John B. Sanfilippo & Son, Inc. (JBSS) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the John B. Sanfilippo & Son Third Quarter Fiscal 2012 Operating Results Conference Call. My name is Britta, and I'll be your operator today. [Operator Instructions] I would now like to hand over the call to the host for today's call, Mr. Mike Valentine, CFO. Go ahead, please.

Thank you, Britta. First, we would like to thank everyone for participating on our quarterly conference call for the third quarter of fiscal 2012. Before we start, we'd like to advise all participants that we may make some forward-looking statements today. These statements are based on our current expectations and involve certain risks and uncertainties that are inherent in our business. The factors that could negatively impact our results are explained in the various SEC filings that we have made, including Forms 10-K and 10-Q. We encourage you all to refer to these filings to learn more about these risks and uncertainties. Starting with a recap of our results. The third quarter net sales increased by 11.9% to $153.8 million from $137.4 million for the third quarter of fiscal 2011. The increase in net sales was mainly attributable to price increases implemented over the last 12 months for nearly all nuts except almonds. Price increases were implemented in response to rising tree nut and peanut acquisition costs. Sales volume, or total pounds sold to customers, was virtually unchanged in the comparison to sales volume for the third quarter of fiscal 2011. Sales volume increases in the commercial ingredients and contract packaging distribution channels, primarily resulting from increased almond sales and new sales of roasting services, were offset by sales volume declines in the consumer and export distribution channels. The declines in sales volumes in these distribution channels were mainly attributable to the unfavorable impact of high cashew, pecan and peanut prices on consumer demand for products containing these nuts. The loss of some low margin private label business in the latter part of fiscal 2011 also contributed to the decline in sales volume in the consumer distribution channel in the quarterly comparison. Current year-to-date net sales increased by 5.1% to $533.9 million from $507.8 million for the same period in fiscal 2011. As was the case in the quarterly comparison, the increase in net sales was attributable primarily to price increases implemented over the last 12 months for virtually all nuts except almonds. Sales volume decreased by 7.6% in the year-to-date comparison, which was driven primarily by volume decreases in the consumer and export distribution channels. The declines in sales volume in these distribution channels were mainly attributable to the unfavorable impact of high cashew, pecan, walnut and peanut prices on consumer demand for products containing these nuts. The loss, again, the loss of some low margin private label business in the latter part of fiscal 2011 also contributed to the decline in sales volume in the consumer and export distribution channels in the year-to-date comparison. The current third quarter gross profit margin increased to 14.4% of net sales from 7.3% for the third quarter of fiscal 2011. The gross profit margin for the current third quarter increased in the quarterly comparison primarily because of improved alignment of selling prices with acquisition costs. Manufacturing efficiency improvements also contributed to the increase in gross profit margin as produced pounds increased by 17.8% while manufacturing spending in the quarter remained relatively unchanged in the quarterly comparison. These efficiency improvements occurred primarily in the Gustine, California; Bainbridge, Georgia; and Garysburg, North Carolina facilities through a combination of spending control and increased output per hour. The current year-to-date gross profit margin increased to 14.9% from 11.4% of net sales for the same period in 2011. The gross profit margin for the first 3 quarters of fiscal 2012 increased in the year-to-date comparison primarily because of improved alignment of selling prices with acquisition costs. Total operating expenses in the current quarter decreased to 11.7% of net sales from 12.8% of net sales for the third quarter of fiscal 2011. The decline in total operating expenses as a percentage of net sales was due mainly to a higher sales base. Total operating expenses in the quarterly comparison increased by $500,000 due to increases in incentive compensation expense, which was offset in part by a decrease in freight expense. Total operating expenses in for the current year-to-date period decreased slightly to 10.1% from 10.2% of net sales for the same period in fiscal 2011. The $2 million increase in total operating expenses in the year-to-date comparison was mainly attributable to increases in incentive compensation, marketing and advertising expenses, which were offset in part by decreases in freight and broker commissions expenses. The third quarter and year-to-date periods in fiscal 2011 also included certain expenses that did not recur in their respective periods in the current fiscal year. Examples of these nonrecurring expenses were litigation-related expenses, a loss for the write-down of machinery and equipment related to the relocation of the Orchard Valley Harvest Modesto, California facility and an increase in the projected Orchard Valley Harvest earnout payments. Interest expense in the current quarter declined to $1.4 million from $1.7 million, for last year's third quarter. Interest expense in the current year-to-date period decreased to $4.0 million from $4.7 million for the same period last year. The declines in interest expense in both comparisons resulted from lower average short-term borrowings. With respect to inventory, total inventories at the end of the current third quarter increased by $18.8 million or 11.9% compared to the total value of inventories on hand at the end of the third quarter last year. The weighted average cost per pound of raw nut input stocks on hand at the end of the current quarter increased by 15.8% over the weighted average cost for this inventory at the end of the third quarter last year. The increases in total inventory value and the weighted average cost per pound of raw nut input stocks were driven by the increase in peanut and tree nut acquisition costs that we mentioned earlier. Pounds of raw nuts on hand decreased by 2.7 million pounds or 4.8% on a quarterly comparison. The weighted average cost per pound of finished goods on hand increased by 7.6%, again, primarily driven by a higher acquisition costs, and the pounds of finished goods on hand increased by 8.3% compared to last year. And now I'll turn the call over to Jeffrey Sanfilippo, our Chief Executive Officer, who will provide additional comments on our performance in the current quarter.

Thank you, Mike. Good morning, everyone. The fiscal 2012 third quarter net income of $1.4 million marks our strongest third quarter since the third quarter of fiscal 2005. This was a remarkable accomplishment considering that acquisition costs for certain key nuts continue to increase significantly over the historically high acquisition costs that existed in last year's third quarter. You will note 2 important trends that have developed over the past year. First, the changes our management team made to our business and the strategies we are executing allow us to better manage the complexity of volatile commodity shifts in our industry. With focused efforts to maintain alignment of selling prices and acquisition costs, efforts to control manufacturing spending and efforts to optimize inventory positions, our company was successful in returning to normal operating margins. Due to our vertical integration, years of nut procurement expertise, visibility of crop conditions, and what I believe to be a core competency in supply chain proficiencies, JBSS was able to react quickly and effectively. We worked with our key partners to optimize their product portfolios, formulas, pack sizes and merchandising displays to keep them competitive while driving incremental volume. A second trend which impacts our entire industry is that higher selling prices continue to have an unfavorable impact on sales volume in the consumer distribution channel and in the snack category as a whole. The necessary price increases implemented by nut processors and national brands continue to work their way through the market, impacting consumer and customer buying decisions. For example, the average retail prices for cashews increased 7.3% during the 12 weeks ending March 17. When we look at average retail prices for cashews versus last year, they have increased 31.5%. We believe these higher prices have impacted consumption of snack cashews in the consumer channel. The cashew volume, measured in pounds at retail, decreased 13% in 12 weeks ending March 17 and 26% versus the prior year. In spite of higher retail prices and demand distraction with several nuts, there is substantial growth in almond consumption and we continue to see growth in trail mixes. We have expanded our Fisher product line, our Orchard Valley Harvest products and worked with our private brand partners to develop new almond and snack mixes to optimize growth opportunities with these products. As we continue to execute strategies to build a sustainable growth model, one pillar of our strategic plan is to grow JBSS brands and those of our key retail partners. We are focused on consumers and developing consumer insights and innovation to build strong brands. Looking at our Orchard Valley Harvest program. On the eve of the second anniversary of our purchase of Orchard Valley Harvest, we are in the process of relaunching the Orchard Valley Harvest brand into the marketplace. Using critical consumer qualitative and quantitative research, targeted communication tactics, new brand positioning, and cutting-edge packaging design as well as a brand-new and invigorated sales organization, we are approaching major retailers, both regional and national, and have received positive feedback and solid interest. We anticipate our first sales of the new Orchard Valley Harvest products to be realized during the first quarter of fiscal 2013. Another key pillar of our strategic plan is to expand globally. We are in the process of setting up an office in China and hiring a chief representative to manage our sales efforts in the Asian market. The company currently exports our Fisher snack line to Asia and we also contract manufacturers several snack items for customers in Asia. As global demand for nuts continues to rise, our management team is establishing the infrastructure to pursue growth opportunities beyond North America. Turning to category updates. The following trends occurred in the consumer channel in our third quarter as a result of higher cost and higher retail prices. All the market information is reported through ACNielsen Homescan data ending March 17. And we look at the category on a 4-outlet basis, which includes food, drug, and mass, plus Walmart. And when we discuss pricing, we refer to average price per pound. Summarizing all retail sectors, the total nut category experienced a softening in pounds volume in the third quarter, though sales dollars increased mainly due to higher prices. The nut category continues to experience significant commodity increases on virtually all nut types, and that is working its way into the marketplace in the form of higher prices. For the third quarter, total pound volume was down 4%, while sales revenues increased 10%. Nut category has rebounded versus last quarter when the category declined 9% in pound volume. Looking at it by subcategories, snack nuts declined 6% in pound sales for the quarter versus last year, while revenue increased 10%. Average prices were up 18% for the quarter versus last year. Cashews and mixed nuts, the nut type that experienced the greatest increase in prices, experienced the biggest declines in pound volume. Consumers are shifting from higher priced nuts such as cashews and mixed nuts to alternatives like almonds and trail mixes, as I mentioned before. The Fisher brand lost 0.2 share in the snack subcategory for the quarter due to merchandising and cycling distribution losses from last year. However, we have seen positive signs since the start of our "Freshness You Can See" integrated marketing campaign around our new clear can and we believe that our focused strategy will lead to improved business performance. We view fiscal 2012 as a transition year for our Fisher brand and with the changes we are making to our marketing, packaging, merchandising and product portfolio, we are optimistic about pursuing new opportunities in the coming year. Fisher has launched a series of new offerings including flavored almonds and honey roast mixed nuts and has relaunched the trail mix line in a smaller, on-the-go package at a better price point for our consumers. These initiatives have been garnering positive feedback from retailers. The baking nuts subcategory increased 2% in pounds for the quarter and increased 14% in dollars. Average prices increased 11% versus last year. Increases were particularly evident within walnuts and pecans, which increased by 20% and 23%, respectively. Private brands were the share win in this environment gaining 0.5 share of pound sales. The produce subcategory was down 2% in pounds while managing an 8% increase in revenue. This subcategory is experiencing softness on virtually all nut types with the notable exception of pistachios, which are up significantly. In closing, I'd like to say our financial performance for the 39 weeks of fiscal 2012 saw the general improvement over the first 39 weeks of fiscal 2011. We currently expect that commodity costs, while higher than historical averages, will remain relatively stable for the remainder of fiscal 2012. We look forward to the fourth quarter and fiscal 2013 with optimism. We will continue to execute our long-term strategic goals of grow our brands, expand globally and provide value-added integrated nut solutions. Our strong balance sheet and cash flow allow us to devote more funds to promote our products, especially our Fisher and Orchard Valley Harvest brands and explore other growth strategies outlining our strategic plan. We are focused on diversifying our product portfolio to mitigate the impact of volatile nut commodities and we continue to invest in research and development, consumer insights and innovation to enhance our profit margins and meet changing consumer needs. We will continue to concentrate on cost-reduction initiatives throughout the entire organization. We have the roadmap to navigate our customers, our brands and our company through this challenging environment. I believe we are doing the right things for our customers, our shareholders and our company. We appreciate your participation in the call and thank you for your interest in our company. At this time, I will turn the call back over to Mike.

Okay. Thanks, Jeff. At this point in the call, we will now open the call to questions from participants. Britta, would you be kind enough to queue up the first question?

[Operator Instructions] Sir, you have no question at this time. [Operator Instructions] Your first question from Greg Venit [ph], a private investor.

Is there any update on the real estate within Chicago? The sale of real estate, do you have an expectation that, that might be done sometime this calendar year?

No, we don't have anything to update on that, Greg. As you know, and as we've told everyone, we have a buyer out there. They do have a lengthy political process to go through. And we're just going to -- hopefully get it done this calendar year. But it's really up to both the state and the certain municipality to get that done.

Okay. And I don't know if you can comment on this or not, but the problems at Diamond Foods are having, the -- what expectations do you have as -- would you be able to pick up some of their business from the growers? Or is that something that we won't know until at the end of the summer?

It's our understanding, Greg, that their contract renewal period expires sometime in June. And we don't anticipate that we'll see much progress on that until that date is reached.

Are you able to enter discussions with these people? Or are any of these growers approached you at all as far as wanting to do business with you instead of Diamond?

Jeff?

Yes. Greg, this is Jeffrey. We have had some contact with several growers. We're obviously always looking to gain new growers. And we think there are opportunities with the situation this year to pursue new growers. I will say we picked up a few new growers in the past couple of months. But a lot of that will occur probably in the June time period when grower contracts come up for review.

And it's my understanding you all have the capacity to take on this addition without any more capital expenditure?

Yes. That's correct, Greg. We have quite a bit of excess capacity at our Gustine, California facility.

Our next question from Bruce Baughman, Franklin Advisory Service.

The -- I was interested in the comment in the release that noted that produced pounds increased by 17.8%. Has it -- and that's in contrast with pounds sold decreasing. Can you comment on that? Or give us some insight as to how that comes about? How the flow of product works there?

Sure, Bruce, this is Jeffrey. If you recall, we have 4 shelling plants that process peanuts of all varieties, walnuts and almonds and pecans. In those plants we continued to process the crop that we received throughout September through January. And so that -- those plants are building inventory. Those pounds count as produced pounds against the value-added products that we ship. So you will see variances between what the plants run, the inventories they build versus what we ship to customers.

Is that a function of your own scheduling? Or is it a function of when the product arrives?

So the product typically arrives during the fall. So it's really a function of what certain grade and sizes that we need and how we convert that in-shell material from farmers into sellable needs and then balancing our inventory needs with purchase material from the outside as well.

Okay. In a situation like we had where pounds produced goes up a lot and pounds sold goes down a bit, does that have some kind of effect on the margins in the quarter that might not be typical?

No.

We have our next question from Nick Peters, the company name is Milwaukee Private Wealth.

I was wondering if you can guys can expand a little bit more on the OVH, so far how that's performed compared to your expectations. And have you grown the footprint on the West Coast into new stores?

Yes. This is Jeffrey. We've gained distribution in some areas. We've really looked at this past year as a transitional period for the OVH brand. We really wanted to do a lot of consumer research and understand the dynamics of the produce consumers specifically for snacks and nuts in the category as we look to redesign the brand and create a marketing campaign and create that differentiation. We've gained little pockets here and there, but I would say our main push is going to start now, what with looking at new distribution.

And that new distribution, is that in more produce stores throughout more grocery stores?

Correct. It is the produce section of the grocery store.

We have no question in queue now. We have no question now.

Okay, Britta. Since there are no further questions in the queue, we'll call an end to the call for our third quarter. And we'd like to thank everyone for their interest in JBSS. Have a wonderful day. Thank you.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect and have a very good day. Thank you.