Company reports lower results due to weaker market prices for its big bird products and weak export demand.

February 26, 2016

4 Min Read
Sanderson Farms hits headwinds in Q1

Sanderson Farms Inc. reported results for its first quarter of fiscal 2016 ended Jan. 31.

Net sales were $605.2 million, compared with $667.4 million for the first quarter of 2015. Net income was $10.7 million, or 47 cents per share, compared with net income of $66.5 million, or $2.87 per share, for the first quarter of fiscal 2015.

"Our results for the first quarter reflect significantly weaker market prices for products sold from our big bird deboning plants compared with last year's first quarter,” said Joe F. Sanderson Jr., chairman and chief executive officer of Sanderson Farms. “Poultry market prices for our tray pack products sold to retail grocery store customers were only slightly lower when compared with the same period a year ago, and we also experienced lower grain costs. As a result, margins on tray pack products remained strong.

"On the other hand, the foodservice market is oversupplied, primarily as a result of continued weak export demand," he added. "Poultry products that would normally be directed for sale in the export markets are instead being sold in the domestic foodservice market. While conditions improved in January, headwinds remain in the export market, even though most avian influenza-related bans on United States poultry products have been lifted. Currency issues, political issues and weak oil prices remain."

The company said results were also affected by a higher effective tax rate. The effective tax rate for the three months ended Jan. 31, 2016, was 44.9%, compared with 35.2% for the three-month year-ago period. The increase was primarily attributable to the company's decision to take advantage of legislation enacted in December 2015 that allowed for bonus depreciation to be taken on qualifying assets placed in service during the 2015 calendar year.

Accelerating depreciation on these items resulted in a favorable impact on first-quarter income tax receivable but had an unfavorable effect on tax deductions that are based on or limited by levels of taxable income. The higher effective tax rate cost approximately $2.0 million, or 9 cents per share, net of income tax. Had Sanderson Farms not elected to take advantage of the legislation, the effective tax rate would have been 35.1%, and the company expects this rate to return to approximately 35.1% for the balance of fiscal 2016.

According to Sanderson, overall market prices for poultry products were lower during the first quarter versus the same period last year. Compared with the first quarter of 2015, the average Georgia dock price for whole chickens was about 0.8% lower, boneless breast meat prices were roughly 21.6% lower, the average market price for bulk leg quarters decreased by 48.4% and jumbo wing prices were 2.7% lower.

The company's average feed cost per pound of poultry products processed decreased 10% to 2.9 cents/lb. versus the first quarter of 2015, and prices paid for corn and soybean meal (its primary feed ingredients) decreased 1.8% and 20.9%, respectively, compared with the first quarter of 2015.

“Near-record corn and soybean crops harvested in the United States last fall contributed to healthy soybean and corn balance tables headed into the 2016 planting season,” Sanderson noted. “Lower grain prices provided a significant tailwind during fiscal 2015, and had we priced all of our fiscal 2016 grain needs at yesterday's prices, our grain costs would be lower by $61.4 million during fiscal 2016 compared with fiscal 2015.

“Broiler egg sets have been only slightly higher than the previous year's levels in recent weeks and, we believe, reflect caution on the part of some in light of the challenging export market environment," he added. "In addition to weak export markets, foodservice markets weakened as well at the end of the calendar year. Stock market volatility and uncertainty regarding the global economy affected consumer behavior as restaurants reported weaker sales numbers in December, and these factors and severe weather across much of the United States affected traffic through foodservice establishments in January."

While noting that construction of the company's new St. Pauls, N.C., complex is on schedule to open in the fiscal 2017 first quarter, Sanderson added that "we continue to move toward full production at our new Palestine, Texas, complex. We will begin the second shift in Palestine starting in April, and we expect the plant to reach full production in the company's fourth fiscal quarter. We look forward to the opportunities the new facilities will create."

Sanderson Farms is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and further-processed and partially cooked chicken products.

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