Sanderson Farms Clocks Record Production on Lower Feed Prices

Poultry processor’s profits more than doubled to $76 million during Q4 FY16

s1Sanderson Farms Inc. (NASDAQ: SAFM), the third-largest poultry producer in the US after Tyson Foods Inc. (NYSE: TSN) and Pilgrim’s Pride Corp. (NASDAQ: PPC), reported its Q4 FY16 and FY16 financial results on December 15th, 2016.

The Laurel, Mississippi-based Company is an integrated poultry processing company that produces and distributes fresh, frozen, and prepared chicken products. The company sells ice pack, chill pack, bulk pack, and frozen chicken in whole, cut-up, and boneless form primarily under the Sanderson Farms brand name to retailers, distributors, and casual dining operators. Its prepared chicken product line includes institutional and consumer packaged cooked and marinated chicken items for distributors and food service operators. Read more about Sanderson Farms’ financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Sanderson Farms’ net sales jumped to $790.8 million compared to $679.6 million in the year-ago same period. During the reporting quarter, costs and expenses increased to $675.14 million from $636 million. Despite higher costs, operating income jumped to $115.66 million from $43.58 million. In all, net income more than doubled to $76.0 million, or $3.36 per share, compared to net income of $27.4 million, or $1.22 per share, in Q4 FY15.

During FY16, Sanderson Farms clocked record annual sales despite a decline in overall poultry market prices compared to FY15, mainly due to favorable grain and feedstock prices. For FY16, the Company sold 3.73 billion pounds of dressed poultry, another record, compared to 3.41 billion pounds sold in FY15. Despite lower poultry prices in FY16, overall market prices for poultry products were higher in Q4 FY16, primarily as a result of improved export demand.

As measured by an average of the Georgia Dock price for whole chickens, prices were lower by approximately 4% in Q4 FY16 compared to the year ago corresponding period, and were lower by 2.7% in FY16 compared to FY15. The Georgia Dock whole bird price remained relatively strong during FY16, consistent with strong demand for retail grocery chill pack products and flat production. Boneless breast meat prices averaged 7.4% higher in Q4 FY16 versus the prior year’s same period.

However, in FY16, boneless prices were 12.5% lower when compared to FY15, reflecting continued weakness in food service demand. Unlike the demand for chicken at retail grocery stores, food service demand remains relatively weak and somewhat volatile. Jumbo wing prices averaged $1.62 per pound during Q4 FY16, up 9.5% from the average of $1.48 per pound during the prior-year period. Jumbo wing prices averaged $1.58 per pound during FY16, up 3.9% from the average of $1.52 per pound for FY15.

s2The average market price for bulk leg quarters increased about 46% in Q4 FY16, but decreased approximately 6.2% for FY16. Improved dark meat prices during Q4 FY16 reflect the increase in industry export volumes during H2 FY16, as most Avian Influenza related bans on US poultry meat were lifted. Moreover, prices for corn meal during Q4 FY16 fell 4.6%, while soybean meal prices were down 10.6%.

FY16 financial highlights

For the full year FY16, net sales inched up to $2.81 billion compared to $2.80 billion in FY15. On the other hand, net income fell to $189.0 million, or $8.37 per share, compared to net income of $216.0 million, or $9.52 per share, in FY15.

Other highlights

s3Expansion of St. Pauls complex: In FY16, Sanderson Farms went ahead with its planned expansion of its St. Pauls complex in North Carolina. The company plans to begin production at the new complex in January 2017. At full production, the pounds produced at St. Pauls will represent a 12% increase in the company’s overall production capacity.

Balance sheet: As of October 31st, 2016, the company had $1.42 billion in assets, stockholders’ equity of $1.190 billion and net working capital of $465.1 million. The company was debt-free at year-end.

Key trends

Shift in consumer preferences to organic foods: Public health experts have long been concerned that routine feeding of certain antibiotics to animals could lead to antibiotic-resistant superbugs, a health hazard for humans and a major concern for pharmaceutical companies. Finding meat raised in the US without antibiotics has become a major challenge for food companies. As a means to mitigate these concerns and spur sales, Tyson, the nation’s largest chicken company, intends to remove antibiotics important to human medicine from its flocks by September 2017. It also has put a stronger focus on selling higher-margin products. To take advantage of the trend, poultry companies and restaurants are seeking to sell poultry raised on organic grain and without antibiotics.

On a similar vein, Pilgrim’s announced on April 29th, 2016, that it is in the process of converting one of its plants to process certified organic chicken and estimates the plant will be completely converted some time in 2017. Once up and running, Pilgrim’s estimates that it would account for roughly 20% of the organic chicken production in the US. It would also be able to cater to consumer preferences such as organic naturally antibiotic free (NABF). Organic chicken now makes up about 2% of total commercial production in the US, but this category is growing at a faster clip of 31% CAGR. Once the plant is fully converted, organic chicken would account for approximately 3% to 4% of the company’s total US production.

Pilgrim’s processes nearly 142 million pounds of chicken a week, making it the second-largest chicken producer in the U.S., according to PoultryUSA. Tyson Foods, based in Springdale, Arkansas, is the largest chicken producer in the US, processing more than 175 million pounds a week. Sanderson, with a production capacity of 9.37 million chickens per week, is the third largest poultry meat producer.

To increase its offerings of high-value organic and antibiotic-free product offerings, Pilgrim’s Pride acquired GNP Company in a $350 million deal in November 2016. The all-cash deal would help Pilgrim’s to keep up with the consumer shift towards products that are more natural and healthy, while strengthening its position in natural and organic chicken products and ready-to-eat foods.

Stock Performance

s4Sanderson Farms’ stock ended the day at $93.93, gaining 1.71%, at the close on Tuesday, December 20th, 2016, having vacillated between an intraday high of $94.94 and a low of $91.00 during the session. The stock’s trading volume was at 581,073 for the day. The Company’s market cap was at $2.06 billion as of Tuesday’s close.

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