Cal-Maine Foods (NASDAQ: CALM) reported Q3 EPS of $0.09, $0.13 worse than the analyst estimate of $0.22. Revenue for the quarter came in at $306.5 million versus the consensus estimate of $325.22 million.

Dolph Baker, chairman, president and chief executive officer of Cal-Maine Foods, Inc., stated, “Our results for the third quarter of fiscal 2017 reflect the volatile market conditions the egg industry has experienced throughout this fiscal year. Our results were affected by lower market prices and weaker demand trends compared with the third quarter last year. Market prices moved significantly higher after Thanksgiving, but dropped back down after Christmas, and our average customer selling prices for the third quarter of fiscal 2017 were down 27.9 percent from the same period a year ago.

“The egg markets have remained under pressure, and we do not expect to see any meaningful improvement until there is a better balance of supply and demand. Following the 2015 avian influenza (AI)-related laying hen losses, United States Department of Agriculture (USDA) data showed that the egg industry repopulated farms and laying hen numbers were reported to approach pre-AI levels. The younger, more productive hen population has resulted in a greater number of eggs. Additionally, in February 2017, the USDA issued revised data that showed the size of the laying hen flock for 2015 and 2016 was actually meaningfully higher in both years than previously reported. Overall, market demand trends have not kept pace with these higher production levels. According to Nielsen data, retail customer demand for shell eggs has remained strong. The USDA reports that egg export demand has improved since the beginning of fiscal 2017; however, it has still not fully recovered to levels prior to the AI outbreak. Additionally, we have experienced reduced demand for egg products, as many of our commercial customers reformulated their products to use fewer eggs when prices spiked and have been slow to resume previous egg usage. Together, these factors have created an oversupply of eggs, with continued pressure on market prices. However, recent USDA reports show the chick hatch has been trending down, suggesting there may be a moderation in the size of the laying hen flock as the year progresses.

“Specialty eggs, excluding co-pack sales, accounted for 23.6 percent of our total sales volume for the third quarter of fiscal 2017, the same proportion as the third quarter last year. Specialty eggs revenue was 40.8 percent of total shell egg revenues, compared with 31.0 percent for the third quarter of fiscal 2016. The average selling price for specialty eggs, which is typically higher and less volatile, was down 5.2 percent over the third quarter of last year, while the average selling price for non-specialty eggs was down 38.7 percent over the prior-year period.

“Our specialty egg business is a primary focus of our growth strategy. We have continued to make significant investments across our operations to meet anticipated demand for cage-free eggs, as food service providers, national restaurant chains and major retailers, including our largest customers, have stated objectives to exclusively offer cage-free eggs by future specified dates. While we expect the multi-year conversion to cage-free production will present new challenges and higher costs for our industry, we believe it also provides additional market opportunities for Cal-Maine Foods. We are working with our customers to facilitate a smooth transition to meet this demand. Our latest joint venture with Rose Acre Farms in Texas is expected to reach full capacity in the production of cage-free eggs during our fiscal 2018 first quarter. In addition to cage-free eggs, our product mix provides a wide variety of healthy choices for consumers including conventional, nutritionally enhanced and organic eggs. As such, we believe Cal-Maine Foods is well positioned to respond to future demand trends and meet the needs of all of our customers.”

Baker continued, “Our operations ran well during the third quarter as we continued to focus on efficient and responsible management and respond to dynamic market conditions. For the third quarter of fiscal 2017, our feed costs per dozen were down 4.3 percent compared with a year ago, and our overall farm production costs were down 1.3 percent over the third quarter of fiscal 2016.

“Another key aspect of our growth strategy is to expand our business through selective acquisitions. Importantly, we have a strong balance sheet and the financial strength to support this strategy. During the third quarter, we completed the acquisition of substantially all of the assets of Happy Hen Egg Farms, Inc., relating to their commercial production, processing, distribution and sale of shell eggs. The acquired assets include commercial egg production and processing facilities with current capacity for approximately 350,000 laying hens and related distribution facilities located near Harwood and Wharton, Texas. Located near our other Texas locations, Happy Hen Egg Farms’ current site is designed for capacity of up to 1.2 million laying hens, and we intend to capitalize on specific market opportunities created by this additional production capacity. We look forward to the opportunity to extend our market reach and deliver greater value to both our customers and shareholders,” added Baker.

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