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Sanderson Farms, Inc.

F3Q08 Earnings Call

August 26, 2008 11:00 am ET

Executives

Joe Sanderson, Jr. – Chairman and Chief Executive Officer

Mike Cockrell – Treasurer and Chief Financial Officer

Lampkin Butts – President and Chief Operating Officer

Analysts

Farha Aslam – Stephens Inc.

Christine McCracken – Cleveland Research Co.

Kenneth Zaslow – BMO Capital Markets

Heather Jones – BB&T Capital Markets

John Kohler – Oppenheimer

Chris Bledsoe – Lehman Brothers

Howard Penny – Research Edge

Operator

Welcome to the Sanderson Farms, Inc. third quarter 2008 conference call. (Operator Instructions) At this time for opening remarks and introductions, I would like to turn the conference over to Joe Sanderson.

Joe Sanderson, Jr.

Lampkin Butts and Mike Cockrell are with me this morning. We issued a news release this morning announcing a net loss of $3.6 million, or $0.18 per fully diluted share, for our third fiscal quarter of 2008. This compares to net income of $30.7 million, or a $1.51 per share, during last year’s third quarter. This year’s net loss includes $1.7 million or $0.09 per share for payments made to settle our donning and doffing litigation.

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

Lampkin Butts

This morning’s call will contain forward-looking statements about the business, financial condition, and prospects of the company. The actual performance of the company could differ materially from that indicated by our forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our most recent annual report on Form 10-K and in the company’s quarterly report on Form 10-Q filed with the SEC in connection with our third fiscal quarter ended July 31, 2008, and that 10-Q was filed this morning.

Joe Sanderson, Jr.

Market prices were mixed during the quarter when compared to last year’s third quarter. While the retail and export markets were and remain relatively strong, the balance between the supply of white meat produced for distribution and food service customers and the demand from those customers remains out-of-balance. The relatively strong retail and export markets were not enough to allow the company to offset the weak food service market and the significantly higher cost for corn and soybean meal we experienced during the quarter.

As predicted, the markets for both corn and soybean meal have remained high and volatile; although, prices have retreated from their summer highs. Recent crop condition reports and USDA’s prop yield estimates indicate that the corn crop should yield over 2.2 billion bushels this fall, which would be the second largest corn harvest on record and represents a significant improvement from predictions issued earlier this summer after the floods in the Midwest. These expectations together with lower crude oil prices and the strong U.S. dollar have lowered corn cash market prices from their high of over $8 a bushel to as low as $5.17 per bushel on the December contract.

Corn is currently trading for around $6 per bushel on the December contract. Because demand for corn from ethanol producers leaves no margin for error, we continue to believe there remains a risk of another run-up in corn prices. With respect to soybean meal, crop condition reports through July and the USDA’s August 12 yield prediction were not as positive as for corn; and the development of the soybean crop continues to be at risk because of late planning. The supply of soybeans during this crop year is tight and the carryout of soybeans is low. The market is also concerned about what an early frost would do to a late developing crop. Market prices for meal have nevertheless retreated from their July highs. The bottom line is that we expect volatility in both corn and soybean meal markets for the foreseeable future.

Feed grain costs will be significantly higher for fiscal 2008 then during fiscal 2007. We reported in May that we have bought and priced our corn needs through July and our soybean meal needs through the end of fiscal year, and we have now priced substantially all of our needs through the fourth fiscal quarter for both corn and soybean meal. Based on these prices, our feed grain costs based on 2008 volumes will be approximately $250 million more this fiscal year than last year. That number incorporates both the price increases and the additional volume needed to feed our additional head. The price increase alone will cost $173 million more this year than last.

Looking ahead to the first half of fiscal 2009, it appears to us that soybean meal poses the greater risk of upside potential because an early frost which because of the late planting would have a more negative effect on the crop than normal. Current estimates are that the corn crop should yield and produce enough corn to settle the market some. While there were anxious moments this past spring, the August 12 report was positive and the balance between the supply and the demand for corn has improved, at least for the short-term as the projected carry-out is now back over 1 billion bushels. However, the expected soybean carry out for the current crop year is low. So if soybean carry outs near historical lows and the corn demand increasing as new ethanol plants come on line, both commodities will demand more acres during 2009. Most experts expect a reversal of the shift we saw this year and expect more corn acres in 2009.

In any event, as the markets begin to big for acres during and after the harvest, the volatility of the markets will continue. If we were to purchase and price all of our 2000 needs today, our corn costs would be higher by $80 million when compared to fiscal 2008, while our soybean meal costs would be higher by $41 million for a total increase in 2009 of $121 million. While our costs were higher, our third quarter results also reflect the imbalance between the supply of white meat and the weakness in food service demand caused by weak economic conditions. Casual dinning and all other food service and distribution customers are reporting decreased traffic through restaurants, which is being attributed primarily to a weak economy and high gasoline prices. So long as this weakness continues, the poultry industry will need to cut production further to bring supply in line with demand.

Leading indicators did not at least at this point lead us to believe that there has been a sufficient cut in the supply of chicken to offset this weakness. The market for boneless breast meat, wings, and chicken tenders weakened even further during August compared to July. As I said in May, I believe it will take another round of production cuts this fall to bring supply into balance with weak demand for chicken and food service.

I’m pleased to report that the continued successful start-up of our Waco facility. We began processing chickens on August 6th last year, and everything is in place to reach full production in Waco during October. We will move the plant to 1.1 million head per week in September, approximately 12% below its full capacity of 1.25 million head per week. Production at the plant will remain at that level however through the end of the calendar year. As poultry houses are built to support the plant, production will gradually increase to 1.2 million per head week sometime during calendar 2009. Our typical fall cutback of approximately 4% at all our other plants or 300,000 per week will go into effect a month earlier than usual on October 1 rather than November 1.

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

Lampkin Butts

As Joe mentioned, market prices for poultry products were mixed during the quarter when compared to our third quarter last year. The average Georgia dock price during our third quarter was 7% higher than last year’s third quarter, averaging $0.86.1 per pound during the quarter compared to $0.80.6 per pound average last year. The Georgia dock price for this week is $0.88.5 per pound, which compares to $0.81.5 per pound for the same week last year. These prices reflect good demand at retail for our fresh chicken products. Joe described a very weak market for chicken at food service, but the strong retail price reflected in the Georgia dock supports the notion that consumers are shopping at the grocery store and cooking at home rather than going out to eat. I should note, however, that although the market price for retail product as reflected by the Georgia dock remains strong relatively to the rest of the chicken market, the price is still not adequate to allow most operators to offset the higher grain costs and return a margin.

Bulk leg quarter prices were also higher for the quarter compared to last year’s third quarter, increasing more than 3.1% reflecting strong export demand. Export volume to Russia was higher by 20.4% during the first half of the calendar year and overall export for the first six months of the calendar year were up 19% compared to last year. Much of the increase continues to come from Hong Kong and China, which combines imported 27% more chicken products during the first half of the year compared to a year ago. Bulk leg quarter prices averaged $0.48.83 per pound during our third quarter this year versus $0.47.38 per pound during last year’s third quarter. Bulk leg quarters are currently trading for $0.54 per pound.

Prices for jumbo wings have remained very weak through the summer months. Jump wings averaged $0.81.2 per pound, down 30.1% from the average of $1.16 per pound during last year’s third quarter. Wing prices are typically weak through the summer, but prices this summer reflect weaker than usual demand from distributors and casual dining customers. The market price for jumbo wings stands at $0.83 per pound. We hope the kick off of football season this Saturday will improve demand for wings.

The primary area of weakness in the chicken markets has been the market for boneless, skinless breast meat and chicken tenders. Much of the boneless breast produced in our big bird deboning plants is sold through distributors and food service channels, and much of it is ultimately consumed in a restaurant. Traffic through most restaurant chains is down significantly and the demand for breast meat is depressed by reduced traffic in all types of restaurants. We hear through various industry channels that boneless breast that might normally be further processed and sold through restaurants is instead being sold into the fresh market compounding the oversupply problem.

Boneless breast meat averaged $1.46 per pound during the third quarter, down 10.7% from the $1.63 average last year and down over $0.19 per pound or 11.7% from the five-year average during our third quarter of $1.65 per pound. Today the market for boneless is $1.29 per pound. Market prices for white meat softened during June and July and have softened even more during August. While the current market price is $1.29 per pound, some product is being sold at a substantial discount to the quoted market.

The result of these market price changes was an overall decrease in our sales price per pound for poultry products sold of $0.03.37 per pound compared to last year’s third quarter. This decrease represents a 4.74% decrease from last year’s third quarter. While chicken prices were lower during our third quarter when compared to last year’s third quarter, our costs for feed grains were much higher. Our cost for corn delivered during the third quarter increased 30.7% compared to our third quarter last year. Soybean meal cost increased 52.4% during the quarter. The average cost of feed and flock sold increased 37.5% during the quarter compared to last year’s third quarter. While our sales price per pound decreased $0.03.37 per pound during the quarter compared to last year’s third quarter, feed costs increased $0.08.2 per live pound. This combination caused a significant deterioration in our margins.

Our volumes during the quarter reflected the increase production at Waco, which will continue to move towards goal production into the fall. Although, as Joe mentioned, we will stop short of full production at 1.1 million head per week. We sold 641.4 million pounds of poultry during the third quarter, a 28.8% increase over the 498 million pounds sold during last year’s third fiscal quarter. We processed 635.8 million pounds or 22.5% more pounds during the quarter than last year. We continue to expect an increase of approximately 16% in pounds processed and sold during fiscal 2008 compared to 2007.

Performance at our Prepared Foods Division during the third quarter was mixed; volume was down at the plant reflecting the weakness in food service demand for partially cooked chicken products. However, margins were up, reflecting the lower cost of raw materials, our mix of products and our mix of products which eliminated some unprofitable products we discontinued in 2008.

At this point, I’ll turn the call over to Mike.

Mike Cockrell

Our net sales for the quarter totaled $466.9 million, and that’s up 18.3% from the $394.8 million during the same quarter last year and reflect our increased volumes. The $0.18 per share loss during the quarter compares to net income of $1.51 per share during last year’s third quarter. Our cost of sales for the three months ended July 31 as compared to the same three months a year ago increased 38.1%. This increase is a result of the significantly higher feed cost during the quarter described by Lampkin. Feed costs and flock sold increased 37.5% over last year’s third quarter and feed costs accounted for 51.7% of our cost of goods sold during the quarter.

SG&A expenses for the third quarter were down $5.1 million to $13 million when compared to $18.1 million a year ago. SG&A during last year’s fiscal quarter reflected $2.4 million in administrative costs associated with the construction and start-up of our new Texas facility. These costs include training salaries and related expenses that are now being booked as costs of goods sold since the plant began operating last August. SG&A expenses during the third quarter last year also reflected the approval of $4 million in expected ESOP contributions, which are not present this year.

Interest expense increased by $1.1 million to $2.3 million during the quarter, reflecting higher outstanding debt and that higher debt is offset by slightly lower average interest rates this year compared to last. Interest costs during last year’s third quarter were also offset by the capitalization of $815,000 of interest costs last year as part of our Waco construction projects.

The company’s effective tax rate for the three and nine months ended July 31, 2008, was 35.8% and 30.8% respectively and that compares to 33.8% and 35.0% for last year. The lower effective tax rate for fiscal 2008 reflect the benefit of certain federal income tax credits available as the result of the impact of Hurricane Katrina. The effective tax rate for the fiscal year could differ materially from that estimated depending on results of operations for the remainder of fiscal 2008 and the final determination of the tax credits available to the company.

At the end of our third quarter, our balance sheet reflected stockholders’ equity of $407.4 million and net working capital of $184.3 million. The current ratio was 2.7 to one, and our debt totaled $177.1 million, and our debt to cap ratio was 30.3% at July 31. We spent $42.3 million on capital expenditures during the first nine months of the year. We also spent $5.8 million on dividends. We had $111.3 million outstanding on our revolving credit facility and that left $188.7 million available to the company as needed.

As I mentioned, we spent $42.3 million on capex through the first nine months of the year. We now expect to spend $46.1 million on capital projects for the year. This amount does not include approximately $17.3 million in leases for vehicles and other assets. That amount is also net of an estimated $8.2 million we plan to spend during the fiscal year for land, engineering, and site design work for our new Kinston, North Carolina plant. The $8.2 million in Kinston includes items for which the company became obligated before deciding to postpone the project and our all for items that we will be able to use when the project moves forward.

Our depreciation and amortization through the third quarter totaled $31.1 million, and we expect approximately $42 million for the fiscal year. For those of you modeling next year, we anticipate a much leaner capital budget. For budgeting purposes, I would use a capex estimate of between $25 and $30 million. We’ll finalize our capex for next year during the month of September and will announce the total on our December call.

Nicole, that completes our prepared remarks for this morning, and we will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Farha Aslam with Stephens Inc.

Farha Aslam – Stephens Inc.

Just a quick question on the processed and prepared foods, what were sales in that division for the quarter?

Joe Sanderson, Jr.

Percentage-wise, it’s about as it has been.

Farha Aslam – Stephens Inc.

At 10% of total?

Lampkin Butts

Yeah, just under that.

Joe Sanderson, Jr.

About the same.

Farha Aslam – Stephens Inc.

Joe, what would you think the industry needs to cut production to get profitability back to kind of mid cycle level?

Joe Sanderson, Jr.

I don’t know. We’re going to have to see if… There are two things. Farha, we kind of thought we were going to see reductions in July. We saw those three or four weeks of 213, I don’t remember what they were, 213/214 million eggs sets back in April and that really did not materialize. When you look at USDA slaughter numbers in July, they were at 100% and 101% and now we’re looking at egg sets of 206 and 207 million that are going to show up sometime in October or November. We’ll see when we get there. Those are barely impressive cuts.

My suspicion is, as I’ve told you in May, the industry typically make the cut and it’s tentative. We’ll have to see if it works. That’s a period of lower demand, just seasonally lower demand. I’m skeptical that that’s going to be enough. We’re headed into Thanksgiving and Christmas and my guess is they’re going to have to be some further cuts. I can’t give you a number or a percentage. I’m very skeptical that those cuts are going to be enough to return us margins to cover these grain costs.

Farha Aslam – Stephens Inc.

In terms of breast meat, what do you anticipate breast meat prices have to be to offset the current kind of $6 corn?

Joe Sanderson, Jr.

It’s going to be different for different people and for different sizes of chicken. But based on…. If you booked all your 2009 corn today and added a basis to it, corn would be, I’m going to use Mississippi and add $0.50 a bushel to it, that would be corn into Mississippi at around $6.75 a bushel, a little bit less, maybe $6.65; and soybean meal would be around $3.80 a ton. To us, you’d need to average somewhere for a year to average $3.85… I mean $1.85 to $1.90 for 12 months to get back to average margins.

Lampkin Butts

That gets you back to average margins, Farha, our 2007 margins. You wouldn’t need that to break even, but you would need that to get back to ’07 margins.

Joe Sanderson, Jr.

That number is different for a 4-pound chicken, for a 5-pound chicken, for a 7-pound chicken, and for an 8-pound chicken. That number primarily I would say for a big bird, and it’ll be a higher number for a 4-pound chicken, a fast food chicken, a higher number for a tray pack chicken.

Farha Aslam – Stephens Inc.

That’s helpful. My final questions, one of them is: Looking into next year, where do you expect your volume growth to be for 2009?

Joe Sanderson, Jr.

When you say where do you expect it…

Farha Aslam – Stephens Inc.

What percent increase do you expect volume for next year?

Joe Sanderson, Jr.

We’ll have about a 10% increase, and it’ll come from manualizing Waco.

Farha Aslam – Stephens Inc.

In looking out to your October quarter, this quarter you were at a loss, do you anticipate making a profit given the market conditions or do you anticipate another net income loss in your October quarter?

Joe Sanderson, Jr.

Well that’s going to take a miracle and an angel or something looks to me. I mean if a boneless breast is $1.29 and corn is over… Actually, our corn and soy are booked and they’re booked at very similar prices, maybe a little bit higher than we had for May, June, and July. There’s going to take divine intervention somewhere to make a profit. I mean I’m not predicting anything, but we’re… I’m not going to answer that question.

Farha Aslam – Stephens Inc.

Thank you very much.

Operator

Our next question comes from Christine McCracken with Cleveland Research.

Christine McCracken – Cleveland Research Co.

Joe, maybe you can just shed a little light on the breeder placements that we’ve seen because clearly we’ve seen these exit numbers come down. The guys seem to be somewhat willing to make the cuts at the breeder level, and I’m curious - - it seems inconsistent with everyone’s expectations around these cuts and how sustainable they need to be. Is it that people view the food service demand is, the weakness in food service demand is temporary and therefore you don’t need to right-size the industry, or is that everybody’s relying on someone else to make those cuts?

Joe Sanderson, Jr.

Well, I have no idea what everybody’s thinking. I think they hold out till the bitter end. I think most people are optimistic, internally optimistic that the industry will ride itself through economics, through cutbacks. Theoretically it appears that there are cuts that we’ll see in October and November, don’t know if they’ll be adequate. You know I’m skeptical that they are. The egg sets are the last things that go when people’s balance sheets are bad enough and they can’t afford to feed extra breeders, but that’s the very last thing. When they’re pessimistic about the future, when people become pessimistic about ’09 and ‘010 and their ability to feed breeders and they think ’09 and ‘010 are going to be bad, only then will they reduce breeder placements.

Christine McCracken – Cleveland Research Co.

Then just heading into the food service negotiations this fall with breast meat, as weak it is and your comments around food service being not overly optimistic, how is the industry not maybe even more aggressive in cutting back. Maybe it’s too late now to effect those negotiations or maybe it’s really changing the nature of how you negotiate. Can you talk about that?

Joe Sanderson, Jr.

Well you know our sales are down. Our prepared foods are down, but our margins are up. It just depends on what people are willing to do going into October, November, and December where most of those contracts are done. If they are willing to go in and take contracts that are going to guarantee them losses, then…And some of them did this past year, and you know that; they did it. I don’t know. I have no idea how that’s going to play out. I would think that there will be shorter term agreements. I believe people will try to do that. But having done that, the downside to that is if they know they only have to take it for three months, they might be more willing to take a lower price for it if they know they only have to swallow it for 90 days, particularly with where boneless breast and tender prices are now, a lower price might be more digestible to them right now. But we hadn’t really seen… That process really hadn’t started yet.

Christine McCracken – Cleveland Research Co.

Just one last question: When grain prices corrected here and the numbers look so good, down, as you mentioned, at significant lower levels, why were you so reluctant and not to give any insight, but why were you maybe more reluctant than usual or your competitors more reluctant to go ahead and lock it in?

Joe Sanderson, Jr.

We did. We bought our corn. We bought our corn for August, September, and October during that drop. But as far as 2009, when those prices came down, and I guess it was during July, wasn’t it, when they started tumbling. I’ve lost track of the time period. But I will tell you that when that happened, and maybe it was right after the August 12 report. No, it was before the August 12 report, when those prices came down, you were still looking at corn delivered into our feed meals at over $6 a bushel. You were looking at soybean meal delivered into our mills at $300-plus a ton. We were looking at locking in values at a dead loss, a significant loss. We were looking at $1.30 breast meat and everything else was a loss. I felt like we had big prayer meeting with our advisors and everything and our advisor was counseling us about this was a significant drop and might be and low and all this, but in my judgment, nobody in the protein business was going to be able to book this and $6-plus on corn delivered and $300 a ton on soy and be profitable and not knowing what meat was going to sell for, I was unwilling to do that. We believe, and particularly with where grain is today, grain delivered today in the March and the May and the July contract is almost $7 delivered. We believe there’s going to be some demand reduction out there from the protein side. I mean we can’t make money buying corn and soy at those levels, and I don’t believe the pork people can, and I don’t believe the beef people can. If oil is $100 a barrel, I’m not certain that a large percentage of ethanol people can pay $6.50 for corn and sell $2 ethanol and make money. I just felt like it would be locking in a dead loss and not knowing…

Particularly, let me tell you something else that nobody’s mentioned, what if in the midst of all of this something were to happen to the export market in Russia and something was hanging over Russia back then, now you got a second thing with this Georgia invasion; but if were to lose the export market and have that, I just didn’t feel it was really a good value; and it was a certain loss.

Christine McCracken – Cleveland Research Co.

You’re full of good news there, Joe. I leave it at that.

Operator

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

Kenneth Zaslow – BMO Capital Markets

Joe, with Armageddon coming…

Joe Sanderson, Jr.

No, but I want my shareholders to be informed. I don’t like them being surprised.

Kenneth Zaslow – BMO Capital Markets

We appreciate that. What do you think, all kidding aside, what do you think the industry will look in a year from now in terms of the shakeout? Will there be a shakeout of players? Will there be consolidation? How does it really play out? I mean again understanding you guys have a better balance sheet than the average chicken company out there, how does it all play out?

Joe Sanderson, Jr.

Well, we truly believe and I believe this and I don’t… We don’t know the exact steps and the timing, but we truly believe that the industry is going to adjust and they’re either going to adjust on their own or the bankers are going to make them adjust. Economics are going to work out. What I believe that over time, economics are going to work out on corn and soy and ethanol and with consumers and political pressure. I don’t think it’s going to come because we go to Washington and lobby. I think economics are going to work it out because of high prices in the grocery stores. But on the chicken side, I believe that balance sheets and bankers are going to work out the chicken side of it. We’re glad, we’re very glad because of our balance sheet that our bankers are not down here visiting us regularly, but they’re visiting some of our friends in the chicken business. We’re glad we’re good operators and our margins, we’re not taking deep losses. But what’s going to happen we believe is these people that are taking deeper losses and whose balance sheets are stretched more than ours and some other people, they’re the ones that are going to have to adjust first, and they’re going to have to adjust more. I don’t know that that means people close or what. I don’t know how it’ll happen or what’ll happen, but that’s the way it’s going to happen. I don’t know if it will be a banker telling somebody or somebody does it before the banker tells them to do it, but it’ll be because of economics and bad balance sheets. That’s the way it’ll work out.

Kenneth Zaslow – BMO Capital Markets

If you guys are actually increasing production 10% in 2009, and assuming [inaudible] going 10% which I think is a fair assumption, where do you the majority of your market share will come from?

Joe Sanderson, Jr.

It’ll come from other people.

Kenneth Zaslow – BMO Capital Markets

Is it territorial? Is it by…

Joe Sanderson, Jr.

Most of the growth is going to be from the Waco plant. I mean it’s going to come from boneless breast and wings and tenders going west and it’s going to come from [inaudible] out of Waco going west. Everything else is pretty well settled and sold out of our other plants.

Kenneth Zaslow – BMO Capital Markets

So will it mostly come from larger, smaller, or you’re indifferent?

Joe Sanderson, Jr.

Indifferent. It’s just going west.

Kenneth Zaslow – BMO Capital Markets

It just seems like there’s some players that are right around the territory that might get a greater impact from your expansion than say other players, so I just was trying to figure out if…

Joe Sanderson, Jr.

Waco is already doing 975,000 birds a week. We’ve got another 200,000 birds a week to go, and then the whole scheme of chicken, nobody’s going to notice that.

Operator

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

Heather Jones – BB&T Capital Markets

You might want to invite your peers to your prayer meetings. That might do more than talking to them. I have a question on exports. Going to your comments on the market, June looks like it was the lackluster month that we’ve had in awhile on poultry exports and clearly Russia was down. But there were also some other countries that were down. I was just wondering how long you think the whole that [inaudible] flu situation will effect Russian exports? What’s your view, current view on the export markets?

Lampkin Butts

I saw the same reports you did about June and I will tell you that if you look at Russia and Ukraine, there was a good portion of the Russian drop that the Ukraine picked up. There was quite a significant increase in Ukraine. I think a lot of that’s product went in the Ukraine instead of directly into Russia. Exports are still very good. We’ve not seen any… You mentioned the bird flu, but we haven’t seen any impact on our exports from isolated bird flu incidences.

Heather Jones – BB&T Capital Markets

I was just talking about the one in Arkansas that was low pathogenic.

Lampkin Butts

Yeah, we really haven’t seen any impact from that. That would've affected any Arkansas producer and they had to divert to different markets, but we didn’t see any impact on exports. There’s been obviously 20% to 19% increase over last year is huge. I don’t think we can count on that forever, but our prices have improved each month. I do think September prices will be higher than August, but September prices are probably reaching a point that there’ll be some pushback. There at a very good level, $0.54 a day and that’s a good level. We can’t complain about that. Based on what our partners overseas are telling us, it could be that October won’t be higher than September for dark meat.

Heather Jones – BB&T Capital Markets

Oh really?

Lampkin Butts

It’ll still be at a good number, but I’m not predicting it’ll continue to go up the rest of the year.

Heather Jones – BB&T Capital Markets

Going back to domestic market, we had heard there was some indications that there might be firming in demand and just wondered if you could talk about how demand for the overall industry looked as you progressed through August? Has it stabilized at all, or is it steadily weakened or?

Lampkin Butts

It’s been soft. Retail demand’s been the best, but even as the Georgia dock got to $0.88.75, it’s leveled off and settled back down at $0.88.5, but a soft Fourth of July demand particularly at food service and for the restaurants. August has been very much like July, better the first half of the month and now, but end of August is a fairly soft market. Other than exports and retails, retail’s okay.

Joe Sanderson, Jr.

Your Labor Day is going to be… How is Labor Day retailer going to be?

Lampkin Butts

Maybe not as well.

Joe Sanderson, Jr.

The market is soft today. This whole week, which is usually a big week going into Labor Day, I would classify as adequate and it’s soft at food service and adequate at retail. Firming and stronger is not what we see.

Operator

Our next question comes from John Kohler with Oppenheimer.

John Kohler – Oppenheimer

Getting to price cuts if I could, given that there seems to be an oversupply of breast meat, will there have to be a disproportionate amount of supply cuts from your competitors to offset that, or is there’s something that possibly you guys could do to alleviate the problem by cutting production? Would that have an impact much faster?

Joe Sanderson, Jr.

We only represent 3% or 4% of the industry. I don’t even know what percentages are. It’s going to be a lot of other people and it’s going to be a lot of people that don’t have their product. We have fairly high percentage of our product sold regularly and there’s a lot of product out there that floats every week and it’s going to be a lot of other people that are going to cut, going to have to cut.

John Kohler – Oppenheimer

I was just wondering if your concentration big bird deboning would lead to a longer rebound if others cut supply, but that’s not the case.

Joe Sanderson, Jr.

The supply of white meat comes from every market segment. In a fast food operation, you typically don’t get but 35% of the headcount out of a fast food operation into the fast food. The other 65% typically will get deboned and so you generate white meat out of that and some of that will get portion control and some of it will get into white meat. The same things true out of chill pack operation. In [agrestats] and a chill pack operation, a good chill pack operator may get 40% of his product, and I mean a good one, 40% into chill pack. The other 60% is going to get cut up and deboned. So you generate white meat out of that other 60% of that product. The debone meat out of that’s going to go into the white meat market. I mean the white meat comes from every market segment and it doesn’t just come from big bird deboning. Big bird deboning is a portion of it, and it’s a big portion, but you get white meat from every market segment.

Operator

Our next question comes from Chris Bledsoe with Lehman Brothers.

Chris Bledsoe – Lehman Brothers

If I recall, I think your peers maybe had mentioned an expectation for something like a September trough infliction in that quarter, but it sounds to me like you’re taking that off the table pretty much at this point. Is that fair?

Lampkin Butts

The market improvement?

Chris Bledsoe – Lehman Brothers

For the trough, for the bottom.

Lampkin Butts

It just depends on whether or not, Chris, these cuts, as Joe said, we’re going to have to wait and get there and see. We have seen prices move. If you look back at 2006 and look at the price graphs for December of 2006, we actually started moving toward a significant improvement in price even in the holidays; and that could happen again. At these cuts, when they hit in November, you could see it. It’s going to take a shift in the demand side to do it I think. But, as Joe said, this cut may be enough, but we’re not predicting that. We’re real slow to make predictions, so we’ll let them do that. It maybe; that could be very well be true, but we’ll have to wait and see if this cuts enough to do it.

Chris Bledsoe – Lehman Brothers

So I guess if I’m thinking about each of the subsegments, big bird versus tray pack versus small birds, if I’m a pure play in any of those subsegments, is there one right now? Is it still big bird that the economics are better? I guess I ask that because you think about the over indexing of the breast meat on the big bird and I’d be inclined to think that we wouldn’t see the economic any better, but yet we still some in the industry converting lines to big bird deboning.

Joe Sanderson, Jr.

I would think that even at…This is hard to believe, but even with boneless breast meat at $1.29 with, leg quarters at $0.54, a big bird deboning is probably still the most profitable market segment through July. We hadn’t seen July agristats results. June, big bird deboning was still the most profitable market segment on a per head basis. I’m guessing that’s probably going to be true in July.

Chris Bledsoe – Lehman Brothers

Your decision to go with, and I realized it’s postponed now, but the build in Kinston was going to be retail tray pack or is going to be retail tray pack, and I guess I’m wondering why you would… If the economics are still better in big bird, why would you go with kind of a retail tray pack? Is it just what he local market would kind of dictate or the regional market would dictate there?

Joe Sanderson, Jr.

I hate to say this, but we don’t want to put too many eggs in one basket. That’s terrible isn’t it? I’m sorry I said it. We had just opened up Waco and we knew we had Waco to sell and we just got Moultrie sold out and we felt like we had a new market for Kinston to sell into, plus backpack Moultrie. It was all marketing reasons and really particularly right now our tray pack plants are pretty close to competing with big bird deboning, not totally, but close to competing with big bird deboning. It was mainly those marketing reasons why we did that.

Chris Bledsoe – Lehman Brothers

I’d also just kind of be curious, if your expectation is that the only, the possibility that the only thing that causes this cycle to turn is bank intervention, it would seem that’d we also maybe see some assets become available on the cheap. I’d guess I’d be curious if that would alter your kind of your long-term thinking around Greenfield expansion, if you were able to get an asset cheap enough.

Joe Sanderson, Jr.

No, that would not change our thoughts. We’ve done both. We still like both. You get something with both. We like Greenfield because we can put it exactly where we want it. You get to satisfy a lot of marketing goals when you locate one and you get to satisfy a lot of environmental and labor and marketing goals when you build one Greenfield, grow out advantages, a lot of good things happen when you build one. You can satisfy a lot of other criteria when you buy one. Both things work. We’ve done them both, and we will evaluate as they become available.

Chris Bledsoe – Lehman Brothers

Then my last question is just kind of closer in thinking about it seems like it’s kind of a psychological game in a way, the producers versus the buyers and as long as the freezers are full, it seems like the buyers have the upper hand here. So I’m wondering at what levels would we need to see cold storage inventory decline to for you to start seeing or the industry to start seeing a pricing that you think it needs. I guess we’re at about 750 million pounds or so today.

Joe Sanderson, Jr.

End of July 747 million, which was 12% over a year ago, down a little bit from June. I don’t know the exact number. I think it gets back to the same thing we said about supply. Even though there’d been some cutbacks, it hadn’t translated into fewer head processed and still too many pounds on the market. As soon there’s enough cutback to impact supply, I think we’ll see those freezer inventories decline compared to a year ago.

Lumpkin Butts

That can happen in 90 days.

Chris Bledsoe – Lehman Brothers

Why wouldn’t egg sets be translating into lower production? Is it just weight gain or is there something else, some other reason that reduced egg sets wouldn’t be translating?

Joe Sanderson, Jr.

Well it can be better hatch percentages, better livability.

Lampkin Butts

The hatch, they’re reporting an 84% hatch and that’s 1% better than typical. Usually the industry runs 83%. If they’re setting less eggs, they’re setting up better eggs, so you got that o1% better hatch. Did we see a reduction in live weight?

Mike Cockrell

We saw a reduction from May to June, but not from… A year ago, you’re still talking about heavier weights that you compare now to a year ago.

Lampkin Butts

Based on the kill we saw in July at 100% and 101%, it makes us suspicious of the egg set data, just telling you the truth.

Chris Bledsoe – Lehman Brothers

I’ll leave it there.

Operator

At this time we have one question remaining in the queue. (Operator Instructions) We’ll take our next question from Howard Penney with Research Edge.

Howard Penny – Research Edge

Could you clarify what you said about the trends I guess at this most recent week and then from a bigger picture perspective when you think about the secular versus cyclical trends? Is it really the change in the ethanol debate in Washington that’s going to change the secular trend in corn prices which is going to make the industry more profitable again?

Mike Cockrell

I’m not sure what it’s going to be. That’s a good question. Joe mentioned that he believed the high prices is going to, just economics by itself, just supply and demand and profitability is going to cause a deterioration in demand for corn from the ethanol producers and the typical producers, the protein producers. Whether or not if and when there’s going to be a policy change that does it, your guess is as good as ours for sure. I don’t think anything like that’s going to happen until after the election at the earliest and probably not until some time into next year, if and when they sit down and debate it and make a change. We’re certainly not going to try to predict that. I think Joe’s absolutely right that when you see 650 corn delivered in, that’s going to cause a reduction in demand for corn and soybean meal just because of economics.

Joe Sanderson, Jr.

All is a variable in this. It depends on what oil is and…

Mike Cockrell

All of the factors that impact oil, we could talk the rest of the day just on those.

Joe Sanderson, Jr.

And the dollar. But I know the chicken people can’t pay $6.50 for corn. I don’t know much about the economics of cattle feeding and hog feeding, but I don’t think they can either and I know chicken people can’t pay $6.50 for corn and $375 for meal and sell chicken and pork and beef for traditional prices. That doesn’t happen. That can’t happen. The economics doesn’t work.

Howard Penny – Research Edge

Your comments about this week, can you repeat those?

Joe Sanderson, Jr.

What about this week?

Howard Penny – Research Edge

Oh, I thought you were just talking about trends in food service or retail.

Joe Sanderson, Jr.

Oh, this week, well the demand, we came in Monday and usually this week is a very strong week for demand to retail and typically at fast food, which we’re not in fast food. But you’d go into, used to when we were in fast food, it was a big week for fast food and retail and to a certain extent for some segments of big bird deboning. We came in Monday and it was soft everywhere, very little demand for anything. You’d think they’d be hollering for wings, wings and chicken tenders for what we call the watering holes, where they serve beer and hot wings and chicken tenders and very little of that and not much at retail, just kind of a blah week. Now that may pick up Thursday/Friday, but it’s just very dull out there. You got Labor Day and you get the first of the month coming and both those things ought, you should’ve had pretty good demand. I don’t about foods. What about foods and their orders?

Mike Cockrell

Same.

Joe Sanderson, Jr.

Nothing?

Mike Cockrell

Bland.

Joe Sanderson, Jr.

Our Prepared Foods Division, usually they would crank up pretty heavy and have big orders and they don’t have big orders either. That’s kind of like July the 4th. We had really strong orders July the 4th at retail and very little out of food service and Labor Day’s kind of the same way. Everybody’s talking, we’re having a lot of conversation about supply, but I told Mike when we were drafting this document, this script that I wanted to comment on demand. I mean we do have a little more supply U.S. of 1% or so, but a part of this calculation and part of what we’re dealing with here besides supply, we are dealing with a demand factor here that is diminished. It’s not like we’ve got 2% and 3% and 4% more chicken meat. It’s like right now we might’ve had that in the first calendar quarter and maybe through April, but right now we’ve got maybe 1%, maybe 2% more, probably no more than that pounds. You’ve got, remember you’ve got more export leaving the country. What we’re dealing with here, as much as pounds is lower demand. We have less demand out there and it manifested itself prominently July the 4th and it is manifesting itself again Labor Day. There is lower demand.

Operator

There are no further questions at this time.

Joe Sanderson, Jr.

Thank you for spending time with us this morning, and we look forward to reporting our year-end results to you in December. Thank you very much.

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