John B. Sanfilippo & Son, Inc. (JBSS) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your John B Sanfilippo & Son, Inc. First Quarter Fiscal 2013 Operating Results Conference Call. My name is Lulu, and I will be your operator today. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded. I would now like to turn the call over to Mr. Michael Valentine, Chief Financial Officer. Please proceed, sir.

For the first quarter of our fiscal 2013, before we turn to operating results, we want to remind everyone that we may make some forward-looking statements this morning. These statements are based on our current expectations and involve certain risks and uncertainties. The factors that could negatively impact results are explained in the various SEC filings that we have made, including Forms 10-K and 10-Q. We encourage everyone to refer to these filings to learn more about these risks and uncertainties that are inherent in our business. Turning to operating results. Net sales for the first quarter of fiscal 2013 increased by 13.2% to $177.5 million in comparison to net sales for the first quarter of fiscal 2012. The increase in net sales was mainly attributable to higher sales prices from pricing actions implemented over the last 12 months. Sales prices increased for most of our major product types in the quarterly comparison due to higher commodity acquisition costs. A shift in sales volume to higher-priced consumer products in the consumer channel from lower-priced bulk products in the Commercial Ingredients channel also contributed significantly to the increase in net sales. Sales volume, which is measured as pounds sold was virtually unchanged in the quarterly comparison. Sales volume increased in the consumer channel from increased sales of Fisher baking and snack nuts, at existing customers and from new sales of Fisher products at new customers. Sales volume also increased in the contract packaging channel due to expanding sales to a major existing customer. Sales volume declined in the Commercial Ingredients and export channels, primarily because of the impact of high prices for peanuts, pecans and walnuts on customer demand. The first quarter of fiscal 2013 saw our gross profit increased by $8.8 million and gross profit margin increased to 17.2% of net sales from 13.9% for the first quarter of fiscal 2012. The improvement in gross profit and gross profit margin occurred mainly as a result of an improved alignment of selling prices with commodity acquisition costs. A shift in sales volume to higher-margin Fisher products from lower margin bulk products also contributed to the improvement in gross profit and gross profit margin. First quarter 2013 total operating expenses increased by $400,000 to $16.7 million in comparison to $16.3 million for the first quarter of fiscal 2012. As a percentage of net sales, first quarter 2013 total operating expenses fell to 9.4% from 10.4% for the first quarter of fiscal 2012. The decrease in total operating expenses as a percentage of net sales was due primarily to higher sales base. Total operating expenses for the first quarter included a net gain on the sale of assets of $600,000. The increases in total operating expenses came from increased spending and compensation and marketing and advertising expenses, primarily. Interest expense in the current first quarter declined by $100,000 in comparison to interest expense for the first quarter of fiscal 2012. The reduction in interest expense was due to a reduction in long-term debt, primarily from scheduled principal payments. The total value of inventories on hand at the end of the current first quarter increased by $21.2 million or 18.7% compared to the total value of inventories on hand at the end of the first quarter of fiscal 2012. The increase in the total value of inventories was attributable to a 13% increase in the weighted acquisition costs for most of the raw nuts that we buy and increased quantities of our raw nut input stocks and finished goods. The increase in the quantity on hand of raw nut input stocks was attributable to an earlier commencement of the walnut harvest and higher carryover stocks on hand for peanuts and pecans. The increase in carryover stocks for peanuts and pecans resulted chiefly from the impact of higher prices, on demand for these nuts in the Commercial Ingredients and export channels. The quantity of finished goods on hand in the quarterly comparison increased -- occurred because of the need to build Fisher product inventories to support continuing sales volume growth for these products, which is anticipated to continue in the second quarter. Primarily as a result of the significant improvement in gross profit, net income for the current quarter more than tripled to $7.5 million or $0.69 per diluted share from $2.4 million or $0.23 per diluted share for the first quarter of fiscal 2012. I will now turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our operating results for the first quarter of fiscal 2013.

Thank you, Mike. Good morning, everyone. The results of our first quarter fiscal 2013 are solid and we earned record net income of $7.5 million, the highest of any first quarter in the company's history. I am proud of our management team for staying focused and disciplined as we continue to execute our corporate strategies in spite of a volatile economic marketplace and high commodity prices. At the same time, I'm proud that the company continue to invest in product innovation, marketing programs and consumer insights to support our Fisher and Orchard Valley Harvest brands and the private brands of our key retail partners. We developed a 5-year strategic plan to help us achieve long-term profitable growth. And the management team continues to complete tactical projects to streamline our business and reallocate financial resources to support our strategic goals. Mike mentioned a net gain on the sale of assets of $600,000 in our first quarter fiscal 2013. We've finalized the sale of a property in Barrington, Illinois, which was the home of one of our outlet stores and this contributed to the net gain. Our long-term goals include expanding globally and attaining recognition by global retailers, food service providers and consumers as a world-class nut partner. I just returned from Asia 2 weeks ago. We are in the process of establishing a representative office in Shanghai to better support our Fisher brand sales in China, and I'm very excited about the opportunities there; goals to profitably increase our market share in private brands and Commercial Ingredients by using innovation and consumer insights valued by our customers. Three, providing the best total solution to retailers by increasing our presence beyond the traditional nut aisles of stores, especially in the produce aisle with our Orchard Valley Harvest brand. Four, utilizing our Fisher brand name recognition as a foundation for targeted, sustained growth via value-added snack and baking products. And lastly, obtaining recognition as a high-quality well-run food business that utilizes our vast industry knowledge and innovation to achieve high growth and profitability. The results over the past several quarters and, indeed, in the first quarter of fiscal 2013 demonstrates the success we're having in executing these goals. We are specifically encouraged by the increase in sales volume for our Fisher brand, and we expect to continue to emphasize this portion of our business. A shift in sales volume to our Fisher baking and snack nut products in the current quarter contributed to higher gross profit margin levels. Executing our Fisher growth strategies in our strategic plan by leveraging the advantages associated with our unique packaging for baking nuts, and increasing promotional and merchandising support for the brand was our top priority in the first quarter, and we were successful. We believe that our efforts to grow our Fisher brand will be aided by anticipated lower market prices for peanuts and for virtually all tree nuts, except almonds, in fiscal 2013. While tree nut market prices are expected to remain high when compared to historical averages, we do anticipate a modest overall market price decrease in fiscal 2013. Turning to channel sales review. Net sales in the consumer distribution channel increased by 20.4% in dollars and 3.2% in volume in the first quarter of fiscal 2013, compared to the first quarter of 2012. Private brand consumer sales volume decreased by 0.9/10 of 1% in the first quarter compared to the first quarter of fiscal '12. Net sales in the Commercial Ingredients distribution channel decreased by 3.9% in dollars and 12.3% in sales volume in the first quarter of 2013. Sales volume decline in the Commercial Ingredients channel primarily was due to the impact of higher peanut, pecan and walnut prices on customer demand. Net sales in the contract packaging distribution channel increased by 20.3% in dollars and 15.7% in volume in the first quarter of fiscal 2013. The sales volume increase was due to higher sales to our major contract packaging customers. And net sales in the export distribution channel increased by 16.2% in dollars but decreased 18.5% in volume in the first quarter of 2013. The decrease in sales volume was due primarily to the impact of higher peanut prices and on customer demand. Looking at category updates, all the information is reported through ACNielsen data ending September 29. We look at the category on Nielsen's new total U.S. definition, which includes food, drug, mass, Walmart, military and other outlets. And when we discuss pricing, we refer to average pricing per pound. Please note that the timing of this update is from Q4 of 2012 to Q1 of 2013, so the numbers will be different from those in the press release. The total nut category experienced a softening in pound volume in Q1, though sales dollars increased due to higher prices. For the first quarter, total pound volume was down 2% while sales revenue increased 10%. The category decline was identical versus last quarter when the category also declined 2% in pound volume. Looking at it by subcategories. Snack nuts declined 7% in pound sales for the quarter versus last year, while revenue increased 9%. Average prices were up 17% for the quarter versus last year. Cashews, peanuts and mixed nuts, the nut types that have experienced the greatest increases in prices, experienced the biggest decline in pound volume. We continue to see consumers shifting from higher priced nuts, such as cashews and mixed nuts to alternatives like almonds. Trail mix growth has slowed down, increasing 2% in revenue but declining 6% in pound sales. Promoted volume for the category also declined versus last year. The Fisher brand increased 0.02 of a share point in the snack subcategory versus last year. Fisher snack has some real momentum, showing share growth for 5 quad week periods in a row. The share gain has been due to increased distribution and better merchandising around our "Freshness You Can See" integrated marketing campaign. Base volume for Fisher has increased 37%, driven by strong gains in distribution. Incremental volume has increased 184% behind a strong retail execution on display activity. The baking and recipe nut subcategory increased 4% in pounds for the quarter, and increased 9% in dollars. Average prices increased 4% versus last year. The recipe nut category has been a real focus for us and our Fisher brand has real momentum behind our Freshness Bag innovation. Fisher gained 5.4 share points of pound share this past quarter. In fact, over the past 6 months, Fisher has gained 4.3 share points and has increased in share versus last year for 8 straight Nielsen periods. For the first quarter, Fisher had 23% pound share of the category and narrowed the gap versus the category leader to under 10 points. Private brand also grew in share by 0.09 of a point this quarter. The produce subcategory increased 9% in pounds and 18% in revenue. Pistachios continue to drive the growth in this subsegment, but almonds are also showing strong growth gaining more than -- more share than pistachios. Retail pistachio prices increased 7% versus last year, while almond prices decreased 12%. Our produce brand, Orchard Valley Harvest, increased 6% in pound volume versus the last year. It is important to note that for the past 18 months, we have talked about price increases in the nut category and the potential impact higher prices will have on demand. And we have seen some demand destruction at retail over the past year. But the significant price increases led to a less-than-proportional decrease in volume. In the past 12 months, total nut category prices increased 13% while volume only dropped 2%. This is a ratio of 0.1538, anything less than 1 signifies inelastic demand where consumers are still willing to purchase products at higher prices. So the numbers correlate to an inelastic demand for nuts, which is good for our industry. We believe the trade associations such as the Almond Board, the National Peanut Board, the National Pecan Shellers Association and the Walnut Board are all doing a wonderful job promoting the health benefits of nuts, and helping to educate consumers on using nuts as a healthy ingredient for snacking and cooking. As commodity prices start to decline for products such as peanuts and pecans, we believe there will be significant opportunities to grow volume through promotions and price decreases reflected on the shelf. In closing, guided by our vision and core values, our company will continue to invest in our people, our brands and our processes to provide increased value for our customers and stockholders. While I'm proud of our recent accomplishments in our first quarter of fiscal 2013, our company has more to achieve to reach its potential and we will continue to advance our core strategies for growth, which are: grow our brands, expand globally and provide value-added integrated nut solutions. We will continue to focus on growing the Fisher brand by aggressively pursuing new distribution opportunities and by increasing our promotional and merchandising support. We believe that these future growth efforts for the Fisher brand, as well as Orchard Valley Harvest and private brands, will be further aided by anticipated lower new crop market prices for virtually all tree nuts except almonds and peanuts. We anticipate strong promotional opportunities to drive volume this holiday season and for the balance of fiscal 2013. 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.

Okay, thanks, Jeff. At this time, we will open the call to questions. Lulu, can you please queue up the first question?

[Operator Instructions] And the first question comes from the line of Gregg Hillman.

Who's the #1 company in the baking nuts?

The #1 brand share is Diamond Foods in baking nuts.

Okay. And then, the way you grew share was by picking up more distribution, like, you got into more grocery stores or outlets. Is that the main way you grew that segment?

Correct. We picked up 2 national retailers with new distribution where we did not have Fisher distribution before. So that was one part of it. Also, executing more promotional displays and getting more pounds on the floor, as we call it, with our current distribution. Then the third thing is, really, increasing the velocity or the sales volume of our Fisher products that are in distribution.

Okay. Then just long-term, in terms of just the availability, the capacity for nuts is being added worldwide and domestically, how does that look like in terms of new trees being planted?

Well, on the supply standpoint, it's really different for each commodity. We anticipate or we do see additional almond plantings. We anticipate higher volumes of almonds coming on board from a supply standpoint. Pecans, we see additional plantings, although, we haven't seen enormous growth in pecans plantings over the last couple of years. I believe with the higher prices, we're seeing more plantings in places like Mexico. I've just returned from Australia, and I know they're planting more pecan trees in Australia to support the demand there, as well as in Asia. Walnuts, we had a nice-sized walnut crop this year. We believe that there is additional plantings for walnuts as well. So overall, I think with these higher prices, growers have seen, from a return standpoint, there have been more additional plantings and we anticipate supply to continue to increase in most commodities.

Okay. And then, when you're saying in demand for nuts is inelastic, I mean, is that just on a given price range? But at certain times when the price of nuts have gone really high, the demand has decreased, is that correct?

Correct, yes. Then, there's a ceiling, I think, on just about anything unless it's vital to your life. But we believe that we -- as I mentioned, we saw a 2% decrease in volume but a 10% to 13% increase in prices. So consumers, even though prices have gone up, they haven't -- they still have been willing to purchase nuts as a snack or ingredient. And so I think it's a positive thing for our industry that they are still willing to pay a little bit more for nuts because they see the health benefits or the value as a snack item.

Okay. But then, just -- but the more expensive nuts would go down, like cashews, something that?

Correct. So we just think it's the decline in cashews and other tree nuts, pecans, for example, we believe there will be a lot of nice opportunities for promotions on both cashews and mixed nuts.

And the next question comes from the line of Bruce Winter[ph].

You explained why you expect the volumes of nuts to increase because of declining prices in the new crop. What do you expect to happen to your profit margins given that you have a higher inventory of the old crop?

Bruce, this is Mike Valentine. We do have a higher carryover than we had last year. But I wouldn't characterize it as an abnormal carryover. In fact, last year our carryovers were too low. We'll be out of those carryovers, probably, in about 4 weeks on those particular nuts that we've pointed out. So it shouldn't be a problem for us.

Good. I also have a question about your 2 office buildings. I'm having trouble figuring it out, and I'm working off your 10-K. The Elgin site, 2005, you have an office building that is breakeven on profits but you don't have a book value in your financial statements. What's the book value of that property?

I'm not sure which property you're referring to.

The Elgin site acquired in April 2005 that's 75% vacant.

Okay -- then, you're talking about -- okay, because there's actually 2 Elgin sites.

Yes. The -- not the old Elgin site, the new Elgin site.

Okay. That -- if you -- on our balance sheet, you'll see our rental investment property is about $29.4 million.

Yes, I see it.

Right. And most of that is attributable to that office building.

And then, the other office building is $6 million in change. Are -- the sum -- are both office buildings sum to this $29 million, 4.43?

Yes. They're both in there. And that second one that's at a little over $6 million really isn't an office building, it's primarily a vacant piece of property that was intended to be our site that we're going to build our plant on.

And you breakeven on the office building -- the new Elgin office building, you're running that at breakeven, roughly. What does the other one cost you, the -- what you called the old Elgin site? Does that have a profit or loss with it?

The old Elgin site is almost completely land. So there's really no operating costs or income associated with it of any significance.

Okay. And what's the purpose of keeping this $29 million of property on your balance sheet? Why don't you do something...

Yes. This is Jeffrey. The original site that we purchased, the $6 million value that's on the balance sheet has been for sale since we moved into this new corporate headquarters. The market has not been very favorable to sell vacant land in this area. But we are optimistic that we've got interest in the property, but it has been for sale. So it's not something we want to keep on the books.

How about the other one?

And then, as far as the office building on our site goes, it's actually part of the site that we're on. And it isn't easily separated, and that's why we're keeping that.

You want to increase the rent on it. You want to find more occupants for it?

Right, right. It just -- and well, first of all, the market really isn't set up to sell it anyway. But because it's part of an entire campus, it would be difficult to break that out and sell it separately without having a negative impact on the manufacturing part of our business.

Okay. So you could opt for a $20 million investment, if you got it fully occupied, you could get a reasonable return on your income if you -- on your investment if you rented it all out?

Well, that's true. But I should point out that the fourth floor of that 4-storey building is not developed. So to rent it out completely would require a pretty sizable capital investment that we really don't think would be a good financial decision.

I would now like to turn the call over to Mr. Michael Valentine for closing remarks.

Okay. Again, we certainly appreciate everyone's interest in JBSS, especially those participants living on the East Coast who have called in. And this concludes our call for the first quarter of fiscal 2013. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference call. You may now disconnect. Enjoy your day. Thank you.