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SandersonFarms (NASDAQ:SAFM)

Q42007 Earnings Call

December 4, 2007 11:00 am ET

Executives

JoeSanderson – Board Chairman & CEO

LampkinButts – President & COO

MichaelCockrell – Treasurer & CFO

Analysts

Pablo Zuanic – J.P. Morgan

ChristineMccracken – Cleveland Research Company

OliverWood – Stifel Nicolaus & Company, Inc.

John[Collar] – Oppenheimer

[AshokHawk] – Chesapeake Partners

FarhaAslam – Stephens Inc.

Operator

Goodday and welcome to the Sanderson Farms fourth quarter conference call. At thistime for opening remarks and introductions, I would like to turn the call overto Mr. Joe Sanderson, please go ahead sir.

Joe Sanderson

Thankyou, good morning and welcome to Sanderson Farms’ fourth quarter and year-endconference call. With me on the call today are Lampkin Butts, our President andChief Operating Officer and Mike Cockrell, Treasurer and Chief FinancialOfficer.

Weissued 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 thefourth quarter of fiscal 2006, we earned $10.5 million or $0.52 per dilutedshare. The $10.5 million and net income during last year’s fourth quarterincluded the recognition as other income of $3.6 million or $0.11 per share netof income taxes for Hurricane Katrina-related insurance recoveries.

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

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

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

Beforewe make any further comments however, I would like to ask Mike to give thecautionary statement regarding forward-looking statements.

Michael Cockrell

Thankyou Joe and good morning. Before we begin the call this morning, I need tocaution you that the call will contain forward-looking statements about thebusiness, financial condition and prospects of the Company. All forward-lookingstatements are based on our current expectations or beliefs as well asassumptions made by and information currently available to management. Theactual performance of the Company could differ materially from that indicatedby the forward-looking statements because of various risks and uncertainties. Theserisks and uncertainties are described in our most recent annual report on Form10-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, 2007will be filed with the SEC on or before December 28, 2007.

Joe Sanderson

Thankyou, Mike. While the overall chicken markets were higher during our fourthfiscal quarter when compared to the fourth quarter of last year, marketconditions were less favorable during the quarter than during the third quarterof the year. Feed grain prices which I will discuss in a few minutes, providedsignificant head winds throughout the year. The improved market conditionsversus a year ago, allowed us to report net income of $1.18 per fully dilutedshare for the quarter. We reported net income of $0.52 for the same quarterlast year.

Ournet sales for the full year were $1.475 billion, an increase of 41% compared tofiscal 2006. Significant improvements were made at Sanderson Farms duringfiscal 2007 in production, processing and sales. The year was highlighted bythe opening of our new Waco, Texas complex, which at fullproduction, will represent an increase in production capacity of 1.25 millionhead of chickens per week, or approximately 18% increase in head capacity perweek.

Iwant to congratulate the people of Sanderson Farms for opening the new Waco facility on time and onbudget and we look forward to a smooth transition to full production. Theadditional pounds produced at Waco will provide steadygrowth for the Company through 2009.

Atthis time I’ll turn the call over to Lampkin.

Lampkin Butts

Thankyou, Joe and good morning. As Joe mentioned market prices for poultry productswere higher across the board during our fourth quarter when compared to our fourthquarter last year. Although most prices decline seasonally from pricesexperienced during this year’s third quarter. The average Georgia dock price during our fourthquarter 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 poundaverage during fiscal 2006. The Georgia dock price is currently[$0.7725] per pound.

Bulkleg quarter prices increased 36.2% for the quarter, compared to last year’s fourthquarter and increased 51.9% for the year. Leg quarters averaged [$0.4408] perpound during the fourth quarter, [$0.4105] per pound for the year and currentlytrade for $0.41 per pound. Boneless breast prices during our fourth quarterwere higher by 17.8% when compared to the fourth quarter a year ago and were25.8% higher for the year. Boneless averaged $1.54 per pound during the fourthquarter and $1.51 per pound during the year.

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

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

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

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

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

Weare obviously pleased with the opening of our new Waco facility. Theadditional production represented by the new facility will add 18% in newweekly capacity of head processed compared to the Company’s weekly capacitybefore opening the plant. This new capacity will open new marketingopportunities for the Company. The plant is currently processing 370,000 headper 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.

Justas we moved near the beginning of each fiscal year, we met with our managers inNovember 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 operatingperformance to continue to improve. Our goal for 2008 is as always, to operateat the top of our industry regardless of market conditions. We compete well inthe industry during 2007 in terms of operating efficiencies and profitability,but we still have room for significant improvement.

Whiledark meat prices are down from their highest for the year, leg quarter priceswere strong during fiscal 2007. For the first nine months of the calendar year,total U.S. exports were higher by18.7% when compared to calendar 2006. Most every export market experiencedgrowth in volumes during the year, including a 15.1% increase in volume to Russia and a 90% increase involume to China.

Duringfiscal 2007, our sales into export markets totaled approximately $165 millionor 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 bythe Russian authorities effective November 1. We believed at the time, thedelisting of our Collins and Hazlehurst plants was improper and both of thoseplants met and exceeded all applicable standards required to ship product to Russia.

Weimmediately applied to have the plants relisted and effective November 27, bothplants were relisted and are eligible to again ship product to Russia.

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

Thesenumbers support the USDA’s estimate of an increase in production for calendar2008 compared to 2007 of 2.9%.

Atthis point I’ll turn the call over the Mike for a discussion of the quarter’sfinancial performance.

Michael Cockrell

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

Forthe 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 pricefor poultry products during fiscal 2007 was up 24% compared to a year ago, theaverage cost per pound in our poultry business, increased 9.1% compared to lastfiscal year, reflecting higher grain cost.

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

Duringthis year’s fourth quarter, we sold 574.5 million pounds of poultry productsbringing 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 fourthquarter and 1.777 billion pounds during fiscal 2006.

Forthose of you who are building a model for fiscal 2008, we expect poundsprocessed and sold to increase as Waco builds to fullproduction. We currently expect pounds to be up from 2.027 billion pounds in2007 to 2.364 billion pounds in 2008 or an increase of 17%.

SG&Aexpenses for fiscal 2007 were up $8.5 million compared to fiscal 2006. Thisincrease was due in part to the start-up cost during fiscal 2007 related to thenew Waco complex which werebooked as SG&A cost until the plant began operations in August. These coststotaled $3.8 million. While we paid no bonuses during fiscal 2006 and we alsoaccrued no contribution to our ESOP last year, during fiscal 2007, wecontributed $5.75 million to the ESOP and recorded $3.3 million for bonusesunder the Company’s bonus award program as corporate SG&A expenses.

Thesehigher costs during fiscal 2007 were partially offset by lower advertisingcost. At the end of our fiscal year, our balance sheet reflected stockholdersequity of $404.7 million and net working capital of $128.2 million. Our currentratio is 2.6 to 1.

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

Forfiscal 2007 interest expense was $5.3 million, an increase from the $2.8 millionexpensed for interest during fiscal 2006 and that of course reflects our higheroutstanding debt during the year.

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

Thiscapital budget includes approximately $4.1 million for some changes at our fooddivision and approximately $3.5 million for addition soybean meal storage atour Texas feed mill. The Companyhas a $225 million unsecured revolving line-of-credit of which $180 million wasavailable to us at October 31, 2007.

Ourdepreciation and amortization during fiscal 2007 totaled $33 million and wecurrently expect that to be approximately $40 million for fiscal 2008.

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

Joe Sanderson

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

Lampkinmentioned 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 welocked in prices at current values. That estimate is based on today’s cashmarket price for grain, but I caution anyone building a model, that prices havebeen very volatile and I expect that volatility to continue.

Ireported to you on the last call in August that we have priced very little ofour 2008 needs as of that date, but we would be looking for opportunitiesduring the harvest to begin pricing some of our needs for fiscal 2008.Unfortunately grain prices once again rallied through the harvest and we werenot aggressive pricing our needs. As a result we are currently on the market forour 2008 grain needs, expect for about 27.5% of our 2008 soybean meal needsthat we did price.

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

WhileI have confidence that the fundamental rules of supply and demand and economicswill work to maintain industry profitability over the long-term, we recognizethat short-term swings are inevitable. However, we will manage our company aswe always do which is the same goal regardless of where we are in the chickencycle. As Lampkin said, our goal will be to operate at the top of the industryand to remain a low cost producer of quality chicken products during fiscal2008.

Withthat we will now take your questions.

Question-and-Answer-Session

Operator

We’lltake our first question from Farha Aslam from Stephens Inc.

Farha Aslam – StephensInc.

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

Joe Sanderson

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

Lampkin Butts

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

Joe Sanderson

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

Farha Aslam – StephensInc.

Andthen when you look at supply hitting the market in January, December andJanuary, do you anticipate a heavy supply hitting the market?

Joe Sanderson

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

Farha Aslam – StephensInc.

Okayand then when you look at industry profitability and then Sanderson’sprofitability, do you anticipate the industry will make money in January andFebruary?

Joe Sanderson

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

Farha Aslam – StephensInc.

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

Lampkin Butts

Thatdepends on the grain market.

Joe Sanderson

Wellit 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 makemoney in October. There were some that lost money in October and November andDecember are likely going to be a little worse than October so I don’t knowwhat the number is going to be in November, how many, but there’ll be a numberof companies that will not be profitable in November. Probably December aswell. I can’t see much past, as far as the market, past Christmas but I thinkyou’ll have a number of companies not making money in November and December.

Farha Aslam – StephensInc.

Okaygreat, thank you.

Joe Sanderson

Thankyou.

Operator

We’lltake our next question from Christine Mccracken with Cleveland ResearchCompany.

Christine Mccracken –Cleveland Research Company

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

Joe Sanderson

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

Christine Mccracken –Cleveland Research Company

Andthen just in terms of…

Joe Sanderson

Letme mention one other thing Christine, I kind of alluded to this, we – I thinkthis year is maybe the most unpredictable year on grain more so than a year agoand we believe that we are one problem away, one problem in South America, orone problem here during the planning or one problem during the crop yeargrowing, one problem away from legging up again in corn and soy. We think theywill go in tandem and if any of those things happen, we think we leg up tomaybe $4.75 to $5.00 on corn and $350 to $400 on meal so I don’t – we have noidea if that’s going to happen but we believe if you’ll look out into 2009 andsome balance tables and the ethanol demand in 2009, the number of bushels andlosing 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 Ithink of legging up again which this $0.2.50 a pound we see right now, could bemore than that if we do experience a problem anywhere.

Christine Mccracken –Cleveland Research Company

That’snot too optimistic there.

Joe Sanderson

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

Christine Mccracken –Cleveland Research Company

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

Joe Sanderson

Youknow I, I don’t know who you’re talking about but I would think there will be anumber of companies that if this happens in grain, there’ll be a number ofcompanies that will be waiting in deep water and they’ll have to back up alittle 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 thinkthat there’s you know, the risk reward here is, it’s pretty serious for youthat you wouldn’t have taken a more aggressive position or what steps are youtaking I guess to offset this? Do you think that it’s just a function of peoplecutting back and you’ll offset it with pricing?

Joe Sanderson

Ido.

Christine Mccracken –Cleveland Research Company

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

Lampkin Butts

We’restill negotiating our food service contracts for next year and we’ve seen someitems that food service contracts have been willing to absorb higher costprimarily grain based and markets being higher because of higher priced grain,wings is an example. We have seen some costs being passed on, on wingcontracts. Boneless breast and tenders, not as much. Some contracts are showingit, some aren’t and we have not finished pricing ours.

Joe Sanderson

Itseems like its slower this year in food service and it’s spotty. I don’t thinkyou 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 andit’s just slower this year.

Christine Mccracken –Cleveland Research Company

I’lljump back in the queue, thanks.

Joe Sanderson

Thanks.

Operator

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

Oliver Wood – StifelNicolaus &Company, Inc.

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

Michael Cockrell

I’mnot sure what sequence you’re talking about. As I mentioned on my comments,they were up versus a year ago.

Oliver Wood – StifelNicolaus &Company, Inc.

I’mtalking about from fiscal 3Q to fiscal 4Q.

Michael Cockrell

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

Oliver Wood – StifelNicolaus &Company, Inc.

Okay.

Michael Cockrell

Andthat skews that number a little bit.

Oliver Wood – StifelNicolaus &Company, Inc.

Howlong should we expect to see that run through?

Michael Cockrell

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

Oliver Wood – StifelNicolaus &Company, Inc.

Right,right. Okay.

Michael Cockrell

Yeah,that’ll be done.

Oliver Wood – StifelNicolaus &Company, Inc.

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

Michael Cockrell

No,we haven’t.

Oliver Wood – StifelNicolaus &Company, Inc.

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

Michael Cockrell

Itis, it takes into account what we expect volume to be in 2008. We take expected2008 volume which of course is feeding more chickens, multiply that volumetimes the difference in per unit price for corn and soy this year versus, whatwe could price, versus what we priced in ’07.

Oliver Wood – StifelNicolaus &Company, Inc.

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

Joe Sanderson

Wedid not and we do not.

Oliver Wood – StifelNicolaus &Company, Inc.

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

Lampkin Butts

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

Oliver Wood – StifelNicolaus &Company, Inc.

Okayso you don’t think the market, even with strong export markets, would absorb2.9% production growth?

Joe Sanderson

Ithink the export market will.

Lampkin Butts

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

Oliver Wood – StifelNicolaus &Company, Inc.

Yeah,I mean you know, it seems to me the fundamentals still look pretty good andit’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 evenshrink a little bit depending on what people do. So, anyway, nice quarter, youguys are definitely doing a good job. Thanks for taking the questions.

Joe Sanderson

Thankyou.

Operator

Ournext question comes from John Collar with Oppenheimer.

John Collar –Oppenheimer

Goodmorning gentlemen, a couple of quick questions. Uses of cash flow for ’08, haveyou make public what your plans are? It looks like you’ll have a fair amount ifprices 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 differentscenarios and we don’t know which scenario is going to actually materialize atthis point. But we do have a little bit of debt we can pay back. We can payback the revolver as we generate cash. Our capital budget expectations arebelow depreciation so depreciation should fund that. But we haven’t setanything else. We’ll have of course our normal options available to us, paydown debt, we could always buy stock back if the Board saw fit to do that, ordo something else with it.

John Collar – Oppenheimer

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

Joe Sanderson

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

John Collar –Oppenheimer

I’mglad to hear it though.

Joe Sanderson

We’realways looking and we feel like that’s a very important part of our job is tocontinue to grow the Company. It’s the main lever we have to increase earningsper 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 issimilar 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 aheavier 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

Youmean 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 thefirst of the year, still looks good.

John Collar –Oppenheimer

Okayand then the last question, if grain prices do go up, they go up for everyoneand I ask this I think every quarter, are you seeing any switch over fromhigher cost proteins to chicken?

Joe Sanderson

Wethink we are … no.

John Collar –Oppenheimer

Okay.

Joe Sanderson

Butwe think the price of beef is providing some cover for us. We don’t think porknecessarily is, but I don’t think people switch that much. But we’re obviouslygoing 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

Thankyou John.

Operator

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

Ashok Hawk – Chesapeake Partners

Heyguys good quarter, my question is with demand in the industry going up youknow, 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

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

Ashok Hawk – Chesapeake Partners

Okaythank you.

Joe Sanderson

Thankyou.

Operator

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

Pablo Zuanic – J.P.Morgan

Goodmorning everyone. Just to follow up here on the demand and supply picture, helpme understand I mean, as you said for the last three or four weeks prices forchicken have remained, you know, relatively stable. How can that be happeningif we have you know, this egg set rise of 4% , although only for three or fourmonths, and we had apparently, you know, supply growing ahead of demand, how doyou 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. Howdo we make sense of that?

Michael Cockrell

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

Joe Sanderson

Also,when you compare, if you compare in percentages, you’re comparing against cutback numbers. But if you compare in head count and look at 2007 versus 2005, theegg sets going forward are only up 2% and that is not an unmanageable – youknow we feel like we have 1 to 2% domestic growth every year and so it’s reallynot 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 itis still protein off the domestic market and the export market is up 18% involume versus last year.

Pablo Zuanic – J.P.Morgan

Andjust to follow-up on the export markets, what would you say to the argumentthat 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 guessare passing them on there, and that’s helping support export prices on this$0.42 - $0.45 range.

Joe Sanderson

Idon’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 onbooking $10 and $11 soybeans, and doing that out front into March and April andMay. I would have anticipated there could have been a drop in export demand forgrains when you crossed $9 or $10 a bushel and $4 a bushel on corn and therehas not been any. I think we might have misjudged the disposable income in China and Russia. It is – seems hardy tous right now.

Pablo Zuanic – J.P.Morgan

Okay,and just going back to the domestic front, I mean, you’re making the argumentthe supply picture should worsen in January and February and I can see thenumbers also, but I could say that egg sets have been running on 4% for a whilenow. And you know, if we think in terms of three months, we’re facing right nowin November, based on the egg sets, and weight trends, should not be very differentfrom 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 tobe better than it is right now. We always typically have an increase in demandChristmas and after the first of the year. I’ve tried to point out that thesupply 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 bemisleading 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 alwayssurprised to see, [inaudible] and now with Waco, that you are able to meet yourproduction targets, you know, across the board and you did so in the firstquarter and I guess, you know, we’ll take your word for it for the next comingquarters, so but who’s losing that market share? I mean somebody has to belosing that market share, right? So it is the small guys, medium-sized players,can you comment on that?

Joe Sanderson

Wellwe think first of all, the market is growing. That’s number one. And then wehave great competitors out there and I would say that. Then I would say thatwe’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 supposethat 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 thirdconsolidator out there, and I [inaudible] Purdue or yourselves, I mean, it justseems to me that you guys are still stuck on this strategy of just goingGreenfield or should we assume that eventually [inaudible] potentialconsolidator.

Joe Sanderson

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

Pablo Zuanic – J.P.Morgan

Alright,that’s very helpful, thank you.

Joe Sanderson

Verygood.

Operator

Andwe’ll take a follow-up question from Christine Mccracken with ClevelandResearch Company.

Christine Mccracken –Cleveland Research Company

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

Joe Sanderson

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

Christine Mccracken –Cleveland Research Company

Andthen just one other question, pretty big drought in the southeast, specificallyin Georgia, obviously a lot of water restrictions in place, does that affectany of your operations in the southeast?

Joe Sanderson

No,we’re in South Georgiaand they’ve not been – South Georgia relies on, has [aquafersion],relies on wells whereas north Georgia primarily relies on surfacewater. Lake Lanier and the otherlake that’s northwest of Lake Lanier and we have no waterrestrictions and hadn’t had – we have our own wells in Georgia and Texas and Louisiana and most of the plantsin Mississippi and we’ve not had anyproblem with water.

Christine Mccracken –Cleveland Research Company

Goodto hear, thanks.

Joe Sanderson

Thankyou.

Operator

Itappears that there are no further questions at this time, Mr. Sanderson I’dlike to turn the conference back over to you for any additional or closingremarks.

Joe Sanderson

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

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Source: Sanderson Farms Q4 2007 Earnings Call Transcript
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