Cal-Maine Foods, Inc. (CALM) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Peter Galbo, Bank of America's food, beverages and protein equity analyst, and we'd like to thank you for joining us today for a discussion with Cal-Maine Foods, the largest producer of shell and specialty eggs in the United States. Before we begin, we have a quick disclaimer. Some of the statements Cal-Maine may make today may be considered forward-looking and are based on assumptions as of today, and Cal-Maine undertakes no obligation to update them. Please refer to Cal-Maine's Form 10-K for a discussion of the risk factors that may affect results and Bank of America's website for important research disclosures. With us today from Cal-Maine are CEO and Chairman, Dolph Baker; and CFO, Max Bowman. We're very excited to have them today. Thanks very much to both of you for being with us. The format of today's call will be a quick slide presentation from the team, followed by Q&A and we'll wrap after about 40 minutes. [Operator Instructions] So with that, Dolph and Max, I'll turn it to you guys for the slides, and then we'll hop into the Q&A.

Okay, Peter, thanks for hosting us today and the opportunity to tell the Cal-Maine story, we're actually in a quiet period right now, and we'll release our third quarter results, March 29. But we'd encourage everybody to look at our filings, 10-K filings on our website. A few comments before we get into the Q&A. We'll start with Page 3 of the deck. You can put that on the screen. There you go. Our company was founded by Fred Adams in 1957. Fred merged his company Adams Foods, with Dairy Fresh in California and Maine Egg Farms in Lewiston, Maine to form Cal-Maine Foods in 1969, and our company has primarily grown through acquisitions. We've had 22 acquisitions since 1989. We are fully integrated. We have locations in 16 states. We focus on the Sunbelt. We own our own feed mills, breeder flocks, hatcheries pullet facilities, production and processing facilities, distribution and sales and marketing. We've been public since 1996 under the symbol CALM. We are a controlled public company with the Adams and Baker family controlling 57% of the vote. Mr. Adams passed away in March of last year, and it forced us to have a secondary, which we had in August. In order to pay the estate taxes owed. The family intends to carry on Fred's legacy going forward. We are the largest producer and marketer of shell eggs in the U.S. We have approximately 19% share of the shell egg market. We have 42 million laying hands and about 9 million pullets growing. It's about $51 million on the slide. In fiscal 2020, we sold approximately $1.4 billion in revenue, over $1 billion dozens sold. We have no debt today at the end of our second quarter, we had $232 million in cash and investments on our balance sheet and $100 million unused credit facility to execute our growth strategy. We'll go to Page 4. We have the best customer list in the egg industry, long-standing relationships, we work hard every day to earn their trust. And Walmart, Sam's, H-E-B and Publix are our top customers. 92% of our sales go into retail channels, it's growing the IRI data as of the first week of February shows that the egg category was -- fresh shell egg category was up 5.7%. Eggs continue to be the least cost source of high-quality protein. We sell a mix of conventional legs, about 67% of our eggs are conventional. 63% -- excuse me, 37% are specialty eggs. We try to match market demand and give our customers and consumers' choice. Our products address 96%. Of the shell eggs at retail, we currently have a 34% market share of specialty eggs sold at retail in the U.S. We'll go to the next page. It's the cage-free movement. There are currently 7 states with about 23% of the total U.S. populations that have adopted cage-free legislation with implementation targeted for 2022 through 2026. California leads the way January 1, 2022. So currently, USDA reports that 26% of the total U.S. hen population is cage-free. The industry projects for the entire industry to go cage-free would require a $6.50-plus billion investment. Cal-Maine has invested $405 million to expand our cage-free production since 2008, and we believe this cage-free conversion is a big opportunity. The egg industry is very fragmented. It's mostly family businesses. There's generational turnover in these families, and the capital requirements to convert the cage-free are a huge commitment. So we think there are great opportunities that lie ahead. And I'll turn it to Max, you have a comment on the ...

Yes. So if you turn to Slide 6. I'll cover some of the key margin drivers and some other cost elements for Cal-Maine. Obviously, our gross margin is impacted by the sales price of eggs and by our volume. You can see from the chart at the top left there, that FY '20, we saw our gross margins pressured on relatively strong volumes versus the prior year. We have been increasing our production capacity and as that production produced to sold has increased, that has helped somewhat with the gross margin percentages. On the SG&A front, you can see that we try to maintain a solid expense discipline for the 3 years prior. We've been running in that 12% to 13% with SG&A as a percent of our sales. We'll continue to look for ways to manage our SG&A activities and to build and maintain capabilities to help ensure our spending aligns with our corporate mission and our responsibilities, all of our stakeholders, employees, customers, our communities and our investors. If you dig into our cost elements, and I'm sure we'll get some of this in the Q&A, so I won't hit this too hard, but our feed ingredient cost is obviously the biggest cost element in our cost of sales. The bottom left chart shows sort of what that quarterly cost per dozen has been going all the way back to '15, it's been relatively stable during that time in the upper 30s to low 40s. But we reported at the end of our second fiscal quarter, that feed costs and ingredients were increasing at that quarter. And we expected that to continue on into the balance of the calendar and fiscal years. And so we've included a sensitivity analysis chart on the bottom right there, that really shows the impact of changing food ingredient -- feed ingredient prices. The center of the chart there, just showing the $0.41 that we finished 2020 at, but the important thing to note, and this, again, is published in our 10-K that basically, for every $0.28 increase in the price of corn per bushel or $27.5 per ton increase in soybean mill, each of those change our price per dozen roughly by $0.01. And I think most of you know that we've seen increases in those feed ingredients since the start of our fiscal year. If you turn to the next slide and just in summary, before we turn it back over to Peter, I'd just say that we're pleased to be here today as the largest producer and distributor of fresh shell eggs in the U.S. We do believe that we are position to serve our customers, particularly in the strong retail channel where we have a large presence. We believe we have significant growth opportunities organically as well as acquisitions. And as Dolph said, we participate in a highly fragmented market. We've got a very strong balance sheet that can support these growth initiatives. And we've got a long track record of best-in-class management systems and teams with many decades of collective experience. We look forward to these conversations today and spending more time with your questions. Peter, we'll turn it back over to you at this point.

Great. Thanks very much, guys. Very comprehensive and having that sensitivity, I'm sure is helpful for folks. So Dolph, maybe just to start, it's been a tumultuous past 15 months going back to the start of 2020. Cal-Maine has, I think, seen a lot of ups and downs, along with a number of other sectors in food and beverage. Just take us through kind of that time period for people who aren't as familiar with the story? And then maybe what you've just seen here up through kind of your reported results in fiscal '21?

Okay, Peter. First, I'd like to acknowledge the hard work of all of our employees who continue to meet our customer demand through this terrible COVID times. Our top priority is the health and safety of our employees. But calendar 2019 was a very difficult year for egg producers. We had record hen inventories. And those record hen inventories for some supply adjustments. In March 2020, the hen inventory was about $12 million under the previous year. Then the stay-at-home orders and the proximity to Easter sparked tremendous demand at retail and record Urner-Barry prices for a few weeks. It didn't take long before the foodservice and hospitality demand shut down and Urner-Barry market move down drastically. The national hen inventory continued to adjust down and bottomed at $314 million in August. But even with those big supply adjustments and record retail demand, it was not enough to offset the foodservice and hospitality demand. The Urner-Barry market did move higher in September and October, but was not sustainable for the Thanksgiving and Christmas holiday. January and February prices have been more favorable as the egg market has moved up the last few weeks and a little bit this week. So it's been a wild ride, but we we're proud of our people and don't know what the future will bring. But I think with the foodservice and hospitality demand coming back, it should create a more favorable supply-demand balance.

So maybe we can touch on that first here. Obviously, one of the questions we get on Cal-Maine is they sell 90% of their eggs through the retail channel and with food service coming back, does that help or hurt them based on your comments, it would seem like the food service recovery actually helped because it firms up some of that supply, but just wanted to kind of get your perspective on that.

Yes. We have experienced record retail demand, and I think that will continue eggs have gotten -- are good for you. Again, they're the least expensive protein. And I think that with the vaccination and restaurants opening, and travel, that there's a lot of pent-up demand out there. And there are only so many eggs, and it should improve the supply-demand balance for both retail and food service, the overall industry.

Got it. No, that's helpful. And I think one of the themes that we've been hearing a lot of -- and this goes certainly back to the Consumer Analyst Group Conference last month, each of the food companies have kind of taken a different perspective on how they're seeing the world post-COVID? Just wanted to get your thoughts where you're viewing normalized demand, any habits -- your day-parts, you've seen that have changed as a result of people being in lockdown that you're expecting to stick around even post-vaccination?

Yes. Again, I think that demand at retail has been good. People are cooking a lot at home. I don't see that changing much. The -- an interesting thing that's happening is the national break is starting to pick up, egg's broken. We'll get the report this afternoon. Where that has been averaging over 240,000 fewer cases broken the last few months compared to a year ago. That's getting closer. It's down to 100,000 -- close to 100,000. So there's good demand from the -- on the product side. There's good export demand for both products and shell eggs. And again, with the different states opening up, it should get the supply demand in a much better balance.

Great. No, good to hear. Max, maybe I'll talk -- pass this one to you, but just obviously, there were some disruptions throughout the Southeast and in Texas from the winter storms, something that we spoke about. Just any update there in terms of operations, or anything else you'd point out?

Peter, I'll take it. I can't say enough about the job our team did during the winter storms. We were prepared as much as we could be. We had our feed -- all of our feed on the farms are being spilled, but it was a difficult situation. Our team did a great job. We had generators from all over the country that -- for back up in addition to the ones we always have on the farms. But the weather was tough, getting people to the farms was difficult. But we did get all the birds fed. We got all the eggs processed even with the rolling blackouts, we did -- there were disruptions with our customers shutting down their distribution centers. So we had eggs back up on us. But we had -- the following week, we had a record sales week, all those eggs moved out. And again, we were helping our customers, whether they were warehouse deliveries, we were doing store door routes for anything that we could, and it's really pretty much back to normal now. We're gearing up for Easter in a few weeks. So we have a lot of heroes to thank out in the field. They did an outstanding job.

Great. Glad to hear things have normalized and you're ready for Easter. Maybe in terms of grain, this is something that Max brought up in the prepared remarks and Dolph, I'd love to get your view here as well. But higher grain through the rest of '20 -- at least calendar '21, seems to kind of be the consensus view. We had a presentation yesterday that kind of said maybe calendar '22 is maybe not anti, but still an elevated grain year. Just curious with the loss you reported out yesterday, how you're thinking about grain from a higher level?

Yes, you're right. It's been an extremely hot topic throughout the year. We -- as I said in opening remarks, I mean corn and soybean meal are our most important and biggest cost input. So we watch those markets very closely on a daily basis. We reported -- when we reported our second quarter results that while the cost for the quarter were still pretty much in line with prior quarters at about $0.41 the trend at the end of the quarter was definitely up. And we said at that time that we expected volatility to continue for the remainder of our both fiscal 2021 and beyond through the full calendar year. And certainly, nothing has happened since then to change our view. We've dealt with the supply chain disruptions caused by COVID. There were a lot of weather events at harvest this past year. We've had all the geopolitical issues and trade agreements. And some of the weather events have not only been in the U.S., but in some of the large grain producing places in South America. So it's been crazy. And just to remind everyone, when we started the year, I think the CBOT corn price was $3.23 a bushel. And the soybean meal price was about $283 a ton. We're now looking at corn in the $5.50 range and soybean meal at $410. So you can take that sensitivity analysis that's in our presentation and do your calculations and know that it has impacted our cost of this year and will for the balance of the year. Our strategy has stayed the same. We always stay pretty close and don't purchase too far ahead. And that's what we've done throughout this year and anticipate going forward.

And maybe we could talk about some of the positive offsets from higher grain, whether that's keeping the head numbers down, if that's putting working capital constraints on some of the smaller guys obviously, not looking for you divulge too much, but just how, from a macro level, we should kind of view the positive offsets from higher grain?

Yes. Well, as I always say, we can't really speak much about what other producers do or will do. But I can tell you what Cal-Maine is doing. And I can -- what we can't comment on this public information out there but I think it clearly is having an impact. As Dolph reported, the hen numbers, we look at that chicken and eggs report, and we're still looking at hen numbers that are -- as they were reported on February 26, down to 327.4 million hens in the inventory. And while that's up a little bit over the previous month, we're still 7 million hens or 2.1% below the same time last year. The hatch was also reported down in February. The eggs in machines were up about 6%. When the USDA reduced it or -- yes, reduced its table egg production numbers in February, mid-February, they brought those numbers down a bit and stated one of the reasons was some of the expected higher grain costs. Those numbers are pretty much in line, slightly up from 2020. But when you look back to 2019, they're about 1.7% below 2019 kind of numbers. Leap and others are calling for lower production, pretty much through and lower hen numbers pretty much through calendar year '21 Leap, particularly called out the number of pullets to be placed. And again, while the numbers were we're up slightly in '20. They were nowhere -- they were down substantially from the 3.7% decrease from those pullet placements in 2019. So overall, we do believe that some of these grain prices are affecting our market and puts in a challenging expense environment. And it helps us kind of deal with some of this food service uncertainty that's coming back. But overall, it should bring the market into better balance.

Historically, the industry has made more money with higher feed costs. Projections continue to suggest supply discipline, given the expense environment that we're in and the lack of industry profitability in the last couple of years. So hopefully, history will repeat itself.

No, sounds promising. And I guess on higher prices as well. You're obviously going to be comping against a pretty tough pricing environment from last year given March. You are getting close to Easter, though, seasonally a high point. I guess, are you hearing anything from your retail customers or any of your customers around what Easter might look like this year, whether that's in comparison to last year or even 2019, again, with activation, CDC saying, grand parents can see grandchildren, just how you're thinking about it?

Well, yes, coming into March, we definitely were -- had a higher Urner-Barry price than the year before, and it's been good. And we've seen, since March, we've seen our market start moving up and including this week. We went into this week and got over the $1.60 per dozen for a large grade A egg in the southeast. So that's ahead at this point. Now last year, as you noted, we're sort of at the start of where COVID hit. And by the end of March last year, we had a southeastern market for a large grade A egg that got to $3.18. Now we don't expect that kind of run. I mean, that was a bit of an unusual circumstance, obviously, as people stock for the COVID-19 pandemic, and were eating at home, and that price went up. Hard in March, but then fell back. But overall, it's been a better pricing environment. We can't predict exactly how the rest of Easter is going to play out. We still got some time. But signs are now for a reasonably good Easter market over the next several weeks. I think it's going to be important to kind of watch that break. As Dolph mentioned earlier, it's been trending up over the last several weeks indicating more eggs moving it back into the food industry. And so hopefully, that will continue and help keep our marketing a good balance.

Perfect. Maybe let's shift topics a little bit and talk about cage-free. Dolph, you had some prepared remarks there. I think the $6 billion to $6.5 billion number for the industry to convert is pretty daunting. And we're a year or 2 away from more prominent actions coming into place, referring cage-free, you gave us Cal-Maine's update. But just what's kind of your view on the status of cage-free, whether that's going to drive more conversions or the opportunities that you're seeing?

Well, historically, I believe going forward, and producers, they we will comply with whatever federal state and local mandates are out there for production methods. As you mentioned, there are 7 states with a couple more right behind them that have that have said all cage-free production and sales within those states. Those states represent, Dolph said, think about 23% of the country's growth. So there's -- of the consumer. So there is a lot of demand for cage-free egg out there. As a producer, what Cal-Maine tries to do, obviously, first and foremost, as Dolph said, is we want to produce eggs that our customers want to buy. We have to match our production to their demand. We believe strongly in offering them the choices that they want to have. And so we've also said we spent over $400 million in preparing for cage-free market. But ultimately, we have to look at our customer base. Our customer base, as most of you know that follow the company, is largely in the Southeast, is in Texas and Florida. And frankly, other states where there hasn't been a big move or certainly a mandate towards cage-free at least at this time. So we'll continue to monitor those things. We'll continue to position ourselves to be ready as best we can for what our customers demand. We think we're in a good position as anybody, as I always say, I like the hand we're dealt -- we've been able to manage the cage-free expansion we've done to this point. Basically, financed out of cash flow. We still got a healthy cash balance. We've got an untapped credit facility, as Dolph mentioned, and we are a public company with access to the capital and debt market. So while I don't -- I'm not suggesting we can take on this whole $6.5 billion as estimated, we certainly feel like we can do our part and see it as somewhat of an opportunity to further grow our business going forward. I can't really comment -- I'll just say on that $6.5 million. That is the estimate that kind of you can back into from what UEP and others have said, where 70% of the birds will have to be converted by 2026, basically, tripling our current numbers. That seems very ambitious. So we'll have to see how it plays out, but we're going to keep our ear to the ground and what our customers say and try to make sure Cal-Maine matches our production to those demands.

And maybe you guys have a retain outset out in the past couple of months about your new Kentucky facility. Just give us a sense on timing for that capital project, whether it's incremental capacity, I think that's -- whenever you have capacity announcements in a commodity industry, that's when investors maybe get a little bit more skittish, but just wanted to kind of give you a chance to explain that to the broader group?

Yes. Well, it's through Dolph's leadership and our Board. We're -- again, we're trying to make sure, most importantly, we match our production and our future production capability to what our customers demand. And the Guthrie project is, I think, a good example of that. I mean we're leaning forward a little bit, trying to get ready for cage-free Guthrie's position, so that we can get eggs into the Northeast or even to the west, throughout the country, really. So it's a good -- it was a good logical place to start. It is a conversion project. It's not incremental. So we're taking a conventional facility, and we're converting them to cage-free. What we said was that was about a 1.5 million cage-free hens will be added and then some pullet capacity, about 300,000 pullet the timing of that is ultimately going to be dictated a little bit about how things play out. Ideally, you want to not add all that production at one-time because then you end up with hens of similar ages and more medium eggs, maybe then you want to be able to stage them in. So we're -- that's our plan is to sort of go slow with this conversion. And it has already started. But ultimately, we'll try to match it up with what our customers tell us they want and need.

Okay. Dolph, maybe I'll talk this next one to you, but big topical question is pasteurized eggs. A category, Cal-Maine currently doesn't play in, but it's certainly drummed up a lot of interest and curious not only what you think kind of the future of that market, but what the potential kind of foray could be for Cal-Maine in that space?

Yes. There has been a lot of interest. There is demand for pasteurized eggs, although it's small. A small part of the market. It represents 4% or 5% of the category. But I commented earlier that we play in 96% of the space at retail. We have not been aggressive on the pasture side, but we're listening to our customers, and we're here to provide them what they ask for. One of the animal welfare and food safety is top of mind for both ourselves and our customers. But it is an interesting space, and it's got a lot of attention. It's got a lot of egg producers' attention. And we'll see how it plays out. I would say there's probably going to be more competition in that space than we've had in the past.

Fair enough. Fair enough. Maybe just with the time we have remaining, guys, I'd like to focus on capital allocation. The company has been very acquisitive over the years. And Dolph, you've certainly been instrumental in that. Haven't done a deal here in the past 18, 24 months. Just curious, your appetite for M&A, it kind of comes full circle. On grain, you're one of the better capitalized producers in the space. Maybe some other guys are struggling. Just help us shape the M&A environment today.

You want to take that one?

Go ahead.

No. It's -- we have grown our company, mainly through acquisitions, but we don't chase them. And again, most of these are family businesses, and there's usually an event within the family that determines that they want to sell their company. And we've been in the space a long time. We have a good track record. And we're usually on the top of the list to call when that decision is made. It's really been a little quiet, to be honest. We haven't made an acquisition since Mahard. We have to be selective in the acquisitions. And I think that everybody is trying to get through the fall holidays and Easter, and it might heat up a little bit as we go through the summer. We're open, but we don't chase.

And I'd just say, we kind of have to balance our acquisition strategy, as Dolph suggests, again, back to that, what do our customers want? We're trying to grow our specialty business, and that seems to be what customers want, including cage-free. When acquisitions aren't available, that half specialty eggs or cage-free egg, that has been part of the reason we spent this money on growing our own capabilities in those areas and investing in our cage-free facility. So we'll balance those 2. If we do make acquisitions, we're looking for expense synergies or enhanced service or customer opportunities. And like we got out of the Mahard acquisition, and that's what we'll continue to look for going forward.

Okay. And maybe we'll finish on the last one and probably the most topical question that I've gotten, but the dividend, variable dividend company, Max, it seems like fundamentals have maybe turned a corner here. Help us frame maybe not timing, but just how you're feeling about it, where you stand, how much more in terms of losses you have to cover from the past year or so? Anything you can help us with there?

Sure. Well, just to sort of restate our position. People always ask me, when you're going to pay a dividend, your fees, your policy change, not to pay a dividend. And of course, I always say that we have a variable dividend policy. We've had the same policy for years. I think it's a great policy for a company like Cal-Maine. It simply says that we're going to pay 1/3 of the money that we earn out as a dividend, and we do that on a cumulative basis. So if we have a quarter where we made money up to that point and we make money in that quarter. 1/3 of it is going out in a dividend. If we lose money, then we have to make up that amount before we're able to start back with the dividend. We went back -- we started this quarter, down about $8.6 million of cumulative losses to overcome before we pay a dividend. As Dolph said, we've been in a pretty challenging environment, really, for the last several years. Most of that was closed in the third -- I guess, fourth quarter last year, COVID, we had a good, really good quarter, but not quite enough to get us over the hump. And as Dolph said, we'll be releasing our earnings late this month, and we'll see. But we feel we're positioned well and lack that capital allocation policy, but that's where we stand right now.

All right. We'll look more. We did have one question come in from the web here that we'd like to throw out to you guys. Asking about industry exports, it seems like maybe they picked up due to Avian Flu picking up in Asia, but just any color on the strength you've seen in exports recently and what you're expecting here maybe in the short term?

Yes. There's been a lot of interest in Japan with Avian influenza, South Korea, and there's been good interest in Canada and Mexico. So I don't know what volumes, but I just see the market reporters reporting it on a weekly basis. And generally, only 3.5% to 4% of the eggs produced are exported in shell and products. So it's all incremental business, and it always helps that supply-demand balance when they pick up. I think that the projections are that they should be good this year from some of the -- from the LEAP report and some others, USDA also.

I mean we saw one report that said Japan's flock been impacted by, I think, about 7% already. So there's certainly across Europe in Japan and others of a disruption in their flocks because of [indiscernible], which should help.

All right. Well, that's what we have time for today. Guys, I want to thank you both very much for coming on with us today and for the presentation, very helpful and thoughtful. If you do have any questions from the webcast or want to follow-up with the team, please feel free to reach out to us, and we're happy to connect. But with that, we'll close the session. Thanks very much again.

Thank you, Peter.

Thank you.