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Sanderson Farms, Inc. (NASDAQ:SAFM)

F1Q09 (Qtr End 01/31/09) Earnings Call Transcript

February 26, 2009 11:00 am ET

Executives

Joe Sanderson – Chairman and CEO

Lampkin Butts – President and COO

Mike Cockrell – Treasurer and CFO

Analysts

Ken Goldman – JP Morgan

Christina McGlone – Deutsche Bank

Heather Jones – BB&T Capital Markets

Farha Aslam – Stephens Inc.

Ken Zaslow – BMO Capital Markets

Chris Bledsoe – Barclays

Jeff Linroth – Leaving It Better

David Bowie [ph] – Elk Partners [ph]

Christine McCracken – Cleveland Research

Operator

Good day, and welcome to the Sanderson Farms first quarter 2009 conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Joe Sanderson, Chairman and Chief Executive Officer. Please go ahead, sir.

Joe Sanderson

Thank you. Good morning and welcome to Sanderson Farms’ first quarter conference call. With me on the call today are Lampkin Butts and Mike Cockrell. We issued a news release this morning announcing a net loss of $6.7 million or $0.33 per share for our first fiscal quarter of 2009. This compares to net income of $6.2 million or $0.30 per share during the last year’s first quarter.

I will begin the call with brief comments about general market conditions and grain cost. I will then turn the call over to Lampkin and Mike for a more detailed account of the quarter. Before we make any further comments, I’ll like to ask Mike to give the cautionary statement regarding forward-looking statements.

Mike Cockrell

Thank you, Joe, and good morning to everyone. This morning’s 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 company’s quarterly report on Form 10-Q filed with the SEC for the quarter ended January 31, 2009, and that 10-Q was filed this morning.

Joe Sanderson

Thank you, Mike. Our financial results for the first fiscal quarter reflect a poultry market that improved when compared to where we were when the quarter started on November 1, but a poultry market that was softer than last year’s first quarter. Our results also reflect higher costs for corn and soybean meal when compared to last year's first quarter, although grain cost were lower during our fourth quarter of fiscal 2008. As we expected, the markets for both corn and soybean meal have remained historically high, although they have moved down from their 2008 highs. Demand for feed grain has fallen with the world economy as animal feeders cut production, ethanol prices followed crude oil lower, and export customers import less grains.

The corn and soybean markets will be soon be bidding for acres for the 2009 crop, and the markets will be closely watching the March 31 Planting Intention Report to see how farmers are going to react to the current market environment. Regardless of that report, however, most believe the markets are going to remain high relative to historical prices, but remain well below levels we saw last year. The only consistent factor in grain markets for the past year has been volatility. We started the 2008 crop year with Midwest floods that delayed planting. That led to fears last summer that the country would run out of corn. These fears pushed corn prices above $8 per bushel and led to talk about $10 corn. Then the American farmer produced a good crop and the economy began to disintegrate. Demand from animal feeders, ethanol producers and export customers all moved lower. The bottom line at the end of the harvest and after adjusting for reduced demand is that there is a comfortable carry out of both corn and soybeans although soy is some tighter.

As a result, most expect more acres of soybeans in 2009 at the expense of corn, cotton and other crops. Because demand for corn has continued to deteriorate as animal feeders reduced production, and many ethanol producers remained below breakeven, many believe there might be further downside to corn. On the other hand, corn is expected to lose acres to soybeans which could tighten corn supplies into 2010. We have none of our corn needs priced past April but have been more aggressive pricing our soybean meal needs.

In December we reported that we had priced our – had we priced our needs on that day, our cost would have been $142 million less this fiscal year than last fiscal year. Based on our cost through the first quarter, what we priced so far and what price we could lock in for the balance of the year, that decrease today would be just over $166 million. That decrease reflects both the lower unit cost of corn and soybean meal and our reduced needs based on our production cuts. This decrease will translate into a reduction in cost of $0.06 per dressed pound for fiscal 2009.

Last year's increased grain cost of $239 million added $0.066 per dressed pound to the cost of chicken. And 2007’s increase of $154 million added $0.0625 per pound. We are poised to get $0.06 of the $0.13 increase back in 2009. However for the industry and Sanderson farms to return to what some describe as normalized margins, we still need significant help from the chicken market. Overall demand for chicken in the retail grocery market chicken segment continues to be strong. This strength is evident in the Georgia Dock market price.

We also experienced a nice seasonal run in market prices for wings ahead of this year's Super Bowl and chicken tender prices followed wings higher as well. However, demand from foodservice for boneless breast meat remains soft. Boneless prices reacted to lower supply levels in January as prices moved from their low of $1.06 in December to $1.42 in late January. Frankly, we believe part of the reduced supply in January was due to the calendar and holidays rather than industry adjustments. The New Year's holiday and Martin Luther King Day closed plants as did some severe ice storms in late January.

These closures reduced supply on top of the production cuts already in place. But as soon as the calendar turned to February, market prices began to decline. Prices fell every day for the first time nine working days of February before stabilizing and now over the past few days have moved back up slightly. The quoted market price for boneless now stands at $1.31 per pound. It appears to us that the lower supply numbers have still not balanced supply with weak foodservice and consumer demand for that particular product. Because I don't expect any help from the demand side for the foreseeable future, further cuts may be necessary.

We continued to run our deboning plants in Louisiana and Mississippi at approximately 14% below their capacity. Waco obviously has all-new poultry housing. Our contract growers who made significant investments in their farms simply cannot tolerate long layouts and fewer flocks over an extended period of time. That is true at all of our divisions but is especially true where the housing is newer, was more expensive, and the debt associated with that housing is new. We have often said that production cuts must be temporary in nature given our independent contract producers dependence on flocks to meet their obligations.

We will slowly increase our headcount at Waco but we will hold production in live weights at current levels at our other plans until the market signals a need for more chicken. Like every consumer related industry in the country, the chicken industry is confronting considerable challenges. You’ve heard me say on the last three conference calls that I remain confident that the basic rules of supply and demand will return our industry to profitability over the long term. I absolutely continue to believe that it is true. We are positioned well with our balance sheet, our operations continue to be among the most efficient in industry, and our sales force continues to do a good job selling our product. All of these facts give me confidence in the long-term future of Sanderson Farms.

At this point, I will turn the call over to Lampkin for a more detailed discussion of the market and our operations.

Lampkin Butts

Thank you, Joe, and good morning, everyone. Overall market prices for poultry products were mixed during the quarter when compared to our first quarter last year. The Georgia Dock prices for whole birds averaged $0.87 per pound during the quarter, an increase of 13% compared to last year's first quarter. The Georgia Dock price quoted yesterday, February 25, is $0.8625 per pound and we face continued strong demand from retail. Bulk leg quarter prices on the other hand were lower by 25% compared to last year, reflecting difficult world economic conditions and tightness in credit. Final numbers for calendar 2008 reflected a 17.3% increase in the total volume of chicken products exported during 2008 and the export market is adequate although we believe prices for March production will be lower into Russia.

The Urner Barry quote for bulk leg quarters is currently $0.34 per pound. The average price for jumbo wings was higher during our first fiscal quarter than last year. Jumbo wing prices averaged $1.15 per pound during the first quarter, up 6.2% from the average of $1.08 per pound during last year's first quarter. Boneless breast prices decreased by 9% when compared to the first quarter a year ago, Urner Barry averaged $1.19 per pound during the 2009 first quarter, and as Joe mentioned, Urner Barry market price for boneless breast is currently $1.31 per pound. The market has moved up $0.08 per pound, moved up slightly this week, and is firmer than earlier in the month.

While chicken prices were mixed during our first quarter when compared to last year's first quarter, our cost for feed grains were higher. The cost of corn delivered during the first quarter increased 4.5% compared to our first quarter last year, and the average cost of feed and flock sold increased 23.9%. Our feed cost will decrease during our second quarter. We sold 606 million pounds of poultry products during the first quarter, a 20% increase over the 504 million pounds sold during last year's first quarter. Our processed pounds were up only 3.9% from 552 million to 574 million pounds as a result of Waco running closer to full production this year just starting up starting last year.

The other reason for the increase in sales pounds was the sale of more leg quarters this year than last because of the timing of export sales. As Joe mentioned, we continue to run all of our plants below full production. We expect to process approximately 585 million pounds during our second quarter, down from 594 million pounds processed during last year's second quarter. For the year, if we maintain our current production, we will process 2.38 billion pounds which will be 3% fewer pounds than the 2.44 billion we processed in fiscal 2008.

At this point I’ll turn the call over to Michael Cockrell, Chief Financial Officer.

Mike Cockrell

Thank you, Lampkin. Net sales for the quarter totaled $388.9 million and that’s up from 362.6 million for the same quarter during fiscal 2008. The $0.33 per share we lost during the quarter compares to $0.30 per share net income during last year's first quarter. Our cost to sales for the three months ended January 31, 2009 as compared to the same three months during fiscal 2008 increased 13.9%. The increase is a result of the 20% increase in pounds of poultry products sold as Lampkin said compared to a year ago as well as higher feed costs.

We sold 606 million pounds of poultry products during the quarter compared to 504 million pounds last year. The additional pounds sold resulted from a 6.4% increase in heads process because of our new Waco facility and an increase in the number of pounds of leg quarters sold offset by the planned reduction in live weights and head processed because of market conditions.

SG&A expenses for the first fiscal quarter of 2009 were $11.9 million and that is down from $13.8 million in fiscal 2008. We expect SG&A expenses for the balance of the year to be equal to or down slightly from a year ago. At the end of our first quarter, our balance sheet reflected stockholders equity of $345.3 million and net working capital of $203.3 million. Our current ratio was 4.2 to 1, are debt totaled $246.2 million, and our debt to total capitalization ratio was 41.6% as of January 31.

We spent $7.2 million on capital expenditure during the first quarter and expect to spend $17.7 million on capital improvements during the fiscal year. Our depreciation and amortization during the first quarter totaled $10.9 million and we expect approximately $45 million in depreciation for the full fiscal year. At the end of our first fiscal quarter, our most restricted debt covenant required that the company maintain a net worth of $276 million and our net worth at January 31 was $345 million, comfortably above that requirement. Our working capital of over $200 million was well above the $50 million required under our revolver. Our debt to cap ratio of 41.6% was below the 55% required on our revolver and our 4.2 to 1 current ratio is well above the 2.0 to 1 that we are required to maintain.

Let me say just a word about our cash balance at the end of the quarter because I got a couple of calls about that this morning. Our low cash position at January 31 was nothing more than timing. We’re obviously a net borrower under our revolver and we manage cash in connection with when we can repay those borrowings under the revolver. Those LIBOR borrowings mature from time to time and we look at our cash balance; if we are able to pay it back, we do; if we don't, we roll it over for another 30, 60 or 90 days. We pay back a maturing LIBOR in January and we payback one in February. It will be March when our cash balance is higher than others just because of the way we manage that.

We remain very comfortable with the requirements under our revolver. While conditions remain challenging, they have improved significantly from where they were at the end of end of our fourth fiscal quarter. Because we estimate that live inventories on hand at the end of the January quarter will be processed, sold and distributed for more than we estimate that it will cost us to complete that live inventory, we made no adjustment to the value of live inventory at the end of the first quarter, similar to what we did at the end of the fourth quarter. As a result, all of our inventory is on our balance sheet at January 31, that includes live and processed chicken our valued on our balance sheet at cost.

That completes our prepared remarks for this morning and we will be happy to take your questions at this time.

Question-and-Answer-Session

Operator

Thank you, Mr. Cockrell. (Operator instructions). Our first question comes from Ken Goldman with JP Morgan.

Ken Goldman – JP Morgan

Good morning.

Joe Sanderson

Good morning.

Lampkin Butts

Good morning, Ken.

Ken Goldman – JP Morgan

It was nice to see a clean press release like this from a protein company, it has been a while. So kudos to you. I have a question on retail, where do you think Georgia Dock prices is going from here? $0.86 is obviously very strong, but is down a little bit sequentially, starting to hear more talk about trade down to private-label and retail, if you could just give us a little more color on that, that would be helpful?

Joe Sanderson

A little more color on the what we project for Georgia Dock?

Ken Goldman – JP Morgan

Sure, if you want to give that much color, I’d…

Joe Sanderson

Let me start with this. We think the consumers are going on to shop at retail like they did for the last six or eight months. The retailer is going to be stronger because people are not eating out as much. They are shopping more at the grocery store, and we think that segment is going to be stronger. We saw a report that said retailer sales were up over 7%, and we think that’s going to continue because we do not believe that demand is going to gain traction in foodservice as long as this recession is in place, and so we think retail is going to continue to be strong. We have – we don’t have any – I mean we do both private-label and our label at several of our key accounts and there hadn't been any significant shift there over the last 12 months.

Lampkin Butts

I’ve read some – I have seen some things that the retailers believe that private-label is getting some more attention but it is not really in the fridge right.

Joe Sanderson

Chicken.

Lampkin Butts

Yes. It has been the same for – has been the same…

Joe Sanderson

For all the private label products.

Mike Cockrell

One thing you said about trading down, we have heard from some of our customers anecdotally, they mentioned trade down to less expensive cuts of meat, dark meat versus boneless breast meat and that of thing…

Joe Sanderson

Even whole birds, the percentage of whole birds is up just a fraction.

Ken Goldman – JP Morgan

But nothing – not meaningful.

Joe Sanderson

No. No, not materially.

Ken Goldman – JP Morgan

Okay. Thanks very much.

Joe Sanderson

You bet.

Lampkin Butts

Thank you.

Operator

Our next question comes from Christina McGlone with Deutsche Bank.

Christina McGlone – Deutsche Bank

Hello.

Joe Sanderson

Good morning.

Christina McGlone – Deutsche Bank

Good morning. One thing, Lampkin, did you say that selling to Russia in March will be priced lower, did you say something like that?

Lampkin Butts

I did. I think that – I will just give you a quick outlook on exports. Exports have improved, it is very much improved from where we were in December. January was better than that, February better, and forward prices for leg quarters to Russia moved up into the low 20s into the low 30s through February. We still believe they are going to be in the 30s in March but maybe a penny or two lower. The inventories in Russia are fine, they're actually low, but demand is not brisk. And the Eastern Europe countries are still a little backed up and we believe it is going to be later in the spring before those inventories clear and allow some improvement. So we think it will be a little lower if not a lot, maybe a penny or two.

Christina McGlone – Deutsche Bank

Okay, thank you. And Joe, I'm curious that with feed costs declining and the anticipation of seasonal demand, do you – is there a concern that we can maybe seen take eggs annual pricing start to moderate?

Joe Sanderson

What, see what moderate?

Lampkin Butts

See egg set moderate?

Christina McGlone – Deutsche Bank

Yes, sorry, the decline in egg sets, so maybe people would feel more optimistic and they would pull back on their cuts?

Joe Sanderson

I wouldn't think so at this point. I would think – we haven’t seen Agristats numbers yet, but I would think everybody would be very cautious. The market have not – the markets is what’s going to give the signal I think for restoration of production. The decline in feed grains and corn and soy have not been enough yet to restore margins. With where the prices are today, $1.30 boneless, $0.32, $0.33 leg quarters, that is not enough yet to get most people to normalized margins. So I don't think – I don't think – I don't think there is anybody who is getting ready to restore egg sets.

Christina McGlone – Deutsche Bank

Okay, great. And I was wondering if breast meat is still selling at a discount to Urner Barry?

Joe Sanderson

Well you know this week – you know the average – I think I have explained this before but over a years period of time, the average price for boneless breast reported for Agristats will historically and typically run $0.15 to $0.18 lower than Urner Barry quote if you look at a 12 month price. And that includes – that mean some weeks it sells at Urner Barry and some weeks it is $0.05 behind Urner Barry and some weeks it is $0.30 behind Urner Barry. When you look at it over a year’s period of time, probably $0.15 to $0.18 behind Urner Barry. This week it is probably $0.10 behind Urner Barry, $0.05 to $0.10. So the market this week is considerably firmer than it was two weeks ago. It is not at the Urner Barry quote. Very few weeks out of the year does it trade exactly at the Urner Barry.

Christina McGlone – Deutsche Bank

Okay. And thank you. And just one last question then, Lampkin, can you say again what your estimate was for pounds for the year? I missed that.

Joe Sanderson

2.38 billion.

Lampkin Butts

Yes. 2.38 billion. And that compares to 2.44 billion a year ago.

Christina McGlone – Deutsche Bank

Okay, thank you.

Joe Sanderson

Thank you.

Operator

Our next question comes from Heather Jones with BB&T Capital Markets.

Heather Jones – BB&T Capital Markets

Good morning.

Joe Sanderson

Good morning.

Lampkin Butts

Good morning, Heather.

Heather Jones – BB&T Capital Markets

Real quick on that question of tonnage for the year, was that your estimate if you continue at current rates or is that what you're saying it will be for the year?

Joe Sanderson

If we continue at current rates, our current production, net.

Heather Jones – BB&T Capital Markets

Okay. So may not be that for the year?

Joe Sanderson

Well, that could change, but that’s our expectation today.

Heather Jones – BB&T Capital Markets

Okay. And going back to the comments about inventories on your balance sheet, just want to make sure I interpreted it correctly, basically you think you are going to sell all the inventory you have at better prices in Q2 than your cost, so shall I interpret that as in fact you are going to make money in Q2?

Mike Cockrell

Well, yes, at current prices, we know what our cost is going to be for the most part for the live inventories on our books at January 31. We project what we think we are going to sell it for based on today's market and right now, yes, we believe we will have that operating margin on those live birds. But today obviously half of those like birds have been sold, the other half are more mature, and will be sold in March, and then we have got some new live birds that we will sell in April that we haven’t made that calculation on.

Joe Sanderson

Just operating margin.

Mike Cockrell

So at the operating margin line though, right, we believe we will sell those live chicken that were in our inventory at a positive margin.

Christina McGlone – Deutsche Bank

Do you think you – okay, assuming all things equal, and I know it is a big assumption, but assuming pricing stays equal to where it is now, do you think you will be cash flow positive for the quarter?

Mike Cockrell

Yes. If prices stay where they are today but you know we don't project that and make – express no opinion about that.

Christina McGlone – Deutsche Bank

Right. And wondering about the big bird sort of thing, the foodservice demand, given the pretty significant retrenchment in that segment, do you think that even when “the economy recovers,” do you think there is too much capacity on the big bird side now, I mean do you think you will spend like a permanent – relatively permanent to say the next 3 to 5 years reduction in casual dining demand et cetera that is going to reduce demand for big birds or you just have to get through the next year or so?

Joe Sanderson

Heather, we did not believe that. We believe here we sit in January of 2009 and we have been through you know like six months and we think this is not a – we don't know – what we have been in this last six months is a very unusual situation, and we did not believe in any manner that it predicts what the future is going to be. And while we believe that this may – this recession with the banking crisis on top of it may extend out for some time, we do not believe that the fundamentals of change yet and there is – we will have to get on the other side of this when the economy does recover and we believe it will and we will have to see when we get on the other side.

Christina McGlone – Deutsche Bank

Okay. I have two more questions, just going back to your comment that you believe that further cuts may be necessary to reach normalized margins, I mean where is your –

Joe Sanderson

I said they may be necessary, I don't know yet.

Christina McGlone – Deutsche Bank

Yes, may be necessary. Is it – what are you saying in there industry, are there any – are you carrying anything or seeing anything that makes you believe some of what is coming?

Joe Sanderson

No. I think November, December, January, February is a time of year that is not a good time to evaluate consumer demand for chicken. It is historically the lowest period of consumer demand for chicken seasonally. I don't know what consumer demand for chicken is going to look like after Easter. And if we have this – I think we have got about 6%, maybe a little more reduction in chicken supply, maybe a little more with live weights, certainly at our company that is true, and I do know what that’s going to look like after Easter. And when you get into May and June and July and September. That is the period of greater poultry demand and 6% during that time period may feel a lot differently than what it does today. And that is why I said May, 6% then maybe quite adequate.

Christina McGlone – Deutsche Bank

Okay. And then my final question is going back to earlier comment on that at current pricing cost you would be profitable, do you believe most of the industry is at this level, so do you believe most of the industry given current feed cost and current breast meat pricing et cetera is losing money?

Joe Sanderson

We don't know that yet. We don't know. I would think that we – we haven't seen

Lampkin Butts

We haven’t seen it in January.

Joe Sanderson

We haven’t seen – we don’t know yet.

Christina McGlone – Deutsche Bank

Okay, all right. Thank you very much.

Joe Sanderson

Thank you.

Operator

Our next question comes from Farha Aslam with Stephens Inc.

Farha Aslam – Stephens Inc.

Good morning.

Joe Sanderson

Good morning, Farha.

Farha Aslam – Stephens Inc.

Hi. Joe you mentioned that you think that small production cuts are needed to restore healthy profits to the chicken industry, do you think that the pressure is not that we haven’t got enough chicken production cuts but that there is still lot of cold storage inventory that needs to be liquidated and that is lying on the market?

Joe Sanderson

No. I didn't say that there needs to be more – I think I said there may need to be more production cuts. I don't know yet. I do know that the one product that has really not reacted to the production cut is boneless breast and there may need to be more. I think it is – November, December, January, February is not the best demand period for poultry and for chicken, and I don't know what that is going to look like in May, June, July, August and September. I do think the – I don't have my graph in front of me, the cold storage inventory, but cold storage inventories came down significantly in January –

Lampkin Butts

And Farha, the January cold storage reports showed that January was 90% – chicken, in frozen poultry, 90% of December, 89% of January a year ago.

Joe Sanderson

I don't think the frozen is a burden right now.

Farha Aslam – Stephens Inc.

So what would you attribute to the recovery in pricing in the last few weeks?

Joe Sanderson

Good question. In boneless breast?

Lampkin Butts

Yes.

Farha Aslam – Stephens Inc.

Yes.

Joe Sanderson

I think the supply cut.

Farha Aslam – Stephens Inc.

It is the supply cut, now starting to have an impact.

Joe Sanderson

Yes.

Farha Aslam – Stephens Inc.

And then Mike in terms of grain, what percentage of cost of goods sold was grain?

Mike Cockrell

During the first…

Farha Aslam – Stephens Inc.

Quarter?

Mike Cockrell

During the first fiscal quarter, it was right at 50%.

Farha Aslam – Stephens Inc.

50% great. And then are you profitable? You mentioned you thinking you're going to be profitable at the operating profit line, but how about at the net income line, do you think that is going to be a positive number?

Mike Cockrell

You know I'm going to let you model that out and let you guys put out some projections. We are not going to project that.

Farha Aslam – Stephens Inc.

Okay. And my final question Joe, why do you think despite the fact that we’ve had such a long negative trend in chicken, we continue not to see significant bankruptcies in the state?

Joe Sanderson

I think people have been able to just hang on, I think they have got covenant relief, I think there was substantial covenant relief last year, and banks did not want to own chicken plants when they couldn't sell them. I think there are a lot of attempts to sell assets and there were no buyers and banks did not want to own the plants. They stayed with them. They stayed with their customer.

Farha Aslam – Stephens Inc.

Okay, that was very helpful. Thank you.

Joe Sanderson

Thank you Farha.

Operator

Our next question comes from Ken Zaslow with BMO Capital Markets.

Ken Zaslow – BMO Capital Markets

Hi, good morning, everyone.

Joe Sanderson

Good morning.

Lampkin Butts

Good morning.

Ken Zaslow – BMO Capital Markets

Hi Joe. I assume that it kind of breaks your heart that your cash, you are going to have production cuts in a year, I think it is the first year that I can remember that you are going to actually be down 3%. What would it take for you to reverse that and what would be the trends that you’d have to see for you to feel good about the margins?

Joe Sanderson

Well, we are watching the pullet placement, that is important. That is a structural change that would mean that production couldn't be ramped up easily by everybody if these pullet placements continue to stay low, if there were some, if there are some plant closures, that would affect our decision. If there were some market improvements, if the markets moved up to profitable levels, and we believed they were going to stay there because of the first two factors. I said we would ramp up really quickly, Ken, because I don't like – none of us like doing what we are doing.

Ken Zaslow – BMO Capital Markets

I know it breaks your heart.

Joe Sanderson

But you know we're doing what we are doing to protect our balance sheet, that is our deal. It is for our shareholders and our balance sheet. And…

Ken Zaslow – BMO Capital Markets

What would the pricing dynamic need to be?

Joe Sanderson

Pardon, what’s that?

Ken Zaslow – BMO Capital Markets

What would the pricing dynamic need to be for you to ramp up, would you need $1.60 breast prices, $0.35 leg, kind of give us some parameter?

Joe Sanderson

Well, we need to see and believe – we need to believe that boneless breast is going to be a good bit higher than what it is. The other prices are about where they need to be. I mean it is just boneless breast, if you got that sensitivity, boneless breast has to go to $1.60 and average it for the year. We have got to believe that it is – it doesn't mean that it has got a go there, we have got to believe that it is going to be there and be there. And that has got to be because some facilities closed down, the breeder flock is not there, and we believe that structurally and fundamentally – but we don't believe the demand is – we believe the demand is going to be diminished for the rest of this year anyway. So we believe that it’s got to come from those other two sources.

Ken Zaslow – BMO Capital Markets

Let me ask the question in a little different way, egg sets are looking down to be about 6% to 8%, do you think demand is down 6% to 8%?

Joe Sanderson

We do for foodservice, yes.

Ken Zaslow – BMO Capital Markets

For overall chicken?

Joe Sanderson

No.

Ken Zaslow – BMO Capital Markets

So does that mean that the inventory is being worked down?

Joe Sanderson

Looks like that way.

Lampkin Butts

Looks that way.

Ken Zaslow – BMO Capital Markets

I mean that we could have a more balanced supply demand dynamic all in two to three months and lo and behold, we could be off to the races with breast prices.

Joe Sanderson

Yes.

Ken Zaslow – BMO Capital Markets

Okay, that’s kind of my thinking too. And then my last question is, I know last quarter you kind of said you weren’t looking for any assets, are you still in the camp of that you don't want to be buying assets from bankrupt companies? Where has that changed?

Joe Sanderson

What did I say last time?

Ken Zaslow – BMO Capital Markets

What do you think now? (inaudible) anyway?

Joe Sanderson

Well, we are looking after our balance sheets and primarily and you know we're not – we’ll do what we think is in the best interest of our shareholders. I don't know.

Ken Zaslow – BMO Capital Markets

What is the best interest of your shareholders? I mean if you're at 14% below capacity in a couple of your plants, you know would you think about buying an asset, or would you want to ramp up first? I don't know. Maybe I'm wrong. You guys know a lot more than I do.

Joe Sanderson

Well, you wouldn't go – you wouldn’t just go buy an asset.

Ken Zaslow – BMO Capital Markets

Right.

Joe Sanderson

You wouldn't go – you would not go out and just buy two or three or five chicken plants just to have more production, just to run more pounds without some strategic deal. And part of doing that would be a big balance sheet, a big clean pristine balance sheet, which means you’ve got to have a big line of credit, a big revolver, a big – and I don't know – you know that is part of that deal, and I don't know that is doable right now today. But you’ve got to have – that goes along with it if that is part of the deal. And the first thing – I mean I wouldn't buy anything without that. That is number one, the balance sheet is first. And then the other, if it made sense, and it's something that we thought would do – you know make our stock more valuable, and that is what we-re – that is what we want to do, but we wouldn't do it without that balance sheet component. The balance sheet is the key, you’ve got to have that, and we're not going to go stretch challenge our balance sheet. I don't care if the plant was free, that is got to be first. But we are always – you know, we are always looking, available, and know what our jobs are.

Ken Zaslow – BMO Capital Markets

Okay. I'll probably follow it offline. Thank you.

Joe Sanderson

Thank you.

Operator

(Operator instructions). And the next question comes from Chris Bledsoe with Barclays.

Chris Bledsoe – Barclays

Good morning.

Joe Sanderson

Good morning.

Lampkin Butts

Hi, Chris.

Chris Bledsoe – Barclays

Hi there. Just a question to follow up on Ken's first question, if egg sets are down 6 to 8 and foodservice demand – foodservice demand may be down that but retail demand not down as much, what do you think is appropriate kind of a net basis for what demand is right now on a year over year run rate, are we talking down three, four, just kind of split the difference or what do you think is right?

Joe Sanderson

How much demand there?

Lampkin Butts

As you know it is kind of hard that all chicken will be sold at some price, so it is always kind of hard to say what the demand is contributing X percent or demand is down X% so that is contributing to the reduced prices because it all gets sold. We have seen some information about casual dining demand and traffic, 60% of consumers right now, less traffic through restaurants is down anywhere from 8% to 11%. What we don't see is what the mix inside of that is, are they trending down from a steak to a boneless breast fillet, or from chicken fry chicken down to hamburger, there is just no hard data. So everything…

Joe Sanderson

The other problem is the mix coming out of your big bird deboning plants. When you look at white meat and wings, all of that goes, the percentage that goes to foodservice is all white meat. And you know that doesn't – that’s what doesn't match up percentage wise, and if it is all 6%, you have got all of that white meat going in there. That doesn’t – that’s what doesn't match up, and you’ve got way – much higher price.

Lampkin Butts

And that is why you see this dynamic of Georgia Dock and leg quarter prices, you have seen some parts of the chicken hold up very well, indicating there is plenty of demand, or there is good demand for retail, for example, but foodservice where all of that boneless goes, there is too much white meat, there is too much boneless.

Chris Bledsoe – Barclays

But if we were to assume that breast meat doesn't get back to a $1.60, is there still a scenario where Sanderson can be profitable, be back at normalized profitability, from having contributions from these other products?

Joe Sanderson

You can get back, yes. We can get back to profitability, but you know that is not – you know when we talk about, we have a model and we have done it before, but you can't get to what we – you know our deal is 20% return on equity, and we have said that before, and – but you’ve got have that boneless breast component to do what we are supposed to do, but you can do it without – you can't – you can be profitable and you can generate positive cash flow with the retail piece and decent leg quarters, and returns out of our food, prepared food division. But you can’t – we cannot be – we cannot be as good as we want to be and without boneless breast prices.

Chris Bledsoe – Barclays

So you're talking about 20% returns but from more an operating margin perspective how good do you want to be then, or how good does that kind of 20% return imply?

Joe Sanderson

On the operating margin line, or are you – I'm not sure exactly what you're asking?

Chris Bledsoe – Barclays

I guess if we are willing to concede that – and I realize you are not there yet, but if the market is willing to concede that the higher highs of the big bird deboning model are no longer within reach at least in this demand environment, could we still get to normalized, even if we don't get to that higher high, as we get from a big bird deboning model historically in a normal demand environment?

Joe Sanderson

I haven’t looked at – we haven’t.

Lampkin Butts

Yes, I don't know what it would need to get. The answer of course… let me tell you another component here that – we have not run frankly a scenario that you described. But the other thing that is – you know you probably need $0.45 and $0.50 leg quarter to do what you're talking about and you need $1. 25 and $1.30 wings and you $0.90 Georgia Dock and I guess it is – to me that was unusual, it would be unusual for that to happen without boneless breast being strong. I think there’s more of a chance for boneless breast being stronger than it is today when you get to May, June, July and August, than it is at other scenarios.

Chris Bledsoe – Barclays

What is your ability to – or what limits your ability to shift your channel mix and selling to markets where demand is stronger, is it just your physical assets aren’t configured in a way that allows you to switch into a smaller bird?

Joe Sanderson

Right, we can't shift out of a big bird into smaller bird or to any great extent and to retail out of our big bird plants.

Chris Bledsoe – Barclays

Are there big bird products that can go into retail that you see an opportunity with?

Joe Sanderson

No, not really.

Chris Bledsoe – Barclays

Okay. All right. Well, thank you.

Joe Sanderson

Thank you.

Operator

Our next question comes from Jeff Linroth with Leaving It Better.

Jeff Linroth – Leaving It Better

Good morning.

Joe Sanderson

Good morning.

Lampkin Butts

Good morning.

Jeff Linroth – Leaving It Better

Sorry I couldn't make it last week, I really do appreciate the comments about the contract growth in Waco. Regarding Kingston, it was pretty early in the process where you decide to put it on hold, are there entities up in North Carolina that I wasn't of course being anxious to see Sanderson Farms presence, are there entities that have made some form of commitments that might have difficulty holding on to those commitments and maintaining them while they wait, what is the situation up there from that perspective?

Joe Sanderson

I don't anticipate that there would be. That’s a good question. We haven't – we mentioned at the shareholders meeting, we bought the land. We spent $8 million buying real estate, we are committed to the project. I have a very good reason to believe the state and the communities are as well, they offered some incentives for us to come, to my knowledge those will still be on the table when we get ready to go back.

Lampkin Butts

But those incentives would not – without those incentives, we would still go ahead with the project. The project was not dependent – we wanted the incentives and we were grateful to the communities for providing but if the time passed and they were no longer available for whatever reason, that will not keep that project from going forward.

Jeff Linroth – Leaving It Better

Okay. That is all I had. Thank you very much.

Joe Sanderson

Thank you.

Lampkin Butts

Thank you.

Operator

Our next question comes from David Bowie [ph] with Elk Partners [ph].

David Bowie – Elk Partners

Hi. I just wanted to understand the pound, the production that you planned, in the first quarter our production volume was up 20% and then…

Joe Sanderson

No, not the production, sales volumes.

Lampkin Butts

Sales volumes.

David Bowie – Elk Partners

Oh, okay.

Joe Sanderson

The production volume was up about 3.5% and that was all because of Waco was running at full capacity and now it is all set by the other plans being at lower volumes. The sales volume was up primary because of Waco and because of a difference in leg quarter sales versus the same period a year ago.

Mike Cockrell

Last January on this call we were explaining why our sales were less than production because we had a late of a lot of leg quarters in inventories. This year that was not the case. So quarter over quarter, first quarter versus first quarter, it looks a little bit strange, because our production was only up, as Joe said, 3.5% to 4%.

David Bowie – Elk Partners

Okay, that makes sense. Then, and then production for the second quarter, it is anticipated to be down 1.5%, okay. I was just trying to figure out what are you anticipating for production in the second half?

Joe Sanderson

In the second half of the year?

David Bowie – Elk Partners

Yes.

Joe Sanderson

Yes, Lampkin, as he said in his comments, we expect 584 million pounds during the second quarter versus 594 a year ago, so down slightly. And then if we continue at the present run rate, it would be right at 600 million pounds each of the second, third and fourth quarters to get to that total of 2.38 for the year.

David Bowie – Elk Partners

Okay. It is kind of been a pretty abrupt decline in production in the second half, I think down 6% or 7%?

Joe Sanderson

The second half down more, that is correct, down more relative to a year ago.

David Bowie – Elk Partners

Yes. Okay. Good. Thanks for explaining that.

Joe Sanderson

Sure.

Lampkin Butts

Thank you.

Operator

(Operator instructions). And the next question comes from Christine McCracken with Cleveland Research.

Christine McCracken – Cleveland Research

Hi.

Joe Sanderson

Good morning.

Lampkin Butts

Good morning, Christine.

Christine McCracken – Cleveland Research

Joe I wanted to ask you mentioned that you are not covered on corn I believe, that you are covered on soy, given your expectations around the crop for more beans to be planted, I'm a little curious on your strategy there?

Joe Sanderson

Okay. I didn't say we were covered on soy. We have some soy bought through April and a little bit more we had no corn priced past April. We have some soy but not a lot. I was just – I guess I was trying to say what we really think is we did a significant amount of soy pricing back in the fall. I might say Mike and Lampkin did, and that has proven to be a very good advantageous event, and we have a bit of that priced through our second and third quarter primarily, and not a lot but some. We do anticipate soy acreage going up. We don't know what it’s yet, we have heard anywhere from 77 to 80 million acres and somewhere in the number, that would be kind of where we think. We are hearing 82 to 86 million acres on corn. I would think – I kind of – we think – I kind of think in the upper, in the 4 million acre range I kind of think in the upper half of that 84 to 86 is what I would guess. And I also – we also believe that this corn carry out is going to grow, this 1.8 billion bushels could grow, and that is why we haven't priced any more corn, but I am trying to get Mike and Lampkin positioned to make some decisions here in the next 30 days to 60 days. But I think probably within the next – I don't know if this March 31 report is going to tell us a lot. I think that will be a first look and I think there could be some changes after that. One of the things we kind of have looked at is the wholesale and retail price of fertilizer and there is a huge spread in there right now particularly nitrogen and urea and the wholesale price of that has come down dramatically as we have been told, but the retail price has not. And if that breaks I think there could be more corn planted than. And I saw the USDA Outlook Conference predicted maybe 87 million acres corn. That was not a survey, that was just an estimate they put out, which is the highest number I have heard so far. But 86, 87 million acres of corn would be – I haven’t run – seen a table of that yet, but that would indicate a pretty good carry out again next year.

Christine McCracken – Cleveland Research

All right. I guess I'm curious you know why wouldn't you take some of that risk off the table, technically this is part of the year where you see the most volatility and certainly given how much you had this winter risk at corn runs, assuming any kind of turnaround in demand, why would you leave yourself wide open on that?

Joe Sanderson

Well, we probably – we historically will – we historically would do that without – we do a portion of that historically before that March 31 report.

Christine McCracken – Cleveland Research

Okay. Just also I guess switching topics, on your comments relative to Waco, it sounded like you were going to increase production there if I heard you correctly? Is that right?

Joe Sanderson

That is correct.

Christine McCracken – Cleveland Research

Okay.

Joe Sanderson

They are scheduled to complete, get up to their 520 odd houses, they are already probably at around 500 and they are supposed to get their 520 odd probably by the end of April, and we will be at – we were at a million more in October and January and sometime I'm guessing May – April maybe, they will be 1.2 million, and we are going to hold them 1.2 million instead of the 1.25 million probably by April 1. They will not go to the 1.25 which is our capacity. And that will get them at a comfortable layout time, and they also will not go to full weight. We are going to keep them on – but we take them up to – - they will be much heavier than Mississippi, Louisiana, but they will not be their full capacity either weight wise or slaughter capacity.

Christine McCracken – Cleveland Research

Right. You know your Georgia plant if I'm not mistaken, has got pretty new houses as well and I'm just curious is it that you are comfortable with the rate you are running in Georgia or that would you be forced to kind of increase there as well?

Joe Sanderson

Well, Georgia is kind of running at 96% capacity, headcount, and it is running at normal weight. It is a retail plant and it is running at normal weight. So they are okay, their layout is okay, and they are fine, and you know they are close enough. The Macomb retail plant is running at 96% capacity, they are okay. The Bryan College Station plant is running at the 96% capacity, they are okay. The ones that are reduced significantly are the Hazlehurst, Laurel, Hammond, Collins deboning plants, they are the ones that’ve got 14% cutbacks.

Christine McCracken – Cleveland Research

All right. That makes sense. And then just one last question on your expectations around competing proteins obviously with the losses on the dairy side, we are expecting a pretty sizeable contraction in dairy herd, and a lot of ground beef on the market, presumably through the summer and even into the second half, I'm wondering have you taken that into account as you look at your breast meat outlook and what are you forecasting that?

Joe Sanderson

Well, we – you know I have – I think we’ve never felt like –beef and port have to get really cheap before we ever we feel much of that. It’s just got to get really, really cheap before we feel it at retail ore foodservice. If we start seeing $0.89 Big Macs or something maybe that – or rump roasted, it’s just got to – we don’t really feel competing meats until they get dirt cheap, and I don't see that happening. So I know the – I think the beef people may – I know they are going to feel it when those – if this dairy herd thing happens, but I don't really think that’s going to affect us too much.

Christine McCracken – Cleveland Research

If I look back though at the last time we had a sizeable herd buyout, if I recall it didn't hurt chicken, is it that the market’s changed somewhat or…

Joe Sanderson

No, I don't think it has changed, but if we are in a cut back position and I think we will be. I just don't believe, I just don't believe that it is going to be that much of a factor. And none of that, none of that dairy met I would think is going to get to retail.

Christine McCracken – Cleveland Research

All right, thanks.

Joe Sanderson

Thank you.

Operator

Our next question is from Chris Bledsoe with Barclays.

Chris Bledsoe – Barclays

Thanks for taking the follow up.

Joe Sanderson

You bet.

Chris Bledsoe – Barclays

The USDA this morning revised it ag exports pretty much across-the-board lower, but I thought they left chicken export intact, and so what I'm wondering is that 600 million or so revision, negative revision in pork, is a potential benefit, trade down benefit to chicken, if that trade down globally, if you have ever seen that before or think we could see it in this kind of what seems to a spreading global recession?

Joe Sanderson

Is that a USDA projection?

Chris Bledsoe – Barclays

Yes.

Joe Sanderson

For pork and chicken?

Lampkin Butts

No, just pork.

Chris Bledsoe – Barclays

Pork revised lower by some 600 million or so and chicken kept steady.

Joe Sanderson

I'd don't know for sure . I do think that the cheap protein and the leg quarters will compete very well in a slow economy, but I don’t really – I don't have any history to prove that, but I think that is true.

Chris Bledsoe – Barclays

Okay. And then just to step up one in, in looking at picking up assets may be on the market, did I read your comment correctly that says that the assets that are out there right now likely come with some dead load associated with that?

Joe Sanderson

No. I didn't mean to imply that. I just was saying that if that – if something, anything, anything were to happen, that one of the requirements for us would be to have a – you take anytime, this time or five years ago, if you took something on, you take it on with a pristine balance sheet, and that would be a challenge right now I think to secure that financing one way or the other.

Chris Bledsoe – Barclays

I got it. The billion-dollar shelf that you filed a while back, that gives you some flexibility though I assume?

Mike Cockrell

Well, it gives you the – obviously you could move with some speed by having the shelf there, but you have to get it executed.

Chris Bledsoe – Barclays

And then the asset that are on the market today, you have a sense for whether those are mostly big bird or retail or is it this just kind of a mix of both and is there a certain direction that you would be more inclined to want to take your business?

Joe Sanderson

We have not been – truly we have not been contacted by any assets recently. So I don't know first hand direct about anything recently about any assets.

Chris Bledsoe – Barclays

Okay. Thank you for taking the follow up.

Joe Sanderson

Thank you.

Operator

It appears there are no further questions at this time. Mr. Sanderson, I would like to turn the conference back over to you for any additional or closing remarks.

Joe Sanderson

Good. Thank you for spending time with us this morning and we look forward to reporting our results to you throughout the year.

Operator

This does conclude today's conference. Thank you for joining and have a good day.

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Source: Sanderson Farms, Inc. F1Q09 (Qtr End 01/31/09) Earnings Call Transcript
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