SAFM

Sanderson Farms, Inc. (SAFM)

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Sanderson Farms (SAFM)

Q3 2013 Earnings Call

August 27, 2013 11:00 am ET

Executives

Joe F. Sanderson - Chairman and Chief Executive Officer

D. Michael Cockrell - Chief Financial Officer, Treasurer and Director

Lampkin Butts - President, Chief Operating Officer and Director

Analysts

Farha Aslam - Stephens Inc., Research Division

Brett M. Hundley - BB&T Capital Markets, Research Division

Michael Picken - Cleveland Research Company

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Andrew Strelzik

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Presentation

Operator

Good day, and welcome to the Sanderson Farms, Inc. Third Quarter Fiscal 2013 Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Joe Sanderson. Please go ahead, sir.

Joe F. Sanderson

Thank you. Good morning, and welcome to Sanderson Farms' Third Quarter Conference Call. Lampkin Butts and Mike Cockrell are with me this morning. We reported net income for our third fiscal quarter of $67.9 million or $2.95 per share. This compares to net income of $28.7 million or $1.25 per share during last year's third quarter. Results for our third fiscal quarter include $14.2 million in expenses related to our bonus compensation plans, including our ESOP or $9.4 million or $0.41 per share, net of income taxes.

I will begin this morning's call with a few general comments. I will then turn the call over to Lampkin and Mike for more detail. Before making any further comments, I will ask Mike to give the cautionary statement regarding forward-looking statements.

D. Michael Cockrell

Thank you, Joe. This morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. Examples of forward-looking statements include statements about our belief regarding future grain and fresh chicken prices, consumer demand, production levels and the supply of fresh chicken products or economic conditions and our expansion plans.

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 annual report on Form 10-K for the fiscal year that ended October 31, 2012, as well as subsequent quarterly reports on Form 10-Q filed with the SEC. Our third quarter 10-Q was filed this morning.

You are cautioned not to place undue reliance on the forward-looking statements made this morning, and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. External factors affecting our business, such as feed grain prices, market prices for poultry meat and the overall health of the economy, among others, remain volatile, and our view this morning might be very different from our view a few days from now.

Joe F. Sanderson

Thank you, Mike. Our results reflect significantly higher poultry market prices during our third fiscal quarter when compared to last year's third quarter. But as has been the case all year, we experienced continued high grain cost during the quarter. The higher market prices for fresh chicken during the quarter compared to last year's third quarter were driven in part by continued record-high Georgia Dock whole bird prices and significantly higher prices for boneless breast meat.

These increases were fueled by steady demand for chicken in the retail grocery store market and continued good white meat demand in food service. Food service demand and market prices for boneless breast meat spiked in May, as several quick -- QSR and food service establishments featured chicken on their menus. As I've stated on our May call, this food service demand has been driven by menu shifts rather than increased foot traffic through restaurants, as restaurant traffic continues to be flat at best.

While grain costs were higher during our third fiscal quarter and the first 9 months of the year compared to last fiscal year, at least some relief could be in sight. Although wet weather this past spring caused crops to be planted late, good growing conditions this summer have fueled optimism for a good crop. The crop is not yet in the bin, however, and as we saw yesterday, market prices will likely remain volatile until the crop is made and harvested.

Based on what we have priced to date and assuming that we have priced our remaining needs through the end of fiscal year, at yesterday's closing prices on Chicago Board of Trade, our cash cost for feed grain purchased would be approximately $79 million higher this fiscal year than last year. However, our cash cost for our fourth fiscal quarter would be $65 million lower than last year's fourth quarter, and these lower costs will translate into approximately $0.08 lower grain cost per pound of chicken processed, once fully priced into our flocks.

We have priced our corn and soybean meal needs through August, but we will be on the market as we head into September and the heart of the harvest season. As Lampkin will discuss in a moment, our production numbers during the third fiscal quarter reflect our return to full production in early June. And as Mike will discuss, our net-debt-to-total-capitalization ratio is, once again, back in single digits.

As we have been saying on these calls for the past year, our next phase of growth, which we are anxious to start in Palestine, Texas, will start when our balance sheet is in good shape, when we complete our due diligence in Palestine, when we are operating well and when we have a reasonable degree of confidence regarding supply and price for grain over the next year. Our balance sheet and our existing operations are both in good shape. Our due diligence and the permitting process in Palestine are substantially complete, and we are close to what we hope will be a decent harvest.

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