John B. Sanfilippo & Son, Inc. (JBSS) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Second Quarter Fiscal Operation Results Conference Call. My name is Dave; I'll be your operator for today. At this time, all participants are in listen-only mode. We will conduction a question-and-answer session toward the end of this conference. [Operator Instructions]. I would now like to turn the cover to Mr. Mike Valentine, Chief Financial Officer. Please proceed, sir.

Thank you, Dave. Good morning, everyone, and welcome to our 2015 second quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; Jasper Sanfilippo, our COO; and calling in is Bobby Tankersley, our Senior Vice President of Commodity Procurement. 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 they 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 you to refer to these filings to learn more about these risks and uncertainties that are inherent in our business. Net sales for the second quarter of fiscal 2015 increased to $251.4 million, in comparison to net sales for last year's second quarter of $225.1 million. The increase in net sales was attributable primarily to a 5.1% increase in sales volume. Higher selling prices mainly from pecans and almonds resulted from higher acquisition cost also contributed to the increase in net sales. Sales volume increased in all distribution channels except the export distribution channel and sales volume increased for all major products types except walnuts and pecans. The increase in the consumer channel volume came from increased sales of private brand snack nuts at existing customers, increased sales of Fisher snack nuts. The primary drivers of the increase in Fisher snack nut volume were the distribution of in-shell peanuts we regained at a major Fisher snack nut customer and increased merchandizing activity. The sales volume increased in the commercial ingredients channel resulted from increased sales of almond and peanut products to existing customers. The increase in sales volume in the contract packaging channel was generated by increased sales of peanut, trail mix and pecan products to existing customers. Sales volume declined in the export distribution channel mainly due to a lower supply of certain grades of in-shell walnuts that are typically sold into the export market. Net sales for the first two quarters of the current fiscal year increased to $456.4 million from $401.8 million for the two quarters of last year. The increase in net sales in the year-to-date comparison was primarily attributable to a 6% increase in sales volume. Again, higher selling prices for pecans and almonds also contributed to the increase in net sales. Sales volume increased in the consumer distribution channel and sales volume was relatively unchanged in the commercial ingredients and contract packaging distribution channels. The volume increase in the consumer channel was generated by increased sales of private brand snack nut and trail mix products. Increased sales of Fisher recipe nuts and Fisher snack nut products also contributed to the volume increase in the consumer channel in the year-to-date comparison. Sales volume again declined in the export distribution channel due to the lower supply of in-shell walnuts that are typically sent into the export market. Second quarter gross profit increased by $300,000 and gross profit margin as a percentage of net sales declined to 14.8% compared to 16.4% for the last year's second quarter. The increase in gross profit in the quarterly comparison primarily resulted from increased sales volume while the decline in gross profit margin was mainly attributable to a $2 million increase in trade spending. The increase in trade spending was made to support both distribution gains and increased merchandizing activity for our Fisher and Orchard Valley Harvest brands. Gross profit for the first two quarters of the current fiscal year increased by $1.6 million and gross profit margin as a percentage of net sales decreased to 14.9% from 16.5% for the first two quarters of fiscal 2014. The increase in gross profit in the year-to-date comparison primarily resulted from increased sales volume. While the decline in gross profit margin was attributable mainly to higher acquisition cost for certain grades of pecans and almonds purchased during the first quarter of fiscal 2015. The impact of increased trade spending on selling prices in the second quarter of fiscal 2015 also contributed to the decline in gross profit margin in the year-to-date comparison. Total operating expenses for the current second quarter decreased to 9% of net sales from 9.1% for the second quarter of 2014. The percentage decrease in the quarterly comparison was primarily attributable to increased net sales. The $2 million increase in total operating expenses occurred primarily because total operating expenses in the second quarter of fiscal 2014 benefited from a $1.6 million gain on the sale of Elgin, Illinois site formerly owned by our company. An increase in the advertising expense also contributed to the increase in total operating expenses in the quarterly comparison. Total operating expenses for the current year-to-date period decreased to 9% of net sales from 9.4% for the first two quarters of fiscal 2014. Percentage decrease in the year-to-date comparison was primarily attributable to increased net sales. A $3.6 million increase of total operating expenses in the year-to-date comparison occurred primarily because total operating expenses in last year’s comparable period included the gain on the Elgin, Illinois site. Increases in compensation, advertising freight and broker commission expenses also contributed to the increase in total operating expenses in the year-to-date comparison. The increase of freight and broker commission expenses mainly resulted from increased sales volume in the consumer channel. Interest expense for the current second quarter was $900,000 compared to $1.1 million for the second quarter of last year, and the interest expense for the first two quarters of the current year decreased to $1.9 million from $2.1 million for last year’s first two quarters. The decrease in interest expense in both comparisons was mainly attributable to lower average borrowing levels. In summary, the decline in net income in the quarterly comparison was due mainly to increased trade spending to support our brands during the second quarter and to the gain on the Elgin, Illinois site it favorably impacted operating results in last year’s second quarter. The decline in net income in the year-to-date comparison was chiefly due to the items noted previously in the quarterly comparison. Additionally, the $1.4 million increase in repair expenses that we incurred in the current year’s first quarter which were associated with our office building located on our Elgin campus also contributed to the decline in net income in the year-to-date comparison. The total value of inventories at the end of the current second quarter increased by $34.4 million or 18.3% compared to the total inventory value we had on hand at the end of last year’s second quarter. The increase in the value of total inventories was driven primarily by increased quantities of raw input stocks and higher acquisition cost for almonds and pecans. Quantities of raw nut input stocks on hand increased by approximately 20.9%. The weighted average cost per pound of raw nut input stocks at the end of the current second quarter declined by 3.9% compared to the weighted average cost of input stocks at the end of last’s year second quarter. This occurred mainly because there was a shift in quantities to relatively lower cost peanuts from relatively higher cost almonds and macadamia nuts. And now I’ll turn the call over the Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance during the current second quarter. Jeff?

Thank you, Mike. Good morning, everyone. It was another strong quarter in top-line growth for the company. The 5.1% volume increase reported equate to 3.4 million additional pounds shipped in the quarter driving our sales to a record $251.4 million, $11.7 million increase over Q2 of fiscal 2014. We continue to see strong sales especially in our consumer distribution channel which increased by 9.2% in the quarterly comparison and was generated by significant growth with existing private brand snack nut customers and a 51.6% increase in sales volume for Fisher snack nuts. We also saw considerable growth in sales volume for Orchard Valley Harvest produce products with a 48.5% increase in pounds sold in the quarterly comparison mainly as a result of distribution gains for new variety pack items. While sales volume for Fisher recipe nuts was unchanged in the quarterly comparison Fisher recipe outperformed the total recipe category at retail as pound volume increased by 6% while the total recipe category declined by 8% according to IRI. The success of Fischer recipe in relation to the overall category performance as well as the success of Fischer’s snack and Orchard Valley Harvest was mainly attributable to a significant increase in trade spending, as Mike mentioned, coupled with new distribution gain and illustrates our continued success in building brands. And as Mike mentioned our gross profit margin as a percent of net sales decreased to 14.8% for the quarter compared to 16.4% for the second quarter of fiscal 2014. And the decline was mainly attributed to a reduction in selling prices due to a $2.2 million increase in trade spending. There are two key reasons for the increase in trade spend. First, we increased our level of promotional activity to drive brand awareness, increased brand velocity and merchandizing. We were successful in getting more pounds on the floor during critical holiday time periods with displays, which resulted in strong volume increases. Second, additional investments were made to gain new customers and support existing customers to expand the number of stores that carry our products and the number of Fisher and Orchard Valley Harvest branded products in those stores. The investments allowed us to gain additional new customers and increased total points of distribution. The decline in gross profit margin in the year-to-date comparison was attributed mainly to higher acquisition cost for certain grades of pecans and almonds during the quarter and as well as the trade spend I just mentioned. It is important to note that we have seen acquisition cost for most domestic tree nuts increased in the 2014 crop year, which falls into our current 2015 fiscal year. Our nut commodity purchases were $56.2 million higher during the first half of fiscal 2015 compared to the same period in fiscal 2014, primarily due to a procurement of larger quantities of cashew and pecans to support our growth combined with increasing commodity cost. The company did execute price increases in the second quarter and we will be taking further pricing action on pecans, almonds, cashews and mixed nuts in the next few months. Turning to sales review by business channel, in the consumer channel, nut sales increased by 13.8% in dollars and 9.2% in sales volume in the second quarter of fiscal 2015. In addition to the strong Fisher and OBH growth I mentioned earlier, our private brand sales volume increased 8.3%, primarily due to a significant increase in sales of snack products at two significant customers. We continue to partner with key retailers to build their private brand programs by using our category expertise and insights to create innovative snack solutions. In the commercial ingredient channel, net sales increased by 11.9% in dollars and 7.6% in sales volume in the second quarter of fiscal 2015. The sales volume increase in the commercial ingredient distribution channel resulted from increased sales of almond and peanut products to existing customers. And here is another channel where we are focusing on building brands. JBSS is launching several new Fisher products in the commercial ingredient channel this quarter. In the international channel, net sales decreased by 18% in dollars and 39% in sales volume in the second quarter of fiscal 2015. As Mike mentioned, a significant portion of this decline is attributed to lower volume of in-shell walnut shipments. The company made a decision to procure less heartily variety walnuts, which is mainly sold in the export market and instead focus our efforts on procuring variety that generate the type of walnuts used in retail packages to support our branded business. Although, the international channel is underperforming and growth has been challenging we continue to establish a stronger foundation for future success. For example, just this week the company launched a website in China on Tmall, the Alibaba site to sell Fisher snack products and we are revamping our Fisher packaging for supply chain advantages for shipments overseas. In the contract packaging channel, net sales increased by 11.3% in dollars and 4% in sales volume in the second quarter of fiscal 2015. The increase in sales volume in the contract packaging channel was generated by increased sales of peanuts, trail mix and pecan products to existing customers. Now let's look at consumption trends in the snack recipe and produce categories. All the market information is reported through IIR data December 28, 2014. When I refer to Q2, I'm referring to 13 weeks of the quarter ending December 28. References to changes in volume or price are versus the corresponding period 1 year ago. We look at the category on IRI's total U.S. definition, which includes food, drug, mass, Wal-Mart, 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 2% in sales dollars in decreased 1% in pound volume in Q2. Overall, prices in Q2 increased 3% versus the prior year. Almonds, walnuts and pecans experienced the largest price increase versus last year. Almonds and walnuts increased 11% versus Q2 last year while pecans increased 10%. These increases resulted in a 9% pound sales decline for almonds and pecans, and an 8% decline for walnuts. JBSS brands posted strong results. Fisher snack and Fisher recipe grew in their respective categories, and Orchard Valley Harvest gained traction within the produce section of the store. Overall, Fisher brand gained 3/10th of a percentage point of pound share of the total category. This follows full year share growth in each of the last two fiscal years. The snack nut category had a successful Q2, increasing 4% in pound volume and dollar sales. Pounds growth came from peanuts, mixed nuts and cashews due to declines in average prices. Snack almond sales declined 3% in part due to an 8% price increase in the snack category for almonds. The Fisher snack business increased in volume by 7% and was flat in dollar sales versus Q2 last year. The growth was fueled by 11% increase in non-promoted sales which led to a 54% increase in velocity, which is pound sales per point of distribution. The recipe category decreased 8% in pound volume and grew 3% in dollar sales versus last year. The results were driven by higher prices of 12% on average. The three major nut types increased in prices versus last year. Almonds were up 15%, pecan prices up 11% and walnut prices up 10%. The price increases resulted in pound volume declines for almonds of 12%, pecans declined 8% and walnuts declined 5%. Fisher recipe continues to gain momentum behind the strategies of growing distribution, increasing merchandising activity and building brand equity. Both Fisher recipe net pound volume and sales dollars grew increasing by 6% and 17% respectively in Q2. Factors driving this growth include an increase of 6% in non-promoted volume, a 7% increase in promoted volume, a 4% increase in total points and distribution and a 2% increase in velocity. An increase in non-promoted volume suggests that the Fisher equity base messaging is working. The Fisher brand continued its sponsorship of the Food Network and celebrity chef Alex Guarnaschelli. The program includes branded vignettes on the Food Network, print advertising and Food Network magazine and other publications, as well as a fully integrated social media effort. Fisher brand has growing consumption for 37 straight quad weeks in pound volume sales, a period covering almost three years. The produce category declined in pound volume 7% and sales dollars 1%. The volume decline was driven by higher prices on almonds of 17% and pistachios were up 7%. Orchard Valley Harvest brand is picking up momentum with increased distribution in velocity. This momentum is driven by the brand's successful Grab & Go minis and the expansion of the line to include multi packs of Grab & Go items. These products provide a differentiated choice for shoppers and the health conscious consumer in the produce section of the store. Orchard Valley Harvest brand increased 19% dollar sales and increased 36% in pound sales. Total points of distribution for OVH increased 21% and non-promoted volume increased 50% versus last year. In closing, the management team remains focused on consistent execution of our corporate goals to create shareholder value. Last quarter, our board of directors declared a special cash dividend on October 28, 2014. The special cash dividend of $1.50 per share on all issued and outstanding shares of common stock and Class A common stock of the company was paid on December 12, 2014. In the first two quarters of fiscal 2015, performance results demonstrate our ability to grow Fisher and Orchard Valley Harvest brands. On the last earnings call, I spoke of new products called Fisher Nut Exactly. We originally launched the item which is a snack cluster with almonds popcorn and dark chocolate in the club channel. Now several new Fisher Nut Exactly snack items have been rolled out in the grocery channel. They include peanut and popcorn dipped in peanut butter, almond and popcorn dipped in milk chocolate and pecan and popcorn dipped in salty pheromone. Initial customer and consumer feedback has been very positive. Look for them in your local grocery store soon. We appreciate your participation in the call and thank you for your interest in our company. I will now turn the call over to Mike.

Thank you, Jeff. We'll now open the call to questions. Dave, could you please queue up the first question?

Certainly, Mike. [Operator Instructions]. This comes from the line of Francesco Pellegrino at Sidoti. Go ahead please.

Good morning guys. Thanks for taking my question.

Good morning.

So first off, inventory. I know you went into where the inventory currently stands on a per pound basis; the costing is that it's going to be down a little bit year-over-year. Can you give us a little bit of insight into the inventory? Is there any type of tree nut that you're currently sitting on that you feel as you might not be well-positioned enough for the rest of the year like you were caught during the previous quarter? I know it's still early in the year, but how is inventory looking?

Well we're still in the process of supplying pecans. We typically don’t finish that until end of February. In respect to all the other nuts, we pretty much have our coverage done. Almonds, because of the high prices, we've decided not to cover a full 12 month period but we have the fiscal year covered in respect to almonds.

Okay. I guess the $2.2 million increase in trade spending on the branded product line, is this something that just one-off during the second quarter of could we see the strength continuing for the rest of the year and into fiscal 2016 or is it just in-line with as you guys greater distribution in gains throughout retail?

Yes, Francesco, this is Jeffrey. So a little bit heavier spending during the holiday period one because of promotional activity that takes place at that point. We really focused on gaining new distribution in our second quarter to drive volume growth in the back half of the year. So it is a little bit abnormal as far as the percentage of trade spend. We do not anticipate that level going forward.

Okay. And just my last question, any update on the walnut recall and what this is going to be incrementally to cost for the company for the third quarter?

This is Mike, Francesco. No, no update; we continue to view it as immaterial.

Okay perfect. Thanks again, I'll jump back in the queue.

Gentlemen, you have no further questions at this time. [Operator Instructions]. Okay, there are no further questions, so I would now like to turn the call back to Mr. Mike Valentine for closing remarks.

Okay, thanks, Dave. Again, we want to thank everyone for their interest in JBSS. This concludes the call for our second quarter operating results.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.