John B. Sanfilippo & Son, Inc. (JBSS) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Second Quarter Fiscal 2014 Operating Results Conference Call. My name is Allison, and I'll be your operator for today. [Operator Instructions] As a reminder this conference is being recorded today. I'd now like to turn the call over to Mr. Mike Valentine, Chief Financial Officer.

Good morning, everyone, and welcome to our 2014 second quarter earnings conference call. We want to thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our Chief Executive Officer; and Bobby Tankersley, our Senior VP of Commodity Procurement. Before we start, we want to let you know that we may make some forward-looking statements today. These statements are based on our current expectations, and they involve certain risks and uncertainties. The factors that could negatively impact results are explained in the various SEC filings that we've made, including Forms 10-K and 10-Q. We encourage you to refer to these filings to learn more about the risks and uncertainties that are inherent in our business. Starting with the income statement. Net sales for the second quarter of fiscal 2014 increased to $225.1 million in comparison to net sales for last year's second quarter of $215.6 million. The increase in net sales was attributable primarily to a 12% increase in sales volume, which is measured as pounds sold to customers. The favorable impact on net sales from the sales volume increase was offset by lower selling prices for all major nut types except almonds during the quarter. Volume increased in all of our distribution channels led by a significant increase in volume in the consumer channel. The increase in the consumer channel volume came from increased sales of private brand snack nut and trail mix products, and a 29% increase in sales volume for Fisher recipe nuts, chiefly from increased merchandising activity. The increase in volume in the commercial ingredients channel was primarily attributable to higher pecans sales due to lower pecan selling prices. The increase in volume in the contract packaging channel came from increased sales in a major existing customer. And the export volume increase in the export channel was due to the timing of inshell walnut sales, as inshell walnuts shipments were delayed into the third quarter of last year due to a late harvest. Net sales for the first 2 quarters in the current year increased to $401.8 million from $393.1 million for the first 2 quarters of fiscal 2013. As was the case in the quarterly comparison, the increase in year-to-date net sales came from a 13% increase in sales volume, offset in part by a decline in selling prices. Volume increased in all channels except the export channel. The volume increase in the consumer channel was generated by increased sales, again, a private brand snack nut and trail mix products, and an 18% increase in sales volume for Fisher recipe nuts. The reasons for the increase in volume in commercial ingredients and contract packaging channels were the same as those cited for the volume increases in those channels in the quarterly comparison. Second quarter gross profit margin declined from 16% -- declined to 16.4% from 17% for last year's second quarter as a percentage of net sales. Gross profit margin for the first 2 quarters of the current year decreased to 16.5% from 17.1% for the first 2 quarters of fiscal 2013. The decreases in gross profit margins for both of the quarterly and year-to-date comparisons were attributable mainly to lower selling prices for private brand snack nut and trail mix products due to competitive pricing pressures. The decreases in margins in both comparisons were offset, in part, by manufacturing efficiency improvements achieved during the first 2 quarters of fiscal 2014. Total operating expenses for the current second quarter decreased to 9.1% of net sales from 10.3% for the second quarter of fiscal 2013. Total operating expenses for the current year-to-date period decreased to 9.4% of net sales from 9.9% for the first 2 quarters of fiscal 2013. The decreases in total operating expenses, as a percentage of net sales in both comparisons, were attributable to a $1.6 million gain on the sale of the Elgin site, that was originally purchased in 2006 for our facility consolidation project. Interest expense was unchanged at $1.1 million in the quarterly comparison. And for the first 2 quarters of fiscal 2014, interest expense declined to $2.1 million from $2.4 million for last year's year-to-date period, and that was due to the result of lower average borrowing levels. Taking a look at inventory, total value of inventories at the end of the current second quarter increased by $19.5 million, or 12%, compared to total inventory value at the end of the second quarter of last year. The increase in the value of total inventories was driven primarily by increased acquisition costs for pecans, walnuts and almonds, during this harvest period. Quantities of raw input stocks decreased by approximately 8%. The higher acquisition costs for pecans, walnuts and almonds led to a 16% increase in the weighted average per pound costs for walnut input stocks in the quarterly comparison. And now, I'll turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance in the current quarter.

Thank you, Mike. Good morning, everyone. I'm pleased with our second quarter results, especially the continued growth of our Fisher recipe nuts. And I'm proud of our sales, marketing and supply chain teams for driving volume increases across all 4 of our distribution channels led by a significant increase in the consumer channel. We achieved net sales of $225.1 million, which is a record Q2 for the company. We are now halfway through our fiscal 2014 and we have accomplished a tremendous amount. In addition to sales and volume growth, our operations teams continue to execute lean [ph] projects to drive efficiencies, improve quality and service and reduce costs. Although, we face competitive pressure that negatively impacted our gross profit margin, the decline in gross profit margin in both the quarterly and year-to-date comparisons was offset in part by manufacturing efficiency improvements achieved during the first 2 quarters of fiscal 2014. And the management team was successful in completing the sale of land and a building that was originally purchased in fiscal 2006 for a facility consolidation project, as Mike mentioned. The sale of the property enabled us to free up cash, which was used to pay down our revolver and partially funded dividend to stockholders in December. A key highlight of the second quarter and the first half of the fiscal year is the significant increase in sales volume measured as pounds sold. In Q2, sales pounds increased 7.1 million, or 12%, and sales volume increased 14.1 million pounds, or almost 13% compared to the first 26 weeks of fiscal 2013. There is great potential for positive momentum in the nut industry as illustrated by a recent Harvard study, published in the New England Journal of Medicine, which describes the health benefits associated with nut consumption. Health and wellness continue to be a significant factor in consumer purchase behavior around the world, and we believe information from research such as the Harvard study, is contributing to long-term global growth in the stack, recipe, produce, and ingredient nut categories. Turning to sales review by channel. In the consumer channel, net sales increased by 1.5% in dollars, and 14.1% in sales volume in the second quarter. Private brand consumer sales, volume increased 13.6% in the second quarter, due primarily to the increased sales of snack nut and trail mix products to 2 significant customers. Fisher recipe nut sales volume increased 28.5% due primarily to increased merchandising activity at a major customer, which occurred as a result of significantly lower pecan prices, compared to pecan prices that existed in the second quarter of fiscal 2013. Fisher's snack nut sales volume declined 14.3% in the quarter comparison, as a result of reduced distribution of inshell peanuts at a major Fisher snack nut customer due to competitive pricing pressure. We anticipate regaining this distribution starting in the third quarter. Net sales in the commercial ingredient distribution channel increased by 5.8% in dollars and increased 5.4% in sales volume in the second quarter of fiscal 2014. In the first 26 weeks of fiscal 2014, net sales in the commercial ingredient distribution channel increased by 10.6% in dollars, and 16.7% in sales volume compared to the same time period in fiscal 2013. The sales volume increase for both the quarterly and 26 week periods was primarily due to increased sales of almond products as a result of distribution gains achieved with a major existing customer, and higher pecan sales as a result of significantly lower pecan prices, compared to pecan prices that existed in the second quarter of fiscal 2013. In the international channel, net sales increased by 14.2% in dollars and 3.6% in sales volume in the second quarter, primarily because of, Mike mentioned, the timing of inshell walnut sales. Net sales in the export channel in the first 26 weeks of fiscal 2014 were relatively unchanged, increasing by 0.5% in dollars, but decreasing 2.4% in sales volume compared to the first 26 weeks of 2013. In the contract packaging channel, distributor -- net sales increased by 15.7% in dollars and 17% in sales volume in the second quarter of 2014. The sales volume increase was due primarily to new product launches and increased promotional activity implemented by a major existing contract packaging customer. Now let's look at consumption trends in the snack, recipe and produce categories. All the market information is reported through IRI data ending December 29, 2013. And when I refer to Q2, I'm referring to 12 weeks of the quarter ending December 29. We look at the category and IRI's total U.S. definition, which includes food, drug, mass, Walmart, military and other outlets, unless otherwise, specified. And when we discuss pricing, we are referring to average price per pound. The total nut category increased 3%, in both pound volume and sales dollars in the Q2. Peanuts, cashews and pecans drove the increase in pound volume versus last year, and all 3 decreased in price versus last year. Pistachios and walnuts have the largest increases in price and decline in pound volume. Almond results were strong both volume and pricing increase versus last year. There has been continued pressure on almond prices as drought conditions in California persist. Even though the crop came in slightly higher than the cash estimate, kernel sizes for all varieties are significantly smaller than normal, creating a short supply of the most popular sizes that are traditionally used in the domestic snack market. Total shipments for the California almond crop through December were slightly up versus last year, in spite of higher prices driven by growth in the export markets. Looking ahead, there is growing concern about risk to the 2014 crop due to water shortages, which is causing additional upward pressure on prices. The recipe category increased in both pound volume and dollar sales versus last year, up 7% and 6% respectively. Looking ahead to pecans and walnuts, which affect the recipe category, the commodity markets have seen significant increases in new crop walnut and pecan prices. Walnut crop receipts through December were 487,000 tons versus the cash estimate of 495,000 tons, putting upward pressure on prices. Interest from China have also been strong. Pecan prices are also up versus last year, persistent rain in the Southeast during the spring and summer caused crop loss and scab damage, reducing the quantity and quality of the crop. Demand from China has been strong as a substantial part of the Southeast crop was exported inshell. Fisher recipe continues to gain momentum behind the strategy of growing distribution, increasing merchandising activity and building equity. Fisher recipe nut pound volume and sales dollars, as measured by IRI, increased in the second quarter versus last year, 22% and 5% respectively. The growth was driven by 21% increase in velocity per pound sales per point of distribution. The Fisher brand continued its sponsorship of the Food Network and celebrity chef Alex Guarnaschelli, which was launched last year. The program includes branded vignettes on the Food Network, print advertising in Food Network Magazine and other publications, as well as a fully integrated social media effort. The snack nut category had a successful Q2, increasing 7% in pound volume and 5% in dollar sales. Fisher snack nut business as reported by IRI, increased in volume and dollar sales versus Q2 of last year, up 9% and 4% respectively. The growth was fueled by 20% increase in non-merchandise sales. The produce category declined in both pound volume and dollar sales, 6% and 10% respectively. The decline was driven by pistachios, which decreased 24% in pounds versus last year. Orchard Valley Harvest brand decreased 13% in dollars and 27% in pound sales, mainly due to a holiday promotion that was not repeated at a major customer. Although our volume was down in the quarter, our sales and marketing teams were successful in executing 2 critical elements in building our Orchard Valley Harvest brand in the first half of fiscal 2014. The team increased distribution by over 20%, gaining new retailers around the country. And although the pound shift declined, unit sales velocity actually increased by 1.4% in the first half of the fiscal year. The early results on the grab and go smaller sizes in key retailers are positive which we will leverage for future distribution gains. In closing, I'm pleased with our record top line results in the second quarter of fiscal 2014. Our management team is executing our strategic growth plans, and all of our employees are focused on improving quality and service, enhancing operational efficiencies and reduced -- reducing cost throughout our supply chain. Going forward, commodity costs have recently increased for peanuts and most tree nuts, which will make the second half of fiscal 2014 challenging. While these cost increases may affect our sales volume for the remainder of fiscal 2014, I expect that higher selling prices should help mitigate the impact of the higher costs. In spite of commodity challenges, we will continue to focus on the long-term, and we remain very optimistic about our future. We're building our Fisher and Orchard Valley Harvest brands. We are participating in emerging markets and -- emerging and growing international markets. Just yesterday, we launched our Fisher website in China, just in time for the Chinese New Year. Please visit us at fishernuts.cn. And we are creating value for key global food retailers, manufacturers and distributors. These 3 growth strategies are augmented by a product and packaging innovation platform that diversifies our product portfolio, and we see strong opportunities with new launches in the coming year. 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, Jeff. We will now open the call to questions. In the event that we have a question about the water situation in California, I invite you to address those questions to Bobby Tankersley. Allison, can you please now queue up the first question.

[Operator Instructions] We have no questions on the audio for you. I'd now like to turn the call back over to Mike Valentine for closing remarks.

Okay, Allison, thank you. Again, we'd like to thank everyone for their interest in JBSS, and this concludes the call for our second quarter operating results for fiscal 2014.

Thank you, Mike. Ladies and gentlemen, that concludes your presentation for today. Thank you for participation in today's conference. You may now disconnect. And good day.