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Sanderson Farms, Inc. (NASDAQ:SAFM)

February 14, 2013 11:00 am ET

Executives

Joe F. Sanderson - Chairman and Chief Executive Officer

Lampkin Butts - President, Chief Operating Officer and Director

Robin Robinson

Stacy Webb

Tara Sasser

Steve Weathersby

Anthony Burks

Lee Southwell

D. Michael Cockrell - Chief Financial Officer, Treasurer and Director

Brian Romano - Director of Administration

Jennifer Buster

Joe F. Sanderson

Good morning. I'm Joe Sanderson. On behalf of our company, welcome to the 2013 Annual Meeting of Stockholders. We're pleased to have each of you here with us this morning. Before we begin the business portion of our meeting, I would like to ask Lampkin to open our meeting with a prayer.

Lampkin Butts

[Presentation]

Joe F. Sanderson

Thank you, Lampkin. Our general order of business today will be to consider the motions to be presented at this meeting, to offer some comments about the company's performance while the votes are being counted, and then to receive a report on the results of the voting. During the portion of the meeting in which we discuss our operations, we will be happy to field any questions you may have about Sanderson Farms.

I would like, at this time, to introduce the company's directors, and I'd like for each one of them to stand as their name is called: Johnny Baker, Proprietor of John H. Baker Interests, Houston, Texas; Fred Banks, Partner, Phelps Dunbar LLP, Jackson, Mississippi; John Bierbusse, Retired Manager of Research Administration, AG Edwards from Chicago; Lampkin Butts, President and Chief Operating Officer, Sanderson Farms; Mike Cockrell, Treasurer and Chief Financial Officer, Sanderson Farms; Toni Cooley, President of Systems Electro Coating LLC, Jackson; Beverly Wade Hogan, President of Tougaloo College, Jackson; Robert Khayat, Retired Chancellor of the University of Mississippi, Oxford; Phil Livingston, Retired Chairman and Chief Executive Officer, Deposit Guaranty National Bank of Louisiana; Dianne Mooney, Retired Senior Vice President, Southern Living at Home, Birmingham; Gail Pittman, President, Gail Pittman Inc., Madison; Charles Ritter, Retired President and Director, the Attala Company, Kosciusko.

I would also like to introduce our corporate attorneys, Louis Fishman and Maureen Gershanik of Fishman Haygood, New Orleans; and Henry Chatham of Wise Carter, Jackson. I'd also like to introduce Bob Kimbro and Brian Rotolo of Ernst & Young, our auditors. They will be available today to respond any appropriate questions you may have later in the meeting. Serving as the inspector of election for today's meeting will be Drew Anderson of Corporate Communications, Nashville, Tennessee. She's in the back of the room.

Motions that have been properly put before our shareholders, consistent with the requirements of our bylaws, will be accepted only from stockholders of record as of December 20, 2012. Those who wish to enter a motion should stand and identify themselves. Their motions will then be placed before the meeting, subject to customary procedures. Because this meeting is being broadcast live via the Internet, please wait for the microphone before making or seconding any motion so that you will be heard. I have in my possession a list of stockholders of record entitled to vote at this meeting and the valid proxies received for those stockholders. I also have a copy of the Notice of Meeting, proxy statement, annual report and an affidavit of service of notice of the meeting, certifying that these documents were mailed to the stockholders of record of Sanderson Farms. These documents will be filed with the records of the company.

This brings us to the first item on the agenda, which is the determination of a quorum. The bylaws of Sanderson Farms provide that a quorum shall constitute presence, in person or by proxy, of a majority of shares entitled to vote at the meeting. May I now have a report on whether or not a quorum is present?

Unknown Executive

Thank you, Joe. The Inspector and I have reviewed the proxies that have been received and examined the credentials of stockholders voting in person. Out of a total of 23,024,307 shares outstanding on the record date, they are present at this meeting, either in person or by proxy, 20,964,296 shares, and that is approximately 91% of the outstanding shares of common stock.

Joe F. Sanderson

Thank you. Since a quorum is present, this meeting will proceed. The next item on the agenda is the reading of the minutes from last year's meeting. You all would like to hear the reading of the minutes.

Robin Robinson

Mr. Chairman, my name is Robin Robinson, and I move that we dispense with the reading of the minutes.

Stacy Webb

I'm Stacy Webb, and I second the motion.

Joe F. Sanderson

It has been moved and seconded that we dispense with the reading of the minutes. For those in favor, please say aye.

[Voting]

Joe F. Sanderson

Opposed, no.

[voting]

Joe F. Sanderson

That motion carries. Now we will proceed with the items proposed in the proxy statement. They will first be put on the floor, and then we will vote. The first item will be the election of 5 Class C Directors to serve until the annual meeting in the year 2016.

Tara Sasser

Mr. Chairman, my name is Tara Sasser. The Board of Directors has nominated the following persons to serve as directors until the 2016 Annual Meeting: Fred Banks, Jr., Toni D. Cooley, Robert C. Khayat, Dianne Mooney and Gail Jones Pittman. I move their elections.

Steve Weathersby

I'm Steve Weathersby, and I second the motion.

Joe F. Sanderson

Is there any discussion of the nominations? The next item on today's agenda is a proposal to ratify and approve the selection of Ernst & Young LLP as the company's independent auditors for the fiscal year ending October 31, 2013.

Anthony Burks

Mr. Chairman, I am Anthony Burks. I move to ratify and approve the selection of Ernst & Young as the auditors for the fiscal year ending October 31, 2013.

Lee Southwell

I'm Lee Southwell, and I second the motion.

Joe F. Sanderson

I will now call for balloting on these items. If there is any stockholder present who wishes to vote in person or to revoke a proxy previously submitted, please raise your hand and the inspector will provide a ballot. The polls on each of these 2 items of business before the meeting are now closed. I will now ask Mike Cockrell and the inspector of elections to tabulate the votes.

[Voting]

Joe F. Sanderson

Fiscal 2012 marked another challenging year for Sanderson Farms and the poultry industry. While our financial and operating results reflect record production in sales, a significant reduction of outstanding debt and a return to profitability, the prevailing economic environment and high feed cost continue to challenge our company and this industry. That said, we are proud of the way our company responded to the challenges we faced in fiscal 2012.

Over the past year, we continued to position Sanderson Farms for the future without losing sight of our traditional values. These values instilled into the culture of the company by our founders have inspired our growth and our success over 65 years in business and have allowed us to earn the trust of our customers, our independent contract producers, our vendors, our employees and the communities we serve. Regardless of market conditions and the cycles that characterize our industry, Sanderson Farms has continued to move forward with a focus on remaining true to who we are and on our ultimate responsibility to be of value for our shareholders.

I want to thank our managers, our employees and our contract producers for their invaluable contributions in fiscal 2012 and thank them for their hard work and for their dedication to Sanderson Farms.

Over the past year, our revenues reached a new record of $2.4 billion, a 20.6% increase compared with the previous record set in 2011 of $1.9 billion. This revenue growth was driven by improved market prices for our poultry products, higher volumes due to our new Kinston, North Carolina processing plant reaching near full production and steady customer demand for our products at the retail grocery stores. I will have more to say about our growth strategy in a few minutes, as well as where I think the industry is headed during fiscal 2013.

But first, I'm going to ask Lampkin and Mike to review our operating and financial results for the year. We remind you, of course, of our warning about forward-looking statements as it appears in our most recent 10-K filing. All forward-looking statements in our presentation are subject to that warning. Lampkin, our President and Chief Operating Officer, will begin with an operational overview.

Lampkin Butts

Thank you, Joe, and good morning to everyone. In spite of the challenges, Sanderson Farms performed well in 2012. I'd like to add my appreciation to our employees, our managers and our growers for their hard work and dedication to Sanderson Farms. While macroeconomic conditions remain challenging and feed costs remain high, we were able to benefit from more favorable market prices in fiscal 2012 compared with the prior year.

As noted on this slide, the Georgia Dock price was up 7.3% for the year compared with 2011 and set a new record high each time it moved up during the year. The Georgia Dock price is a reliable indicator of the supply and demand dynamics for products sold to retail grocery stores, which have been relatively steady through most of the past 3 years. The Georgia Dock price currently stands at an all-time high of $1.25 per pound.

While the market for boneless breast remained relatively soft through the year, market prices still improved by 9.1% compared with fiscal 2011. The softness in the boneless breast market reflects continued weak demand for almost all protein consumed away from home, as restaurant traffic has been affected by persistently high national unemployment rates and general consumer concerns. This trend affected demand for white meat from all of our food service customers, including both casual dining customers and our food service distributors. We expect demand from food service customers to remain soft until the nation's job market improves and consumers begin dining out again on a more consistent basis.

Wings were a bright spot in the chicken product mix throughout the past year with the strongest price improvement over fiscal 2011. For the year, jumbo wing prices were higher by 81.2%. Wing prices have continued their upward move during 2013, the early bird quote [ph] for jumbo wings hit $1.92 per pound the week of Super Bowl, which was an all-time high. As is typically the case, market prices for wings fell after Super Bowl Sunday. But March Madness is around the corner, and we're hoping for an exciting tournament that puts fans back in the mood to eat chicken wings with their favorite beverage.

Bulk leg quarter prices were also stronger and increased approximately 16.7% during fiscal 2012. You can see on this slide that leg quarter prices remained relatively steady throughout the year. Dark meat prices reflect continued strong export demand for our products. Despite several challenges during the year, including the threat of punitive tariffs on United States chicken exports to Mexico and the continuing tariffs on products sold to China, export demand remained relatively strong during 2012. Overall, the volume of poultry exports for calendar '12 were up approximately 4% compared with last year, and the value of exports was up 15%.

We processed a record 2.9 billion pounds of dressed poultry at fiscal 2012 compared with 2.8 billion pounds during 2011. Sanderson Farms finished the year as the third largest poultry producer in the United States. During the year, we continued to gradually increase production at our newest plant in Kinston, North Carolina, and we reached near full capacity in the spring. I should note that we achieved these volumes even after the production cuts that were announced and implemented during the year. At the beginning of calendar 2012, we instituted a 4% cut -- production cut that remained in place all year. In addition, beginning in early August, we reduced our excess by an additional 2% across all company divisions to lessen the expected impact of higher grain costs.

Our commitment to excellence in every aspect of our operations has set a high standard, and we remain focused on doing what it takes to perform at the top of our industry regardless of economic concerns and the constant fluctuation in market prices. We acknowledge the opportunities we have to further improve our operations and our sales and in our performance versus our peers. During 2013, we're now focused on capturing these opportunities and working through the challenges ahead for us in the coming year. Above all, we remain confident in the strength of Sanderson Farms and our ability to execute our strategy.

I'll now turn the program over to Mike Cockrell to review financial highlights.

D. Michael Cockrell

Thank you, Lampkin. Good morning, and I want to add my appreciation for you all being with us today. Sanderson Farms financial performance during fiscal 2012 reflects improved market conditions compared to last year, as described by Joe and Lampkin, but also challenges. Although the prevailing economic challenges continue to influence most all aspects of our business, we are pleased with our results.

We're pleased that we returned to profitability and that we were able to reduce our outstanding debt significantly during the year. As Joe mentioned, our annual sales of $2.4 billion during the year set another record for the company. Our cost of sales for the year increased also 6.1% compared to a year ago, in total, $2.2 billion. Our average sales price of poultry products during 2012 was up 16.2% compared to last year. While this increase was offset slightly by an increase in feed cost, we still realized a significant improvement in our operating margins this fiscal year compared to last. For the year, our feed grain costs comprised 53.5% of our poultry cost of goods sold, and that's the same percentage as during 2011.

We do believe that our success in this economic environment is due to our consistent ability to meet our primary objective, and that is to maintain a secured balance sheet and also manageable growth. In line with this objective, we continue to strengthen our balance sheet last year, and we maintain a financial statement that ranks among the strongest in our industry. We believe that this is a vital strategic objective for the company.

As of October 31, 2012, our balance sheet reflected $896.5 million in assets, stockholders' equity of $550.1 million and net working capital of $262.2 million. Notably, we made significant progress during the year reducing our outstanding debt. Our year-end total long-term debt was $150.2 million, and that compares to $273.7 million at the end of fiscal 2011. As a result, our total debt-to-cap ratio at the end of the year was 22.6%, but our net debt-to-cap was actually below 20%. Our strong balance sheet provides us with the capacity to support our current operations but also to continue to grow the business. For the year, we spent $49.2 million in capital improvements. As of today, we have approved $40.8 million in CapEx for fiscal 2013, and we plan to fund those projects using cash on hand, internally generated working capital, cash flows from operation, and as needed, we can draw on our revolving credit facility. The company does have a $500 million unsecured revolving credit line, of which $380.7 million was available to us at the end of the year. Our depreciation and amortization during fiscal 2012 totaled $60 million, and we expect it to be about $61.4 million for 2013.

As we look to the year ahead, we are actually cautiously optimistic that the national economic recovery has begun to take -- gain traction. A slightly better employment outlook, a stronger housing market and an improving construction market give us reason to be optimistic. At the same time, however, we'd also have significant challenges ahead for our company and the industry with higher grain costs, at least for the rest of this fiscal year. And as well, the recovery remains fragile.

Meaningful improvement in demand from our food service customers, as described by Lampkin, will materialize only if the national employment situation continues to improve and consumers continue to regain their confidence and start eating out on a more consistent basis. While we acknowledge these challenges though, we continue to manage Sanderson Farms for the long term. This strategy has historically served us well throughout all the cycles that characterize our industry. With a strong financial statement and a good balance sheet, we're ready for 2013. But as always, we recognize our primary responsibility is to create value for our shareholders.

Before turning the program back to Joe, I'd like to note that we will release our first quarter 2013 results next Thursday, February 21. Those will hit the market before the market opens. And we will also host a conference call, as is our practice, at 10:00 next Thursday morning, and look forward to talking with many of you again next week.

I'll turn the program back to Joe.

Joe F. Sanderson

Thank you, Mike. Since 1992, Sanderson Farms has continued its pattern of steady growth, and 2012 was no exception. While we note our position as the third largest poultry producer in the United States, it is important to us that we have achieved our growth while maintaining our financial position that ranks among the strongest in our industry. We are always mindful of our balance sheet as we consider strategic investment opportunities that will position Sanderson Farms for future growth.

During the year, we continue to gradually increase production at our newest plant in Kinston, North Carolina, and we reached near full capacity in the spring. The increased production at the Kinston plant during fiscal 2012 more than offset the other production cuts that Lampkin noted earlier. This new facility reflects our confidence in the long-term success of Sanderson Farms and our industry. We believe we have an obligation to our shareholders to continue to identify opportunities to add earnings capacity and earnings-per-share growth.

Toward that end, we previously announced in August of 2012 the selection of a site for a new poultry complex to be located in Nash County, North Carolina, subject to various contingencies. However, following a period of deliberation, we reached the decision with local government officials to not proceed with our plans to locate in Nash County as a result of various timing issues. We'll digress off the script. Usually, we don't make news at this meeting. But today, we're going to make some news for the first time, I believe. We wanted to do it, though, with our shareholders. Since that announcement, we have continued to evaluate and pursue all alternative locations that will enable us to continue our pattern of steady growth. Today, I am pleased to announce that we have selected sites in and near Palestine, Texas for our next poultry complex. The new big bird deboning complex will consist of a feed mill, hatchery, poultry processing plant and wastewater treatment facility. Texas has been an outstanding place to do business, and we are looking forward to expanding in Texas and to the new marketing opportunities the new facility will create. Of course, the new facility remains on hold until we get some visibility around the price and availability of grain and is subject to various contingencies, including obtaining necessary permits, entering into construction contracts, obtaining necessary growers and final approval of our Board of Directors once market conditions improve.

With the addition of Kinston production, our product mix has shifted more towards chill-pack chicken. This location has allowed us to reach new retail markets in the Northeast and will enhance our ability to deliver higher earnings to our shareholders as market conditions improve. In addition, with Kinston and our new location at Palestine, we have created new opportunities for our employees and young managers who have demonstrated their leadership abilities as they have worked through the challenges of starting a new operation. Their dedication and commitment to Sanderson Farms provide us with a great deal of confidence for the future.

Prices paid for corn and soybean meal, the company's primary feed ingredients, increased during the year with a very steep increase in the fourth quarter. Overall, we paid $50.6 million more for feed grain in fiscal 2012 compared with fiscal 2011. For the year, total feed costs in flocks sold were 1% higher than fiscal 2011 levels. While poultry market conditions improved in fiscal 2012 compared with the prior year, the company and our industry experienced a much more challenging cost environment at the end of the fiscal year, and we expect this trend to continue through fiscal 2013. While market prices for grain have come off their record highs reached in August, as summer drought conditions across most of the country caused prices to escalate and created considerable uncertainty regarding the national corn and soybean crops, they remain well above historical trends today.

As we turn our attention to fiscal 2013, there are 5 things we are closely watching that will impact our company and the industry during this coming year. First, we're keeping a close eye on South American grain crops. As of today, the corn and soybean meal crops in Brazil, Argentina and the rest of South America are developing well. There are a few places too wet or too dry, but overall, the crops are developing on schedule. Productive crops out of South America will likely take some pressure off of American exports. So while the impact may be minimal, the quality and quantity of the South American crops will definitely influence the grain board in the United States.

Second, we have an eye on Washington and the political debate regarding the country's fiscal health. We recall the significant impact of contentious debate regarding the debt ceiling had on American consumers in August of 2011. And we are hopeful that is not repeated. For now, Congress has kicked the debt ceiling can down the road again, but we are hopeful that a successful resolution of debate and the additional degree of certainty that will result from its resolution will spur some optimism and relief among consumers and businesses.

Third, we will, of course, be watching the 2013 grain crops in the United States. We will get our first glimpse into the 2013 crops when the USDA announces Planting Intentions on March 28. We have every reason to believe American farmers to respond to current market prices by planting every available acre they can find, and the Planting Intentions report should reflect that. However, chickens don't eat Planting Intentions. So the crop must get in the ground, we need more sure and decent weather through the growing season, and the crop has to get in the bin. The United States has experienced 3 consecutive years of below-trend-line yields, and we will be closely watching this crop to see how it develops.

Fourth, we will watch chicken production numbers and demand from consumers as we move through 2013. Egg sets during calendar 2012 were below the previous year, but egg sets over the past few weeks have moved higher. While egg sets are up and production has increased slightly versus last year, market prices have remained steady and have even moved -- haven't even moved higher. That would indicate a bit more demand from consumers. We believe fundamental principles of economics will work to balance supply and demand of chicken products over time, and we will closely watch those factors during the coming year.

And finally, to a lesser extent than the first 4, we will keep an eye on Europe. While it doesn't affect us directly, serious problems with the European economies or European bank prices could spill over on our shores and dampen the U.S. economy and recovery. Anything that impacts the amount of disposable income American consumers have to spend or impacts their willingness to spend what they have will impact our industry.

Despite the headwinds we have faced this year, and those ahead of us, we have many reasons to be optimistic about the opportunities for Sanderson Farms. Our balance sheet is strong, we have significantly reduced our debt, and we have sufficient capital to execute our growth strategies, once market conditions allow. The Sanderson Farms brand continues to represent the precious, highest quality, 100% natural chicken in the market, backed by exceptional customer support and service. Our employees support our brand with commitment to excellence in every aspect of our operations. We have achieved a favorable product mix that we believe meets the current demands in the market. And we have a talented team in place across our operations to deliver these products. We have confidence in our young managers, who are poised to continue Sanderson Farms leadership in our industry.

Finally, as we announced today, we are further demonstrating our confidence in the long-term success of Sanderson Farms with a considerable investment in a new poultry complex that will provide additional quality products for new customers, opportunities for employees and above all, additional value for our shareholders. Our success as always is due to the talent of our employees, contract growers, management team and Board of Directors, and we thank them for their dedication to Sanderson Farms. And to the traditional values that define us, our confidence in the future reflects this solid foundation, and we believe we are well positioned to carry this legacy forward.

It is also appropriate today to thank all of our customers for their trust and their confidence in our products. We close by thanking you, our shareholders, for standing by us and for your continuing to believe in what Sanderson Farms stand for and for the support your investment provides.

We will now answer any questions you may have. Thank you very much. Because this meeting has been broadcast live via the Internet, please raise your hand to be recognized and let us get a microphone to you before you have -- ask any questions. Are there any questions?

There being no question, I will ask for the tabulation of the votes on the motions.

D. Michael Cockrell

Joe, the results are as follows. A total of 20,964,296 shares or 91% of the company's outstanding stock is represented at this meeting, either in person or by proxy. On the election of the 5 Class C Directors, at least 18,928,634 shares or 98.4% of the total shares represented at the meeting were voted in favor of the election of each of the board's 5 nominees to serve until the 2016 meeting or until their successors have been elected and qualified.

On the proposal to ratify and approve the selection of Ernst & Young as the company's independent auditors for the year, at least 20,824,769 shares or 99.3% of the total shares voted on the proposal were voted in favor of the proposal to ratify and approve the selection of Ernst & Young.

Joe F. Sanderson

Thank you, Mike. Each of the Class C Directors has been duly elected, and the selection of Ernst & Young as independent auditors for the current year has been ratified. I hereby direct that the results of election to be incorporated into the minutes of this meeting. That completes our official business agenda for today. Is there any other business? If there is no further business to come for this meeting, I will entertain a motion to adjourn.

Brian Romano

Mr. Chairman, Brian Romano, I move the meeting be adjourned.

Jennifer Buster

I, Jennifer Buster, second the motion.

Joe F. Sanderson

It has been moved and seconded that the meeting be adjourned. Will those in favor, please say aye.

[Voting]

Joe F. Sanderson

Opposed, no.

[Voting]

Joe F. Sanderson

Motion carries. Thank you all very much. We appreciate your attendance.

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Source: Sanderson Farms, Inc. - Shareholder/Analyst Call
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