Sanderson Farms Earnings Call INSIGHTS: Cutting Back More at Holidays, Storm Impact

On Tuesday, Sanderson Farms, Inc. (NASDAQ:SAFM) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Cutting Back More at Holidays

Christine Mccracken – Cleveland Research: It sounds like your announcement around the cut at 2% is already in place. Are you making any adjustments to weight at this point?

Joe F. Sanderson, Jr. – CEO and Chairman: No, we are not. The only other adjustment we made is around the holidays. We are going to cut back more during the holidays prior to Thanksgiving and prior to Christmas, but we have made no adjustment to our lab weights.

Christine Mccracken – Cleveland Research: Are weights actually higher right now. You mentioned that your yields actually added pounds in the quarter is that just the reflection of the cool weather and the seasonal…?

Joe F. Sanderson, Jr. – CEO and Chairman: They were higher in May, but they are not higher now, actually they are lower right now because of the heat. We didn’t get heat until June and our weights came off really in July and August.

Storm Impact

Farha Aslam – Stephens Inc.: Joe, you mentioned that your operations are going to be somewhat impacted by the current storm, do you think the industry overall is going to be impacted and do you think this storm is going to impact chicken pricing?

Joe F. Sanderson, Jr. – CEO and Chairman: I wouldn’t think – I wouldn’t think it would impact chicken pricing. We’re going to be – our plants are going to be down one shift today in Mississippi and Louisiana and then tomorrow and hopefully we’ll be able to make it up Saturday. I don’t think it will impact chicken pricing – they are not, but two other plants in Louisiana, I believe ramping and hopefully they won’t be affected. So, we haven’t failed to (indiscernible), nothing has happened yet that we just have an abundance of caution, we decided to shut down so people wouldn’t be traveling and like to look after their homes and their families.

Farha Aslam – Stephens Inc.: Then when we look at your production cuts, you have announced that 2% excess decline, so in the January quarter, can we expect you to produce in sales 2% less chicken year-over-year?

Joe F. Sanderson, Jr. – CEO and Chairman: Yes. Farha, during the January quarter, first quarter of 2013, we’re projecting that we’ll process 683.8 million pounds and that compares to 694.9 million pounds during the first quarter of 2012, that’s 2% lower.

Mike Cockrell – Treasurer and CFO: No, not quite, because…

Farha Aslam – Stephens Inc.: Slightly….

Mike Cockrell – Treasurer and CFO: It’s going to be, yes, 1.6% lower.

Joe F. Sanderson, Jr. – CEO and Chairman: 1.6% lower.

Farha Aslam – Stephens Inc.: Then, when you look at the industry and the grain costs that are facing the industry, how much of a cut do you think is required and could you just share with us the timing of when you think the cuts will be implemented across the industry and when pricing can recover the grain costs hit?

Joe F. Sanderson, Jr. – CEO and Chairman: I don’t have a clue about what it will take. But the industry is going to feel the impact of the grain prices in September and October. I feel like the cuts will come in September and October and November. As soon as this impact is going to be around $0.08 a pound and it’s going to bite – the hit will occur as the demand for chicken softens post Labor Day. My judgment is that the industry always cuts in steps. They search or the industry searches for the right level. So, you get a current and then you get another current until the industry finds the right level. I don’t think it will happen all at once and if you’ll go back and look in the past in the summer of 2008, even last year, I believe, I don’t have an exit thing in front of me, but if you’ll look in the past, you’ll see the industry makes cuts and then makes more cuts until the right level is achieved to return to profitability. So, I would look for some cuts in October and then maybe some more in November, December until the…

Farha Aslam – Stephens Inc.: When you look at pricing, do you think that you’re going to face resistance with roughly the 10% to 15% pricing that industry needs from customers and (indiscernible)?

Joe F. Sanderson, Jr. – CEO and Chairman: No.

Farha Aslam – Stephens Inc.: So, we’re going to have to find cut production eventually raise prices and offset this current rate?

Joe F. Sanderson, Jr. – CEO and Chairman: I don’t think – but you know, we’ve run some sensitivity charts and the pricing that you need to achieve on big bird deboning is not particularly – is not going to be that serious and there shouldn’t be any resistance. If you hold leg quarters at $0.48 which I think is – you get above that you are going to get resistance in the export market. You take wings up – where were the wings?

Mike Cockrell – Treasurer and CFO: $1.65.

Joe F. Sanderson, Jr. – CEO and Chairman: $1.65. Boneless has to go to that’s net. You have average about $1.60 on boneless and that’s no big deal. The big deal is going to be on trade pack on chill pack. You’ve got trade pack to get to 2009 margins has to go to $1.15, the Georgia dock does. That is going to be – the individual prices though on various items on the grocery store I don’t think is going to be an issue. Getting Georgia dock to $1.12 or $1.15 that’s a pretty big jump from where we are but we are at (0.95) now, so that’s pretty big jump too. I don’t think the individual parts prices is a big deal.

Farha Aslam – Stephens Inc.: Then just one final detailed question. In terms of your production mix what percentage was big bird in terms of the volume sold versus trade pack in this current quarter?

Joe F. Sanderson, Jr. – CEO and Chairman: In this current quarter, 53.95% of the pounds processed were processed at our big bird plants and 46.05% were processed at our chill pack plants, that’s 350.8 million pounds at chill pack and 410.9 million pounds at big bird deboning.