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Sanderson Farms' Q1 Loss Postpones New Plant Plan

by 5m Editor
25 February 2011, at 9:12am

US - Reporting its results for the first quarter (Q1) of 2011, Sanderson Farms announced it had made a net loss of more than $33 million (before an inventory adjustment), which was attributed to weak demand from the food service sector and high feed prices.

Net sales for the first quarter of fiscal 2011 were $427.7 million compared with $420.1 million for the same period a year ago. For the quarter, the company had a net loss of $33.6 million, or $1.52 per share, compared with net income of $15.8 million, or $0.75 per share, for the first quarter of fiscal 2010. The Company's results for the first quarter of fiscal 2011 include a charge of $22.3 million, before income taxes, to reduce the value of live inventory from cost to market. Excluding this adjustment, the net loss for the first quarter of fiscal 2011 was $19.2 million, or $0.87 per share.

Joe F. Sanderson, Jr., chairman and chief executive officer of Sanderson Farms, Inc. commented: "The results for the first quarter of fiscal 2011 were influenced by a number of factors. Overall, we experienced lower poultry market prices than the same period a year ago, primarily due to an oversupply of chicken during the first quarter of fiscal 2011. While retail demand for chicken has remained steady, we have continued to see weak food service demand, and we expect this trend will remain until the national unemployment rate improves. Consumers are simply not dining out as frequently and restaurant traffic has remained under pressure. We also experienced a significant increase in feed costs during the quarter, compared with a year ago, and this affected our profitability."

According to Mr Sanderson, market prices for poultry products were mixed during the first quarter of fiscal 2011 compared with the same period of fiscal 2010 but were lower overall. A simple average of the Georgia dock price for whole chickens was approximately 3.5 per cent higher in the Company's first fiscal quarter compared with the same period in 2010. Boneless breast meat prices during the quarter were approximately 3.1 per cent lower than the prior-year period. The average market price for bulk leg quarters increased approximately 2.8 per cent for the quarter compared with the same period last year, primarily due to higher export demand than a year ago. Jumbo wing prices, which averaged $1.00 per pound, were down 36.6 per cent compared with an average of $1.57 per pound a year ago. Prices paid for corn and soybean meal, the Company's primary feed ingredients, increased 42.9 per cent and 4.4 per cent, respectively, compared with the first quarter of fiscal 2010. These price increases reflect lower yields of both corn and soybeans during the 2010 crop year and uncertainty regarding the size and quality of the 2011 crop.

Inventory adjustment

The Company recorded an adjustment to value its live broilers at 31 January 2011, at market value rather than at cost. The Company records the value of its inventory at the lower of cost or market value. When market conditions are favourable, the Company values its live broiler inventory on hand at cost, and accumulates costs as the birds are grown to a marketable age subsequent to the balance sheet date. Because market prices for corn and soybean meal have increased substantially since 31 October 2010, the projected cost to complete, process and sell broilers included in live inventory at 31 January 2011 is expected to exceed the market value for the finished product.

As a result of the adjustment described above, inventories of live poultry were only $1.8 million higher at 31 January 2011 than on 31 October 2010 despite having fewer units of inventory of live broilers on 31 October 2010, in anticipation of the holiday season when demand for chicken is historically at its lowest point in the year, and having additional units of live poultry in inventory at 31 January 2011 at the new complex in Kinston and Lenoir County, North Carolina. In addition to more units in inventory, the cost of live poultry in inventory was higher at 31 January 2011 because of higher grain costs, which are accumulated in live inventory until the chickens that have consumed that grain are processed. These higher costs resulted in a cost value exceeding the expected market price at which the Company expects to sell the chickens when they are eventually processed and sold.

North Carolina projects

Mr Sanderson continued: "While market conditions have been challenging, we are pleased with the successful start-up of our new Kinston, North Carolina, facility. This project was completed on time and on budget, and, as planned, we began processing chickens in Kinston in January 2011. At full capacity, which is expected to be reached early during calendar 2012, the Kinston complex will employ approximately 1,500 people and will be equipped to process and sell 6.7 million pounds per week of dressed poultry meat. We look forward to the new marketing opportunities the Kinston plant will provide for Sanderson Farms as we embark on our next phase of growth in fiscal 2011."

In addition to the Kinston facility, the Company previously announced its intention to develop and construct a second North Carolina complex during fiscal 2011. While the Company continues to evaluate various alternatives for a suitable location, management has determined it is in the best interest of Sanderson Farms and its shareholders to delay construction of this project. In light of escalating prices for feed grains and the very tight supply of corn in particular, the Company believes it prudent to delay construction of the second North Carolina facility until management has better visibility around the 2011 feed grain crops in the United States. While the Company's balance sheet is strong and it remains committed to the second North Carolina complex, the Company believes it is prudent to be conservative with its working capital and balance sheet at this time.

Credit facility

On 23 February 2011, the Company entered into a new revolving credit facility through a consortium of banks to, among other things, increase the line of credit to $500 million from $300 million, and to extend the terms until 2016 from 2013. In addition, the credit remains unsecured and certain covenants related to the revolving credit loan agreement have been amended in anticipation of the Company's future growth. As of 31 January 2011, the Company had no outstanding borrowings under the then existing revolving credit facility but the Company did have $9.9 million outstanding letters of credit under the credit facility.

Outlook

Mr Sanderson added: "We believe fiscal 2011 will be a challenging year for Sanderson Farms and our industry. We are already experiencing escalating grain prices, especially for corn, which are at near-record levels. The US Department of Agriculture (USDA) recently reported that corn supplies are at their tightest levels in 15 years.

"Experience tells us that production adjustments will ultimately balance supply and demand and support market prices that will allow us, over time, to offset higher feed costs. Such adjustments will take time. Despite the challenging environment, we will continue to operate our business with a focus on those things we can control. We remain confident about the future of our business, our balance sheet remains sound, and we look forward to the opportunities ahead in fiscal 2011. As always, our goal is to operate at the top of our industry and deliver long-term value to our shareholders, " Mr Sanderson concluded.

Further Reading

- You can view the full report by clicking here.