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Sanderson Farms Inc. (NASDAQ:SAFM)

F4Q09 Earnings Call

December 8, 2009 11:00 am ET

Executives

Joe Sanderson – Chairman, Chief Executive Officer

Michael Cockrell – Chief Financial Officer

Lampkin Butts – Chief Operating Officer

Analysts

Farha Aslam – Stephens Inc.

Christina McGlone – Duetsche Bank

Christine McCracken – Cleveland Research

Akshay Jagdale – Keybanc Capital Markets

Kenneth Zaslow – BMO Capital Markets

[Steven Cher – Lithgo Research]

Ken Goldman – J.P. Morgan

Jeff Kanter – UBS

Heather Jones – BB&T Capital Markets

Operator

Welcome to the Sanderson Farms Incorporated fourth 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.

Joe Sanderson

Good morning and welcome to Sanderson Farm’s fourth quarter and year end conference call. This morning we reported net income of $19.8 million or $0.96 per fully diluted share for our fourth fiscal quarter of 2009. During the fourth quarter of last year, we lost $51.9 million or $2.56 per diluted share.

Last year’s $51.9 million net loss included an adjustment of $29.7 million net of income taxes or $1.46 per share to our live and processed inventories to reflect those inventories at the lower of cost or market. No such adjustment is present in this year’s results.

For the year ended October 31, 2009 we reported net income of $82.3 million or $3.99 per diluted share. For fiscal 2008 we reported a net loss of $43.9 million or $2.13 per diluted share which numbers also reflect the inventory adjustment.

If you did not receive a copy of the release and accompanying financial summary, they are available on our website at www.sandersonfarms.com. Before we continue I will ask Mike to give the cautionary statement regarding forward-looking statements.

Michael Cockrell

Good morning everyone. This morning’s call will contain forward-looking statements about the business, financial condition and prospects of the company. 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 most recently filed quarterly report on Form 10-Q. We expect to file our annual report on Form 10-K for the year ended October 31, 2009 with the SEC on or before December 22, 2009.

All forward-looking statements speak only as of today and are based on our current expectations, beliefs and assumptions which could change quickly based on many external factors affecting our business. We of course undertake no obligation to update or revise our forward-looking statements.

Joe Sanderson

While the chicken market was mixed during our fourth fiscal quarter compared to last year’s fourth quarter, the markets were less favorable across the board during the quarter when compared to the third quarter of this fiscal year. However, feed grain prices were also lower during the quarter compared to last year resulting in improved margins compared to last year.

Our net sales for the full year were $1.789 million, an increase of 3.8% compared to fiscal 2008. Our increased sales reflect our growth in Wico offset by our production cuts during the year. Fiscal 2009 was a successful year for Sanderson Farms. We returned to profitability during our second fiscal quarter, reported our largest ever quarterly earnings during our third fiscal quarter and remained profitable during our fourth quarter’s quite challenging market conditions.

I’m proud that we put our Kingston, North Carolina project back on track and am pleased to report that the project is moving forward on schedule. We will place our first pullets in North Carolina in April 2010 and look forward to beginning operations there in January of 2011.

Our success during fiscal 2009 allowed us to pay down a significant amount of debt and there were actually a few weeks during the fourth quarter when the outstanding balance on our revolver was zero. We ended the year with a debt/cap ratio under 20% while return on average equity was 212%.

I’m very proud of the manager’s, employees and growers at Sanderson Farms who are responsible for this success. I’m also proud of our strong balance sheet primarily because its strength allows us the flexibility to meet our obligations to our shareholders; that is, we fully recognize our obligation to find ways to increase the value of our shareholders investment in Sanderson Farms and our balance sheet has allowed us to move forward the Kingston project to do just that.

I also fully believe that our balance sheet strength is a strategic asset in our cyclical business. I’ll now ask Lampkin and Mike to provide details on the quarter and will return to discuss grain and answer your questions when they finish.

Lampkin Butts

Good morning everyone. I’m struggling a bit with my voice this morning. I’ll ask your indulgence and apologize.

Overall market conditions were improved when compared to our fourth quarter last year, but market prices were considerably lower than during our third quarter and mixed when compared to last year’s fourth quarter.

The average price for the Georgia Dock during our fourth quarter was approximately 3.38% lower than last year’s fourth quarter, averaging $0.847 for the quarter. For the year, the Georgia Dock averaged $0.865 per pound which represented approximately a 4% increase over the $0.83 per pound average during fiscal 2008.

The Georgia Dock price is currently $0.82 per pound. As many of your know, the Georgia Dock price is a good indicator of the supply and demand dynamics for products sold to retail grocery stores.

Despite market price for boneless breast meat produced at our Big Bird plants have been under significant pressure owing to reduced food service demand, the balance of supply and retail grocery demand has held relatively steady through most of this past fiscal year. The balance is reflected in the improvement in the Georgia Dock price during fiscal 2009.

Bulk leg quarter prices were approximately 29% lower during the quarter compared to last year’s fourth quarter and decreased approximately 19% for the year. Leg quarters averaged $0.371 per pound during the fourth quarter and $0.375 per pound for the year, but the current earnings closed at $0.34 per pound.

The decrease in leg quarter prices during the quarter reflects the impact of lower overall export demand. Total exports will be down year over year and politics and economics will always influence to meet export demand. This year was no exception. However, we are comfortable with where we are today and our relationship with our export customers, and believe fiscal 2010 will be a lot like 2009.

The market for boneless breast meat has been softening seasonally since July. Prices during our fourth quarter were higher by 6.5% when compared to the fourth quarter a year ago but were 15.6% lower than during our third fiscal quarter. While boneless prices were higher than last year’s fourth quarter, last year’s oil prices were dismal.

The closing market price for boneless average $1.27 per pound during the fourth quarter; $1.34 per pound during the year. Currently the market price for boneless breast is $1.24 per pound. While the quoted market prices for boneless has remained above $1.20 per pound, boneless was being discounted below $1.00 a pound this fall mainly during October.

The market has stabilized over the past few weeks and actually moved up slightly the week before Thanksgiving primarily due to holiday cutbacks.

Softness in the boneless breast market continues to reflect weakness in the market for almost all protein consumed away from home. This includes the demand for white meat from our casual dining customers as well as the softness in the market for chicken from our distribution customers.

Finally, wings have certainly been a bright spot in the chicken market this year. Jumbo wing prices during our fourth quarter averaged $1.39 per pound, up $0.51 from the average of $0.88 per pound during last year’s fourth quarter. For the year, jumbo wing prices were higher by 41% from an average of $0.94 per pound during 2008 to an average of $1.32 per pound during 2009. Jumbo wings currently trade for $1.52 a pound.

When you roll all of this together, our average sales price for poultry products during the full fiscal year was higher by $0.01 per pound over last year, increasing 1.4% for the year ended October 31, 2009 compared to the year ended October 31, 2008.

This increase of $0.01 per pound in our average sales price for chicken together with the $0.278 per pound improvement in our feed costs contributed to the $0.05 per pound operating margin improvement in our chicken business this fiscal year compared to last year.

Our cost for corn delivered to our feed mills during this year’s fourth quarter were lower than last year’s fourth quarter, decreasing 35% while the cost of soybean meal increased 4.2% during our fourth quarter compared to last year.

For the year, we paid over $120.8 million less for feed grain compared to fiscal 2008. Remember that there is a lag in the time it takes for the cost of feed delivered to our mills to show up in our cost of goods sold because we recognized the cost of grain when chicken that eat that grain are processed.

Our feed cost per processed pound of chicken were lower by $0.062 or 19.7% during this year’s fourth quarter compared to a year ago. For the year, feed costs were $0.278 per pound lower or 10%.

While market conditions have softened seasonally, weaker markets are also the result of continued demand weakness, but supplies remain in check. Greater check prices for the first ten months of calendar ’09 were down 3.5% compared to the same ten months a year ago and the projected breeder flock for May 2010 is down 4.4%.

Egg set numbers continue to run behind last year’s numbers. Egg sets through last week have averaged 200 million eggs per week compared to 209 million per week in ’08, 215 million in ’07 and 211 million in 2006.

We maintain our optimism that the industry is poised for improvement market conditions when demand returns from the domestic consumer. We competed well in the industry during 2009 in terms of operating efficiencies and profitability and our mangers will receive bonuses for their work in keeping Sanderson Farms near the top of our industry.

While we did not achieve the top target of our earnings per share goal in fiscal 2009, our employees earned a bonus for achieving a portion of that goal. That said, we have room for significant improvement and we will work hard this year to improve.

Like Joe, I congratulate our mangers, employees and growers on their success this year and look forward to improvement during 2010.

Now I’ll turn the call over to Mike for a discussion of the quarter’s financial results.

Michael Cockrell

Our financial performance during the fourth fiscal quarter of the year reflects the improvement environment that we enjoyed compared to a year ago, but still reflects the challenges that our industry faces.

Net sales for the quarter totaled $469 million and that’s up from $460.2 million for the same quarter during fiscal 2008. The increase in net sales reflects the slightly higher sales price for poultry products compared to last year described by Lampkin and a slight increase in pounds sold of less than 1%. For the fiscal year, net sales totaled $1.8 billion and that’s up from $1.7 billion last year.

Cost of sales for the year decreased 5.6% compared to a year ago and totaled $1.6 billion. Our average sales price for poultry products during fiscal 2009 was up 1.4% compared to last year and the average cost per pound in our poultry business decreased 8.2% compared to last year reflecting the lower grain costs.

For the year, grain costs comprised 47.3% of cost of goods sold and that compared to 50.1% last year. Our cost of sales for the quarter ended October 31, 2009 decreased 12.8% compared to the same quarter a year ago. This decrease is also the result of lower feed grain costs.

During this year’s fourth fiscal quarter we processed 649.3 million pounds of dressed poultry and sold 641.3 million pounds. We processed 2.43 billion pounds for the year and sold 2.45 billion pounds.

Of the pounds processed during fiscal 2009, 1.46 billion or 60% of our total processed pounds were processed at our Big Bird plants and 965 million pounds or 40% were processed at our retail plants.

For those of you modeling 2010, we currently expect to process 2.6 billion pounds of dressed poultry during fiscal 2010 which would represent a 7% increase over pounds processed over this year. If we run our plants as expected, those pounds would be processed as follows; 619 million pounds in Q1, and 659.7 million in each of Q2, Q3 and Q4.

Of course these projections are subject to change as a result of weather, changes in target live weights, market conditions and other factors.

SG&A expenses for fiscal 2009 were up $10.1 million compared to fiscal 2008. This increase was due in part to the accrual of bonuses and an ESOP contribution, both of which were absent during fiscal 2008. While we paid no bonuses for 2008, and accrued no contributions to the ESOP last year, during 2009 we contributed $6 million to the ESOP and recognized as corporate SG&A expenses $4.4 million for bonuses under the company’s bonus award program.

SG&A expenses for fiscal 2009 were also larger because of an increase in the accrual for restricted stock grants. These higher costs were partially offset by planned decreases in our marketing budget of $3.3 million.

At the end of our fiscal year, our balance sheet reflected stockholders equity of $430.7 million and net working capital of $162.7 million. The current ratio was 3.1 to one.

Our long term debt at year end was $103.1 million and our total debt to cap ratio was 19.5% as of October 31, 2009. Our net debt to cap ratio was 18.2%.

For the year, we spent $25.4 million on capital improvements and paid $11.9 million in dividends. Of the $25.4 million spend on capital improvements during the year; $3.1 million was for our new Kingston complex. As Joe mentioned, our return on average equity for fiscal 2009 was 21%.

For fiscal 2009 interest expense was $9 million even, a slight increase from the $8.5 million of expense last fiscal year and reflects our higher average outstanding debt offset by lower interest costs.

Our effective tax rate of 35.5% during fiscal 2009 was a bit lower than our earlier guidance because of a higher charitable contribution carried forward from fiscal 2008 than we had anticipated and slightly higher job tax credits than we estimated. Going forward we continue to model an effective tax rate of 36.5%.

We now expect capital expenditures for fiscal 2010 to be approximately $136.5 million and to be funded by cash on hand, internally generated working capital and cash flows from operations, and as needed, liquidity provided by our revolving credit facility.

Of this total $107.4 million is for the new Kingston complex. The company continues to have a $300 million unsecured revolving line of credit, of which $251.8 million was available at October 31, 2009.

Our depreciation and amortization during fiscal 2009 totaled $43.2 million and we are modeling $45 million for fiscal 2010.

Joe Sanderson

Our feed grain costs during fiscal 2009 were significantly lower than during 2008. If we had locked in prices for all of our needs for fiscal 2010 at current values, that is, if using the Chicago Board of Trade price for current and future needs as it closed last night, and factoring in the additional volume we will need this year, our cost of grain during fiscal 2010 would be $37.4 million higher than during fiscal 20089. That number consists of $12.1 million in price and $35.2 million in volume.

While that estimate is based on yesterday’s cash market price for grain, I caution anyone building a model that prices have been very volatile and I expect that volatility to continue. I reported to you on our August call that we had priced none of our 2010 needs as of that date, but would be looking for opportunities during the harvest to begin pricing some of our needs for 2010.

We have still not priced a significant portion of our 2010 needs. As you know, this year’s harvest has been slowed by weather. While most believe we will ultimately harvest a record soybean crop and a near record corn crop, the weather delays have caused higher than normal volatility in prices. We continue to believe the harvest will be adequate to meet the needs of corn and soy users and will remain patient for the time being.

I agree with Lampkin that current reduced market conditions reflect continued weakness in consumer spending and consumption of protein away from home. I also continue to believe we will not see meaningful demand improvement for chicken at food service until American’s begin getting their jobs back in large numbers.

When that happens though, I believe the industry through production cuts that continue to be reflected in reduced egg sets and pullet placements has put SF in a position to benefit from that demand.

I do not have a crystal ball for 2010 but I do know leading indicators point to lower supplies and I believe retail grocery demand will continue to be strong. I can’t say I believe food service demand will be robust during 2010. However, I believe it will improve, but don’t believe improvement will be meaningful until last 2010 or 2011 as unemployment moderates.

That said, I remain optimistic for the long term. We sell a great product that consumers enjoy and can easily afford. Sanderson Farms has outstanding managers who produce that product efficiently for a strong and expanding consumer base.

Our balance sheet is strong. We are demonstrating our optimism with a considerable investment in a new complex that will add value for our investors, opportunities for our employees and high quality products for our customers.

With that we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Farha Aslam – Stephens Inc.

Farha Aslam – Stephens Inc.

Joe you had mentioned that you expect supplies to be down in 2010 but weights are going up in the industry. Could you share with us your thoughts on the balance between weight and head?

Joe Sanderson

I don’t expect any significant increase in either one. I think the increase in Agro stats that showed up in 2009 was primarily in the trade pack region. There was a nominal increase in the Big Bird de-boning but it was very slight.

The trade pack region increased more than anyone else, but it has not changed in about six months now and I think that has kind of topped out. Small bird hasn’t increased any. I don’t really anticipate very much movement in weights anymore in 2010.

I don’t see any more head until we see some improvement in pricing. I think head count is going to run close to what we have. You might see a few more head count beyond this 202 million head count. You might see that go up a bit for the summer just because everybody anticipates that being a season of improved demand.

There’s a possibility, we hear rumors that there might be a plant or two that may shift some product to big birds, but we don’t know that. And we think there may be one company that may be going to double shift a couple of plants, but I don’t expect any major changes in 2010.

Farha Aslam – Stephens Inc.

In terms of export demand, have you seen export demand pick up in the last few weeks as the dollar has weakened a bit?

Joe Sanderson

We have. We’ve believe December pricing is going to be $0.03 to $0.04 higher than November and that is a bit unusual, but it appears that the product we ship in December is going to be somewhat higher than what we priced in November primarily to Russia and Eastern Europe.

Farha Aslam – Stephens Inc.

In terms of SG&A next year you have a bonus accrual program and then also a new plant coming online. Can you help us with just some color on where you expect that to come in?

Joe Sanderson

Let me speak to the bonus. We paid a bonus on earnings per share and an Agro stats bonus this year, and the Agro stats bonus, you can go back and look at the 10-K for 2007 and it was similar to that. And the earnings per share will be based on a higher threshold for 2010 because our equity is higher so we’ll start with 20% on the beginning equity which is $430 million, and what was our beginning equity in 2009? $353 million, so our threshold is going to be a higher target for all of us in 2010.

Michael Cockrell

As for the start up in Kingston, for fiscal 2010 model between $3.5 million and $4 million. The plant is going to start up in January 2011, and the heavy part of the SG&A that gets booked before the plant starts up will be those last few months before the plant opens, so it may be closer to $3.5 million with the bulk of it being booked next fiscal year, during next November and Dece3mber when all the salaried employees are hired and so forth.

Joe Sanderson

The $3.5 million to $4 million, as we go through the year we’ll refine that. We can go back and look and we’ll do that on our next call. We’ll look at Waco and see where that, it’s going to be just like the Waco start up which was about that. So we’ll refine it as we go through the year, but that should be a good number to get started in a model.

Operator

Your next question comes from Christina McGlone – Duetsche Bank.

Christina McGlone – Duetsche Bank

Joe I was wondering if you could give an update on Russia in terms of the quota’s, the chlorine issue that I’m not sure if it’s now been deferred from January 1, and also if you think that we’ll get a Russian premium for leg quarters for next year.

Joe Sanderson

We think the quota is going to be 590 million metric tons. That hasn’t been published, but that’s what they said, and that’s down from 570 million metric tons. That’s been verbalized. It hasn’t been published, but we think that’s what it’s going to be and we’re okay with that.

We think other parts of the world, we kind of knew that was coming. We thought it was going to be 600 million and for some reason they did 590 million instead of 600 million. It is what it is and we’ll be fine with that.

If they need the product and that market gets on fire and the demand is there, and those prices get real high, they can change that quota and allow more product in and I suspect they would. And I would also tell you there are other ways that product gets into that country besides through their ports from time to time if that market does get real hot and there’s a Russian premium.

I don’t have any idea. It kind of depends on the Russian economy and last year there was a premium there for about 10 months. There is no premium there right now but there has been a premium there most of the time, so based on history I would say at least part of the year there should be a premium there.

Christina McGlone – Duetsche Bank

How many plants does Sanderson have approved for Russia?

Joe Sanderson

Three.

Christina McGlone – Duetsche Bank

And what about the chlorine issue?

Joe Sanderson

It appears that has been set aside, but we don’t have an official word on it. But if they put the quota out, it sounds like its been set aside.

Christina McGlone – Duetsche Bank

I was curious about your outlook for breast meat, because as Lampkin said it firmed a little bit before Thanksgiving and I just wanted to get what you thought about for the rest of the month and then into next year.

Joe Sanderson

We think that the only reason it firmed was because of production cutbacks. I wouldn’t be surprised if it did that. Also something, during October, breast was trading at $0.20 to $0.25 back. Right now it is trading $0.10 to $0.15 back because of cutbacks.

I wouldn’t be surprised to see that firm up again before Christmas because there are substantial cuts. We think there’s not going to be, right now based on employment, we don’t think we see anything in front of us to change the demand for boneless breast.

The production cuts we see are going to keep boneless about what it is we think and about like last year. We get a little better demand in the spring and summer. Maybe the people that do have jobs, maybe a little more comfortable that they’re going to keep their jobs, but those people that do not have jobs, we do not think they’re going to change their behavior about going out to eat.

And so we don’t see a big change in 2010 from 2009.

Operator

Your next question comes from Christine McCracken – Cleveland Research.

Christine McCracken – Cleveland Research

Just relative to the volume estimates that you gave heading into the early spring, are you expecting then, at least from your recent comments it didn’t sound like you were expecting much of a demand improvement thus far. Is there something that gives you more optimism as we head into the spring or maybe you could put a little color on that? Is that just seasonal?

Joe Sanderson

What those volumes are is a restoration of our normal slaughter schedule. Last year during January, February, March, April and part of May we had that cut back in place and we’re not going to do that this year. We’re going to be at our normal, a little bit less than normal at our Big Bird operations, but we are going to run at close to normal capacity.

We feel like that with cutbacks that the industry has that we won’t be in as near the challenging environment that we were a year ago.

Christine McCracken – Cleveland Research

So you’re not expecting any improvement in demand, but you expect the competition to kind of stay rational?

Joe Sanderson

I do.

Christine McCracken – Cleveland Research

Specifically on the fast food sector, it seems like some of the results, the comps have been coming in pretty light. I’m wondering if that’s what you’re seeing or if you’re seeing any kind of turn around or improvement in quick serve.

Joe Sanderson

The only thing we know about quick serve is what we read. We don’t really service very much quick service. We don’t do any fast food. I saw MacDonald’s this morning, so we do hear about that and it looks like it is tailing off just a bit and it was the last market segment to do that. So we’re not seeing anything positive about quick serve.

Christine McCracken – Cleveland Research

So then as an offset are you seeing any pickup in the other sectors that might be picking up some of that volume in the sectors you do serve?

Joe Sanderson

No. It’s stable but we have not seen any improvement at all. That price improvement that we’ve seen in boneless, November versus October, we think is strictly due to cutbacks.

Christine McCracken – Cleveland Research

And it does sound like one of the largest sectors taking breast meat is actually slowing down some.

Joe Sanderson

I don’t think there’s a lot of breast meat going into quick serve. There’s some tenders, but I think mainly the quick serve is getting the eight piece and nine piece cut up and some tenders, but they don’t take a lot of breast meat.

We service a little bit of that but it’s just flat. Some of those people we do service, I was thinking of KFC and Church’s and Popeye’s, which we don’t, but the quick serve Arby’s and people like that, it’s just flat.

Operator

Your next question comes from Akshay Jagdale – Keybanc Capital Markets.

Akshay Jagdale – Keybanc Capital Markets

I wanted to push you a little bit on or talk a little bit more about the outlook for industry production and right now it looks like the industry is at about 95% utilization, similar to where you were this year. If I’m profitable and I’m a chicken company and I’m under utilized right now, I would be increasing production. So we’ve seen so far all the production cut backs and my belief is that most of that is coming from Pilgrim’s Pride but if you look forward, can you just talk about why you think the industry other than yourself is going to be rational in their production outlook going forward?

Joe Sanderson

I think based on information we have from Agro stats from the last two months, 75% of the industry has been profitable and they’ve been profitable since last March. So if you base it on profitability they would be increasing production right now and they haven’t done it.

I think they haven’t done it for a couple of reasons. I think one is every penny that a lot of the people made went straight to the banks. They didn’t have access to those profits. They were paying back debt they incurred in 2008. And secondarily, I think another restraint that they have on them is I think a lot of companies are looking for new bankers. I think there are some banks that want to get out of the chicken business.

And some banks have gotten out of the chicken business. I think maybe there are some companies out there that got in real trouble in 2008 and they can’t take a chance on going back to full production. They might not have a bank backing them right now.

Having said that, there are a group of companies that could do anything they want to. There are a group of companies that have been profitable and have no balance sheet issues that are good. Good operators make plenty of money, but there is a segment out there that don’t want to, probably don’t want to be in the chicken business if they could get out of it. I think that’s why you haven’t seen any more pullet placements or any more egg sets.

Akshay Jagdale – Keybanc Capital Markets

The other question is more longer term; looking at your model for Big Bird deboning and we’ve heard a lot about other companies trying to expand in that segment. Can you talk to that a little bit? I know you’ve said in the past that operationally and I know Lampkin is a bit limited in this, but operationally you feel comfortable about being in the top 25 or top 15% on Agro stats. But over time, if there’s more entrance into a profitable segment that should drive profitability down, so I know there’s some people concerned about that. Can you just talk to that a little bit?

Joe Sanderson

We’ve heard that some other people may have moved some birds into that market segment and that makes sense. It’s been the most profitable market segment for the last 15 years and I would expect that to happen and as a result of that, possibly margins could be under pressure in that market segment and I would expect that.

That’s part of it. But it’s got a long, that’s something that’s going to happen over years of time I believe. It takes a pretty good while to become really good at that. I believe the good operators are still going to achieve the best margins.

So I’m not really terribly anxious about that right now. There hasn’t been a lot of new entrants in that over the last several years. It’s been fairly stable, but I hear that there may be some people going to move some product into that.

Now whether they move it into our market segment or whether they take that product and fabricate the white meat out of it is another story. But they may sell the wings as we do and maybe the tenders as we do or they may further process the tenders and further process the white meat. I don’t know.

But to me that’s normal competition and I’m not terribly concerned about it. We’ve been competing against very good people in that market segment for a long time and we’ll compete against some more people over time. There’s a certain learning curve that goes with it and I’m okay with it.

We’re going to keep on doing it and as I said in New Orleans, once we get this Kingston plant up we’re going to be out of balance Big Bird to trade pack. It’s logical that the next plant we build is going to be a Big Bird deboning plant.

We’re going to build another one probably when our balance sheet says that it’s time to do it and we believe that the market’s going to get better and it’s going to grow. It may not grow rapidly but you know, 1% or 2% a year. So we’re going to do it ourselves, so I’m optimistic about that.

Akshay Jagdale – Keybanc Capital Markets

On the grain side, I know you said the cost per pound is not going to change very meaningfully next year if you would price everything today, but can you just more generally talk about your outlook for corn and soybean meal and what you see in the market so that we can think about where you stand in terms of taking positions for next year.

Joe Sanderson

We think the board is a little bit inflated right now because of the late harvest and because of the some funds that have bought some contracts kind of like they did in the summer and spring and summer of 2008. There’s an uncertainty about the size of the crop and the crop is not in the bin, and we don’t think we’re going to really know that probably until January.

There’s been a lot of soybean meal exported and really some beans and everybody’s guessing that the USDA is going to reduce the carryout on the beans. We kind of think maybe the first half of the year may be a little more bullish on beans and corn and the second half of the year maybe the picture will look a little different.

When you have the South American crop and the plantings for the U.S., and we think there may be large plantings both corn and soy, but we don’t think we’re going to see cheap corn or cheap soy. I think there’s a possibility that you could have the carryout on both of them could be a little bit less than what they came out with.

But I think values could be some lower than what they are today, but we don’t think we’re going to see $3.00 corn and $225 meal. I think today is the wrong time to take a heavy position. I think certainly after January and maybe even after the March planting report, may be the time you might want to buy some.

The base has certainly come down. Bases for January, February and March is some lower now than it was earlier on in both corn and soy. We think the Board will present better opportunities down the road a little bit and so we’re just being patient right now.

Operator

Your next question comes from Kenneth Zaslow – BMO Capital Markets.

Kenneth Zaslow – BMO Capital Markets

The wing prices versus breast prices, and I knew the usual situation where wing prices are at such a premium to breast prices. In terms of that, do you think we’re going to go back to more normal levels? Do you think it’s structural and if it goes back to normal levels, what will work? Will wings come down? Will breast go up? How do you see that playing out?

Joe Sanderson

What you’re doing right now in your processing plant is leaving a leaving a little more breast meat on the wing. It’s a crazy thing. You’re training employees differently right now, but it’s a shift and something we’ve never done before.

Wings, my judgment is that after the Super Bowl that wing prices are going to come down from where they are right now and you would think breast prices in January might start moving up some. But I don’t think breast prices are going to go crazy. I don’t remember exactly what they did last January, but they moved a little bit.

I don’t have my chart in front of me, but wing prices, if the head count stays like it is, they’re going to be strong all year. Boneless breast moved up in January and February. You would think wing prices would move down some.

Kenneth Zaslow – BMO Capital Markets

You don’t think it’s a relative issue? You don’t think the premium, because we’ve heard a lot of commentary from industry sources of how the premium, but you think it matters very little. You think it’s individual prices.

Joe Sanderson

I don’t think it has anything to do; they go to different restaurants.

Kenneth Zaslow – BMO Capital Markets

I’ve asked this a year or so ago and I didn’t know if you’d give any more clarity, Sanderson Farms margins are higher than that of the industry’s clearly. If the industry margins were flat or nobody was making any money, can you talk about where you would be on a profit per pound or some sort of relative and give examples of what you’re doing, because it’s hard to figure out. This is a quarter that, somebody did something at Sanderson Farms that was a lot better than what’s happened in the last couple of quarters, so I’m just trying to figure out what exactly what are you doing. Is there still margins? Help me out here in terms of the operational side of Sanderson Farms. Not the margins for the industry.

Joe Sanderson

It’s hard to say. We didn’t come in first in Agro stats, I can tell you that. We’re chasing four or five good companies that did a good job this last year. They were smaller companies that did a great job.

Kenneth Zaslow – BMO Capital Markets

But what are you doing? What are you specifically doing to get to the top.

Joe Sanderson

We had a lot of things to do. We had a management meeting last week and identified a whole litany of things we can do better and represented millions of dollars each month. It had to do with egg production and pullet development and maintenance costs in our plants and yields in our plants and a lot of sales stuff.

We identified several million dollars a month that we could do better and we’re going to do it. And it had to do with calls, and grading and a lot of stuff that we could do better.

Kenneth Zaslow – BMO Capital Markets

Can you anecdotes or anything to give us a little color.

Michael Cockrell

No, I’d embarrass my managers. All of that said, as you know we put a lot of emphasis on how we perform versus our peers and Agro stats. That’s the way all of executive committee and managers are determined, if we finish at the top.

And they did well this year. Our managers did very well and they’re going to get an Agro stats bonus. They finished at the top of the industry, but not the top. And as Joe said, we’ve looked every year where we can do better. We can’t quantify each of those items for you right here, but I tell you we did last week and everybody’s got these goals to try to get to those top two or three companies that are still beating us.

Kenneth Zaslow – BMO Capital Markets

It’s hard to figure out. There’s industry margins and then there’s Sanderson Farms margins. I’m trying to piece them out but it seems like one day.

Joe Sanderson

We’re still working at it. I’ve been working at it 41 years and we don’t have it down pat yet.

Operator

Your next question comes from [Steven Cher – Lithgo Research]

[Steven Cher – Lithgo Research]

I was hoping you could help me out in prepared chicken products. Could you give me the pounds sold and the net sales this quarter?

Michael Cockrell

Pounds sold of prepared foods, $16 million during the quarter versus $14.9 million last year on an increase of 1.3%. For the year, $60.7 million versus $68.6 million a year ago, a decrease of $3.8 million pounds or a decrease of 5.5%.

[Steven Cher – Lithgo Research]

Did you say net sales for the quarter?

Michael Cockrell

That’s pounds sold. Foods for the quarter, sales dollars $33.6 million this quarter versus $29.9 million for the same quarter a year ago. For the year, $132.9 million versus $134.9 million.

[Steven Cher – Lithgo Research]

How should we think about that business going forward? You’ve had a pretty significant decline the last couple of years. Is that going to be kind of flat? Should it start growing with the rest of the business? How should we look at that just as far as 2010 goes?

Michael Cockrell

A couple of things about that; as you may recall we made a shift at prepared foods where we had half of the space of that plant in Jackson was devoted to what we called our entre department. That department took product and made soups and casseroles out of it and the sales for that product was higher unit’s sales price than what we’re doing now.

That accounts for some of the decrease in dollars. We converted that space in the plant to a prepared chicken line that batter brands, fries and chicken products, and that’s a big reason for the decrease over the last couple of years.

Going forward it should look very similar to what it looks like now. They still aren’t sold out full. They’ve had a program to have it sold out full but the particular customers that that plant targets are the ones that are going through the very difficult time right now and the volume that they’re pulling is not quite what we anticipated it would be.

Joe Sanderson

I’ll add on to that. The foods division had been for years taking product from our plants that was kind of forced into it and they had to take it and the plant had to sell it to them and it was sold flat priced and neither one of them liked the deal. What we did a couple of years ago was turn foods into a profit center and they operate independent of our plants.

We don’t sell anything out of our plants, fresh poultry plants flat priced. So foods has to go buy their products from other processors and they do that and then they sell it to the food service customers.

Michael Cockrell

In the 10-K every year, and again we’ll be filing that at the end of this month, we’ll have some color on that. We’ll divulge the volume and the dollars.

Their profits were up substantially.

Joe Sanderson

Even though their volume was down a little bit, their profitability was up 50%. They did a really fine job up there this year and we want that to be about 10% of our sales. To utilize and go to capacity we want to add one more line up there and utilize that floor space.

I do not want to, we’re not going to sell stuff that we don’t make a profit on. I don’t care if they sell it or not. We’re not going to sell stuff that we don’t make money on.

[Steven Cher – Lithgo Research]

I believe you said that cost of feed fell $0.062 per pound.

Michael Cockrell

That was a quarter.

[Steven Cher – Lithgo Research]

So this was your most expensive feed quarter in the year, is that correct on a per pound basis?

Michael Cockrell

Yes, that’s correct. Last year’s first quarter would have been higher, second and third lower.

[Steven Cher – Lithgo Research]

Then on the statement about cost of grain, the $12.1 million in price higher this year if you locked everything in. I assume that’s taking the full year number not the quarterly number.

Michael Cockrell

That’s right.

[Steven Cher – Lithgo Research]

On China, is there any update there as far as the politics of it? Any word as far as the saber rattling about the quota’s and so forth?

Joe Sanderson

Right now everything is fine with China. Products move freely and prices are okay. They are doing an investigation. There’s a group in China who are doing that dumping investigation but that’s going to take awhile. But right now everything is fine in China. Prices are flat at $0.79 but that’s kind of quieted down, frankly.

Operator

Your next question comes from Ken Goldman – J.P. Morgan.

Ken Goldman – J.P. Morgan

Yesterday I was talking to one of your competitors. I joined late on this call so just tell me if you’ve addressed this already. Your competitor said he’s never seen a time when the price of substitute proteins matters so much for chicken demand; meaning when port and beef prices are high, chicken demand rises and vice versa. He’s seeing that to a greater degree than usual. So my question is do you agree with this and if you do, shouldn’t this be particularly good for chicken demand next year given that pork prices should be a lot higher?

Joe Sanderson

Maybe a little bit. I think people eat some beef, some pork, some chicken and I’d guess if port and beef were really sky high, it might benefit us some. But I don’t believe people, you know when pork is really cheap, I don’t believe consumers go in there and buy all pork. I believe they’re going to eat some of everything.

During July 4 and Labor Day we saw in the west a few more pork features than we normally would have seen, but in the east it was still chicken. I’m more comfortable when pork and beef are high, but I never have seen a direct hard correlation. And that’s only true at the retail grocery store. That’s not true at food service because there’s not that much pork anywhere at food service.

Ken Goldman – J.P. Morgan

You talked about your next plant; how confident are you that you will indeed build this plant and if you do build one, when should we think about that opening? Is it the beginning of 2012 or is it just way too early for us to even think about timing on that one?

Joe Sanderson

It’s way too early. Our deal is our balance sheet. We’ll wait until Kingston is, I was just saying in response to, but it’s logical that that would be our next step. And we’re not through. Kingston is not the last plant we’re going to build, but our trigger for a new plant will be a clean balance sheet and we’ll rebalance and get back towards the most profitable segment and it will be a marketing decision. And that would make all the sense in the world for our company.

Operator

Your next question comes from Jeff Kanter – UBS.

Jeff Kanter – UBS

Given weak food service, the volatility of grain prices and basically what the industry has been through, why would the industry, because it seems like there’s a bias that the industry is going to ramp up production any day now, so why would the industry ramp up production to build up a freezer case and take down profits? Why would that happen?

Joe Sanderson

I don’t think it will. I don’t believe that’s going to happen.

Jeff Kanter – UBS

So you’re just going to go and take what the market gives you essentially, because it seems like Tyson is going to do that a little bit as well. Is that correct?

Joe Sanderson

We are returning to normal production. We cut back significantly for four months last year and our growers were running 25 to 28 days without chickens for December through April. And we’re not going to do that this year.

We made significant cutbacks. We’re just going to be at our normal production levels. We’re not ramping up anything. We’re going to be at normal production levels, but we’re not ramping up. I wouldn’t ramp up for anything right now. It makes no sense for us to ramp up.

Basically what we see out there is a year of demand similar to 2009 and there’s no reason to ramp up, and my judgment is that based on what I see in Agro stats nobody is planning on, pullet placements say no ramp up and what I’ve gleaned from Agro stats, people are not planning on ramping up. I see a lot of information from Agro stats that tells me that nobody is going to ramp up.

Jeff Kanter – UBS

[inaudible] disciplined industry.

Joe Sanderson

No, they’re not disciplined. They’re just not planning on ramping up.

Jeff Kanter – UBS

But the supply situation looks good. Generally, are you feeling pretty good about 2010?

Joe Sanderson

Yes.

Jeff Kanter – UBS

Your stock has moved a little bit higher here. Are you still planning on going into the market and buying back your stock?

Joe Sanderson

My appetite at this level is totally different than it was $37 to $38. Does that answer your question?

Jeff Kanter – UBS

I think so. Can you be more specific?

Joe Sanderson

I just don’t have the appetite. It touched $45 this morning. It looks different. I don’t quite have the appetite at $40 whatever it is this morning than I did when it was $40. When we asked the Board for the authority it was $37 to $37.5 I believe and I think at these levels, it’s a totally different picture.

Michael Cockrell

That authority goes for several years and our stated purpose has not changed. It’s still we’ve been granting some restricted stock and we have a couple of equity programs including the MS management share purchase plan, and that’s allowed the outstanding fully diluted shares to drift up and we want to reduce the effect of those programs on dilution and we’ll do that.

But as Joe said, we’re not quite as hungry for the stock where it is today.

Jeff Kanter – UBS

But the conversation changes if it goes down, is that correct?

Joe Sanderson

Absolutely. We still have the same stated purpose and have the authority and we’ll do it.

Operator

Your next question comes from Heather Jones – BB&T Capital Markets.

Heather Jones – BB&T Capital Markets

Earlier you were talking about the meetings you’ve had with your mangers etc. and talking about taking, I believe the quote was millions out of your different costs. So your other costs, if you take out feed costs, but just all other costs on an EBIT basis, have been moving down pretty nicely over the last few years. I understand that SG&A will be up next year because of the Kingston plant, but would you expect a significant reduction in your other production costs, ex feed?

Joe Sanderson

Yes. There’s some in live production. There is some in processing. Processing is going to benefit more than anybody from running a normal schedule next year instead of that four months of 7.5 pound chickens and lower head count.

And then we think there is a good bit of, we have some sales improvements we anticipate we can do. But when you put all, it’s not just cost. It’s product mix, it’s yields, and when you put it all together, it’s a lot of money.

Heather Jones – BB&T Capital Markets

It sounds like it could be pennies per pound.

Michael Cockrell

It could be. It’s not likely that you’re going to get all of it for the full year. You’ll accumulate it by the fourth quarter. This year we did, we did the same thing a year ago, and this year we improved versus Agro stats, we improved $2.5 million or $3 million a month this year versus the year before. And we want to do something like that again in 2010. That’s how we do it.

Joe Sanderson

The industry improved too. But to stay ahead of the industry, you have to do that. So we identified a bunch of stuff and that’s what you have to do to stay because the industry is improving also.

Heather Jones – BB&T Capital Markets

I believe you made a comment about expecting ’10 demand to be similar to ’09 and I understand you don’t have a crystal ball, but I’m just wondering your confidence level with that.

Joe Sanderson

At the end of the day, I don’t have a clue. It looks like unemployment is going to be similar in 2010 to 2009. But what I think is, people are now, the first three or four months of 2009 people were in shock, but it seems like people are kind of living with what this unemployment thing. And my hope is that people who do have jobs maybe they may start loosening up a little bit.

In the back half of the year, if some people do start getting their jobs back, you could see a better situation in the second half or something building toward 2011. You might see also a better export, a better situation in our export destinations too.

Did you CNBC this morning and see the bank analysts? What is the woman’s name?

Heather Jones – BB&T Capital Markets

Meredith Whitney.

Joe Sanderson

She was terribly pessimistic. If what she said happens, happens, I think it’s going to make everybody pessimistic again. But I don’t know. I just think you need to keep your balance sheet clean and improve your operations and look at 2010 kind of like take a conservative posture and plan on 2010 being like 2009 and just be very conservative in your assessment with it.

Nobody’s predicting this unemployment is going to really drop until much later and that’s kind of what I think.

Operator

Your next question comes from Kenneth Zaslow – BMO Capital Markets.

Kenneth Zaslow – BMO Capital Markets

You talked about the stock repurchase. Why don’t you think your stock is worth $44? It seems like a weird comment that you wouldn’t, I understand that your appetite might change but why would you kind of take it completely off the table of share repurchase.

Joe Sanderson

I didn’t take it off the table. I’m just saying $37 was more appealing to me than $44. We’re just going to sit down and talk about it.

Kenneth Zaslow – BMO Capital Markets

How do you assess that $44? I know it was 15% higher.

Joe Sanderson

The check will be larger for 600,000 shares. It will be a bigger check. I’d rather buy it at $37 than I would at $44. That’s the only thing.

Michael Cockrell

As you know we’ll buy that stock back pursuant to the, we’ll follow the rules to the letter and under the rules we don’t go solicit stock. We don’t go try to find it. We wait for somebody to call us if they’ve got an offer, and they’ll call and make an offer and we’ll evaluate it.

We still have the same goal in mind and that is to eliminate the effect of the dilution on our shareholders and we’ll do that. I think that not putting words in Joe’s mouth, but it may not happen quite as fast as we wanted it to, but it will still happen. We plan to do it.

Operator

There are no further question.

Joe Sanderson

Thank you for spending time with us this morning and on behalf of everyone at Sanderson Farms we wish you all a happy holidays and a very merry Christmas and a happy and prosperous and peaceful New Year. Thank you.

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Source: Sanderson Farms Inc. F4Q09 (Qtr End 10/31/09) Earnings Call Transcript
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