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Sanderson Farms (NASDAQ:SAFM)

Q4 2007 Earnings Call

December 4, 2007 11:00 am ET

Executives

Joe Sanderson – Board Chairman & CEO

Lampkin Butts – President & COO

Michael Cockrell – Treasurer & CFO

Analysts

Pablo Zuanic – J.P. Morgan

Christine Mccracken – Cleveland Research Company

Oliver Wood – Stifel Nicolaus & Company, Inc.

John [Collar] – Oppenheimer

[Ashok Hawk] – Chesapeake Partners

Farha Aslam – Stephens Inc.

Operator

Good day and welcome to the Sanderson Farms fourth quarter conference call. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Joe Sanderson, please go ahead sir.

Joe Sanderson

Thank you, good morning and welcome to Sanderson Farms’ fourth quarter and year-end conference call. With me on the call today are Lampkin Butts, our President and Chief Operating Officer and Mike Cockrell, Treasurer and Chief Financial Officer.

We issued a news release this morning announcing net earnings of $24.1 million or $1.18 per fully diluted share for our fourth fiscal quarter of 2007. During the fourth quarter of fiscal 2006, we earned $10.5 million or $0.52 per diluted share. The $10.5 million and net income during last year’s fourth quarter included the recognition as other income of $3.6 million or $0.11 per share net of income taxes for Hurricane Katrina-related insurance recoveries.

For the year ended October 31, 2007 we reported net income of $78.8 million or $3.88 per diluted share. For fiscal 2006, we reported net loss of $11.5 million or $0.57 per diluted share.

Each of you should have received a copy of the release and accompanying financial summary. If you did not, they are available on our website at www.sandersonfarms.com.

I will begin the call with some brief comments about the year and then turn the call over to Lampkin and Mike for a detailed account of the operating and financial results. After their remarks, I will come back to discuss feed grain prices before opening the call for your questions.

Before we make any further comments however, I would like to ask Mike to give the cautionary statement regarding forward-looking statements.

Michael Cockrell

Thank you Joe and good morning. Before we begin the call this morning, I need to caution you that the call will contain forward-looking statements about the business, financial condition and prospects of the Company. All forward-looking statements are based on our current expectations or beliefs as well as assumptions made by and information currently available to management. 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 most recently filed quarterly report on Form 10-Q. Our annual report on Form 10-K for the year-ended October 31, 2007 will be filed with the SEC on or before December 28, 2007.

Joe Sanderson

Thank you, Mike. While the overall chicken markets were higher during our fourth fiscal quarter when compared to the fourth quarter of last year, market conditions were less favorable during the quarter than during the third quarter of the year. Feed grain prices which I will discuss in a few minutes, provided significant head winds throughout the year. The improved market conditions versus a year ago, allowed us to report net income of $1.18 per fully diluted share for the quarter. We reported net income of $0.52 for the same quarter last year.

Our net sales for the full year were $1.475 billion, an increase of 41% compared to fiscal 2006. Significant improvements were made at Sanderson Farms during fiscal 2007 in production, processing and sales. The year was highlighted by the opening of our new Waco, Texas complex, which at full production, will represent an increase in production capacity of 1.25 million head of chickens per week, or approximately 18% increase in head capacity per week.

I want to congratulate the people of Sanderson Farms for opening the new Waco facility on time and on budget and we look forward to a smooth transition to full production. The additional pounds produced at Waco will provide steady growth for the Company through 2009.

At this time I’ll turn the call over to Lampkin.

Lampkin Butts

Thank you, Joe and good morning. As Joe mentioned market prices for poultry products were higher across the board during our fourth quarter when compared to our fourth quarter last year. Although most prices decline seasonally from prices experienced during this year’s third quarter. The average Georgia dock price during our fourth quarter was 15.5% higher than last year’s fourth quarter, averaging [$0.8088] for the quarter. For the year, the Georgia dock averaged [$0.7670] per pound, which represented a 9.9% increase over the [$0.6978] per pound average during fiscal 2006. The Georgia dock price is currently [$0.7725] per pound.

Bulk leg quarter prices increased 36.2% for the quarter, compared to last year’s fourth quarter and increased 51.9% for the year. Leg quarters averaged [$0.4408] per pound during the fourth quarter, [$0.4105] per pound for the year and currently trade for $0.41 per pound. Boneless breast prices during our fourth quarter were higher by 17.8% when compared to the fourth quarter a year ago and were 25.8% higher for the year. Boneless averaged $1.54 per pound during the fourth quarter and $1.51 per pound during the year.

Prices have softened seasonally since Labor Day and the [inaudible] market price for boneless breast is currently $1.29 per pound. Finally jumbo wing prices during our fourth quarter averaged $1.16 per pound up $0.25 from the average of $0.91 per pound during last year’s fourth quarter. For the year, jumbo wing prices were higher by 38% from an average of $0.81 per pound during fiscal 2006 to an average of $1.11 per pound during fiscal 2007. Jumbo wings currently trade for $1.06 per pound.

All this said our average sales price for poultry products during fiscal 2007 was more than [$0.1206] per pound higher than last year, increasing 24.1% for the year ended October 31, 2007 when compared to the year ended October 31, 2006. This increase of [$0.1206] per pound and an average sales price for chickens allowed us to more than offset the substantially higher feed grain cost we experienced which added $0.06 per pound to the cost of chicken processed during fiscal 2007.

Our cost for corn were higher during the quarter compared to last year’s fourth quarter rising 43.7% while the cost for soybean meal increased 18.8% during our fourth quarter as compared to last year.

For the year, our feed grain cost were up $126.7 million compared to fiscal 2006. The Company’s current cost for these commodities are up substantially and we expect higher prices to continue for the foreseeable future. Based on current pricing, feed grain cost for the Company during fiscal 2008 would be approximately $55 million higher than 2007 costs if we priced all of our 2008 needs at today’s prices.

Joe will have more to say on feed costs in a few minutes.

We are obviously pleased with the opening of our new Waco facility. The additional production represented by the new facility will add 18% in new weekly capacity of head processed compared to the Company’s weekly capacity before opening the plant. This new capacity will open new marketing opportunities for the Company. The plant is currently processing 370,000 head per week and we’ll gradually increase production over the next nine months, reaching its full capacity of 1.25 million head per week by next August.

Just as we moved near the beginning of each fiscal year, we met with our managers in November to identify opportunities in our plants, in the field and in sales, that we will work to capture during 2008 and we expect our overall operating performance to continue to improve. Our goal for 2008 is as always, to operate at the top of our industry regardless of market conditions. We compete well in the industry during 2007 in terms of operating efficiencies and profitability, but we still have room for significant improvement.

While dark meat prices are down from their highest for the year, leg quarter prices were strong during fiscal 2007. For the first nine months of the calendar year, total U.S. exports were higher by 18.7% when compared to calendar 2006. Most every export market experienced growth in volumes during the year, including a 15.1% increase in volume to Russia and a 90% increase in volume to China.

During fiscal 2007, our sales into export markets totaled approximately $165 million or 11.2% of our total sales. As you know, on October 18, 2007, following an inspection of our plants by Russian authorities, our Hazlehurst, Mississippi and Collins, Mississippi plants were delisted by the Russian authorities effective November 1. We believed at the time, the delisting of our Collins and Hazlehurst plants was improper and both of those plants met and exceeded all applicable standards required to ship product to Russia.

We immediately applied to have the plants relisted and effective November 27, both plants were relisted and are eligible to again ship product to Russia.

The USDA is predicting increased chicken production during 2008 which is supported by leading indicators such as egg [sets] and breeder placements. Breeder chick placements over the last nine months are up 2.3% compared to the same months a year ago and their projected breeder flock for [May] is up 2.3%. Egg set numbers over the last few weeks have been running between 3 and 4% ahead of last year’s numbers. These egg set numbers are compared to reduced numbers last year as many in the industry, including us, were running at less than full production last fall in response to adverse market conditions.

These numbers support the USDA’s estimate of an increase in production for calendar 2008 compared to 2007 of 2.9%.

At this point I’ll turn the call over the Mike for a discussion of the quarter’s financial performance.

Michael Cockrell

Thank you, Lampkin. We were pleased with our financial performance during the fourth fiscal quarter. Net sales for the quarter totaled $426.9 million and that’s up from $291.7 million for the same quarter during fiscal 2006. The increase in net sales reflects the improved poultry market described by Lampkin and an increase in the pounds of poultry products sold during this year’s fourth quarter of 24% when compared to last year’s fourth quarter.

For the fiscal year, net sales totaled $1.475 billion or 41% increase from the $1.048 billion for fiscal 2006. Cost of sales for the year increased 26% compared to a year ago and totaled $1.3 billion. While our average sales price for poultry products during fiscal 2007 was up 24% compared to a year ago, the average cost per pound in our poultry business, increased 9.1% compared to last fiscal year, reflecting higher grain cost.

For the year, grain cost comprised 41.6% of our cost of goods sold. Our cost of sales for the fourth quarter ended October 31 increased 38% when compared to the same quarter during fiscal 2006. This increase is primarily a result of an increase in poultry pounds sold during the quarter of 24% or 112 million pounds as well as the higher feed grain cost.

During this year’s fourth quarter, we sold 574.5 million pounds of poultry products bringing our total sales to 2.027 billion pounds for fiscal 2007. By contrast, we sold 462.6 million pounds of poultry products during last year’s fourth quarter and 1.777 billion pounds during fiscal 2006.

For those of you who are building a model for fiscal 2008, we expect pounds processed and sold to increase as Waco builds to full production. We currently expect pounds to be up from 2.027 billion pounds in 2007 to 2.364 billion pounds in 2008 or an increase of 17%.

SG&A expenses for fiscal 2007 were up $8.5 million compared to fiscal 2006. This increase was due in part to the start-up cost during fiscal 2007 related to the new Waco complex which were booked as SG&A cost until the plant began operations in August. These costs totaled $3.8 million. While we paid no bonuses during fiscal 2006 and we also accrued no contribution to our ESOP last year, during fiscal 2007, we contributed $5.75 million to the ESOP and recorded $3.3 million for bonuses under the Company’s bonus award program as corporate SG&A expenses.

These higher costs during fiscal 2007 were partially offset by lower advertising cost. At the end of our fiscal year, our balance sheet reflected stockholders equity of $404.7 million and net working capital of $128.2 million. Our current ratio is 2.6 to 1.

Our total long-term debt at year end was $96.6 million and our total debt to cap ratio was 19.3% as of October 31, 2007. Our net debt to cap ratio was 18.9%. For the year, we spent $114.4 million on capital improvements and we paid $10.3 million in dividends.

For fiscal 2007 interest expense was $5.3 million, an increase from the $2.8 million expensed for interest during fiscal 2006 and that of course reflects our higher outstanding debt during the year.

During fiscal 2007 as I said, we spent $114.4 million on planned capital projects and that included $75.7 million to complete construction and equipping our Waco, Texas complex. We now expect our capital expenditures for fiscal 2008 to be approximately $34.8 million and we expect that to be funded by cash-on-hand, internally generated working capital, cash flows from operations and as needed, liquidity provided under our revolving credit facility.

This capital budget includes approximately $4.1 million for some changes at our food division and approximately $3.5 million for addition soybean meal storage at our Texas feed mill. The Company has a $225 million unsecured revolving line-of-credit of which $180 million was available to us at October 31, 2007.

Our depreciation and amortization during fiscal 2007 totaled $33 million and we currently expect that to be approximately $40 million for fiscal 2008.

With that I will turn the call back over to Joe for some closing comments.

Joe Sanderson

Thank you, Mike. As a follow-up on a couple of things mentioned by Lampkin, I’ll make a few comments and then we’ll open the call for questions.

Lampkin mentioned that based on current grain prices our feed grain cost will be approximately $55 million more during fiscal 2008 than they were during fiscal 2007 if we locked in prices at current values. That estimate is based on today’s cash market price for grain, but I caution anyone building a model, that prices have been very volatile and I expect that volatility to continue.

I reported to you on the last call in August that we have priced very little of our 2008 needs as of that date, but we would be looking for opportunities during the harvest to begin pricing some of our needs for fiscal 2008. Unfortunately grain prices once again rallied through the harvest and we were not aggressive pricing our needs. As a result we are currently on the market for our 2008 grain needs, expect for about 27.5% of our 2008 soybean meal needs that we did price.

With the appetite for corn growing from methanol producers I expect all grain markets to remain high and volatile at least through the 2008 crop year. Although grain prices will be higher during fiscal 2008, our Company and our industry could still maintain profitability. Grain costs will add approximately $0.2.4 per pound to the cost of producing a pound of dressed chicken on top of already relative higher costs during 2007. In order to offset this cost, the chicken markets must move in tandem with these increased costs.

While I have confidence that the fundamental rules of supply and demand and economics will work to maintain industry profitability over the long-term, we recognize that short-term swings are inevitable. However, we will manage our company as we always do which is the same goal regardless of where we are in the chicken cycle. As Lampkin said, our goal will be to operate at the top of the industry and to remain a low cost producer of quality chicken products during fiscal 2008.

With that we will now take your questions.

Question-and-Answer-Session

Operator

We’ll take our first question from Farha Aslam from Stephens Inc.

Farha Aslam – Stephens Inc.

Hi, good morning. Could you share with us Joe your [inaudible] outlook for breast meat and the quarter prices?

Joe Sanderson

Well, I’m going to let Lampkin speak about leg quarters and the export market. Why don’t you do that and then I’ll …

Lampkin Butts

Yes, the export market – we’ve got our leg quarters booked for December obviously for export and that same range, as we’ve mentioned earlier in the call, we haven’t booked past that but the tone, the trend, the demand is still good going into the first of the year. We believe that leg quarters are still going to have a [four] in front of them.

Joe Sanderson

And breast meat, the breast meat prices, the quoted price has been fairly steady now for three or four weeks at $1.29. It would not surprise me though that in the 10 days before Christmas that demand would slacken again you could see some small downward move in boneless breast. I do believe the demand will be off through December until you get past Christmas. And then typically we see an increase in demand at the first of the year. You really start – you pack for it right after Christmas and before New Year’s. For the short term, I don’t think we’re too far away from the bottom.

Farha Aslam – Stephens Inc.

And then when you look at supply hitting the market in January, December and January, do you anticipate a heavy supply hitting the market?

Joe Sanderson

Let me give you some numbers. I mentioned this the other day. If you’ll look at the last seven weeks of egg sets, beginning October 13 through the weekend in November 24th, egg sets are 104% of last year. That’s more meat than we had a year ago. And probably with some heavier weights. So, but if you look at it compared, those numbers as Lampkin said were against cutback numbers. If you look at those 2007 egg sets against 2005, it’s only 102% of 2005. So I think there’ll be more meat but it won’t be that much more than two years ago. I’m not; today I’m not terribly worried about the pounds coming to market in January.

Farha Aslam – Stephens Inc.

Okay and then when you look at industry profitability and then Sanderson’s profitability, do you anticipate the industry will make money in January and February?

Joe Sanderson

Well I don’t know what the market’s going to be in January but I would think a good producer based on today’s market prices would be making some money.

Farha Aslam – Stephens Inc.

And then going out into January and February, you don’t think that the industry’s going to dip into negative territory?

Lampkin Butts

That depends on the grain market.

Joe Sanderson

Well it depends on the grain, and where the position is on the grain but I wouldn’t, I mean I think you’ll – they’re already – 100% of the industry didn’t make money in October. There were some that lost money in October and November and December are likely going to be a little worse than October so I don’t know what the number is going to be in November, how many, but there’ll be a number of companies that will not be profitable in November. Probably December as well. I can’t see much past, as far as the market, past Christmas but I think you’ll have a number of companies not making money in November and December.

Farha Aslam – Stephens Inc.

Okay great, thank you.

Joe Sanderson

Thank you.

Operator

We’ll take our next question from Christine Mccracken with Cleveland Research Company.

Christine Mccracken – Cleveland Research Company

Morning. I just wanted to follow-up I guess on your feed comments, clearly you guys weren’t as aggressive in locking in your feed needs for the coming year, was there anything really standing in your way? Was it just the uncertainty of the markets particularly in light of how badly it hurt you last year? I’m a bit surprised you weren’t a little bit more aggressive in locking in your feed needs.

Joe Sanderson

Well, we were poised, we started pricing meal frankly very early and we had a target for corn that obviously we didn’t reach, but we were looking at 2 billion bushel carry-out and we were looking at some forecast by some people that were advising us that we all agreed with, by the way. And the market, I think it was mid-October it was corn, the December board was around $3.40 maybe $3.42. All of a sudden it turned and ran up to $3.80 and then from $3.80 on up to $4.00 and it just didn’t get to the target. We were fully prepared to be aggressive purchasers but we didn’t get to where we thought we were going.

Christine Mccracken – Cleveland Research Company

And then just in terms of…

Joe Sanderson

Let me mention one other thing Christine, I kind of alluded to this, we – I think this year is maybe the most unpredictable year on grain more so than a year ago and we believe that we are one problem away, one problem in South America, or one problem here during the planning or one problem during the crop year growing, one problem away from legging up again in corn and soy. We think they will go in tandem and if any of those things happen, we think we leg up to maybe $4.75 to $5.00 on corn and $350 to $400 on meal so I don’t – we have no idea if that’s going to happen but we believe if you’ll look out into 2009 and some balance tables and the ethanol demand in 2009, the number of bushels and losing 3 or 4 or 5 million acres corn to beans. I mean this market is trading 2009; it’s not trading 2008 right now I don’t believe. But it’s right on the cusp I think of legging up again which this $0.2.50 a pound we see right now, could be more than that if we do experience a problem anywhere.

Christine Mccracken – Cleveland Research Company

That’s not too optimistic there.

Joe Sanderson

Well it is optimistic. I mean I’m not – if that happens, the industry’s going to adjust and if it happens quickly, the industry will adjust quickly. So I don’t have any worry about the industry not adjusting to that. The quicker it happens the quicker the industry will adjust.

Christine Mccracken – Cleveland Research Company

You’re right, a couple of your peers have obviously gone out and so that they are planning on about 3% I think [expansion] for next year, you think that that number could be lower in light of the entire grain cost, assuming they come to the market sooner.

Joe Sanderson

You know I, I don’t know who you’re talking about but I would think there will be a number of companies that if this happens in grain, there’ll be a number of companies that will be waiting in deep water and they’ll have to back up a little bit toward the shore.

Christine Mccracken – Cleveland Research Company

Joe, I’m a little surprised I mean really, if that is your outlook and you think that there’s you know, the risk reward here is, it’s pretty serious for you that you wouldn’t have taken a more aggressive position or what steps are you taking I guess to offset this? Do you think that it’s just a function of people cutting back and you’ll offset it with pricing?

Joe Sanderson

I do.

Christine Mccracken – Cleveland Research Company

Okay. Just on a separate subject then briefly, you know, food service contracting here through the fall, can you give us an indication of how that is coming in?

Lampkin Butts

We’re still negotiating our food service contracts for next year and we’ve seen some items that food service contracts have been willing to absorb higher cost primarily grain based and markets being higher because of higher priced grain, wings is an example. We have seen some costs being passed on, on wing contracts. Boneless breast and tenders, not as much. Some contracts are showing it, some aren’t and we have not finished pricing ours.

Joe Sanderson

It seems like its slower this year in food service and it’s spotty. I don’t think you could – we heard last spring a lot of people were going to be re pricing, we don’t think that’s taking place as easily as might have been anticipated and it’s just slower this year.

Christine Mccracken – Cleveland Research Company

I’ll jump back in the queue, thanks.

Joe Sanderson

Thanks.

Operator

We’ll take our next question from Oliver Wood with Stifel Nicolaus & Company, Inc.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Thanks a lot. First just a housekeeping question, it looked like interest expense was up sequentially but the debt was down, I was just wondering if you could help us understand what’s going on there?

Michael Cockrell

I’m not sure what sequence you’re talking about. As I mentioned on my comments, they were up versus a year ago.

Oliver Wood – Stifel Nicolaus &Company, Inc.

I’m talking about from fiscal 3Q to fiscal 4Q.

Michael Cockrell

We had, we capitalized some interest related to our new Waco facility.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Okay.

Michael Cockrell

And that skews that number a little bit.

Oliver Wood – Stifel Nicolaus &Company, Inc.

How long should we expect to see that run through?

Michael Cockrell

We’re through capitalizing the interest if that’s what you mean.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Right, right. Okay.

Michael Cockrell

Yeah, that’ll be done.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Okay, great and then, I’m not sure if I missed it in the prepared comments, but have you guys provided guidance for interest expense in fiscal 2008?

Michael Cockrell

No, we haven’t.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Okay. Another housekeeping question, the $55 million increase in feed costs based on the current, futures current, is that volume neutral?

Michael Cockrell

It is, it takes into account what we expect volume to be in 2008. We take expected 2008 volume which of course is feeding more chickens, multiply that volume times the difference in per unit price for corn and soy this year versus, what we could price, versus what we priced in ’07.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Okay, didn’t hear much about labor and I’m wondering if you’re competitors had labor issues in the quarter, just wondering if you experienced any sort of labor issues or if you have any concerns on that front?

Joe Sanderson

We did not and we do not.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Good. Final question, you know, looking at potential 2.9% production growth albeit on pretty soft comps, what would you expect to see cold storage do with that kind of production growth?

Lampkin Butts

You would expect to see cold storage to increase over the next couple of months.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Okay so you don’t think the market, even with strong export markets, would absorb 2.9% production growth?

Joe Sanderson

I think the export market will.

Lampkin Butts

I think the export market will absorb the increase dark meat and also the cold storage docks through October were 11% less than the ’06, so cold storages are in good shape going into this time of year.

Oliver Wood – Stifel Nicolaus &Company, Inc.

Yeah, I mean you know, it seems to me the fundamentals still look pretty good and it’s just a question of you know, where does production shake out, you know, whether we see those cold storage stocks, you know, grows to the same or even shrink a little bit depending on what people do. So, anyway, nice quarter, you guys are definitely doing a good job. Thanks for taking the questions.

Joe Sanderson

Thank you.

Operator

Our next question comes from John Collar with Oppenheimer.

John Collar – Oppenheimer

Good morning gentlemen, a couple of quick questions. Uses of cash flow for ’08, have you make public what your plans are? It looks like you’ll have a fair amount if prices stay solid. I was just wondering what you’d use that for.

Michael Cockrell

John, as you do, we model out what we expect ’08 to be but we use a lot of different scenarios and we don’t know which scenario is going to actually materialize at this point. But we do have a little bit of debt we can pay back. We can pay back the revolver as we generate cash. Our capital budget expectations are below depreciation so depreciation should fund that. But we haven’t set anything else. We’ll have of course our normal options available to us, pay down debt, we could always buy stock back if the Board saw fit to do that, or do something else with it.

John Collar – Oppenheimer

Right, I know historically the Company’s always got their balance sheet in good shape and that’s led the way to the next growth spurt. Is that still a ways away? I know the last time you expanded; you caught a lot of flack.

Joe Sanderson

That doesn’t have anything to do with what we’re going to do down the road.

John Collar – Oppenheimer

I’m glad to hear it though.

Joe Sanderson

We’re always looking and we feel like that’s a very important part of our job is to continue to grow the Company. It’s the main lever we have to increase earnings per share and we are not going to let the balance sheet sit idle.

John Collar – Oppenheimer

Okay, and then bird weight, I guess in ’07, I’m looking at about 5.9 pounds which is similar to ’06. Is that likely to be the case again in ’08? Or do you expect …

Joe Sanderson

No, no it won’t be because of Waco, Waco is going to be a heavier bird and that will bring our corporate average up as it comes online.

John Collar – Oppenheimer

Okay, great. Export sales in ’08 you expect them to be similar to ’07 at this point, I know it’s early?

Michael Cockrell

You mean the markets or the…

John Collar – Oppenheimer

Yeah, do you expect similar demands as in…?

Michael Butts

Yeah, it is, it’s hard to see 12 months out, but based on what we see going into the first of the year, still looks good.

John Collar – Oppenheimer

Okay and then the last question, if grain prices do go up, they go up for everyone and I ask this I think every quarter, are you seeing any switch over from higher cost proteins to chicken?

Joe Sanderson

We think we are … no.

John Collar – Oppenheimer

Okay.

Joe Sanderson

But we think the price of beef is providing some cover for us. We don’t think pork necessarily is, but I don’t think people switch that much. But we’re obviously going to get more retail feature than beef is with beef prices where they are.

John Collar – Oppenheimer

Okay, great, thank you very much.

Joe Sanderson

Thank you John.

Operator

We’ll take our next question from Ashok Hawk with Chesapeake Partners.

Ashok Hawk – Chesapeake Partners

Hey guys good quarter, my question is with demand in the industry going up you know, 3%, first of all does that include the 17% increase in your Waco plant? And secondly, what markets do you see expanding into to absorb that 17% increase in capacity?

Joe Sanderson

Our increase will only represent .5 to .75 of 1% which will be – won’t be mature until the last quarter of our year, August, September, October. So we don’t think, you know, half of that product is likely to be exported too, the dark meat out of that plant, or out of our Company is going to be exported. So what you’re dealing with primarily is breast meat and wings that the domestic market will have to absorb and we feel comfortable that given time, it’s not going to be sold until we get it on the shipping dock. It typically takes a year to get good customers and good homes for it, but we think the domestic market will have enough growth for that to be absorbed over time.

Ashok Hawk – Chesapeake Partners

Okay thank you.

Joe Sanderson

Thank you.

Operator

We’ll take our next question from Pablo Zuanic with J.P. Morgan.

Pablo Zuanic – J.P. Morgan

Good morning everyone. Just to follow up here on the demand and supply picture, help me understand I mean, as you said for the last three or four weeks prices for chicken have remained, you know, relatively stable. How can that be happening if we have you know, this egg set rise of 4% , although only for three or four months, and we had apparently, you know, supply growing ahead of demand, how do you interpret that? There’s a huge concern over there about a chicken [inaudible] right, in the coming months, but I would say that we’re going to [inaudible] going through that. Yet prices have stabilized for four weeks. How do we make sense of that?

Michael Cockrell

Well those prices are they’re a function of not just supply but also demand. You know you can’t always anticipate exactly what that demand is going to be. But the supply has been, has brought those markets down since Labor Day but certainly they’re well above where we were this time last year. I think the numbers will be a little higher in January than what we’re seeing right now and it depends on what kind of demand we get after the first of the year as to what market prices we’ll be able to sustain.

Joe Sanderson

Also, when you compare, if you compare in percentages, you’re comparing against cut back numbers. But if you compare in head count and look at 2007 versus 2005, the egg sets going forward are only up 2% and that is not an unmanageable – you know we feel like we have 1 to 2% domestic growth every year and so it’s really not been burdensome on the market at this point.

Michael Cockrell

Although, the export markets has taken quite a bit of that meat. It is dark meat, but it is still protein off the domestic market and the export market is up 18% in volume versus last year.

Pablo Zuanic – J.P. Morgan

And just to follow-up on the export markets, what would you say to the argument that because corn prices are higher, you know per uses in China and Russia, also face higher corn cost as a result need higher chicken prices, and I guess are passing them on there, and that’s helping support export prices on this $0.42 - $0.45 range.

Joe Sanderson

I don’t think there’s any doubt about that and I made this comment the other day, it has been very impressive to me that China has not backed off one bit on booking $10 and $11 soybeans, and doing that out front into March and April and May. I would have anticipated there could have been a drop in export demand for grains when you crossed $9 or $10 a bushel and $4 a bushel on corn and there has not been any. I think we might have misjudged the disposable income in China and Russia. It is – seems hardy to us right now.

Pablo Zuanic – J.P. Morgan

Okay, and just going back to the domestic front, I mean, you’re making the argument the supply picture should worsen in January and February and I can see the numbers also, but I could say that egg sets have been running on 4% for a while now. And you know, if we think in terms of three months, we’re facing right now in November, based on the egg sets, and weight trends, should not be very different from what we see two, three months out, but you make it sound like the supply, the numbers actually have a greater [lag] then I guess.

Joe Sanderson

No, no, we misspoke if – we believe the market in January and February is likely to be better than it is right now. We always typically have an increase in demand Christmas and after the first of the year. I’ve tried to point out that the supply in January is going to be 4% more than it was a year ago, but only 2% more than it was two years ago. If you look at percentages, it can be misleading and we’re not pessimistic about January and February.

Pablo Zuanic – J.P. Morgan

Alright, I just wanted to ask one, I guess more at the company level, I’m always surprised to see, [inaudible] and now with Waco, that you are able to meet your production targets, you know, across the board and you did so in the first quarter and I guess, you know, we’ll take your word for it for the next coming quarters, so but who’s losing that market share? I mean somebody has to be losing that market share, right? So it is the small guys, medium-sized players, can you comment on that?

Joe Sanderson

Well we think first of all, the market is growing. That’s number one. And then we have great competitors out there and I would say that. Then I would say that we’re going to get them sold.

Pablo Zuanic – J.P. Morgan

Alright, and one last question, you know when I look at anti-trust issues, I suppose that you know, chicken companies cannot get past 30%, you know, [PPCs] are 25, Tyson I believe 22, there seems to be that there’s room for a third consolidator out there, and I [inaudible] Purdue or yourselves, I mean, it just seems to me that you guys are still stuck on this strategy of just going Greenfield or should we assume that eventually [inaudible] potential consolidator.

Joe Sanderson

Well, we’ll do – historically we’ve done both. We bought Hammond, we bought Collins, we bought Prepared Foods, and we have no prejudice other than, I don’t want to wait. I’m not going to not build for the purpose of waiting for somebody to want to dance with us. You know, we’ll do either one but frankly our balance sheet is in pretty good shape and we’re not going to buy something just to buy it. We’re not going to buy something to avoid building and that’s not our – you know, we’ll buy when it’s right and if it’s not right we won’t do it. But we’re going to keep on growing the company.

Pablo Zuanic – J.P. Morgan

Alright, that’s very helpful, thank you.

Joe Sanderson

Very good.

Operator

And we’ll take a follow-up question from Christine Mccracken with Cleveland Research Company.

Christine Mccracken – Cleveland Research Company

Just to follow-up on that last train of thought, given the margin pressure that you say some of these guys have been in, under in the last couple of months, has the market environment changed at all? Have you found some of these companies to be more receptive or are there more discussions? Also wondering if, given where the dollar is, if you’ve seen any foreign companies in the market kind of looking around?

Joe Sanderson

We’ve not seen any foreign companies and the losses I described have only really been for a couple of months. I think everybody is in pretty good shape financially and I would say that typically when assets do become available, more often it’s because of bankers and not because of owners. I don’t think people are in that shape yet.

Christine Mccracken – Cleveland Research Company

And then just one other question, pretty big drought in the southeast, specifically in Georgia, obviously a lot of water restrictions in place, does that affect any of your operations in the southeast?

Joe Sanderson

No, we’re in South Georgia and they’ve not been – South Georgia relies on, has [aquafersion], relies on wells whereas north Georgia primarily relies on surface water. Lake Lanier and the other lake that’s northwest of Lake Lanier and we have no water restrictions and hadn’t had – we have our own wells in Georgia and Texas and Louisiana and most of the plants in Mississippi and we’ve not had any problem with water.

Christine Mccracken – Cleveland Research Company

Good to hear, thanks.

Joe Sanderson

Thank you.

Operator

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

Joe Sanderson

Thank you for spending time with us this morning. On behalf of everyone at Sanderson Farms, we wish you all a very happy holiday season and a happy, prosperous and peaceful new year. Thank you.

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Source: Sanderson Farms Q4 2007 Earnings Call Transcript
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