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Despite challenges, Sanderson Farms reports robust fiscal year 2005

Steadily scratching its way up the pecking order

Laurel — Sanderson Farms (NASDAQ: SAFM) plans to invest roughly $24 million in Collins to build a feed mill, expand its hatchery and make changes to the processing plant to accommodate an expansion and market shift for the complex.

The news comes on the heels of a successful annual meeting, during which Sanderson Farms CEO Joe Sanderson marked fiscal year 2005 as one of “significant growth and challenges.”

“Obviously, a key measure of our performance is reflected in our financial results,” Sanderson told the crowd of shareholders. “We’re pleased to report strong financial results … reflecting strong operating performance and a favorable product mix, and representing the second most profitable year in our company’s history. For the second year in a row, our sales topped $1 billion, and net income for the year totaled $70.6 million, or $3.51 per diluted share. Our focus on our operations and our commitment to the integrity of our brand allowed us to again reward our shareholders with solid earnings.”

Sanderson Farms leaders have put into motion a growth plan that will allow the company to continue to grow its capacity for earnings through 2009.

“This plan includes the addition of a second shift at our new poultry facility in Adel and Moultrie, Georgia, the completion of the conversion in Collins to big bird deboning, and the start-up of construction at our recently announced new big bird deboning facility in Waco, Texas,” he said. “Our formula for internal growth when external assets are not available and when our balance sheet is strong has worked well.”

Sanderson Farms president and COO Lampkin Butts said the company — the fifth largest poultry producer in the U.S. — ended the fiscal year with “a substantial amount of cash on the balance sheet and essentially no debt.”

“The strong financial results … were partly due to favorable market conditions during fiscal 2005, although chicken prices were mixed throughout the year and didn’t attain the record levels we experienced in fiscal 2004,” said Butts. “Despite the challenges of Hurricane Katrina during our fourth quarter, we finished the year near the top of our industry.”

Last year, Sanderson Farms processed more than 277 million chickens, or 1.6 billion dressed pounds, compared to 722 million pounds processed in 1997. “Our strategic market shift over the past several years — to balance our production and processing between chill-pack products for the retail market and big bird deboning products for the casual dining and food service markets — has served us well,” he said.

On August 22, 2005, Sanderson Farms began operations at its new Moultrie, Ga., processing facility, which produces products for the retail market.

“At the same time, we began making changes at Collins to convert that plant from a mix of big bird deboning and retail products to 100% big bird deboning,” said Butts. “We’ll begin processing on the second shift in Georgia during March, and plan to have that plant at full production on both shifts by July 30. Also, we will complete the expansion of our Collins production facilities by early summer, and will complete the addition of 150,000 head per week of big birds at Collins by the end of July.”

In 2005, Sanderson Farms extended its market further east and into the Northeast, and strengthened its position as a leading brand of 100% natural, fresh chicken available on the market. “The additional head of chill pack chickens represented by the second shift in Georgia will require that we maintain our sales momentum during 2006, and I am confident we can do that,” he said.

Export demand dropped last year, partly in response to Avian flu concerns from consumers in foreign countries. Boneless breast meat traded below $1.10 per pound all year, and market prices continue to hover well below the historical average price for the product. Leg quarter prices have fallen from the mid-40s during fiscal 2005 to below 20 cents per pound. However, the U.S. Department of Agriculture predicts a modest 3.7% increase in export volume for 2006, said Butts.

“Our prepared foods division also made progress during 2005,” he pointed out. “Benefiting from lower breast meat prices, the division returned to profitability during 2005, but we still expect more from the division. Over the next 18 months, we’ll invest substantial capital in equipment designed to increase our capacity to cook chicken and to make the foods plant more efficient. This high-speed cooking equipment will more than double our capacity to cook chicken, and the reduced costs per pound should better position us to compete for new business. This strategy will also provide another market into which we can sell our increased volume of boneless breast meat produced at our big bird deboning facilities.”

On January 12, Sanderson Farms’ board of directors approved another major expansion. Waco, Texas, will be the site of a new poultry processing complex, said Mike Cockrell, Sanderson Farms CFO.

“This new complex will consist of a new poultry processing plant and wastewater facility, as well as a new hatchery,” he said. “The existing feed mill in Texas will be expanded to provide the capacity necessary for the new complex, which when fully operational, will have the capability to process 1.2 million big birds per week. The complex will employ approximately 1,300 people at full capacity and will require 600 new poultry houses in Texas. Engineering of this new complex is underway with completion of the project scheduled for May 2007, with production to then ramp up into 2008. This project will enable the company to continue its pattern of steady growth.”

As a result of Hurricane Katrina, Sanderson Farms did not suffer significant damage to its assets, nor did the company’s employees or contract growers in Mississippi or Louisiana experience loss of life or serious injuries, said Cockrell.

“While the storm’s impact on our live inventories and live production process affected the company’s capacity and volume during the fourth fiscal quarter of 2005 and into the first fiscal quarter of this year, none of the losses will affect Sanderson Farms over the long term,” he said. “While it is not our practice to issue press releases discussing our contributions in this regard, Sanderson Farms and its employees provided over 1.8 million hot meals, over 135 truckloads of ice and countless man-hours to our neighbors more seriously affected by the storm.”

In 1947, D.R. Sanderson Sr., and his two sons, D.R. Sanderson Jr. and Joe Frank Sanderson, began a farm supply business, which sold feed, seed, fertilizer and other farm supplies. In 1951, the family formed a partnership, Sanderson Brothers, and eventually added poultry production.

When Sanderson Farms was incorporated in 1955, the company began its steady climb to becoming one of the top-quality chicken producers in the nation. Publicly traded since 1987, the company employs 8,645 people and contracts with more than 600 independent growers.

Contact MBJ contributing writer Lynne W. Jeter at Lynne.Jeter@gmail.com.

About Lynne W. Jeter

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