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Exhibit 99.2
Final Transcript Conference Call Transcript SAFM Q2 2010 Sanderson Farms Earnings Conference Call Event Date/Time: May 25, 2010 / 03:00PM GMT |
Final Transcript | ||
May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
CORPORATE PARTICIPANTS
Joe Sanderson
Sanderson Farms Chairman & CEO
Sanderson Farms Chairman & CEO
Mike Cockrell
Sanderson Farms CFO
Sanderson Farms CFO
Lampkin Butts
Sanderson Farms President & COO
Sanderson Farms President & COO
CONFERENCE CALL PARTICIPANTS
Christine McCracken
Cleveland Research Analyst
Cleveland Research Analyst
Ken Zaslow
BMO Capital Markets Analyst
BMO Capital Markets Analyst
Farha Aslam
Stephens Inc. Analyst
Stephens Inc. Analyst
Steven Schaer
Wisco Research Analyst
Wisco Research Analyst
Heather Jones
BB&T Capital Markets Analyst
BB&T Capital Markets Analyst
Ken Goldman
JPMorgan Analyst
JPMorgan Analyst
Akshay Jagdale
KeyBanc Analyst
KeyBanc Analyst
Christina McGlone
Deutsche Bank Analyst
Deutsche Bank Analyst
PRESENTATION
Operator
Good day, and welcome to the Sanderson Farms, Incorporated second quarter 2010 conference
call. Todays call is being recorded.
At this time, for opening remarks and introductions, I would like to turn the conference over to
Mr. Joe Sanderson. Please go ahead, sir.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you. Good morning and welcome to Sanderson Farms second quarter conference call.
Lampkin Butts and Mike Cockrell are with me this morning.
We issued a news release this morning announcing net earnings of $35.1 million, or $1.62 per share,
for our second fiscal quarter of 2010. This compares to net income of $26.2 million, or $1.25 per
share during last years second quarter.
I will begin the call with some general observations, but before I do, I will ask Mike to give the
cautionary statement regarding forward-looking statements.
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Final Transcript | ||
May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Mike Cockrell Sanderson Farms CFO
Thank you, Joe, and good morning everyone.
This mornings 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 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 on the Companys quarterly report on Form 10-Q filed with the SEC in connection with our
second fiscal quarter this morning. You are cautioned not to place undue reliance on
forward-looking statements made this morning, and each such statement speaks only as of today. We
undertake no obligation to update or to revise our forward-looking statements. External factors
affecting our business, such as grain costs, market prices for poultry and the health of the
overall economy, among others, remain volatile. And our view today may be very different from our
view even a few days from now.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you, Mike.
Three general factors drove our results for this quarter. First, our sales volume of fresh chicken
was up over 16%, compared to last springs lower volume that reflected production cuts. Second, our
feed costs and net sales price per pound for fresh chicken did not change significantly during the
quarter compared to last years second quarter. The additional volume allowed us to significantly
lower our other costs, and expand our margins. Finally, we operated well during the quarter, and I
thank everyone, our managers, employees, and our growers, for their focus on our operations.
Market prices for fresh chicken were mixed during the quarter compared to last years second
quarter. The average Georgia dock price was lower during the quarter than last year, although
retail demand remains strong. Export demand during the quarter was impacted by the well-publicized
issues with China and Russia, but leg quarter market prices managed to remain flat with last years
second quarter. Prices for boneless breast meat, however, were much better during the quarter than
during last years second quarter. Most all of the fresh white meat produced at our big bird plants
is consumed away from home, and while markets improved and there have been reports that traffic
through some restaurants has shown modest improvement, we believe demand for that product will
continue to be soft until American consumers regain their jobs and their confidence.
Cash market prices for corn were lower during the quarter than during last years second fiscal
quarter, and were lower than during our first fiscal quarter of this year. Likewise, our corn cost
and flocks sold were also lower. The decrease in corn costs were offset by soybean meal prices
which have remained above a year ago levels since November of 2009. The March planning intentions
report indicated a near record number of corn acres and more soybean acres for this year compared
to last year. Planning progress reports indicate that farms across the corn belt have made good
progress getting their corn crop in the ground. Weather concerns will likely contribute to
volatility this summer as always, but the crop is off to a good start. As a result, we have not
been aggressive pricing our corn needs and remain very close to the cash market. Given where
futures contracts are trading today, if we were to price all of our corn needs for the rest of the
fiscal year at yesterdays close, cash corn costs would be lower during our third quarter compared
to last year and higher during our fourth quarter. We are going to remain patient, because we
believe futures are a bit high relative to fundamentals.
With respect to soybeans, supplies of old crop soybeans are projected to be tight this summer,
despite more acres of beans this year, and this tightness in supply is reflected in the July
Chicago Board of Trade contract price of over $275 per ton for soybean meal at yesterdays close.
We have priced a portion of our soybean meal needs through October, and based on those prices and
current futures contract, our cash costs for soybean meal should be lower than a year ago, both
during our third and fourth quarters. The bottom line is that our feed ingredients cost should be
lower in fiscal 2010 than during fiscal 2009. Based on what we have priced to date, and assuming
that we could price the rest of our needs through the end of fiscal year at current prices on the
Chicago Board of Trade, our feed ingredients cost would be between $13 million to $14 million lower
this fiscal year than last year, after factoring in our increased volume needs. This lower cost
would translate to a decrease in the cost per dressed pound of poultry of just over $0.01 per pound
for the year.
In addition to our costs, we will be closely watching the chicken markets to see how they respond
to a slightly healthier consumer and relatively high prices for competing meats. Egg sets have
trended above a year ago, but remain below historical averages, which should support higher prices
this summer. Even more important for the long term is the reduction in pullet placements. Through
the first four months of 2009, pullet placements are even with a year ago. In its report last
Friday, the USDA projected a breeder flock on the ground this fall 1.4% smaller than a year ago.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
I am pleased to report that progress continues at our Kinston, North Carolina facility. We have
placed our first live birds in April and are on schedule to open the plant next January. We look
forward to the opportunities this new plant will provide the Company and its employees, and look
forward to the next phase of our growth in Goldsboro, North Carolina. We announced in March that
the Company will build a new plant near Goldsboro, subject to certain contingencies being met, and
are working to remove those contingencies, so that we can make the new big bird deboning facility a
reality. Once Kinston is open and running full, the Companys mix will be balanced more toward
chill-pack, and Goldsboro will balance our mix back toward big bird. The two North Carolina plants
will together add 30% more capacity to the Company and continue the Companys growth through 2014.
At this point, I will turn the call over to Lampkin for a more detailed discussion of the market
and our operations during the quarter.
Lampkin Butts Sanderson Farms President & COO
Thank you, Joe, and good morning, everyone.
Market prices for poultry products were mixed during the quarter, when compared to our second
quarter last year. The average Georgia dock price during our second quarter was 2% lower than last
years second quarter, averaging $0.842 per pound during the quarter compared to $0.86 per pound
last year. The Georgia dock price for this week is $0.8675 per pound, which compares to $0.8775 per
pound for the same week last year. The Georgia dock price reflects continued strong demand for
fresh chicken in retail grocery stores.
Bulk leg quarter prices were flat for the quarter compared to last years second quarter, export
volume to Russia was non-existent during the first calendar quarter of the year, while export
volume to China was down 79.9%. Overall, exports were down 14.6% compared to last year. Bulk leg
quarter prices averaged $0.352 per pound during our second quarter this year and during last years
second quarter. [Ernaberry] bulk leg quarters are currently quoted at $0.36 per pound.
Price for jumbo wings remained strong during our second quarter, but have retreated significantly
from their all-time high reached in January. Jumbo wings averaged $1.31 per pound, which is down
5.8% from the average of $1.39 per pound during last years second quarter. Ernaberry jumbo wings
are currently $1.09 per pound.
Boneless breast prices were higher during our second quarter, increasing by 8.6% when compared to
second quarter a year ago. This years average [ernaberry] price of $1.50 per pound compares to an
average of $1.38 per pound during last years second quarter. Today, the Ernaberry market for
boneless breast is $1.70 per pound. While boneless breast prices were much improved from the first
quarter, I will echo Joes opinion that the improvement in boneless breast prices is a result of
supply cuts more than demand improvement.
The overall result of these market price changes was essentially no change in our average sales
price per pound of chicken sold. As Joe mentioned, our operating performance during the quarter was
strong, and I am pleased with the performance of our growers, managers and employees.
We sold 669.9 million pounds of poultry during the second quarter, a 16.4% increase from the 575
million pounds sold during last years second fiscal quarter. We processed 654.6 million pounds of
dressed poultry during the quarter, up from the 570 million pounds we processed during last years
second quarter. For the first six months of the year, we sold 1.25 billion pounds of poultry
products, compared to 1.18 billion last year, and processed 1.25 billion pounds this year compared
to 1.14 billion last year. We now expect to process 2.57 billion pounds of fresh chicken this year,
an increase of approximately 6% compared to 2009. We estimate we will process approximately 659.7
million pounds in both our third and fourth quarters.
Performance also improved at our prepared foods division during the second quarter, reflecting a
more profitable sales mix and improved efficiencies. We have been pleased with the sales progress
at our prepared foods plant, as well as our product mix, although we are looking for more sales at
that plant. We sold 29.2 million pounds of processed chicken from our foods division through the
first half of this year, compared to 30.9 million pounds through the first half of last year.
Looking ahead, we remain confident that we will continue to improve our operating performance and
sales execution at foods. While we are pleased with our performance during the second quarter,
there are areas of our business where performance and execution can improve.
At this point, I will turn the call over to Mike Cockrell, Chief Financial Officer.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Mike Cockrell Sanderson Farms CFO
Thank you, Lampkin.
The 14.1% increase in net sales for the quarter, to $487.1 million from $426.8 million last year,
was the result of an increase in poultry pounds sold of 16% while our sales price per pound was
essentially flat. The 11.2% increase in our cost of sales for the three months ended April 30 as
compared to the same three months during fiscal 2009, was the result of that 16% increase in pounds
of poultry sold, while feed costs were also essentially flat with a year ago. Feed cost and flocks
sold of $0.274 per pound increased 1.8%, or less than $0.005 a pound, compared to last years
second quarter, and feed costs accounted for 47.5% of our cost of poultry products sold during the
quarter, and that compares to 45.3% last year. While our net sales price for poultry products and
our cost of feed and flocks sold were flat, our volume increase and our operating efficiencies
allowed us to reduce our other costs in our poultry business by $0.022 per pound sold, and thus
expand our margins.
Our operating margin of 11.4% compares favorably to last years 10.1%. The $10.8 million increase
in SG&A expenses for the first half of the year reflects $2.2 million higher amortization of equity
compensation grants, $1.1 million in administrative costs at Kinston, $1.4 million in higher
training costs, and a $3.3 million accrual for an ESOP contribution during fiscal 2010. Interest
expense decreased from $2.5 million to $1.2 million during the quarter, reflecting lower
outstanding debt.
Consistent with prior years, we accrued no bonus payments for the first half of the year. If we
remain profitable at current levels, during the second half of the year, we will begin accruing for
bonus payments during our third fiscal quarter. The Companys effective tax rate for the quarter
and for the first six months ended April 30 was 35.7%, and for the balance of the year we expect to
use that same rate. This could change if Congress passes an extension of certain Katrina-related
employment tax credits.
During fiscal 2010 we now expect to spend approximately $139.8 million on capital projects, and
that includes $107.4 million for Kinston. Our depreciation and amortization during the first half
of the year totaled $21.9 million, and we currently expect about $44 million to $45 million for
fiscal 2010. On April 7, we closed a secondary offering of 2.3 million shares of our common stock
that we placed in the open market at $53 per share. The Company netted approximately $115.5 million
that we booked to shareholders equity and cash. For purposes of calculating our GAAP net earnings
per share, our weighted average fully-diluted shares outstanding during the second quarter were
21.0 million, and were 20.7 million for the six month period. For fiscal 2010, we expect
fully-diluted average shares outstanding to be approximately 22 million for the full year. The full
impact of the additional shares on earnings per share, of course, will be felt during fiscal 2011.
And, that completes our prepared remarks this morning, and you can now open up the call for
questions.
QUESTION AND ANSWER
Operator
(Operator Instructions). Well take our first question from Christine McCracken with Cleveland
Research.
Christine McCracken Cleveland Research Analyst
Good morning.
Joe Sanderson Sanderson Farms Chairman & CEO
Good morning.
Christine McCracken Cleveland Research Analyst
Joe, it seems like you are still relatively cautious on the outlook for food service, and
still, if you look at the supplies of competing meats, especially into food service, they seem like
theyre going to continue to tighten. Just wondering, why wouldnt you see a better second half in
food service, absent kind of the significant improvement employment, just based on competing or
smaller competing meat supplies alone.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Joe Sanderson Sanderson Farms Chairman & CEO
Well, we think that theres a possibility we do think we might see better pricing this
summer because of the situation you described, and perhaps even from the 90% ot the people that
have their job, they may be more comfortable about going out to eat. Last year, They were very
cautious even in but I still believe were not going to see the real boom in demand until people
get their jobs back. And but I agree with that scenario, what you described, and we do believe
theres a we are in a good spot right now with competing meats and the supply of poultry and we
should, theres a possibilty we should see some better pricing ahead of us.
Christine McCracken Cleveland Research Analyst
Any early read on contracting for fall, or is it still too early?
Joe Sanderson Sanderson Farms Chairman & CEO
It is too early about that. We havent heard a word about that yet.
Christine McCracken Cleveland Research Analyst
So is it your assumption then I assume because youre going ahead full speed with the
Kinston plant, that demand would be able to get a little better by 2011. Is that kind of when
youre projecting the Boone demand?
Joe Sanderson Sanderson Farms Chairman & CEO
Well, Kinston is a tray-pack plant, and its going to retail grocery, and we dont really time
plants. We are building Kinston for the next 50 years and Goldsboro for the next 50 years. We dont
time them, for the market, we our balance sheet, and we dont have a clue about whats going to
happen, you know, in, I do believe that 2011, 2012, 2013, 2014, not so sure about 2011, but I
dont believe this country is going to abide 10% unemployment. If it is still 10% unemployment in
2011 and 2012, I believe there will have to be some political change. Theyre not going to abide
voters are not going to tolerate 10% unemployment.
Christine McCracken Cleveland Research Analyst
Okay.
And then, just one other question. On inventories, it look like you sold maybe quite a bit out of
inventory, it looks like that might have been a pick-up from last quarter, is there any meaningful
amount of chicken still left in inventory, or is that going to be a nonissue then, in your volumes
for the back half?
Joe Sanderson Sanderson Farms Chairman & CEO
That just, it just happens when boats ship. It doesnt, you know, it doesnt you know, we
it just happens from time to time. We may build inventory next quarter and it will ship out the
next month.
Lampkin Butts Sanderson Farms President & COO
Theres no significant change or buildup. Everything is shipping as normal. As Joe said, the
timing. If the timing of a boat getting in misses the end of a quarter by a week, it is just
coincidence.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Mike Cockrell Sanderson Farms CFO
Your observation is absolutely correct though. We did, as we talked about on the last call,
Christine, we had a buildup in leg quarters that we sold out of inventory during the quarter, and
there are not that many left in inventory at the end of the second quarter.
Christine McCracken Cleveland Research Analyst
Alright. I will get back in queue. Thank you.
Lampkin Butts Sanderson Farms President & COO
Thank you.
Operator
Well go next to Ken Zaslow with BMO Capital Markets.
Ken Zaslow BMO Capital Markets Analyst
Good morning, everyone.
Joe Sanderson Sanderson Farms Chairman & CEO
Good morning.
Ken Zaslow BMO Capital Markets Analyst
Mike, in a recent conference, you alluded to the fact that the margin structure for 2011 I
think thats what you did it could actually, if you times that by your volume, get different
numbers. When you make a comment like that, what type of margin outlook are you looking at? Are you
looking for margins in 2011 better than 2010? How do you actually think about that? You made that
comment at our conference.
Mike Cockrell Sanderson Farms CFO
I know which I know the comment you are talking about. We compared our margins in 2007 to
2009 and just made the observation that 2009 margins were less, on a per pound basis than 2007, but
we made more money. And of course, the story there has been the story of Sanderson Farms for a long
time. Its about growth, and having more pounds to leverage into the market. You are not going to
get me into making a guess as to what 2011 margins are going to be, because as Joe just said a
minute ago. we have no clue about that.
Joe Sanderson Sanderson Farms Chairman & CEO
You dont know about grain, you dont know about employment, you know, we dont know about
Russia? You dont know, you know, we havent there are too many things you dont know about. You
dont know about production levels. And I dont have a clue about 2011.
Ken Zaslow BMO Capital Markets Analyst
All right. When you say you dont know anything about production levels, can you help me
understand then, this whole breeding herd and, this pullet placement. Can 2011 production be up 5%,
7%, 2%? When you say theres no idea of what 2011 production is, again I havent been doing this
industry as long as you did you have, but can you give me an idea of why you think theres
absolutely no, you know, idea of how production will be in 2011?
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Final Transcript | ||
May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Joe Sanderson Sanderson Farms Chairman & CEO
Well, you wont know that, you will start getting a clue about that in July and August and
September, October, pullet placements then, beginning in July, August, September, will give you a
clue about actually, we put pullets down in April and May for January and February. So that
tells you that April and May are for January and February. It doesnt look like you have already
seen for January and February and it doesnt look like theres going to be a lot more chickens
in January and February of 2011. But you wont know really until July, August, September, October,
when you see pullet placements then, you will know more about production levels in 2011.
Ken Zaslow BMO Capital Markets Analyst
Fair enough. To me, I was under the impression that generally production levels are somewhat
limited, and then you had food service demand, even if it doesnt come back roaring, that it would
be a that margins likely would not go down in 2011 but, I will let you guys keep out your
cautiously optimistic view, but I appreciate it. Thank you.
Joe Sanderson Sanderson Farms Chairman & CEO
Well, I am of the opinion you are not going to see a huge increase in production levels. But I
dont know that.
Ken Zaslow BMO Capital Markets Analyst
Okay. So let me ask you this question, why dont you think theres going be a big production
increase then, if you dont have any idea of it just feels like you do have a bigger idea than
youre I am trying to match your comments together. The idea that there will be more limited
production in 2011
Joe Sanderson Sanderson Farms Chairman & CEO
I think one is because of backing constraints on a good bitof the industry, and I think
because of the China and Russia situation, and I think because of the experience of 2008 on a lot
of people, it scared a lot of people to death and scared a lot of the bankers. I think there are a
lot of people out there that dont want a lot more chickens. And I think all of those things are
going to influence people not to put out a lot more chickens.
Ken Zaslow BMO Capital Markets Analyst
Great. I appreciate it.
Operator
We will take our next question from Farha Aslam with Stevens Incorporated.
Farha Aslam Stephens Inc. Analyst
Hi. Good morning.
Joe Sanderson Sanderson Farms Chairman & CEO
Good morning.
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Final Transcript | ||
May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Farha Aslam Stephens Inc. Analyst
Your export sales seem very, very strong despite Russia being closed, could you share with us
what markets you are sending the products to, and what might be incremental markets that you are
sending leg quarters to?
Lampkin Butts Sanderson Farms President & COO
Farha, we are shipping
Joe Sanderson Sanderson Farms Chairman & CEO
Some of that is proprietary, Fahra, I am going to
Lampkin Butts Sanderson Farms President & COO
We are shipping the same countries weve been shipping, except were not shipping anything to
Russia and were not shipping anything directly to China. You see the reports. Export volume is up
to Mexico, the export volume is up to some of the former Soviet Union countries, and theres more
dark meat being sold in the United States.
Farha Aslam Stephens Inc. Analyst
Are you concerned that the recent rise in the US dollar makes it tougher for US poultry
exports, particularly and then therefore, makes Russia more important, that we get that market
open?
Lampkin Butts Sanderson Farms President & COO
Stonger dollar makes it tougher for us to compete. Yes, thats it is a factor. Russia would
have a lot more impact than that. Id rather Russia open up, if were going to have a strong
dollar. But Russia is more important.
Farha Aslam Stephens Inc. Analyst
Russia is more important.
Lampkin Butts Sanderson Farms President & COO
Yes.
Farha Aslam Stephens Inc. Analyst
And then, back on Sanderson specific topics, could you share with us about how much you
anticipate in incremental expenditures related to training for the full year, related to the
start-up at Kinston, and stuff thats going through the SG&A line?
Mike Cockrell Sanderson Farms CFO
Yes. $2.5 million for the balance of the year, on Kinston. Training has been $1.4 million
through the first half. Id model the same thing for the second half. We have about staffed up our
training staff as high as it is going to be. We will have those trainees and
Joe Sanderson Sanderson Farms Chairman & CEO
You are going to have a little bit more that figure you quoted in there, is that the
management trainees, or the training that you are doing for the hourly employees? Kinston start up?
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Final Transcript | ||
May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Mike Cockrell Sanderson Farms CFO
Its the trainees salaries.
Joe Sanderson Sanderson Farms Chairman & CEO
Thats what I thought. You are going to have a little bit more than that.
Mike Cockrell Sanderson Farms CFO
Yes, maybe a little bit more than that. Add those two together to get the total amount for the
balance of the year.
Farha Aslam Stephens Inc. Analyst
Okay. And do we have any costs related to Goldsboro yet?
Lampkin Butts Sanderson Farms President & COO
No,.
Farha Aslam Stephens Inc. Analyst
Okay. And then my final question is, on your bonus program that you will start accruing in the
second half, how much is that kind of roughly equal to, or what are the parameters around that?
Joe Sanderson Sanderson Farms Chairman & CEO
Go back and look at 2009, and what were you in 2009?
Mike Cockrell Sanderson Farms CFO
$12 million.
Lampkin Butts Sanderson Farms President & COO
Farha, you can look at the the bonus award program is filed and you can go look at that and
see the parameters. At 100%, if we earn the top ranking on earnings per share, thats part of the
bonus, the other is Agristats performance, and if we earn top Agristats performance, then you
earn the full amount of that part of the bonus. But, last year we earned part of the Agristats, and
about two thirds of the earnings per share, to get to that $12 million.
Farha Aslam Stephens Inc. Analyst
Okay.
Lampkin Butts Sanderson Farms President & COO
And again, if we remain profitable in the third quarter, we will begin accruing toward that
level.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Farha Aslam Stephens Inc. Analyst
Perfect. Thats very helpful. Thank you so much.
Lampkin Butts Sanderson Farms President & COO
Thank you.
Operator
We will go next to Steven Schaer with Wisco Research.
Steven Schaer Wisco Research Analyst
Good morning.
Joe Sanderson Sanderson Farms Chairman & CEO
Good morning.
Steven Schaer Wisco Research Analyst
Say, I wanted to talk a little bit about the non-feed cost of goods sold. Obviously you had
much more volume, so I understand that that number is leverages. It had been running around $0.32
and now it went to $0.30, and I am just curious, you know you did have 11 million pounds, I
believe, slip into this quarter as far as volume goes. As we look at that number going forward is
there anything one-time about this quarter that made it so low, do you think and since youll
have good volume the rest of the year, that kind of $0.30 a pound would be a good starting point as
far as how to model that.
Joe Sanderson Sanderson Farms Chairman & CEO
There was nothing one-time. There were improvements in production, there were production
efficiencies, and there were efficiencies in live production, and there were efficiencies in the
processing plant that were about equal. We expect that to continue through the balance of the year,
and we also would expect some improvements in sales beginning in July, with some additional sales
that we have picked up. I dont know the impact thats going to have, but it was kind of across the
board live production and in processing, and I think that it was that $0.02 a pound, wasnt it?
Non-feed improvement. Its that stuff we talked to you about at the first of the year that we
identified and picked up, and part of it was because of olume and part of it was because of
efficiencies.
Steven Schaer Wisco Research Analyst
Okay. Great. So, it is not unreasonable to think that $0.30 might be a good baseline as far as
modeling that number.
Lampkin Butts Sanderson Farms President & COO
Should be.
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Final Transcript | ||
May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Steven Schaer Wisco Research Analyst
Okay. And then just one follow up I had was on the prepared foods side of things. And I am
curious, you know, volume pounds sold were a little bit off this quarter. Is there anything unique
there that caused pounds sold to go down, or maybe you could just talk about whats going on there,
and maybe how we should look at that business for the rest of the year?
Lampkin Butts Sanderson Farms President & COO
No, nothing. Nothing unusual. Other than, that segment some of our customers there, as we have
mentioned earlier, food serviced demand is off, and their sales are flat to down a little bit.
Joe Sanderson Sanderson Farms Chairman & CEO
Their sales are going to pick up in the third quarter, are they not?
Lampkin Butts Sanderson Farms President & COO
The second half should be better volume through foods than the first half.
Steven Schaer Wisco Research Analyst
Okay. Great. Congratulations.
Lampkin Butts Sanderson Farms President & COO
Thank you.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you.
Operator
We will go next to Heather Jones with BB&T Capital Markets.
Heather Jones BB&T Capital Markets Analyst
Good morning.
Lampkin Butts Sanderson Farms President & COO
Good morning.
Heather Jones BB&T Capital Markets Analyst
I have a detailish question first. I was looking through your, the Q, and just straight ahead
it looks like you earned $1.64 for the quarter, but then you now have this new accounting standard,
the two class method, and I was wondering if you could give us some guidance on with that
distributed, undistributed earnings hit will be going forward, because in Q2 it looks like it was
almost double what it was in Q1. And then the second question on that is, should we be using this
diluted shares outstanding number, via the two class method going forward?
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Mike Cockrell Sanderson Farms CFO
That is a detailish question. The
Heather Jones BB&T Capital Markets Analyst
I couldnt get to the $1.62, and it was confusing me. So I finally went through the notes and
found this. I wanted to know what to do going forward.
Mike Cockrell Sanderson Farms CFO
Thats one of the reasons that on the call I suggested that if you are modeling for the full
year, you use $22 million. It is actually $21.8 million. I round it up to $22 million, just to be
conservative for the full year. The undistributed earnings are about 2.2%, if you really want to
get down into the weeds of that, and for the full year, thats what I would use. Project your
earnings and your net income, and then distributed and undistributed earnings is going to be about
2.5% of that.
Heather Jones BB&T Capital Markets Analyst
Is that a good number to use for 2011, too?
Mike Cockrell Sanderson Farms CFO
I would say so.
Heather Jones BB&T Capital Markets Analyst
Okay. All right. Given that what is a given that you will have four quarters of extra
shares from the stock offering and giving this new accounting standard, what is a good share count
to use for 2011?
Mike Cockrell Sanderson Farms CFO
For 2011, add the full 2.3 million to 21.7 million, what does that come to?
Heather Jones BB&T Capital Markets Analyst
Okay. Thats
All right. Then, going back to the food service question, it sounds like you are saying it is still
soft, but it seems like it improved somewhat. I am wondering if you can give us a sense of how that
business is trending currently year-on-year, as compared to maybe where it was trending say in
January of this year. For Sanderson specifically.
Joe Sanderson Sanderson Farms Chairman & CEO
It hasnt changed, Heather. Weve picked up some new business. But our regular customers are
just flat and, you know, when we are basically selling the same people and they project out what
theyre going to buy, and what they think theyre going to buy, and the fact of the matter is none
of them buy was much as they say theyre going to buy. They say its because their sales are off.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Heather Jones BB&T Capital Markets Analyst
But are you seeing a
Joe Sanderson Sanderson Farms Chairman & CEO
Thats why these sales this is two years in a row where almost everybody we sell, and
thats 40 or 50 or 60 accounts up there, and they project out, and we think were almost 100% sold
out on the cook line, the fry line, and we are not, because they dont buy near what they said they
were going to buy.
But we had new whats going to happen in the third and fourth quarter is that weve picked up
new some business, and
Heather Jones BB&T Capital Markets Analyst
Okay.
Lampkin Butts Sanderson Farms President & COO
Heather, we would be, the demand side of our business food service distributors are through
the foods division, we just we dont, we have not seen any improvement in either category. We
it is not worse, but it is just I would say it is flat. Now the [ernaberry] boneless market and
the tender market have gone up. But we
Joe Sanderson Sanderson Farms Chairman & CEO
the fresh food service. And its gone up and its two reasons. One is because of the supply
and, two, one of the big processors out there has been buying boneless breast meat off and onsince
March.
Heather Jones BB&T Capital Markets Analyst
But given that the tenders and the breast meat market is up, and production is up relative to
last year, and big bird production is up relative to last year, so even more breat meat on the
market, but yet boneless skinless pricing is strong. Even if food service is clearly not robust,
isnt there some improvement somewhere along the line?
Lampkin Butts Sanderson Farms President & COO
Yes.
Heather Jones BB&T Capital Markets Analyst
I know you are saying production, supply is relatively tight to historical levels, but it is
still up year-on-year. So something has to have changed on the demand side. Thats what I am trying
to get to.
Lampkin Butts Sanderson Farms President & COO
Yes, I agree with you. I just we have not seen it from our customer base.
Heather Jones BB&T Capital Markets Analyst
Then, on the retail feature activities front, is it a fair expectation that chicken should get
more retail feature activity going forward, given the increase in pork and beef prices?
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Joe Sanderson Sanderson Farms Chairman & CEO
Yes.
Heather Jones BB&T Capital Markets Analyst
Okay. And if you hit the top end of your earnings target per your bonus program, and if you do
fairly well relative to Agristats, whats the max bonus number that we should put in, that you
could feasibly see this year?
Mike Cockrell Sanderson Farms CFO
The max is $18 million on the earnings per share portion.
Heather Jones BB&T Capital Markets Analyst
Okay.
Mike Cockrell Sanderson Farms CFO
If you wanted a model for that.
Heather Jones BB&T Capital Markets Analyst
Okay. Then finally we have heard
Joe Sanderson Sanderson Farms Chairman & CEO
Whats the total?
Mike Cockrell Sanderson Farms CFO
The total, if you add the Agristats top performance as well, is $23 million.
Heather Jones BB&T Capital Markets Analyst
Total?
Mike Cockrell Sanderson Farms CFO
No, Agristats is $5 million and earnings per share is $18 million.
Heather Jones BB&T Capital Markets Analyst
Okay. Thats If you now, speaking of Agristats, we have heard that in recent weeks the
average big bird complex is making somewhere between the $0.14 to $0.15 a pound, and theres some
complexes that are actually earning north of $0.20 a pound, but yet theres still some complexes
just across the industry that are losing money. First, I was wondering if you could confirm that
those numbers sound right, and secondly, if theres still a fair amount of complexes that are
losing money, despite lower feed costs, gives you confidence that supply costs wont be up
dramatically in 2011.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Joe Sanderson Sanderson Farms Chairman & CEO
Theyre not the last Agristats we saw there was only one complex in the red, or two in the
red.
Lampkin Butts Sanderson Farms President & COO
Thats March.
Joe Sanderson Sanderson Farms Chairman & CEO
That was March. March, we havent seen April. But there were probably five that were barely
above water. I dont know them I dont see the per pound. How much we see per head.
Lampkin Butts Sanderson Farms President & COO
We havent seen $0.20.
Joe Sanderson Sanderson Farms Chairman & CEO
Not $0.20 per pound.
Lampkin Butts Sanderson Farms President & COO
What was it per head, do you remember?
Joe Sanderson Sanderson Farms Chairman & CEO
Probably $0.12 per pound in March, at the top.
Heather Jones BB&T Capital Markets Analyst
Thats in March? Okay.
Joe Sanderson Sanderson Farms Chairman & CEO
Yes, $0.12.
Heather Jones BB&T Capital Markets Analyst
But going back to those complexes being in the red and five barely above water. Is that what
gives you some confidence that production wont go up dramatically in 2011?
Joe Sanderson Sanderson Farms Chairman & CEO
Those things I said, banking, the experience of 2008. I think those are the primary things.
2008 is fresh on peoples mind, and there are the companies that will expand, or are typically one
and two plant, maybe with the exception of Pilgrim, theyre theyre smaller companies, and
theyre good operators, and theyre not going to expand with big numbers. I dont think there will
be a huge expansion, and even if there is one, it
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
would it totally depends, if you go back and look at the numbers, and look at your egg set
numbers going back to 2007 and 2006. 2007 is a good year to look and it was a profitable year, and
it totally depends on demand, export demand and demand in the US. I dont remember what we made in
2007, but it was $3.90 a share or somewhere thereabout, and we were setting 218 million eggs, but
we had pretty even demand across the board. And decent exports. I am not worried about the
production increases if you have demand on the other side of that.
Heather Jones BB&T Capital Markets Analyst
Okay. Thank you.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you.
Operator
We will take our next question from Ken Goldman with JPMorgan.
Ken Goldman JPMorgan Analyst
Good morning.
Lampkin Butts Sanderson Farms President & COO
Morning.
Ken Goldman JPMorgan Analyst
I had to hop off so forgive me if this has been asked, but if my math is right you are now at
negative net debt. I appreciate the reasons why you are debt averse, and I know it helps you grow
when others cant, but just curious, Mike, how sustainable you see this, and if it is not
sustainable, obviously it is a good thing, right? But if it is not sustainable, whats the capital
structure going to look like a year from now?
Mike Cockrell Sanderson Farms CFO
Well, depends on how much money we make for the balance of the year. We have some pretty heavy
spends coming up, the construction in Kinston is going to get heavy this summer, so we will have
plenty of needs for our cash, but at the end of the day, were fully paid off on our revolver, we
have the $50 million fixed term piece that we will begin amortizing in 2012. So the capital
structure during 2011 should look exactly like it does today. Now we will have to go renegotiate
our bank loan agreement this winter. We will start on that this calendar year and hopefully
complete it the first of next calendar year, but we will plan to keep a revolver similar in scope,
terms and conditions as what we currently have in place. But dont expect any significant changes.
Joe Sanderson Sanderson Farms Chairman & CEO
We dont want to be we dont want to be to have a capital structure like that, but we think
we are going spend it pretty rapidly between these two complexes.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Ken Goldman JPMorgan Analyst
Understood. And then, separate issue. The US is holding hearings, or has held hearings,on
competition in the chicken space, and from what I understand, its a lot of sound and fury, but I
am curious what your take is on that and whether you think theres any chance of any changes or
regulations that may affect you going forward.
Joe Sanderson Sanderson Farms Chairman & CEO
We have the longest term contract in the industry. We have a 15-year contract. We have a
provision in our contract, and have since 1990, when 1997, we did not require our growers to put
in any new equipment I doubt very we did not anticipate any regulation that would of
course I say that I dont really know, but I wouldnt anticipate anything that would be terribly
burdensome on us, but I dont know that. I dont know what theyre contemplating, actually.
Ken Goldman JPMorgan Analyst
Thanks very much.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you.
Operator
Well take our next question from Akshay Jagdale with KeyBanc.
Akshay Jagdale KeyBanc Analyst
Good morning. Congratulations and good quarter.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you.
Akshay Jagdale KeyBanc Analyst
Joe, can you I think you have one thing that was very helpful. You had mentioned an egg
set number in absolute terms. That sort of has become a benchmark in my head. What would pullet
placements or broiler, the layers available have to be over the next three or four months for us to
even come close to that 215 million weekly average on egg sets that we saw in 2007? I mean I have
the layers available for the prior year, but is there something you are looking at in absolute
terms that would get you worried for next year?
Joe Sanderson Sanderson Farms Chairman & CEO
Nothing would worry me about next year. I dont get worried. I am not going to get worried
about egg sets if they you know, I dont get worried about that. I would have to go back and
look and see what the percentage is and stuff dont do that.
You asked me about absolute. I would have to go back and look and see what the breeder flocks were
and the pullet placements were in 2006 to build the breeder flock to get to the numbers, and see
what the breeder flock size was in 2007. I dont remember those. I think absolute numbers are more
important than percentages. But you would need to see what the pullet placements were in 2006 to
get to the breeder flock that produces 218 million to 220 million eggs. And I dont have that
number. I will get that number for you. I have it somewhere. But Im not going to worry about it,
and if it happens. It happens.
You know, without seeing the demand, food service and Russia opened, I think that might be
problematic.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Akshay Jagdale KeyBanc Analyst
Thats helpful. You have been very hesitant in the past to say the industry is quote unquote
rational. Are you willing to say that now, because you have been talking a lot about credit
constraints and whatnot. Are you comfortable to say that the industry is maybe more rational today?
Because I know you have been in the past to say that.
Joe Sanderson Sanderson Farms Chairman & CEO
I think that I dont know that theyre rational. I think that theyre the bankers are
rational, and I think the bankers become concerned when no assets changed hands in 2008, and that
was the first time during a down cycle that nobody could sell any assets. And there were lots of
assets for sale and usually when you have a down cycle or a bankruptcy, somebody is there to buy,
and nothing changed hands except the plant in Louisiana and the state of Louisiana invested more
than Pilgrims did in it. I mean, more than Foster Farms did. So I dont know that I am ready to
say the industry is rational. I think some people became fearful.
Akshay Jagdale KeyBanc Analyst
How much capital do you really need to just expand your not to put in a new plant, but
theres quite a few people out there who are operating below optimal capacity utilization rates.
Does it really take a lot of capital for you to just, sort of increase your breeders flock by 5% or
6%?
Joe Sanderson Sanderson Farms Chairman & CEO
No, no. Very little capital.
Mike Cockrell Sanderson Farms CFO
The only thing, though, that they would have to be thinking about is the same thing all of us
did in 2008, when we had to come up with $60 million to fund working capital needs because corn
went to $8 a bushel. We didnt pay that for it, but youve got that out there. If you put the
pullets down, youre going to have to feed them, and you are going to feed the broilers, and
yourre going to have buy the grain, and that does impact Theres no way to answer that question
accurately, without knowing where all of those costs are going to go.
Akshay Jagdale KeyBanc Analyst
Okay. Thats helpful. And then just one on grains longer term, I know there has been a lot of
talk about E-15 and that mandate maybe coming through. What is your view on that, and what do you
think if that gets approval? What kind of impact could that have on corn prices?
Joe Sanderson Sanderson Farms Chairman & CEO
We think that probably it is going up, the mandate is going up. We dont know if it is going
to be 12 or 13 or 15. I think initially, it will make corn prices go up and I think long term,
though, corn yields are going to continue to increase, and it is just an environment we will have
to deal with. You know, we are dealing with $3.50 corn now, and instead of $2.50. It is just
something we will have to live with.
But, the ethanol people are going to have to live with it, too. They are going to have to deal with
higher priced corn, and you know,we are not going have good weather in Midwest every year from now
on, we are going to have and weve missed it last year we are going to have a year when
theres going be a bad crop. And the ethanol people are going to have to pay $6.50 or $7.50 for
corn, and if oil is $65 a barrel, like it is today, or $67, when that happens its going to be
difficult for them.
Akshay Jagdale KeyBanc Analyst
Thank you. Ill pass it along.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Operator
We will take a follow up question from Christine McCracken with Cleveland research.
Christine McCracken Cleveland Research Analyst
Yes. Just one quick follow up, on the trucking situation. Apparently, it is tight this time of
year, apparently, anyhow. But with the delay in the Florida crop, I guess, there has been some
reports, I guess, of some tighter than normal refrigerated trucks. Im just wondering, is that an
issue for you, or have you seen anything like that?
Joe Sanderson Sanderson Farms Chairman & CEO
Not really. It was about around Easter, it got tight. It was three or four weeks ago,.
It got a little tight and then its loosened back up. Not a not bad. We I dont know, what
percentage do we ship on our own trucks? Do you know? It hasnt been an issue.
Christine McCracken Cleveland Research Analyst
Okay. And then, just on fuel costs, generally as you look out on distribution, is that when
you look at your pre-unit costs are you assuming kind of flattish or lower fuel costs into the
second half?
Mike Cockrell Sanderson Farms CFO
Its not- its going to be it looks like it may be a little bit lower, Christine, but it is
not going to be a big number.
Lampkin Butts Sanderson Farms President & COO
We havent
Mike Cockrell Sanderson Farms CFO
We havent booked it. But as we have said before, when it is going the other way as well. It
doesnt move the needle a whole lot for us.
Joe Sanderson Sanderson Farms Chairman & CEO
Its not a big percentage of our costs.
Christine McCracken Cleveland Research Analyst
All right. Thanks.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you.
Operator
And well take a follow up from Heather Jones with BB&T Capital Markets.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Heather Jones BB&T Capital Markets Analyst
Thanks. I just have a couple of quick questions. The stock compensation, should we be looking
at a roughly a $2 million increase for Q3 and Q4?
Mike Cockrell Sanderson Farms CFO
Let me look at the number. Whats your other question?
Heather Jones BB&T Capital Markets Analyst
The other question is on these Kinston costs, I know that start up for Goldsboro is just
starting 2011, but I was wondering what youre projecting for those costs? Im trying to figure out
what a delta, a rough delta would be, year-on-year, for the start up training costs in 2011 versus
2010.
Joe Sanderson Sanderson Farms Chairman & CEO
Goldsboro start up costs.
Mike Cockrell Sanderson Farms CFO
It is going to be if you are modeling that far out.
Joe Sanderson Sanderson Farms Chairman & CEO
You are not going to hit much Goldsboro start up in 2011. It will be a little bit, but it
wont be as much because you will most of Goldsboro is going to come in 2012.
Heather Jones BB&T Capital Markets Analyst
So that is roughly $8 million of costs that will go away in 20111.
Joe Sanderson Sanderson Farms Chairman & CEO
Yes.
Heather Jones BB&T Capital Markets Analyst
Okay.
Mike Cockrell Sanderson Farms CFO
It will come back.
Joe Sanderson Sanderson Farms Chairman & CEO
Back in 2012.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Mike Cockrell Sanderson Farms CFO
The year-to-date amortization of stock has been 3.5 million.
Heather Jones BB&T Capital Markets Analyst
Yes.
Mike
Cockrell Sanderson Farms CFO
For the second half of the year, it will be roughly that. I will have to throw in this caveat.
Before part of that is performance shares, during the first six months of the year, 2.1 million
of that amortization was related to restricted stock that is time-based and has accrued ratably
over the life of that restricted stock, 1.415 million of that was amortization of performance
shares. The amortization of those shares depends on performance, theyre tied directory to the
Company achieving targets on return on sales and return on equity, and those targets are public,
theyre filed with the SEC of course, but we have begun amortizing a grant that was made in 2008
and a grant that was made in 2009 that appears to us will be achieved. So we started amortizing
that, but it will depend on performance.
Heather Jones BB&T Capital Markets Analyst
So that when you say 3.5 in the back half, that assumes
Mike Cockrell Sanderson Farms CFO
That assumes a level of profitability similar to what we have achieved so far this year.
Heather Jones BB&T Capital Markets Analyst
Okay. All right. Thank you again.
Operator
We will take a question from Christina McGlone with Deutsche Bank.
Christina McGlone Deutsche Bank Analyst
Hi. Good morning.
Joe Sanderson Sanderson Farms Chairman & CEO
Good morning.
Christina McGlone Deutsche Bank Analyst
I had trouble getting in the queue. I guess I have three questions. First, on leg quarter
pricing, it has held very firm. I am starting to hear that maybe theres some issues in the Baltic
with inventory levels, and I am wondering what you think of that, and if that could impact the leg
quarter pricing that we see on [earnaberry]?
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Joe Sanderson Sanderson Farms Chairman & CEO
Christina, we have, as you said, leg quarter prices have been flat. Theres we dont my
export group doesnt see any improvement in those prices without Russia opening up. We did see a
lot of product going into those, some of the former Soviet Union countries that shipp to the
(inaudible) over there, and that could indicate some inventory build up. But it hasnt affected the
markets yet. We need Russia to open up.
Christina McGlone Deutsche Bank Analyst
Okay.
Lampkin Butts Sanderson Farms President & COO
Some of that product may be shipping. We we think some of that product may be leaving
though some of those countries, and crossing the border into Russia. If you will look at the we
dont know that. We just see the volume increasing in some countries that border Russia, some
people speculate that some could be working its way into Russia. We do we cant confirm that
yet.
Christina McGlone Deutsche Bank Analyst
Okay. Thank you. Second question, I was just wondering about the grower availability in North
Carolina. There has been some reluctance on the part of lenders and some other processors in their
region expressed concern. I am wondering if you are runing into that or if that exists, and maybe
thats one of the reasons for your, for saying that production wont dramatically increase.
Joe Sanderson Sanderson Farms Chairman & CEO
Well, I can tell you that we are ahead of schedule in North Carolina. with our grower sign.
We needed 28 pullet houses, which are all committed,.
Mike Cockrell Sanderson Farms CFO
24.
Joe Sanderson Sanderson Farms Chairman & CEO
24, Im sorry. And 48 hen houses. We have thirty of those committed. We need 360 broiler
houses, and have 330 of those committed. And thats ahead of schedule. So, we are in good shape
there.
There are, I mean, in the last two years, there have been some changes in banks that are willing to
lend to chicken growers, and we have seen that some banks want more of a security down payment up
front, but it has not been an issue for us in North Carolina.
Christine McCracken Cleveland Research Analyst
Thank you. Last question, it is a little bit early, but talking about Kinston, what do you
think about the retail pricing program when Kinston comes online, because you have competitors
talking about increasing their case-ready business, you have two smaller players on the East Coast
increasing the case ready business, so I am just curious if it is going be competitive, not just
because of Kinston but because of the competitive response.
Joe Sanderson Sanderson Farms Chairman & CEO
We think it will be very competitive. We we have actually opened since 1993, this will be
our fourth retail plant to open, and every time we open one, it is very competitive. And this is
not going be any different. And we are going to have to fight our way in, and we expect to do that.
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May 25, 2010 / 03:00PM GMT, SAFM Q2 2010 Sanderson Farms Earnings Conference Call |
Christine McCracken Cleveland Research Analyst
Okay. Thank you.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you.
Operator
With no further questions in the queue, I would like to turn the conference back to Joe
Sanderson with any additional or closing remarks.
Joe Sanderson Sanderson Farms Chairman & CEO
Thank you, Ann. And thank all of you for spending time with us this morning. We look forward
to reporting our results to you throughout the year. Thank you.
Operator
This does conclude todays conference. We thank you for your participation.
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