Cal-Maine Foods, Inc.CALMNASDAQ
LOADING
|||
Operator: Good morning, everyone, and welcome to the Cal-Maine Foods Second Quarter Fiscal 2026 Earnings Conference Call. All participants are in a listen-only mode. After today's prepared remarks, there will be a question and answer session. At that time, I will provide instructions for those wishing to ask a question. Please note that this call is being recorded. I will now turn the call over to Sherman Miller, President and Chief Executive Officer of Cal-Maine Foods. Please go ahead, sir. Good morning.
Sherman Miller: 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. Looking at our performance in the second quarter and first half of the year, the story is clear. We've built real momentum. We delivered solid results even against a tough comparison to last year, which was marked by supply-demand imbalances and historically high prices. With lower egg prices, our increasingly diversified business model, combined with effective execution, has proven to be a source of resilience. That positions us uniquely today, a rare combination of both value and growth, with the potential to strengthen even further over time. Our specialty egg business maintained strong prices and volumes despite challenging comparisons and delivered growth in the first half of the fiscal year. At the same time, our recently announced expansions are positioning our prepared foods business to deliver sustained double-digit volume growth. Another key trend we're seeing is the ongoing shift in our sales mix across the portfolio. This shift was visible throughout the second quarter and first half of the fiscal year, and we expect it will steadily enhance the durability and predictability of our earnings. It's a direct reflection of the deliberate execution of our long-term strategy. We believe our results continue to reinforce just how effective that approach will be in pursuit of operational and financial excellence. Let me share a few strategic highlights from the second quarter and first half of the year that show how we're driving continued sale diversification and favorable mix shifts. In 2026, shell egg sales represented 84.4% of total net sales compared to 94.7%. Specialty eggs drove a greater portion of shell egg sales, accounting for 44% of total shell egg sales compared to 31.7%. Specialty eggs and prepared foods combined accounted for 46.4% of net sales compared to 31.2%. In 2026, shell egg sales represented 85% of total net sales compared to 94.5% in 2025. Specialty eggs drove a greater portion of shell egg sales, accounting for 39.6% of total shell egg sales compared to 33%. Specialty eggs and prepared foods combined accounted for 42.8% of net sales compared to 32.4%. None of this happens without our people. I want to sincerely thank our teams across the organization whose disciplined focus and commitment to excellence drive the operational and financial performance that underpins everything we do. Their hard work and dedication continue to set us apart, and these results are a direct reflection of their efforts. Before Max walks you through our results in detail and provides additional color on our financial performance, I'd like to take a few minutes to focus on the long-term strategic direction of the company, how we're positioning ourselves for sustainable growth, and where we see the most compelling opportunities ahead. Cal-Maine enters this moment from a position of strength. Our core shell egg platform is durable, proven, and built through decades of effective execution. That foundation gives us something rare in today's market: structural integrity at the base of our business paired with powerful avenues for growth. What makes this platform particularly compelling is how the category and consumer behavior are evolving. Across the US, eggs remain an affordable protein source. Consumers are seeking complete high-quality proteins, GLP-1 users are gravitating towards satisfying nutrient-dense foods, younger consumers and families are treating eggs as an everyday staple, and across the board, convenience is a major tailwind with rising interest in ready-to-eat and ready-to-heat formats. We see consumers trading up, with specialty and premium segments showing stronger repeat usage and alignment with the attributes people care about: wellness, taste, simplicity, and clean labels. Put simply, eggs are leading on health, convenience, and quality. That combination is reshaping category growth in a way that we believe plays directly to our strengths. This is why we're intentionally evolving Cal-Maine into a more resilient, strategically diversified portfolio, growing specialty eggs and accelerating value-added prepared foods. It's not a pivot; it's a progression. We're taking a well-established business and expanding into multiple growth engines that we believe will deliver higher quality earnings, deeper customer partnerships, and a stronger alignment with long-term consumer trends. A major part of that progression is our prepared foods platform. Building on the acquisition of Echo Lake Foods, we're investing to meaningfully expand our prepared foods capabilities. We've launched a $15 million network optimization and capacity expansion project that is expected to add 17 million pounds of annual scrambled egg production by mid-fiscal 2027. This project consolidates all scrambled egg manufacturing into a single modernized facility, eliminating redundancy across sites, streamlining workflows, and strengthening supply reliability. It also adds a new production line and upgraded automation that will improve yields, reduce labor requirements, and increase throughput. In short, we believe it positions Echo Lake Foods to support both near-term customer demand and long-term organic growth with greater efficiency and precision. This builds on our previously announced $14.8 million high-speed pancake line, which is expected to add another 12 million pounds of capacity through early fiscal 2027. As these projects ramp, Echo Lake Foods has and will experience temporary lower volume and higher costs beginning late in 2026 and are expected to continue through the remainder of the fiscal year. We believe the short-term impact will be outweighed by the long-term benefits: higher output, improved efficiency, and a more agile, modernized platform. We're also scaling our joint venture, Trapini Foods, which is investing $7 million through fiscal 2028 to add 18 million pounds of capacity, expanding production more than sevenfold. When you combine Echo Lake and Trapini, we expect total prepared foods capacity to increase more than 30% over the next eighteen to twenty-four months. We believe this will position us to meet accelerating demand for high-protein, ready-to-eat, convenience-forward formats that are aligned with changing consumer preferences. In addition to accelerating value-added prepared foods, we're growing specialty eggs. In the second quarter, we acquired certain production assets from Clean Egg LLC in Texas, which expands our specialty cage-free and free-range egg capacity, supports local sourcing, captures accelerating market growth, and optimizes our supply chain. These investments are expected to help strengthen our mid-cycle earnings profile and build a more resilient business over time. They also reinforce what makes Cal-Maine unique among agriculture producers. We're a pure-play leader in one essential category, selling roughly one out of every six eggs consumed in the US, with full vertical integration from feed and flock to processing, distribution, and customer delivery. We're using that scale strategically, designing solutions that make egg consumption easier, more valuable, and more accessible across all channels. This is a long-term investment story, not a short-term trade. The egg industry has always been cyclical, supply-driven, and headline-sensitive. The objective has never been to avoid cycles; it's to manage through them effectively. That is where we have consistently differentiated ourselves. We have been in environments like this many times before. Periods of supply disruption and price volatility are not new to this industry. Each time we've navigated them, we've emerged stronger. Importantly, the supply challenges related to high-path AI are not behind us. The current epi curve closely resembles prior years, including 2022. Global outbreaks continue, and recovery remains uneven and unpredictable rather than linear. This is not a short-term dislocation; it's a structured reality that reinforces the importance of scale and operational execution. Looking long-term, one of the most compelling opportunities in eggs is increasing US egg consumption. That growth does not occur without reliable supply. Reliability builds trust with retailers, food service partners, and consumers. Increasing in numbers over time is not a negative; it's a prerequisite for sustainable growth. Customers consistently value consistency over spot pricing, and in an environment where volatility is the norm, reliability becomes a durable competitive advantage. Our strategy is intentionally designed to perform across cycles. We maintain a strong balance sheet to preserve flexibility in all environments, pursue accretive growth with disciplined capital allocation, and continue expanding our portfolio across egg types and adjacent categories. We remain relentlessly focused on cost drivers and efficiency to protect margins through cycles, earning trust by doing the right thing with customers, employees, and partners. This is not a strategy for a single cycle; it's a strategy built for durability. Demand in this category is real, but it is also complex. What is often labeled as demand reflects a wide range of dynamic variables, including the timing and geography of bird gains or losses, shifts in where consumers shop, media-driven panic buying, weather patterns, wholesale market movements, promotional activity, and holiday timing. Navigating that complexity effectively is a core operational capability. Finally, this is a fundamentally different company than the last time we experienced similar market conditions. Today, we have a stronger balance sheet, meaningful growth both organically and through acquisitions, greater diversification into specialty eggs and prepared foods, deeper bench strength across the organization, and reduced exposure to pure commodity pricing through specialty mix, hybrid pricing models, and value-added products. We are more diversified, more resilient, and better positioned to compound value over the long term. With that, let me turn the call over to Max to drill down into our financial results and discuss our capital allocation framework. Max?
Max Bowman: Thanks, Sherman, and good morning, everyone. As a reminder, we published our earnings release in October 2026. Unless otherwise indicated, all comparisons are to the comparable period of fiscal 2025. For 2026, net sales were $769.5 million compared to $954.7 million, down 19.4%. Total shell egg sales were $649.6 million compared to $903.9 million, down 28.1%, with 26.5% lower selling prices and 2.2% lower sales volumes. Conventional egg sales were $363.9 million compared to $616.9 million, down 41%, with 38.8% lower selling prices and 3.6% lower sales volumes. Specialty egg sales were $285.7 million compared to $287 million, down 0.4%, with relatively flat sales volume and selling prices. Breeder flocks grew 12.7%. Total chicks hatched rose 65.1%, and the average number of layer hens expanded 2.6%. Prepared food sales were $71.7 million compared to $10.4 million in 2025, up 586.4%, and compared to $83.9 million in 2026, down 14.5%. Echo Lake Foods contributed $56.6 million of the sales in 2026 compared to $70.5 million in sales in 2026. As Sherman mentioned, the announced expansion initiatives had an impact on the second quarter of fiscal 2026. Gross profit was $207.4 million compared to $356 million, down 41.8%, primarily driven by 26.5% lower shell egg selling prices and 2.2% lower shell egg sales volumes, partially offset by lower egg prices for outside purchases and a 3% increase in percent sold, as well as contributions from prepared foods. Operating income was $123.9 million compared to $278.1 million, down 55.5%, with an operating income margin of 16.1%. Net income attributable to Cal-Maine Foods was $102.8 million compared to $219.1 million, down 53.1%. Diluted earnings per share were $2.13 compared to $4.47, down 52.3%. Cost of sales decreased 6.1%. Lower costs associated with egg purchases and egg products more than offset the increase in prepared food costs due to the acquisition of Echo Lake Foods, as well as the increase in our farm production and processing, packaging, and warehousing costs. SG&A expenses increased 6.8% due to the addition of Echo Lake Foods and increased professional and legal fees. This was partially offset by a reduced charge in the change in earn-out liability recorded in the prior year period and lower employee-related costs. Net cash flows from operations were $94.8 million compared to $122.7 million, down 22.8%. We ended the quarter with cash and temporary cash investments of $1.1 billion, down 18.2%. We remain virtually debt-free. We purchased 846,037 shares of our common stock during the quarter for a total of $74.8 million. These transactions were completed under our current share repurchase authorization, which permits the repurchase of up to $500 million, of which $375.2 million remains available. In 2026, we will pay a cash dividend of approximately 72¢ per share to holders of our common stock pursuant to our variable dividend policy. The dividend is payable on February 12, 2026, to holders of record on January 28, 2026. The final amount paid per share will be based on the number of outstanding shares on the record date. Our capital allocation strategy is designed to balance disciplined stewardship with long-term value creation. We maintain a strong cash position and an unlevered balance sheet, giving us the flexibility to execute targeted and accretive acquisitions, reinvest through CapEx, and return capital to shareholders. Recent operating cash flows have funded strong dividends under our long-standing policy of paying one-third of net income and have also supported share repurchases to further enhance returns. At the same time, reinvestment is focused on expanding specialty eggs and prepared foods. Mix shift, scale efficiencies, and vertical integration drive margin enhancement and higher quality earnings. Together, these actions are expected to create total shareholder return in which dividends, buybacks, earnings per share growth, improved mix, and long-term multiple expansion all work together to compound value over time. Turning to 2026, net sales were $1.7 billion, down 2.8% or $48.4 million. Total shell egg sales were $1.4 billion compared to $1.6 billion, down 12.5%, with 12.6% lower selling prices as volumes remain relatively flat. Conventional egg sales were $869.8 million compared to $1.1 billion, down 21%, with 19.4% lower selling prices and 2% lower sales volumes. Specialty egg sales were $569.2 million compared to $543.7 million, up 4.7%, with 3.8% higher sales volumes and 0.8% higher selling prices. Breeder flocks grew 21.6%. Total chicks hatched rose 71%, and the average number of layer hens expanded 6%. Prepared food sales were $155.6 million compared to $19.4 million, up 702.9%. Echo Lake Foods contributed $127.1 million in sales. Gross profit was $518.7 million compared to $603.3 million, down 14%, primarily driven by 12.6% lower shell egg selling prices and partially offset by a decrease in the price and volume of outside egg purchases, as dozens produced increased 3.1%, as well as contributions from prepared foods. Operating income was $373.1 million compared to $465 million, down 19.8%, with an operating income margin of 22.1%. Net income attributable to Cal-Maine Foods was $302.1 million compared to $369 million, down 18.1%. Diluted earnings per share was $6.26 compared to $7.54, down 17%. Cost of sales increased 3.2% as our dozens produced increased 3.1%, and our farm production cost per dozen increased 2.1%. Our prepared foods cost increased due to the acquisition of Echo Lake Foods. These costs were partially offset by lower costs associated with outside egg purchases and egg products. SG&A expenses increased 9.2% due to the addition of Echo Lake Foods and increased professional and legal fees. This was partially offset by a reduced charge in the change in earn-out liability recorded in the prior year period. Net cash flow from operations was $373.4 million compared to $240.2 million, up 55.5%. That concludes my review of the financial results. I will now turn the call back over to Sherman.
Sherman Miller: Thanks, Max. Looking ahead, our priorities remain centered on execution. As we expand Specialty Eggs and Prepared Foods, integrating new assets, scaling new capabilities, and continuing to focus on the quality and consistency customers expect. We're pursuing innovation and selective acquisitions that are expected to expand consumer choice, strengthen channel reach, and build a more reliable growth profile. Ultimately, our opportunity is to demonstrate where Cal-Maine's going, not just where it's been. Building a business with strong base returns and multiple growth engines. One that compounds value over time by serving consumers across every preference, at every rung of the egg value ladder. That's the Cal-Maine we're creating. Durable, diversified, and positioned to lead the category's next decade of growth. With that, I'll turn the call back over to the operator to begin the Q&A portion of today's call.
Operator: Thank you. We will now begin the question and answer session. We ask that you please limit yourself to one question and one follow-up. Once your questions have been answered, please reenter the queue if you would like to ask additional questions. One moment while we compile our Q&A roster. Our first question is going to come from the line of Heather Jones with Heather Jones Research. Your line is open. Please go ahead.
Heather Jones: Good morning and congratulations on a solid quarter. Apologize for my voice. I have a really bad cold, so apologies. I wanted to ask about, given where current spot prices are for eggs, in the past, that would have translated to Cal-Maine generating losses, you know, at the EPS line. I was just talking about the changes that you all have made in the portfolio over the last few years, the push into prepared foods and the higher percentage on cost-plus type models. Just wondering if you could walk us through how you think about the earnings power or the earnings trajectory in depressed ag markets like this?
Sherman Miller: Good morning, Heather. This is Sherman, and thank you for that question. As you know, we don't give specific guidance, but I'll touch on each of those. Specialty is something that we've been working on for a long time, and we've had double-digit growth. We believe that will continue. Prepared foods is exciting for us, and it's performing. We committed to already a 30% growth over the next eighteen to twenty-four months, and we're excited about also additional growth there, whether it's organic or M&A in the future. Also, the hybrid pricing, we talked about it last quarter that there's trade-offs. On the higher side, but the real benefit happens in lower markets. So the point that you hit on is valid. The real key there is us supporting our customers' go-to-market strategy and being a trusted supplier for the long term. We believe that each of these will continue to improve our mid-cycle performance. Max, you want to add anything there?
Max Bowman: Sherman, I think you covered it, but what you said in your remarks about we're a different company than where we were the last time the market was at these levels, and you highlight those things. Just the growth we've had, even stronger balance sheet, more diversification, the growth in prepared foods, continued emergence of specialty. All those things, I think, make us a stronger, more durable company going forward.
Heather Jones: Okay. And just to follow-up on that, and I know there are always tail risks and things that could happen, but given these changes, do you think Cal-Maine is in a position that it can weather down markets like this without generating losses given these changes?
Sherman Miller: Once again, Heather, we don't give guidance, but Max just hit on the real strengths that make us completely different than where we were the last time we saw these market conditions. Our balance sheet certainly is positioned better than it's ever been. The growth that we've had, we've been very strategic to focus that growth in specialty eggs and also prepared foods, which carry a lot of weight in these lower market conditions. On top of that, the hybrid pricing we think is going to be very beneficial to us. So in a much better position than we've ever been, Heather.
Max Bowman: And those prepared foods, Heather, as we said before, Prepared Foods runs a little bit countercyclical. They're going to benefit from a lower egg market. So that's just another strength, I think, that we didn't have before.
Heather Jones: Okay. Thank you.
Operator: Thank you. And one moment for our next question. Our next question comes from the line of Pooran Sharma with Stephens. Your line is open. Please go ahead.
Pooran Sharma: Good morning, and thanks for the question. Wanted to start off with the prepared foods segment. Understanding you're making some adjustments there. So lighter volumes, maybe a little bit higher cost until the end of the year is what I'm understanding. You saw gross margins for that segment come down roughly 3% to around 19.6%. Is that a right kind of level to think about for the rest of this year? Or what kind of color can you give us in regards to gross margin for prepared foods?
Sherman Miller: Good morning, Pooran, and thank you for that question. Prepared foods, we gave guidance right out of the gate with Echo Lake that we're looking at a 19% EBITDA margin, and we still think that holds true. There was some slippage in this quarter for the reasons you mentioned, us preparing for a stronger future. There will probably be a little additional slippage during the next quarter, but the year as a whole, we're still feeling good about the 19% EBITDA margin. So, once again, well worth the time of us pulling back and preparing for the future of this growth. Of 30% over the next eighteen to twenty-four months is really exciting to us. Max, what would you add to that?
Max Bowman: I think you covered it.
Pooran Sharma: Great. Great. I guess my follow-up would be, and you guys have talked about the M&A pipeline in the past, maybe opening up when ag markets are depressed. But just given your broader expansions into prepared foods, do you think that this would limit your opportunity or your M&A pipeline? Because I would think that for these businesses, a lower ag market would mean higher earnings potential and potentially higher valuation. So just wanted to get your take on the broader M&A pipeline opportunity given the depressed egg markets and given the change in your business?
Sherman Miller: Pooran, the attractiveness to that prepared foods business is tied back to stability. Away from what you're talking about, feast or famine. So, we don't necessarily think that will be a huge influence. To us, growth is broader than it's ever been. All remaining egg-centric to our core, but now, growth in conventional, specialty, prepared foods, possible ingredients feeding prepared foods, even prepared foods brands are all possible avenues of growth for the future. We'll continue to use a very disciplined model to evaluate acquisitions and move forward at the right pace. Max?
Max Bowman: Again, you covered it well, Sherman. I'll leave it there.
Pooran Sharma: Okay. Appreciate the color.
Operator: Thank you. And one moment for our next question. Our next question comes from the line of Veronica Augustine with Goldman Sachs. Your line is open. Please go ahead.
Leah Jordan: Hi. Good morning. This is actually Leah Jordan with Goldman. So the shift to specialty eggs and prepared foods is really the key part of your story here going forward, and it looked great on the quarter today. But just how are you thinking about capacity growth for specialty eggs over time? Given the Clean Egg acquisition we saw this quarter, how do you think about M&A versus organic growth to continue that capacity expansion? Ultimately, any color on how we should think about the cadence of the mix shift in your sales towards specialty over the longer term?
Sherman Miller: Good morning, Leah. As you said, our specialty eggs and prepared foods are exciting, making up 46% of our net sales for the quarter. We've seen double-digit CAGR type growth in acreage. We look forward to continuing to drive to those same type growth metrics. Longer term, we can definitely see specialty eggs making up greater than 50% of our total shell egg net sales. When you pair that with the 30% growth that we're targeting in prepared foods, we think it lends well to much more stable earnings here in the future.
Max Bowman: Yeah. And Leah, you brought up the Clean Egg acquisition. That was a small but very timely important acquisition for us. If you look at the description we gave, it's composed of 677,000 brown cage-free and free-range layers and pullets, all specialty. We have market growth planned and occurring now, and getting those eggs at this time and for what we anticipate upcoming was very important and critical to the continued growth of that specialty business.
Leah Jordan: Thank you. That's very helpful. Just to follow-up on the prepared foods discussion, given the investments underway, any more detail around the progress of the optimization and expansion efforts so far? As well as any more color on the related higher costs that we should think about in the back half of this year relative to what we saw this quarter? As those investments come online over the next twelve to eighteen months, how should we think about that cadence of the growth trend there?
Sherman Miller: You pointed out the important piece that is an eighteen to twenty-four month project, and we've announced the CapEx piece of it, $36 million for that 30% growth. In the interim of pulling back some lines so that we can get all of our automation and all of our different lines in place, there's some volume efficiency penalties we received from that. But the growth long term is certainly going to be good, and all at the same time, still believing we'll hit that 19% EBITDA margin that we talked about.
Max Bowman: We're confident that we can continue over the long term to grow that business, as we called out when we acquired Echo Lake at that 9 to 10% CAGR. So again, we talked about in the first quarter about sort of letting it run, let's see what it can do, and then we kind of assessed. Now we're making the changes that we think position us the best for long-term growth and success in prepared foods.
Leah Jordan: That's all very helpful. Thank you.
Operator: Thank you. And one moment for our next question. Our next question comes from the line of Ben Klieve with Benchmark Stonex. Your line is open. Please go ahead.
Ben Klieve: Alright. Thanks for taking my questions, and congratulations on a good result here in a very dynamic period. The first question is on the specialty volume front. I'm wondering if you can hone in on specialty volumes within the second quarter. They were basically flat, given that they're basically flat and, you know, you noted that small acquisition you had in the quarter, plus a general upward trend in specialty volumes. I'm wondering if you can kind of break down the puts and takes that led to specialty volumes being, again, kind of roughly flat in the quarter?
Sherman Miller: Good morning, Ben. Especially last year was a tremendous year, so we're making a very tough comparison. If you remember, conventional eggs became extremely tight, which put a lot of demand on specialty eggs. So to be flat is a huge win, we believe, and especially specialty eggs now accounting for 44% of total shell egg sales. I did mention that free-range and pasture-raised both had double-digit growth, both in dollars and dozens. We don't formally break down that category, but as a whole, specialty eggs are solid, and the double-digit CAGR we've been seeing, we think the mechanisms are in place for us to continue to do that.
Max Bowman: Yeah. I mean, the comparative quarter is a tough part there, and just to expand a little further on what Sherman said, when conventional eggs are selling for higher than specialty, of course, the consumer is going to move towards specialty because they perceive it as a bargain. That was the case that we had last year that has totally turned around in this quarter we're reporting and today. But yet we held on to flat volumes. We still feel good and have said that we believe that we can have double-digit specialty growth over time. So despite a very difficult market comparison, we still have a lot of confidence in where our specialty business is and where it's going.
Sherman Miller: One additional point, Max, is we do participate across every major specialty egg subcategory, which means that we're serving all customers interested in specialty. So, regardless of which type of specialty egg they're in, we take pride in producing that.
Ben Klieve: Very good. That's very helpful across the board. One more for me, and then I'll get back in queue. Is this dynamic that you've talked about regarding pricing of commodity eggs, and kind of evolving that from purely market-based to more towards cost-plus contract-based, however you want to characterize it. Can you talk about the receptivity of your retail customer for this dynamic today in the face of kind of normalized egg pricing versus even several months ago when prices were elevated? I mean, I would expect that the retailers are maybe less excited to engage in this conversation today than they were, but I'm wondering if you can elaborate on that dynamic in any way.
Sherman Miller: Yeah. Be glad to. It really all centers on the particular customer's go-to-market strategy, whether they're a high-low customer or whether they're an everyday low price, they have different needs, and so that's the way these pricing structures are geared. I think the models perform exactly like they're supposed to be. For the customer, it gives them some high side, which is very important. During these tight periods, there's some benefit on the low side for us, which once again ties back to our mid-cycle earnings performance. Max, what would you add to that?
Max Bowman: I think you nailed it. I mean, it's just that long-term relationship. I think your thoughts are generally right, Ben. But, you know, Sherman points out different customers have slightly different priorities. The other thing that we mentioned in some of our prepared remarks is just the reliability of supply. What we're trying to do for the long term is demonstrate that even in times of tough production last year and even this year, Cal-Maine continues to get the egg to the customers that they want and demand, and we're going to work with them to build those long-term relationships to support their pricing priorities.
Ben Klieve: Got it. Got it. Very helpful. Very good. Well, thanks for taking my questions. Appreciate the time. I'll get back in queue.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Heather Jones with Heather Jones Research. Your line is open. Please go ahead.
Heather Jones: Thanks for taking the follow-up. I'm just trying to get a sense of how much of a step down we should anticipate for the prepared foods business for the second half of 2026. Revenues came down significantly from Q1 to Q2, but some of that I would assume is due to egg pricing. But just how should we be thinking about the cadence of that business given its significance for your earnings for the second half? Thank you.
Sherman Miller: Well, Heather, I think we indicated that we would expect Q3 to have a continued pullback as we make these changes that we believe are good for the long term. So, quarter over quarter, Q3 compared to Q2, I think you'll see slightly different results there. But we're confident that we're positioning the business for the long term. Sherman called out that growth that we're looking for over the next eighteen to twenty-four months. You won't see as much of that in the third quarter. I think it starts emerging in the fourth quarter and then builds from there over the next twelve months or so.
Heather Jones: Okay. Thank you for that. Then on the SG&A side, that came in somewhat higher than I was expecting for the quarter. So just trying to think because last year, you had a contingency payment of like I think it was, like, $7 million. So the year-on-year increase was much more significant in Q2 than Q1 on an adjusted basis. So how should we think about SG&A expense for the rest of the year?
Sherman Miller: Well, you're calling out that contingency payment that was associated with Favio, and we called that out. It was less this quarter than it was the same quarter last year, and that was just a factor of egg prices being so high last year and down a bit now. I think that continues through October this fiscal year or excuse me, this calendar year. So we'll be following that and completing that at the end of '26. What was the other part of your question? I lost my train of thought.
Heather Jones: Oh, just trying to figure out what kind of numbers should we be using.
Sherman Miller: Going forward, so it's like a run rate. Yeah. The other thing on the SG&A, I think we called out increased professional fees. That seems to be the order of the day, these days. So I think those numbers are going to run a little hot. The other thing that drives SG&A is particularly specialty volume sometimes. We still are confident specialty volumes are going to grow. When you do that, you're going to have some promotional expenses and some fees associated with that that will make SG&A be up a bit. I suspect as our retailers get more comfortable with supply, we will see more promotional activity in the back half of the year, which will likely drive some increased costs on the SG&A line there.
Heather Jones: Okay. Thank you.
Operator: Thank you. And one moment for our next question. Our next comes from the line of Benjamin Mayhew with BMO Capital Markets. Your line is open. Please go ahead.
Benjamin Mayhew: Hey, good morning. Congratulations on the quarter. So it looks like you had a bit of a COGS benefit during the quarter as a result of lower-priced outside egg purchases. So my questions are, has your volume of outside egg purchases been on the decline sequentially as your company's supply recovers? Can you remind us how you plan to utilize outside egg purchases moving forward as supplies reach more normalized levels and egg prices are at a dollar? So what I'm really trying to get at is like, should we expect ongoing benefits in future quarters from outside purchases, or is this more of a one-off item?
Sherman Miller: Good morning, Ben. Last year was certainly a year, and our customers had some periods of extreme orders. If the stores we serviced had eggs, and the store across the road did not, then our orders were growing exponentially. We cover those orders through our production plus outside sales. We have been reporting our percent of produced of sales for quite a while. We've moved back to that right at that 90% mark. We do see that growing a few percentage points going forward. Just because we plan on adding supply to be able to ensure that our customers have the eggs that they need. So whenever we do that, that does force lower purchases on the outside, and that's some of the effect that you're seeing. But we plan our business well far ahead, and short-term changes are difficult, whether up or down. But we do see the percent produced of sales to get back to that more of that 93, 94, 95% range here in the near term.
Max Bowman: Yeah. And, Ben, just historically, we've called out before, those outside egg purchases to a large degree are sort of a gap filler or how we address changes in the market. As Sherman said, if we were to see more disruption in the market, for the same reasons as last year, that would likely drive additional purchases because we will do that to benefit our customers. As we said before, to prove up markets, if you will, and try to develop longer-term customers for the future. So it's a little bit opportunistic there, and it's a little bit based on what market conditions are. But no doubt egg prices being down. We called out the percentages related to the decrease in the egg price as well as the volume. So both of those factors affect it. At this point, with prices where they are, I think it will certainly be down. As Sherman says, as our production comes fully online, that should help mitigate it as well. But keep your eye out for those other dynamics that could drive more purchases as we go forward.
Benjamin Mayhew: Thank you for that. Yeah. And that's a good segue to my last question here. Other dynamics. Do you have any thoughts on why we have seen such a rapid decrease in bird flu cases across the industry? Is there any one thing that industry players are doing that is protecting against the spread? Or do you chalk it up more to, you know, maybe luck?
Sherman Miller: There's lots of ways of measuring that. If you're looking at just pure layer numbers, you would be correct. But if you look at what we think is a greater indicator, and that's just the presence of the virus, it's an absolute terrible situation. It's all over the US. Bigger than that, it's all over the globe. Back in 2015, when we saw the virus disappear, we also saw it disappear on a global scale, slightly before it did here. All the indicators that it's a huge global presence, since October. First, 26 countries are reporting high-path AI in poultry. The number of outbreaks is 496. So the presence of the virus is extremely strong. 2025 was the worst year ever at 45.6 million layers and pullets. That exceeded the next worst year of 2022 of 43.1 million. So, Ben, it's very difficult to estimate the magnitude, but all the indicators of the problem are still there. The incidence rates in November were as high as 2022. Just not the high bird numbers because smaller flocks were affected. Usually, whenever big losses occur, there's some type of precursor, whether it's a major wild bird dive or where it's a turkey population area or a commercial duck population, something increases that overall virus load in an area before we see these large bird explosions. So unfortunately, Ben, I would say that we're still on pins and needles watching this virus.
Max Bowman: I'd just add. I was reading last night a lead market analytics report that came out. Amongst the things he was doing in that report was sort of critiquing his own primarily forecasting ability over the last several years and how it was driven. There are many points, and it's worth a read if you have access to that. But one of the things that he said, and I'll tie into what Sherman said, the incidences are still there. So the potential is still there. Since '22, if you look at sort of the projections for flock numbers and those kinds of things, for the most part, you've seen they've been underestimated. Excuse me. They've been overestimated because of the influence of the or the likelihood that we see further potential AI. We don't know what the future brings. Always the past isn't necessarily the best predictor for the future, but it does inform it. I think it's worth consideration.
Benjamin Mayhew: Very helpful. Thank you. I'm going to hop back in the queue.
Operator: To ask a question, please press 11 on your telephone. I'm showing no further questions at this time. I would like to hand the oh, I'm sorry. One moment. Alright. I am showing no further questions at this time. I'd like to hand the conference back over to Sherman for further remarks.
Sherman Miller: Alright. Well, thank you. Since there's no additional questions, operator, if you would, we're ready to conclude the call.
Operator: This concludes our question and answer session. A replay for today's webcast will be available following the call on the Investor Relations page of the Cal-Maine Foods website. In addition, a transcript of today's call will be posted on the Cal-Maine Foods website in the Investor Relations section. Thank you for joining us today. You may now disconnect. Everyone, have a great day.