John B. Sanfilippo & Son, Inc. (JBSS) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Fourth Quarter and Fiscal 2012 Year-End Operating Results Conference Call. My name is Jasmine, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Michael Valentine, Chief Financial Officer. You may begin.

Thank you, Jasmine. First, we'd like to thank everyone for participating in our quarterly conference call for the fourth quarter and fiscal year ended June 28, 2012. Before we start, we want to remind everyone 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 results are explained in the various SEC filings that we have made, including on Forms 10-K and 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties. In considering year-over-year comparisons that we will make in today's call, participants should note that the fourth quarter of fiscal 2011 and fiscal year 2011 were 13-week and 53-week periods, respectively, while the fourth quarter of fiscal 2012 and fiscal year 2012 were 12-week and 52-week periods, respectively. The current quarter net sales increased by $324,000, or 0.2%, to $106.7 million compared to net sales for the fourth quarter of fiscal 2011. The increase in net sales in the quarterly comparison came mainly from increased sales prices for all major product types, which were implemented because of higher commodity acquisition costs during the year. Sales volume decreased by 12% in the quarterly comparison. However, approximately 62% of that volume decrease was attributable to the additional week in the fourth quarter of last year. Sales volume declined in the consumer, Commercial Ingredients and export distribution channels primarily because of the impact of high peanut prices on consumer demand for peanut products. Unit volume also declined as a result of limited supplies of peanuts due to the drought that occurred in the main peanut growing areas last summer. Fiscal 2012 net sales increased by $26.4 million, or 3.9%, to a record $700.6 million compared to fiscal 2011 net sales. The increase in net sales in the yearly comparison primarily resulted from price increases for all major product types, which were implemented again because of higher commodity acquisition costs. Sales volume declined 8.7% in a yearly comparison; however, 21% of that volume decline was attributable to the additional week in fiscal 2011. The decrease in sales volume occurred in the consumer, Commercial Ingredients and export distribution channels during the year, which were driven by declines in sales of peanuts, pecans, cashews, walnuts and mixed nuts. The decline in sales volume for these products was, again, mainly attributable to the impact of high prices on consumer demand. The decline in sales volume for peanuts and walnuts was also attributable to limited supplies of these nuts due to smaller crops. The current fourth quarter gross profit margin increased to 16.6% of net sales from 15.9% of net sales to last year's fourth quarter. Gross profit dollars increased by $1.3 million, or 5%. The increases in gross profit margin and gross profit were due primarily to improved alignment of sales prices with acquisition costs, especially for peanuts and tree nuts. Fiscal 2012 gross profit margin increased to 15.3% of net sales from 12.5% of net sales in fiscal 2012. Gross profit dollars increased by $22.9 million, or 27.2%. As was the case in the quarterly comparison, the increases in gross profit margin and in gross profit were due primarily to alignment of sales prices with acquisition costs for peanuts and tree nuts. Total operating expenses for the fourth quarter of fiscal 2012 declined to 12% of net sales from 13.2% for the fourth quarter of fiscal 2011. The decline in total operating expenses as a percentage of net sales was primarily attributable to $5.7 million of goodwill impairment that was recorded in the fourth quarter of fiscal 2011, which was offset in part by a $700,000 reduction in the litigation accrual again recorded in last year's fourth quarter. Both of these items did not recur in the current fourth quarter. Total operating expenses for the current fourth quarter included increases in incentive compensation, advertising and marketing expenses, which were partially offset by a decrease in shipping expense as a result of the lower sales volume. Total operating expenses for fiscal 2012 fell to 10.6% from 11.0% for fiscal 2011. The decrease in total operating expenses, as a percentage of net sales, mainly was attributable to the recording in fiscal 2011 of the goodwill impairment that I mentioned earlier, a $1.7 million increase of projected earn-out payments for the OVH acquisition and a $2 million increase to a litigation accrual, which were all offset in part by a $1.1 million settlement benefit. None of these items recurred in fiscal 2012. Total operating expenses for fiscal 2012 included increases in incentive compensation, advertising and marketing expenses, which were offset in part by lower shipping and broker commission expenses. Interest expense in the fourth quarter declined to $1.4 million from $1.7 million for the fourth quarter of last year. Interest expense in the current fiscal year fell to $5.4 million from $6.4 million for fiscal 2011. The declines in interest expense in both the quarterly and fiscal year comparisons were principally attributable to lower average total borrowing levels and also lower average interest rates on short-term borrowings. As a result of the above, net income in the quarterly comparison increased by $1.7 million, or almost 76%, and net income for the fiscal year comparison increased by $14.3 million, or 504%. The total value of inventories on hand at the end of the current fiscal year increased by $17.4 million, or 13.5%, compared to the value of inventories on hand at the end of fiscal 2011. The increase in the value of total inventories on hand was mainly attributable to increased quantities of raw pecans and raw almonds. The weighted average cost per pound of raw input stocks on hand at year-end increased by 3.5% compared to those stocks at the end of last year. The weighted average cost per pound of finished goods inventory on hand increased by 7.7% in the year-end comparison. The increase in cost per pound for raw input stocks and finished goods was attributable almost entirely to higher acquisition costs. And now I'll turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance for the current quarter and fiscal year.

Thank you, Mike. Good morning, everyone. In spite of a volatile economic marketplace and extraordinarily high commodity prices, the company's results in the fourth quarter and year-end fiscal 2012 validate the success of our disciplined approach to managing raw material and operational costs and aligning those costs with our pricing and product portfolio strategies. I am proud of our management team and each and every employee for achieving record net sales of just over $700 million in fiscal 2012 and for achieving targeted operating margins and efficiency goals this past year. At the same time, I am proud that the company continued to invest in product innovation, marketing programs and consumer insights to support our Fisher, Orchard Valley Harvest and ARMA brands and the private brands of our key retail partners. As we celebrate our 90th year in business, I believe our founding fathers would also be proud of the company today and encouraged by the opportunities yet to come. Fiscal 2012 could be described as a quiet year, a challenging year and a remarkable year for JBSS. In some respects, it was a quiet year. We were not involved in major projects such as acquiring a business or relocating operations. And we had no unusual events impacting our financial results, as Mike mentioned. In other respects, however, fiscal 2012 was a challenging year. As a Mike highlighted, the cost for tree nuts remained at historically high levels and cost for peanuts more than doubled due to a small crop. Although our sales volume was certainly negatively affected by the high cost of nuts and limited quantities of certain nut type, we were able to align our selling prices with our costs and provide consistent quality supply to our customers and consumers. It is important to note the impact higher commodity prices continue to have on the nut category in the United States, and I would like to highlight the most recent trends. All the market information is reported through AC Nielsen data ending July 7. We look at the category on Nielsen's new total U.S. definition, which includes food, drug, mass, Walmart, military and other outlets when we -- and when we discuss pricing, we're referring to average price per pound. The total nut category experienced a softening in pound volume in our Q4, though sales dollars increased due to higher prices. For the fourth quarter, total pound volume was down 2% while sales revenue increased 12%. The category decline has moderated versus last quarter when the category declined 4% in pound volume. Looking at it by subcategories, snack nuts declined 9% in pound sales for the quarter versus last year, while revenue increased 9%. Average prices in the snack category were up 19% for the quarter versus last year. Cashews, peanuts and mixed nuts, the nut types that have experienced the greatest increase in prices, also experienced the biggest decline in pound volume. Consumers are shifting from higher priced nuts such as cashews and mixed nuts to alternatives like almonds. Trail mixes continue to be a bright spot, showing growth of 15%. The price of trail mixes increased 11% in comparison to the 19% increase for snack nuts. The baking nut category decreased 4% in pounds for the quarter and increased 3% in dollars. Average prices in the baking category increased 8% versus last year. A bright spot, however, is the produce subcategory, which increased 12% in pounds and 23% in revenue. Pistachios continue to drive the growth in this subsegment, but almonds are also showing strong growth. Retail pistachio prices are relatively stable versus last year, causing consumers to increase their purchases as other nut types went up in price. Freight costs made it a challenging year for our company, but we cannot control Mother Nature, crop sizes or necessarily the demand destruction for nuts in the U.S. or the growing demand for nuts in emerging markets such as China. But we can control how we manage our business and navigate our customers and consumers through such volatile markets. And in this respect, it was a remarkable year for our company. We remained focused on executing our 3 key strategic goals: grow our brands, expand globally and provide integrated nut solutions. First, grow our brands. We are making investments necessary to take a consumer-driven approach to core brand development in the snack, ingredient and produce categories. We are pleased with progress made by our Fisher brand in the baking nut category. Our efforts are being realized as recent market data has shown a significant increase in our market share. Behind the Freshness Seal bag launch, Fisher gained 3.6 points of pound share this past quarter. In fact, over the past 6 months, Fisher has gained 2.2 share points in the baking category. The Fisher snack brand maintained share in the snack subcategory versus last year. And Fisher's snacking gained 0.1 share point in the latest 4-week period. The share gain has been due to increased distribution and better merchandising around our "Freshness You Can See" integrated marketing campaign. Fisher has launched a series of new offerings, including cocoa mocha and vanilla bean-flavored almonds and honey roast mixed nuts and has relaunched a trail mix line in smaller on-the-go packages at a better price point for our consumers. These initiatives have been garnering positive feedback from retailers. We believe there is tremendous potential for our Orchard Valley Harvest brand in the produce category. This brand, which we acquired in fiscal 2010, expands our presence in the perimeter area of the supermarket, which continues to expand in size and importance. Orchard Valley Harvest brand increased 0.3 share point versus last year fourth quarter as a result of distribution gains. I would categorize fiscal 2012 as a re-launch year for the OVH brand. Time and resources were dedicated to consumer qualitative and quantitative research, targeted communication tactics, new brand positioning and unique packaging design. With the new and invigorated sales and broker organization, we are rolling out an exciting Orchard Valley Harvest program this year. We have received positive feedback from retailers who have embraced the new concept, and we expect new placements starting in our second quarter fiscal 2013. The second key strategic goal is to expand globally. We are devoting increased resources to the international market, particularly Asia. We believe the potential for our products in the international market is enormous. As a leader in providing integrated nut solutions, we feel that we are qualified in expanding our footprint, especially in emerging markets throughout the world. And we have strong results already in countries like Mexico, Korea and China. While international sales are currently approximately 5% of our total sales, we expect to grow this percentage in the future. I'm excited to announce the company is setting up a sales office in Shanghai, China, and we just hired a sales manager to oversee our business development efforts in Asia. As global demand for nuts continues to rise, our management team is establishing the infrastructure to pursue growth opportunities beyond North America. Our third strategic goal is to provide integrated nut solutions. Investments in innovation continue to be a priority for us. Whether the innovation comes from ideas such as developing new snack mixes containing nut products, creating new flavors for traditional products, establishing new markets for existing products or developing new packaging, we intend to be a leader in our industry. We will continue to work with our loyal customers and consumers to provide a diverse product line of the highest quality. The investments we are making in consumer insights are critical to recognize current and future consumption trends. We work closely with retailers, restaurant suppliers and other food manufacturers, who value solutions-based methods that drive mutual growth for the snack, produce and culinary ingredient categories. For example, there continues to be substantial growth trends in almond and trail mix consumption, and we expanded our Fisher product line, our Orchard Valley Harvest products and worked with our private brand and Commercial Ingredient partners to develop new almond and snack mixes to meet growing consumer demand for these products. Guided by our vision and core values, our company will continue to invest in our people, brands and processes to provide increased value for our customers and stockholders. We will continue to concentrate on cost-reduction initiatives and operational efficiency goals throughout the company. Our strong balance sheet and cash flow allow us to invest in tools and capabilities that will drive brand growth and allow us to support other growth strategies outlined in 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. In closing, while I'm proud of our recent accomplishments, our company still has much more to achieve to reach its potential. And we will continue to advance our core strategies for growth in fiscal 2013: grow our brands, expand globally and provide value-added integrated nut solutions. We will win with talent and knowledge to create a capable, high-performance culture, one that can execute with excellence. Our organization is energized and is confident in the potential and capabilities of our people, our brands and our processes. We are focused, and we know what we need to do to succeed. We have strong plans in place that will enable us to improve our performance and grow our business. The company was able to manage through record high commodity costs over the past 2 years. We anticipate a stabilization of commodity costs in fiscal 2013, which should allow our customers and us to return to focusing on growing sales volume through increased collaborative marketing and merchandising programs. We appreciate your participation in the call and thank you for your interest in our company. I will now turn the call back over to Mike. Thank you.

Okay. Thanks, Jeff. At this time, we'll open the call to questions. Jasmine, can you please queue up the first question?

[Operator Instructions] And you have a question on the line from Mr. Austin Hopper with AWH Capital.

Just want to ask a couple questions about your walnut business. You spoke to a more, sort of, stabilized pricing environment generally in 2013. Can you comment about carry-in inventory in walnuts going from the 2011 to 2012 crop year? Any thoughts on kind of what the carry-in inventory is expected to be versus maybe what was last year for the industry?

Yes. This is Jeffrey. Thanks, Austin. Yes, we anticipate there's going to be some tight supplies going into new crop year for walnuts. Walnuts were competitively priced this past year, and we saw a pretty substantial growth in shipments. For walnuts, we anticipate a tight supply going into new crop. However, the new crop looks substantial. And we anticipate that prices will stabilize going in new crop. But we do see a good quality and a significant-sized crop coming up for 2013.

Okay, great. And then can you talk about just kind of contracting with walnut growers? Is it typical that you have sort of 100% contracts with your growers where they provide you 100% of their production, or is it more that they would provide to multiple processors?

This is Mike. I think the majority of our growers contract solely with us.

Okay. Have you seen any change in the industry on that front?

No.

Okay, okay, just curious. Okay. And then finally, you talked a fair amount about your Fisher baking, and I'm just curious what you've seen on that front on the walnut side of your business in terms of your ability to grow share there, how you've been able to do it and kind of what has happened on the walnut baking side?

Sure. Well, we have a full program. It's not just walnuts, its pecans, almonds, walnuts, hazelnuts, so it's a full baking nut program. And we've invested in innovative packaging. It's a stand-up bag that retailers, I think, embraced. We did a lot of consumer research on the baking category and what, potentially, was missing in the category. And the focus group supported going to a stand-up bag, it's better presence in the markets, better presence on the shelf. Consumers like the fact that they can reclose all the packaging in the baking nut category in case they don't use a full amount for a recipe. So as a result of that, we were able to gain new distribution at some key retailers. So we're very optimistic about our opportunities to expand our Fisher baking program in the market. Plus we have a strong integrated promotional program. We're teaming up with Karo Syrup for the fall for a promotion with them on holiday baking nuts.

Your next question comes from the line of Avris Vexler [ph].

Divicom Partners [ph]. Just a question, I believe that in the year that just ended in June 30, the company depreciation and amortization was probably to the tune of about $16 million to $17 million, while the capital expenditure is in the range of $8 million, creating basically an additional, I guess, cash earnings of maybe $8 million to $9 million, $0.70 to $0.80 per share. That discrepancy was also last year. And last year, it created about $12 million, maybe over $1. Do you expect that to continue?

We've seen that the trend actually for more than 2 years. I think it's been more like 5 years and a lot of that has to do with the fact that most of our equipment, especially up here in the Elgin area, is new. And we're not planning on any major projects in fiscal 2013.

Okay. So capital expenditure, I guess, if you have any range of estimates, the next year will be in the tune of $8 million and depreciation maybe in the tune of $16 million to $17 million creating another $8 million?

Well, I think you're right on the depreciation. We will disclose what we're going to forecast for CapEx in our K, which is going to be filed next Thursday. So keep an eye out for that.

Your next question comes from the line of Nick Peters with Milwaukee Private Wealth Management.

Can you go over what are the major costs that go into the sell-in expense line?

I'll take it. Okay. This is Mike. The major costs, of course, compensation-related expenses. After that, I would say probably freight expenses, advertising expense and broker commissions were top of list.

Has that changed meaningfully over the past 3 years?

I think, in respect to freight, we've seen quite a bit more of our customers picking up their goods here instead of us delivering it to them. So and that started about 2 or 3 years ago, we noticed that. Brokerage commissions, as a business, has shifted away from industrial sales to more consumer sales. We've seen an increase in commissions as a result of that.

Okay. And then finally, can you go over the successes and where you've been finding, I guess, the most success in your marketing campaign over the past few years?

Well, definitely on the baking category, we think there's been a lot of opportunity for baking. Although it's not growing rapidly, we still think there's a lot of opportunity for ingredient nuts in grocery and so we've had great success there. I think a lot of the new innovative packaging brought some innovation to the category, which has hadn't seen in a long time. As I mentioned, the consumer-friendly packaging, I think, is attracting consumers to that category now. I think the Fisher snack, although we haven't had great success there, I think we've got some good plans in place to relaunch and invigorate the snack side of our brand. And then Orchard Valley Harvest, as I mentioned, it was really a rebuilding year for Orchard Valley Harvest brand, and we've invested a lot in consumer insights, brand positioning. We believe we've got a strong concept going forward that we will relaunch this year. And then private brands, we've got some key private brand partners that we work with, very innovative, building equity in their brands, close partnership. We are providing them with innovation and work very closely on growing their brands as well.

Your next question comes from the line of Ron Strauss with Perkins (sic) [Pekin].

Pekin Singer Strauss Asset Management. You characterized, Jeff, the walnut crop has been substantially larger this year than last. Could you talk a little bit about the other tree nut crops and peanuts as well?

Okay, sure. Well, I'll cover pecans. So far, the crop looks good. It's a little bit early still because our harvest hasn't started. It is the off year for pecans. So normally, this would be a smaller crop than last year. However, with what we've seen in the market and what our field buyers are telling us, it's going to be a strong crop. Also there's a huge carryover for pecans, partly due to the price increases and just the demand destruction we've seen for pecans in the U.S. and for export shipments. So we believe there's enough crop to cover over until next year, and we see a pretty strong crop even though it's the off year. The almond industry continues to grow. Although the crop size is substantial, demand continues to increase. In the almond market pricing has been very stable over the last couple years. And as a result of higher prices of other nut commodities, the almond market continues to grow double-digit domestically and export shipments are very strong.

And, Ron, I'll take cashews and peanuts. Let's start with cashews. The northern hemisphere crop was recently harvested in May, and that looks like it's coming in as a normal-sized crop. The reason why cashews prices are expected to decline is we've seen a very significant decrease in demand for cashews. I think the last category numbers I saw, we're almost down 20% year-over-year. But anyway, good news on the supply side. In respect to peanuts, we expect a record crop, possibly as much as 2.8 million tons. A normal-sized crop is typically around 2.1 million tons, and that's why we're anticipating sizable declines in peanut prices this fall and forward.

With these large crop sizes in mind, do you see price pressures coming on the selling side? And if so, what does that portend for gross margins?

Well, Ron, we've done a great job. This is Jeffrey. I think I've done as good a job as anybody in our industry managing our inventory levels. And so as our standards come down as new crop gets harvested and we bring it into our buildings, we're in a strong position to start marketing and promoting. This past, really, 2 years has been a challenge trying to sustain volume because of price increases. If you talk to our Commercial Ingredient team, they've probably had 3 or 4 price increases just in the past year, which are never easy to execute. But it just takes the focus off of really driving growth and driving volume. I think with the stabilization of the markets and some commodities coming down, we can refocus our efforts now on rebuilding some of that growth. But we're in a good position to take advantage if and when these crops do come down and they're in our building.

[Operator Instructions] Your next question comes from the line of Christopher Robertson.

Cardinal Capital. Wanted to ask you if we could dig into the administrative expenses a little bit. I know that last year was unusually low. Could you remind us whether that was just a function of compensation? And also I know there was a previous question about the mix between freight and advertising, et cetera. But could you give a little bit more granularity for those of us of that aren't as familiar with the name as to the dollars tied to those different areas, please?

Sure. This is Mike. The bulk of our admin expenses are related to compensation expenses. Last year was low because we did not hit our targets. And consequently, there were no incentive compensation expenses. And that pretty much explains the increase this year. After that, the categories get pretty small, probably depreciation would come second. And by the way, I'm including all the benefits and that sort of type of expense when I talk about compensation. And then, once we get beyond that, it gets pretty small outside of audit and legal expenses.

Okay. And the second question that I had was can you comment at all about the Diamond Foods' fallout, and how that has helped or provided any opportunities that you see that weren't there before, or whether it's more status quo in the industry?

This is Jeffrey. From a sales standpoint, any kind of doubt with any supplier or manufacturer as to supply concerns, if you're a retailer or another food manufacturer, always will create opportunities from a selling standpoint for us. We've done a great job, I think, definitely last year making sure we had consistent supply for our customers and consumers. And so any kind of doubt that might be occurring in the buyers' mind as to Diamond, I think, creates opportunities for us. If we have the right value proposition and sell story from a selling standpoint. From a grower standpoint, again, if there's doubt on what's happening or concern from a grower standpoint, could create opportunities for us to pick up additional in-shell from our field buyers.

And at this time, we have no further questions. I would like to turn the call to Mr. Michael Valentine for closing remarks.

Thanks, again, Jasmine. Again, we'd like to thank everybody for their interest in JBSS. This concludes the call for our fourth quarter and fiscal year 2012 operating results.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.