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 Calmain 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 Main may make today may be considered forward looking and are based on assumptions as of today and Cal Main undertakes no obligation to update them.
Please refer to Calmain's Form 10 ks 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 Mayne 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 and A and we'll wrap after about 40 minutes.
If you do have any questions at any point during the call today, you can submit them through the portal on your screen or email me at peter.galboebofa.com. So with that, Dalton, to Mac, I'll turn it to you guys for the slides and then we'll hop into the Q and A.
Okay, Peter. Thanks for hosting us today and the opportunity to tell the Calhoun story. We're actually in a quiet period right now and we'll release our Q3 results March 29. I would encourage everybody to look at our filings, 10 ks filings on our website. A few comments before we get into the Q and 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 Main Foods in 1969.
Our company has primarily grown through acquisitions. We've had 22 since 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 COM. 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, 000, 000 laying hands and about 9, 000, 000 pullets growing, that's about 51, 000, 000 on the slide.
In fiscal 2020, we sold approximately $1, 400, 000, 000 in revenue, over 1, 000, 000, 000 dozens sold. We have no debt today. At the end of our second quarter, we had $232, 000, 000 in cash and investments on our balance sheet and $100, 000, 000 unused credit facility to execute our growth strategy. We'll go to Page 4. We have the best customer list in the ag industry, long standing relationships.
We work hard every day to earn their trust. And Walmart, Sam's, HEB and Publix are our top customers. 92% of our sales go into retail channels. It's growing. The IRI data as of the 1st week of February showed 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 eggs, 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, 500, 000, 000 plus investment. Cal Main has invested $405, 000, 000 to expand our cage free production since 2, 008. And we believe this cage free conversion is a big opportunity. The egg industry is very fragmented, mostly family businesses. There's generational turnover in these families and the capital requirements to convert the cage free are huge commitment.
So we think there are great opportunities that lie ahead. And I'll turn to Max, you have a comment on the Yes.
If you turn to Slide 6, I'll cover some of the key margin drivers and some other cost elements for Kyle 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 in FY 2020, 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 and 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 and A as a percent of our sales. We'll continue to look for ways to manage our SG and A activities and to build and maintain capabilities to help ensure our spending aligns with our corporate mission and our responsibilities to all 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 and 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 2nd fiscal quarter that feed costs and ingredients were increasing at that quarter and that 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 is just showing the $0.41 that we finished 2020 at. But the important thing to note, and this again is published in our 10 ks that basically for every $0.28 increase in the price of corn per bushel or $27.50 per ton increase in soybean meal, 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 positioned 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 Dall 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 it's 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 main is 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 2021?
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, 000, 000 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 food service and hospitality demand shut down and Urner Berry market moved down drastically. The national hen inventory continued to adjust down and bottomed at $314, 000, 000 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 October, but was not sustainable for the Thanksgiving and Christmas holiday. January February prices have been more favorable and 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're proud of our people and don't know what the future will bring, but I think with the food service and hospitality demand coming back, it should create a more favorable supply demand balance.
So maybe we can touch on that first here. Obviously, 1 of the questions we get on Cal Main is they sell 90% of their eggs through the retail channel and the foodservice coming back, does that help or hurt them? Based on your comments, it would seem like the foodservice recovery actually helps 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 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, the overall industry.
Got it. No, that's helpful. And I think 1 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 or your dayparts you've seen that have changed as a result of people being in lockdown that you're expecting to stick around even post vaccination?
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, eggs 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 much better balance.
Great. Good to hear. Matt, maybe I'll talk this 1 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, our bins filled, but it was difficult situation. Our team did a great job.
We had generators from all over the country that for backup 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 them, 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.
Good. 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 Dolls, I'd love to get your view here as well. But higher grain through the rest of 2020, at least calendar 2021 seems to kind of be the consensus view. We had a presentation yesterday that kind of said maybe calendar 2022 is maybe not as high, but still an elevated grain year.
Just curious with the last report out yesterday, you're thinking about grains 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 2nd 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 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 mill price was about $2.83 a ton. We're now looking at corn in the $5.50 range and soybean mill at $4.10 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 your defaults 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 Cali Maine is doing and I can what we can comment on is public information out there. But I think it clearly is having an impact. As DAF 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, 400, 000 hens in the inventory.
While that's up a little bit over the previous month, we're still 7, 000, 000 hens or 2.1% below the same time last year. The hatch was also reported down in February. The eggs and 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 1 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. Aleafia and others are calling for lower production pretty much through and lower end numbers pretty much through calendar year '21. LEAP particularly called out the number of pullets to be placed. And again, while the numbers were up slightly in 'twenty, They were nowhere they were down substantially from the 3.7% decrease from those pulp placements in 2019. So, overall, we do believe that some of these in grain prices are affecting our market and put us in a challenging expense environment.
And it helps us deal with some of this foodservice 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.
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 vaccination, CDC saying grandparents 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, including this week. We went into this week and got over the $1.60 per dozen for large Grade A Ag 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-nineteen pandemic and we're 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 the 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 back into the food industry. And so hopefully that will continue and help keep our market in 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, 000, 000, 000 to $6, 500, 000, 000 number for the industry to convert is pretty daunting. And we're a year or 2 away from more prominent actions coming into place requiring cage free.
You gave us Cal Mains 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, and I believe going forward, the producers, they will comply with whatever federal state and local mandates are out there for production method. As you mentioned, there are 7 states with a couple more right behind them that have said all case free production and sales within those states. Those states represent, we thought said, I think about 23% of the country's growth. So there's over the consumer. So there is a lot of demand for cage free act out there.
As a producer, what Calamein tries to do, obviously, 1st and foremost is to offset 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, 000, 000 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 as 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 dealt with. We've been able to manage the case 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 Dov mentioned, and we are a public company with access to We certainly feel like we can do our part and see it as somewhat 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, 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 Main matches our production to those demand.
And maybe you guys have a recent announcement 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 DAS leadership and our board, 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 is positioned so that we can get eggs into the Northeast or even to the West throughout the country really. So it's a good was a good logical place to start.
It is a conversion project. It's not incremental. So we're taking conventional facilities and we're converting them to cage free. What we said was that was about $1, 500, 000 cage free hens we'll be adding 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 1 time, but then you end up with hands of similar ages and more medium maybe than 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. 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 1 to you. But big topical question is pasteurizing. A category Calmain 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 CalMatte in that space?
Yes. There has been a lot of interest. There is demand for pasture raised eggs, although it's small, a small part of the market, it represents 4% or 5 percent of the category. But I commented earlier that we play in 96% of the space at retail. We have not been aggressive on the passenger side, but we're listening to our customers and we're here to provide them what they asked for.
1 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 Daltz, 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 and A, it kind of comes full circle on grain. You're 1 of the better capitalized producers in the space, maybe some other guys are struggling. Just help us shape the M and A environment today.
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 is 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 Maynard. 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 Doss 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 have specialty eggs or cage free eggs, that has been part of the reason we spent this money on growing our own capabilities in those areas and investing in our case 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 Meyhart acquisition and that's what we'll continue to look for going forward.
Okay. And maybe we'll finish on the last 1, 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 restate our position, people always ask me, when you're going to pay a dividend, your policy change, not to pay a dividend. 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 Main.
It simply says that we're going to pay a third of the money that we earn out as a dividend and we do that on a cumulative basis. So, we have a quarter where we made money up to that point and we make money in that quarter, third 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, 600, 000 of cumulative losses to overcome before we pay a dividend. As Josh said, we've been in a pretty challenging environment really for the last several years.
Most of that was closed in the 3rd I guess Q4 last year. COVID, we had a good really good quarter, but not quite enough to get us over the hump. As Doss said, we'll be releasing our earnings late this month and we'll see. But we again feel we're positioned well and like that capital allocation policy, but that's where we stand right now.
All right. We'll look more. We did have 1 question coming 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 eggs produced are exported in shell or in 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.
We saw 1 report that said Japan's flock been impacted by, I think about 7% already from AI. So there's certainly across Europe and Japan and others, a disruption in their blocks of the cause of AI, 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'll happy to connect. But with that, we'll close the session.
Thanks very much again.
Thank you, Peter. Thank you.