight give or
take a little bit more? How does that decision made?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
We know the head that we are going to process, but we have we base it off our target live
weights and as happened this quarter sometimes that target live weight will be off one way or the
other because of weather or good performance or bad performance of the birds because of that.
But we know the head and we just apply our target live weights to it.
Stephen Share - Morgan Joseph Analyst
Does the target live weight vary seasonally? Or is it one number for the whole year?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
One number for the whole year on our model.
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Stephen Share - Morgan Joseph Analyst
Okay, so in other words, when we look at that 699, you had quite a bit of weight loss in the
third quarter last year. Its not I mean, if we have another hot year, that 699 is going to
maybe be too hot, correct?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Absolutely, just like our second-quarter number that we have guided toward on our last call
ended up being too low, absolutely.
Stephen Share - Morgan Joseph Analyst
Okay, so that number really is going to vary in the cold months you are going to beat it and
in the hot months, youre probably going to underperform it. Thats the way we should look at that?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Spring and fall we tend to our birds come into the plant heavier because of the nice
weather. Winter and summer they come in lighter because of the extreme weather, absolutely.
Stephen Share - Morgan Joseph Analyst
Okay, great. Then the last question for me is just on your inventory build, that was mainly
live. It looked like process moved up a little bit, though, processed poultry. Is that
Mike Cockrell - Sanderson Farms, Inc. CFO
It did and that number is broken out in our Q, but processed inventory, you had a little bit
in Kinston, but 11 point yes, the export, $11.5 million of it was because of a build in export
product. It was just the timing of when there were two boats that shipped right after the end of
the quarter, just timing of that export.
Stephen Share - Morgan Joseph Analyst
So its kind of the usual thing. Its not any change as far as were trying to put more meat
away or anything like that?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
No. no, as you know, we dont do that.
Stephen Share - Morgan Joseph Analyst
Okay, thats what I thought. Okay, thanks a lot.
Operator
Ken Goldman, JPMorgan.
Ken Goldman - JPMorgan Analyst
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Good morning. I apologize in advance for the length of this question, but just to build on
Heathers question, you talked about how good things were last year in big bird deboning. But over
the last 52 weeks, for birds weighing over 6.25 pounds, the biggest ones, the industry produced 23%
more birds and over 32% more pounds. Thats not just a few more. Thats potentially a structural
change in a very short period of time. Thats not you guys, right? Thats your competitors doing
that.
My guess is they are making some kind of longer-term decision to capture some of those terrific
margins that youve earned in that business for over a decade. So if thats true, that means if
they cut, they are probably not going back to zero in terms of big bird production.
So my question is this. Given that some of your competitors are in this big bird deboning business
when perhaps they didnt used to be, why is it impossible that even when these supply cuts come,
your deboning margins never return to historical levels? I realize you will earn more earnings. You
will earn more EPS because of a greater number of birds produced. I guess Im just asking how much
more difficult if at all is it to competes today with seemingly so many more producers making birds
or each producer making more birds in that size? I told you it was long.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Well, you know, last the number of participants in Agri Stats in the big bird deboning
region is unchanged except for one. I guess there have been one added this year from last year
until this year. I dont know where you are coming up with your number. And whats happened
there are two things that have happened over the last year, maybe 18 months.
As you know and as Im not telling you anything new, we have always indicated we have had a larger
bird than average in our tray pack region and in big bird region larger than average in both
regions. We still do, but in the tray pack region, a lot of the tray packers have moved their bird
weight up closer to us and a lot of those are above 6.25. That they could be 6.30. They could be
6.40 and there are a lot of deboners that are not considered necessarily big bird deboners that may
be processing birds 6.5 to 7, typically going to portion control food service.
Then you have another group in the big bird deboning region that may be classified 6.5 up and a lot
of the people in the big bird deboning region have moved their weights up but you only have one
additional participant in there. That is Douglas, Georgia. Is that not right, Bob?
Unidentified Company Representative
It may be. Im not sure.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I think thats right, but the only difference today in 2007 in my judgment Im not talking
about corn. Im just talking about the marketplace. The only difference in today and 2007 is 13
million or 14 million or 15 million unemployed people. So 2007 is the last year we had a normal
market place where everybody was working and boneless breasts was we had good demand for
boneless breasts, wings, and tenders.
Now there is more meat on the market. Agra stats has gone around and told everybody you get better
yields, lower cost. You grow a bigger bird. We have been doing it for 15 years and so have some
other. We are not the only ones.
But the first step besides grain is to get these people back to work and then we will be talking
about returning to normal margins. But the marketplace we sell into out of our five deboning plants
has been pumped for three years now.
So I cant theres no way to evaluate to me the potential for big bird deboning until our
marketplace returns to normal. Im sorry that was a long answer. I apologize in advance.
Ken Goldman - JPMorgan Analyst
No, I deserved that. I guess the one follow-up I would have on that question is you mentioned
that the only difference is demand but according to the USDA, if you look at the birds over 7.75
pounds, the biggest ones
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
There you go.
Ken Goldman - JPMorgan Analyst
the number slaughtered over the last 52 weeks compared to the same 52 weeks in 2007, up
61%. Thats a supply difference too, right?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
That cant be right. That cant be right.
Lampkin Butts - Sanderson Farms, Inc. President and COO
I dont see how that could be right either.
Ken Goldman - JPMorgan Analyst
Im looking at the math right here. It looks like let me see. Let me do it real quickly
here.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
That cant be right.
Mike Cockrell - Sanderson Farms, Inc. CFO
I can get you some numbers on that.
Ken Goldman - JPMorgan Analyst
I have it. I might be a little off, but its certainly a lot bigger.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
We will double check that with another route.
Ken Goldman - JPMorgan Analyst
Okay, lets move on. One more question. If you had to guess based on what you are seeing in
the markets for chicken and corn today, I know you dont give guidance but I will sniff around
anyway. What would your earnings be in the third quarter? Are we talking a loss of $0.25 or $1?
What is more reasonable there in terms of expectations?
Mike Cockrell - Sanderson Farms, Inc. CFO
For the third quarter?
Ken Goldman - JPMorgan Analyst
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Yes.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I have no idea. It depends on it mainly depends on the market because we know what we have
got grain bulk for. And right now the market boneless breasts is $1.32 and being heavily
discounted. Tenders are coming down every day. Wings are $0.70 a pound and we have got high-priced
grain in the big birds, the Georgia dock is $0.86 or $0.865. And it does not appear the market
is going to have to turn on a dime on boneless and tenders and wings and we dont nobody expects
wings to improve in June and July, so
Mike Cockrell - Sanderson Farms, Inc. CFO
Steve, if you are before we go to the next question, Steve, if youre still on the line,
you asked about the interest rate. Our all-in rate on the outstanding in the revolver is just under
2%, 197 basis points, and under our revolver for a debt to cap under 25%, we pay 175 over LIBOR. It
goes up to 2 over LIBOR, 200 basis points over LIBOR between 25% and 35% debt to cap. Rufus, we
will go to the next question.
Lampkin Butts - Sanderson Farms, Inc. President and COO
Ken was on. He asked for guidance.
Ken Goldman - JPMorgan Analyst
I didnt get it.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Yes.
Ken Goldman - JPMorgan Analyst
All right. Thanks, guys.
Operator
Christine McCracken, Cleveland Research.
Christine McCracken - Cleveland Research Company Analyst
Its not as hot as it is out there, though, fortunately. Maybe the chickens will grow faster.
In any case, two follow-up questions. First, you mentioned that you didnt think leg quarters could
go a lot higher than maybe that $0.50 kind of ceiling. Are we getting any pushback? Historically at
these levels we start to hear about kind of trade issues. Any risk that that happens in the second
half?
Lampkin Butts - Sanderson Farms, Inc. President and COO
Well, theres always a risk of trade issues. We saw that last year with Russia and China. But
we have always felt like $0.50 was sort of a point that we started getting some resistance in
export markets for leg quarters. We and we export demand has been very good all year and volumes
up, prices up.
But we, at the end of last week, we began feeling some resistance to these prices for June
production
and we just started feeling this. We are feeling like in some countries we export to
that they are reluctant to put more product in inventory at the levels that we booked May
production
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
for. Cash is tight for some of those customers and they dont have the liquidity to
finance $0.50 leg quarter and inventory like they do at $0.30 leg quarters.
So we are just now beginning to feel that and a week ago, we were very optimistic about June
production. Its not this could all change again after the June 1 but right now, we are saying
that this that the dark meat market may have topped out. It could trade a little lower for June
production.
Christine McCracken - Cleveland Research Company Analyst
All right, then just in terms of domestic market, how competitive is it out there? Are you
seeing any substantial discounting still relative to the quote or are you pretty ?
Lampkin Butts - Sanderson Farms, Inc. President and COO
We are for boneless breasts and tenders, yes.
Christine McCracken - Cleveland Research Company Analyst
How far back?
Lampkin Butts - Sanderson Farms, Inc. President and COO
$0.20 to $0.25.
Christine McCracken - Cleveland Research Company Analyst
And then just in terms of consolidation or potential closure of complexes, at this point are
you seeing anybody shop assets? Are you starting to hear about anything being closed? Or is it
still a little early for that?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
There are some assets for sale. Do we know of three? We know of three companies, small or
relatively for sale. We have not you know, there was one closed, one plant closed in Mississippi
about a month ago, a small 600,000 birds a week I guess it was 300 or 350 a week. We have not heard
of anything else. But there are three we understand there are three companies marketing
themselves and I think we hadnt heard any hot rumors really like we heard earlier.
Christine McCracken - Cleveland Research Company Analyst
Yes, like in 08 or even in the fall. Just then on your risk management strategy, or lack of
risk management strategy on corn. I know it has been your position historically not to take a
position and kind of protect yourself on basis. But I am just curious if you have considered
looking at options strategies to kind of reduce your risk assuming we do have a short crop, any
kind of weather issue during the growing season, why not protect yourself from that perspective
given what happened this year?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Mike, do you want to answer that?
Mike Cockrell - Sanderson Farms, Inc. CFO
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Who, me? Christine, we just dont do that. We just dont feel like, I dont feel like we are
smart enough to see into the future and what could happen. You know, if this corn is going to be
$7.50 next year and soybean meal is going to be $3.50. Nobody saw that tsunami coming and corn went
from $7.50 down as low as $6.15 when that happened. Of course, I believe that if thats what its
going to be that there will be some demand destruction at some point with that. And I dont know if
there will be a lot of call for the government to take some action. I just think we are going to
rely on our balance sheet and our operations and not our guess. I just we I dont feel like
we need to be guessing that much. Thats our answer.
Christine McCracken - Cleveland Research Company Analyst
Thanks.
Operator
Ken Zaslow, BMO Capital Markets.
Ken Zaslow - BMO Capital Markets Analyst
Good afternoon, everyone. What percentage of the companies out there in the chicken world do
you think is actually their balance sheets are in jeopardy? The three small ones, but in general,
you guys seem to have a bigger picture idea here that more balance sheets are in jeopardy. So just
trying to figure out if youre talking about 5%, 10%? What do you think is in jeopardy out there?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
We dont know that. We just we dont have a clue about that. I know there are a lot of them
out there that have good balance sheets and but we believe that there are some out there that
are really stretched right now.
Ken Zaslow - BMO Capital Markets Analyst
In terms of numbers, more than the three? Im assuming its more than three. Three are the
ones that you know of thats up for sale, but theres more balance sheets that are actually
stressed. Is that kind of the thinking?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
I would think so.
Ken Zaslow - BMO Capital Markets Analyst
Okay. Joe, you always held the comment that higher beef and pork prices wont help chicken
prices because you cant eat chicken 24 hours a day.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Well, they hadnt. I think I said that back in December and I said it again in February and
Im sitting here and its not helping me right now.
Ken Zaslow - BMO Capital Markets Analyst
Why if beef and pork prices go down would it hurt you? Would you have the same philosophy
given you are probably the only one out there who actually said that, so I am actually going to
listen to you this time.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
I would have the same philosophy.
Ken Zaslow - BMO Capital Markets Analyst
Okay, so even if beef and pork prices go down, that shouldnt hurt chicken prices any more
than it helped it, right?
Lampkin Butts - Sanderson Farms, Inc. President and COO
We have always said that it helps on the margins and I think to quote Joe at your conference
last week, he said, I would always rather compete against high-priced beef and pork. Thats just
we would rather compete against high price. But at the end of the day, as weve said, people eat a
little bit of all of it. It helps on the margin. You may get more features at retail here or there.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
But the deal about getting features, you get more features, you sell features you sell it
at a feature price.
Lampkin Butts - Sanderson Farms, Inc. President and COO
And thats not all that great either, to me.
Ken Zaslow - BMO Capital Markets Analyst
And any sort of new products or anything that you think is going to help the food service
industry? Every now and then we hear a little bit of rumblings of some new products that are coming
on in the chicken market. Substantial enough or anything substantial to actually help the food
service side?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Unimportant. We need people to go back to work and thats I think thats the key and we
need gasoline to come down. The big deal is to get people back to work. The rest of it is I
think these our restaurant partners have worked their behinds off and with all kind of features
and $10 deals and $20 deals and they have done everything they can. And people just dont have the
money to go out to eat. You know, when they do, they are eating coffee and eating smoothies or
something. Theyre not eating chicken.
Ken Zaslow - BMO Capital Markets Analyst
How much are you guys losing right now? I know you dont want to give what you are going to
lose, but Im assuming you are losing quite a bit of money. Things are kind of pretty bad right
now. Is that a fair what would you say you guys are losing as of the month this month? Im
assuming its not too great.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Well, our inventory write-down, why dont you compare our inventory write-down this quarter to
the one we did last quarter. What was our inventory write-down in the first quarter?
Mike Cockrell - Sanderson Farms, Inc. CFO
It was $22.3 million.
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May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Ken Zaslow - BMO Capital Markets Analyst
And this was only $6 million?
Mike Cockrell - Sanderson Farms, Inc. CFO
Yes.
Ken Zaslow - BMO Capital Markets Analyst
So things have so you are not losing as much as you are losing you lost less you are
losing less now than you did last quarter?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Absolutely.
Ken Zaslow - BMO Capital Markets Analyst
All right, and I guess my final question is obviously people dont believe that you are
actually going to hit your 2010 margins in 2012. But the question is what about 2009 or theres
never been a time you lost money two years in a row. Can you frame if you were to lose how
long you would endure two years of losses or is there something that would prevent you from losing
two years in a row? Better yet, is there whats the likelihood of you getting back to 2009
levels?
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
You know, the deal is that the industry forget Sanderson the industry cannot sustain
losses like they are sustaining for a long period of time. They will they cant do it and you
have been observing this for years and years and the industry has been losing money since
November-ish and balance sheets deteriorate and losses have to stop. The only way to stop losses
with $7 corn is to reduce production and get prices up. That is the rule and the law of the jungle.
Ken Zaslow - BMO Capital Markets Analyst
Thats fair enough for me. I agree with that. Thank you very much.
Operator
Akshay Jagdale, KeyBanc Capital Markets.
Akshay Jagdale - KeyBanc Capital Markets Analyst
In the interest of time, I can follow up off-line. I think you have answered a lot of our
questions. Thank you.
Operator
Kristina McGlone, Deutsche Bank.
Christina McGlone - Deutsche Bank Analyst
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Final Transcript
May 24, 2011 / 03:00PM GMT, SAFM Q2 2011 Sanderson Farms Inc Earnings Conference Call
Im good as well. Thanks a lot.
Operator
With that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr.
Sanderson, I will turn the conference back over to you for any closing remarks.
Joe Sanderson - Sanderson Farms, Inc. Chairman and CEO
Thank you. Thank you for spending time with us this morning. Well look forward to reporting
our results to you throughout the year. Thank you very much.
Operator
Ladies and gentlemen, this does conclude todays conference. Thank you for your participation.
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