Cal-Maine Foods Inc 2027 Q1 Earnings Call

Good morning. Thank you for joining us today. I want to remind everyone that today's remarks may include forward-looking statements. These are based on management's current expectations and are subject to risks and uncertainties described in our SEC filings. I would like to begin with a question we believe is most important as we look at Cal-Maine from this point in the cycle: how does the earnings power of the company evolve from here? There are really two timing questions underneath that. The first is when the conventional shell egg market begins to rebalance. The second is when the investments we are making in prepared foods translate into greater earnings contribution. Starting with conventional eggs, the market remains oversupplied, which continues to put downward pressure on wholesale prices. The key question is the timing of rebalancing. There are some early indicators worth watching.

According to the American Egg Board September supply commentary based on assessments collected through June, AEB estimates the U.S. layer flock at approximately 336 million to 343 million birds, roughly 4 million below its previous estimate. AEB also reports that August hatch numbers are down approximately 12% year-over-year, and that cancellations are becoming more common. From a production standpoint, AEB estimates an average of approximately 19.9 million cases per month over the last three months, a slight reduction from its prior report. These indicators do not establish that the market will turn, but they provide important context on the potential direction of supply. HPAI could also affect the timing of when supply rebalances with demand. As shown on slide 9 of our earnings presentation, activity has historically increased with fall wild bird migration, although timing and severity vary by year.

We are approaching the period when the historical curve has typically turned upward. While a meaningful layer outbreak could tighten supply and support egg prices, because relatively small changes in supply can have an outsized market impact, the healthier, more sustainable outcome is for normal industry economics to work. Our focus remains on rigorous biosecurity to protect our flocks and reduce exposure. Importantly, we do not see structural weakness in egg demand. The data remains constructive across retail, food service, and exports. According to NielsenIQ, calendar year to date through August, measured retail egg volume increased approximately 4%. More recently, in the four weeks ended August 29, 2026, national retail dozens remained slightly positive year-over-year, even as average price per dozen declined approximately 27%. Affordability and greater promotional activity should provide additional support to consumption as we move into the seasonally stronger fall baking and holiday periods.

The demand trends within specialty shell eggs are particularly constructive. NielsenIQ data show that calendar year to date combined U.S. cage-free, organic, free-range, and pasture-raised dozens sold at retail increased approximately 6%, outpacing the approximately 4% growth of the overall egg category. We are also seeing healthy demand beyond retail. According to the American Egg Board, citing Circana data, QSR egg servings increased approximately 2.4% year to date through July, representing approximately 69 million incremental egg servings. American Egg Board data show that U.S. egg export volume increased approximately 29% year to date, with July representing the highest monthly export volume since May 2023. More fundamentally, eggs remain exceptionally well-positioned against durable consumer trends around protein, nutrition, convenience, simple ingredients, and value. Taken together, this gives us confidence in the long-term demand foundation, even as supply and demand work back toward balance.

That brings us to the more important point for Cal-Maine. The current cycle needs to be viewed in the context of how much the company has already changed. The transformation is not prospective. It is already visible in our mix. What comes next is scaling the earnings contribution. During the first quarter, specialty shell eggs and prepared foods represented approximately 54% of net sales, including approximately 12% for prepared foods. Conventional shell eggs remain foundational to Cal-Maine. Our scale, vertically integrated operating model, customer relationships, and national distribution capabilities are significant competitive advantages, and the business has demonstrated substantial cash-generating capacity through the cycle in the past. Specialty shell eggs broaden that foundation. Our ability to serve consumers across conventional, cage-free, nutritionally enhanced, organic, brown, pasture-raised, and free-range eggs is an important competitive advantage.

It allows us to participate across price points and consumer preferences rather than relying on any single segment of the category. Specialty shell eggs and our cost plus and hybrid pricing structures also create a more diversified economic profile. They do not eliminate commodity exposure, but we believe they reduce the extent to which daily conventional wholesale egg prices alone impact Cal-Maine's earnings potential. Prepared Foods takes that diversification further and brings us to the second major timing question. When will the investments we are making translate into greater earnings contribution? This is a multi-year capacity and commercialization build. Investment, commissioning, and startup costs necessarily precede full utilization and earnings contribution. The question is not simply when capacity comes online, it is how quickly we convert that capacity into customer demand, utilization, fixed cost absorption, and profitable growth.

We expect Prepared Foods production capacity to increase by more than 60% by the first half of fiscal 2028, compared to the end of fiscal 2026. Our high-speed pancake line is expected to add approximately 12 million pounds of annual production capacity through early fiscal 2027. Our network optimization expansion project is expected to add approximately 17 million pounds of annual scrambled egg production capacity through fiscal 2027. In Egg Corp, our investment is expected to add approximately 18 million pounds of additional production capacity progressively through fiscal 2028. Those projects are complemented by the additional $54 million of Prepared Foods capacity investments we announced last quarter. The Echo Lake, Crepini, Creighton Brothers, and Van's acquisitions have broadened our capabilities, customer base, and routes to market. The next phase is increasingly about scaling those platforms and converting the increased production capacity we are building into profitable growth.

Importantly, the addressable opportunity extends well beyond breakfast. The measured prepared breakfast category alone represents approximately $8.4 billion in annual U.S. retail sales, but our broader opportunity is egg-based prepared foods across multiple meal occasions and day parts, including breakfast, on-the-go, snacking, after-school, and convenient meals. Our strategy is to leverage our capabilities in eggs and protein across a larger set of products, customers, channels, and consumer occasions. Capacity comes first. Commercialization and customer demand follow. Earnings contribution builds as volume scales, utilization increases, fixed costs are absorbed, and operations mature. That progression is important to understanding both where our earnings are today and the earnings power we're building. With that, I'll turn the call over to Max to review our first quarter financial results.

Thanks, Sherman, and good morning, everyone. Earlier this morning, we issued our quarterly earnings release and filed our Form 10-Q for the first quarter of fiscal 2027. We also posted a supplemental first quarter earnings presentation to our website that provides additional details on our performance. For the first quarter, consolidated net sales were $539.6 million, down 41.5% compared with the prior year period. Gross profit was $403,000 compared with $311.3 million in the prior year period. Operating loss was $82.2 million compared to operating income of $249.2 million in the prior year period, and operating margin was negative 15.2%. Net loss attributable to Cal-Maine was $58.6 million compared to net income attributable to Cal-Maine of $199.3 million in the prior year period, resulting in diluted loss per share of $1.26, compared to diluted earnings per share of $4.12. Turning to our segment results.

For conventional and specialty shell eggs combined, our percent produced to sold was 98.2%. Conventional shell eggs generated net sales of $201.7 million, down 59.5% compared with the prior year period. Segment operating loss was $71 million, with an operating margin of negative 35.2%. Price realization for external customers, which we define as our average conventional shell egg selling price relative to the daily average Urner Barry Southeast market price, was 99% in FY 2027 quarter one, compared with 101% in FY 2026 quarter four. The primary driver of the change was market timing. Much of our conventional business is priced back of the market and our selling prices move with a lag. In Q4, the Urner Barry market declined rapidly, which benefited realization as our selling prices lagged the market down.

Towards the end of Q1, the market rose rapidly in late August, creating the opposite effect as our selling prices lagged the market. Our pricing approach has not changed. The direction and timing of the market did. Customer pricing arrangements, including cost-plus and hybrid structures, remain intact and realization remains historically strong. Sales mix and egg donations during the quarter also contributed to the slight sequential decline in price realization. Despite the slight sequential decline, price realization remained above historical levels achieved before the pricing structure changes, demonstrating that our strategy continues to work as intended. Specialty shell eggs generated net sales of $236.9 million, down 14% compared with the prior year period. Segment operating income was $14.9 million, with an operating margin of 6.3%. The year-over-year decline reflects an unusually strong prior year period when we strategically stepped in to supply customers during industry-wide shortages.

That decision reinforced our position as a reliable supplier of choice and kept our brands on shelf when supply was constrained. As the comparison normalizes, we expect growth to more closely align with the broader market. Prepared foods generated net sales of $63 million, down 13% compared with the prior year period. Segment operating income was $7.8 million, with an operating margin of 12.4%. SG&A expense for the quarter was $81.7 million, compared with $69.5 million in the prior year period. Interest income net of expenses was $8 million, compared with $12.9 million in the prior year period. Our effective tax rate for the quarter was 24.2%, compared with 24.4% in the prior year period.

Turning to cash flow and the balance sheet, net cash used in operating activities during the quarter was $101.4 million, compared to net cash provided by operating activities of $278.6 million in the prior year period. Capital expenditures were $26.6 million, and we acquired additional EB franchise territory in the Northeast U.S. for $25 million during the quarter. We ended the quarter with cash and temporary cash investments of $767.6 million and remain virtually debt-free. During the quarter, we repurchased 66,601 shares of our common stock under our share repurchase program for approximately $5 million. Under our current $500 million repurchase authorization, approximately $315.7 million remained available at quarter end. Subsequent to the end of the first quarter, Cal-Maine Foods repurchased 204,888 shares on the repurchase program for $14.9 million.