John B. Sanfilippo & Son, Inc. (JBSS) Q1 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the John B. Sanfilippo & Son Inc. First Quarter and Fiscal 2016 Operating Results Conference Call. My name is Sue and I am your investor operator. At this time, all parties are on listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. I’d now turn the call over to Mr. Michael Valentine, Chief Financial Officer. Please proceed, sir.

Thank you, Sue. Good morning everyone and welcome to our 2016 first quarter earnings call. We thank you all for joining us today. On the call with me is Jeffery Sanfilippo, our CEO and Jasper Sanfilippo, Jr., our COO. Before we start, we want to remind you 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 on 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. Taking a look at the operating results, net sales for the first quarter of fiscal 2016 increased by 10.1% to $225.8 million, in comparison to net sales for the first quarter of last year of $205 million. The increase in net sales came from higher selling prices. Selling prices were higher from most major nut types, due to higher commodity acquisition cost. Sales volume which is defined as pound sold to customers was relatively unchanged in the quarterly comparison. Sales volumes decreased in the consumer channel, but was offset by sales volume increase in the contract packaging distribution channel. Sales volume was relatively unchanged in the commercial ingredients and export distribution channels. The sales volume decrease in the consumer distribution channel was mainly due to a 28.7% decline in volume for almonds. The decline in almond sales occurred primarily with existing private brand customers, but the decline in almond volume was also contributing factored to 1.4% decline in Fisher recipe net sales volume. The Almond decline was attributable to the overall negative impact on consumer demand from significantly higher retail prices this quarter compared to last year’s first quarter. Sales volumes for Fisher snack nuts was down 2.4%. This decline was mainly driven by lower peanut sales to an existing customer due to the timing of promotional activity. These sales volume declines were partially offset by new sales of Fisher Nut Exactly snack bite. Also offsetting the almond volume decline was a 2.8% volume increase or Orchard Valley Harvest and Sunshine country produced products combined. The increase in sales volume for the contract packaging distribution channel was attributable to new product launches made by existing contract packaging customers. Gross profit for the first quarter of fiscal 2016 increased by 8.2% or by $2.5 million to $33.2 million in the quarterly comparisons. Gross profit margin as a percentage of net sales decreased to 14.7% in current quarter from 15% for last year’s first quarter. The increase in gross profit was mainly attributable to improved alignment of selling prices and commodity acquisition cost. The decrease in gross profit margin was primarily driven by an increase in manufacturing cost per produced pound. The increase in manufacturing cost was due to higher manufacturing spending and reduced shelling production for pecans, walnuts and peanuts. Higher manufacturing spending mainly came from increases in employee related expenses, operating supplies and repair and maintenance expense. The shelling production decline occurred because of shelling of our pecan, walnut and peanut crops was completed earlier in the current first quarter in comparison to the completion of shelling in last year’s first quarter. First quarter 2016 total operating expenses increased to $19.5 million in comparison to $18.7 million for the first quarter of fiscal 2015. As a percentage of net sales, first quarter 2016 total operating expenses decreased to 8.6% from 9.1% for the first quarter of 2015. The increase in total operating expenses of quarterly comparison was primarily attributable to increases in the in-store product sampling, advertising and employee related expenses, which were offset impart by decrease in shipping expense. The decrease in operating expenses as a percentage of net sales was mainly due to the fact that net sales increased by 10.1%, while total operating expenses only increased by 4.2%. Interest expense in the current first quarter declined by $100,000 in the quarterly comparison. The reduction in interest expense was due to a reduction in long-term debt levels. Net rental and miscellaneous expense declined by $1.4 million, because last year’s first quarter included expense associated with repairs to the exterior of our office building located on Elgin, Illinois campus. That project was completed during the second quarter of fiscal 2015. Turning to inventories, the total value of inventories on hand at the end of the current first quarter increased by $16.5 million or 9.6%. The increase in inventory was attributable to increased acquisition cost for almonds and cashews coupled with higher quantities of peanut, walnut work in process inventories. These quantities increases were partially offset by a decrease in the quantity of finished goods inventory. The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of the first quarter of fiscal 2016 was relatively unchanged compared to the weighted average cost of those stocks at the end of the first quarter last year. Net income rose to a third quarter record of $8 million or $0.71 per share diluted for the first quarter of fiscal 2016, compared to $5.9 million or $0.53 per share diluted for last year’s first quarter. I will now turn the call over to Jeffrey Sanfilippo, our CEO, who will provide further comments on our operating results for the first quarter. Jeff?

Thank you, Mike, good morning, everyone. This is the third consecutive quarter the company has reported record operating results for net income and diluted earnings per share. As Mike mentioned EPS in the Q1 of fiscal 2016 increased by 34% to a record $0.71 per share diluted and net income was a record $8 million increasing 35.1%. Top-line sales growth was strong as well increasing 10.1% to a record $225.8 million. These results demonstrate a focused commitment by the company to create shareholder value and provide relevant profitable value added products and services to our customers and consumers. I want to thank our management team and all of our dedicated employees for their leadership and congratulate them on a great start to our fiscal 2016 year. As Jasper mentioned on the last earnings call, we ended fiscal 2015 with strong momentum and we continue now to execute our plans to grow JBSS brands, expand globally and provide best in class integrated net solutions to key partners. One significant trend we’ve started to see in the marketplace is consumers appear to be reacting negatively to high almond prices. For example according to IRI data for the quarterly comparison, retail price increases for almonds range between 15% and 20%, while almond pound volume declined by approximately 11% in the snack category, 22% in the recipe nut category and 13% in the produce category. We anticipate that sales volume declines for almond will continue for the remainder of fiscal 2016, due to historically high almond prices. Despite significant sales volume challenges for almonds JBSS was able to maintain sales volume in the quarterly comparison primarily as a result of strong volume performance in our contract packaging distribution channel. It is worth noting that the sales volume increase in the contract packaging channel, mainly resulted from the leveraging of production and innovation capabilities to assist our key contract packaging customers and launching new items. Sales volume gains for Fisher Nut Exactly snack bite and Orchard Valley Harvest and Sunshine Country produced products also made meaningful contributions in offsetting the decline in sales volume for almonds. Our Fisher Nut Exactly brand continues to gain new distribution as we ship snack bites to five new retailers in the current first quarter. Turning to a sales review by JBS business channel, net sales in the consumer distribution channel increased by 5.5% in dollars a decrease by 3.5% in sales volume in the first quarter, compared to the first quarter of fiscal 2015. Private brand consumer sales volume and Fisher recipe nut sales volume decreased 6.3% and 1.4% respectively, primarily due to a decrease in sale of almond products as we’ve talked about. Though our sales volume declined for Fisher recipe nuts, Fisher recipe nuts outperformed the recipe nut category at retail with flat pound volume, while pound volume in that category fell by 8.7% according to IRI data for the quarterly comparison. Sales volume for Fisher snack nuts decreased 2.4%, primarily as a result of lower peanut sale to an existing customer due to the timing of some promotional activity. This decline in sales volume is partially offset by 2.8% increase in Orchard Valley Harvest and Sunshine Country sales volume and sales of our new Fishers Nut Exactly snack bites. The commercial ingredient channel increased by 15.6% in dollar. Though sales volume was relatively unchanged in the first quarter of fiscal 2016, compared to the first quarter of fiscal 2015. An increase in sales volume primarily due to a new product launch by a significant customer was offset by a decrease in sales volume of walnuts and peanuts. In the international channel, nut sales increased by 11.7% in dollars and sales volume was relatively unchanged in the first quarter of fiscal 2016. Earlier this calendar year, we optimized our Fisher snack program for China and other international markets and the new products and packaging have been well received by existing and new distributors and customers. In the contract packaging channel, net sales increased by 21.8% in dollars and 10.8% in sales volume in the first quarter of fiscal 2016. The sales volume increase was primarily due to new product launches as we have talked about executed by existing customers as I mentioned before. Turning to category updates in the snack, recipe and produced segment and review of our brand performance. Market information I’ll referring to is IRI reported data and today it is for the period ending September 27, 2015. When I refer to Q1 I’m referring to 13 weeks of the quarter ending September 27th. References to changes in volume or price are versus the corresponding period one year ago. We look at the category on 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 term velocity refers to the sales per point of distribution. First, let me review some category dynamics; for the quarter we saw an increase in dollar sales, but a slight decrease in pound volume. This is the result of generally higher retail nut prices, which is impacting consumer purchase behavior. The total nut category increased in sales dollars by 3% and declined in pound volume by 1% in Q1. Overall, prices in Q1 increased 4% versus the prior year. Almonds, cashews and pistachios experienced the largest price increases. Almonds increased 16%, cashews increased 7% and pistachios increased 6% versus Q1 of last year that resulted in the 13% pound sales decline for almond and pistachios, while cashews increased 3% in pound sales. Interestingly cashews are now 9% less expensive than almonds and it is possible that some consumers are switching to cashews from almonds. Now, I’ll talk about each category in a little more depth. Starting with recipe nuts. In Q1 the recipe nut category decreased 1% in dollar sales, 9% in pound sales driven by an average price increase of 9%. The decline was led by a 21% increase in almond prices along with increases on walnuts of 5% and pecans of 2%. Our Fisher brand had a very strong quarter and continues to gain momentum. 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. Our brand equity effort on Fisher helped the brand gain sure leadership in Q1 across IRI’s multi-outlet geography. Furthermore, Fisher recipe nuts increased 12% in dollar sales and flat in pound sales versus last year, despite the challenging category landscape. As a result, Fisher share in the category increased 1.7 points versus last year. Our equity marketing and retail merchandising efforts help drive 11% increase in dollar velocity and a 2% increase in total points of distribution. Now let me turn to the snack category. In Q1, the snack category increased 7% in dollar sales and 1% in pound sales versus last year. Average prices were up 6% led by almonds that were up 15% in the snack category. Fisher snack decreased 1% in dollar sales and 4% in pound sales as we’ve mentioned. The decline was driven by an 8% decline in merchandise sales. Our Fisher Nut Exactly new product launch continues to proceed well and distribution continues to build and the product line is performing best at retailers that have provided strong merchandizing support to drive awareness and trial. In the produced category in Q1, volume dollars decreased 2% and pounds were down 4%. Our Orchard Valley Harvest brand had mixed results for the same time period. As you know we acquired the assets of Orchard Valley Harvest in fiscal 2010 and we relaunched the brand in 2012, to be more on trend and better meet the needs of consumers. Products were reformulated to have a cleaner ingredient line, packaging graphics were updated and varieties focused on convenient on the go minis and multipacks. The original OVH product line was replaced by the current OVH product line in all but one major retailer. We are now launching the OVH on the packs at that major retailer and transitioning the remainder of the line to our Sunshine country brand. This represents a very significant distribution gain for our Orchard Valley Harvest brand in the current packaging format. As a result of this transition, although dollar sales for Orchard Valley Harvest products increased 2%, pound volume temporarily declined by 13.7% at retail in the quarterly comparison. This was largely offset by volume gains in our Sunshine Country brand. When we look at overall nut market trends, we experienced increased almond cost during fiscal 2015, which have increased further in the first quarter of fiscal 2016. Consequently the resulting price increases have negatively affected sales volume of almond products during the first quarter of fiscal 2016 and they continue to negatively impact FX sales volumes during the remainder of 2016. As Mike mentioned earlier, our nut commodity purchases were $19.4 million higher during the first quarter of fiscal 2016 in the same period of fiscal 2015, primarily due to procurement of large quantities of cash used, combined with increasing almond acquisition cost. Procurement strategies and the alignment of commodity cost, selling prices and inventory positions with customer demand continue to be important factors in our business. In closing, while we face many challenges that impact our company, we’ve proven our ability to manage through difficult markets and regulatory changes to mitigate the impact on our financial performance. We will continue to work closely with customers to provide value and help them continue to build their nut and snack programs. As you may be aware this time, there is a great deal of M&A activity and interest in the nut industry. In addition, there is supply and demand volatility, competitor challenges and there are significant changes in food regulations and international market conditions. Leading into our first quarter of 2016, our results demonstrate the success of our strategies to grow our brands and create value for key customers. The management team remains focused on consistent execution of our corporate goals to create customer and shareholder value. Our goals remained consistent, growing Fisher and Orchard Valley Harvest into leading nut brands by focusing on consumers demanding quality nuts in the snacking, recipe and produced categories. Expanding globally, and building our company into a leading international branded and private brand snack nut company, and providing integrated nut solutions to grow non-branded business at existing customers in each distribution channel. 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.

Thanks Jeff. At this time we will open the call to questions. Sue can you please queue up the first question?

Thank you. [Operator Instructions]. Your first question comes from the line of Francesco Pellegrino of Sidoti. Please go ahead.

Good morning, guys. Just wanted to start off by asking you about the consumer distribution channel, Mike told that high almond prices affect the both private label and branded label sales, did either private label or Fisher take a larger margin hit during the quarter?

Hey, Francesco its Jeffery. No it’s pretty consistent with the total category. There was no specific hit versus private brand or Fisher, it was pretty consistent with the rest of the category.

Okay. I guess just another thing, you guys referred to a lot about the timing of promotional activity when it came to the Fisher snack nuts, and I was just wondering because I know during the second quarter of last year this was something that came through as trade spending. Could you maybe just elaborate a little bit more on this timing issue?

So Francesco this is Jeffery again. So we were heavily spending in trade last year at this time. A lot of it was gaining new distribution with new products that we launched. I will say that we cut back a little bit in our trade spending this quarter at this time period. However, what we’re seeing is timing for first quarter versus volume in second quarter. I can tell you our October numbers are relatively strong. So I think we’ll make up some of the gap that we saw in the first quarter from a volume standpoint.

When you say relatively strong volume are we still talking about flat volume year-over-year or we talking about since you’re doing less trade spending that your net sales would just be higher in I guess with volume sales flat, since you’re doing less of that trade spending, which sort of is your reconciliation from gross sales to net sales.

Francesco this is Mike. What we’re saying is that some of the promotional activity that took place in the first quarter of last year is taking place in the second quarter of this year. So that’s going to drive additional volume.

Additional more profitable volume or additional inline profitable volume that was -- we need to be doing more spending.

No it’s just timing of promotional activity. I wouldn’t read anything else into it.

Okay. Talking about the promotional activity that you’re doing, anything further on the Fisher Nut Exactly snack bite launch are you gaining any additional distribution during the quarter? Going forward what type of growth that we really would be expecting? And I know you came out very strong during the fourth quarter I believe it was.

So we gained five new retailers in this current our fiscal first quarter the 2016. So we’re still gaining distribution. We’re seeing a lot stronger activity with retailers that we work with that actually merchandise the product. It is a new product in the marketplace. And so we got to get trial and sampling with retailers. So we see great success with retailers that do put product on the floor merchandising and support the brand. So we’re continuing to focus on expanding distribution there is still a lot of retailers that we’re not in yet with the brand. So we anticipate gaining further distribution and then working with the existing customers that do carry the brand now and continue to promote it, sampling is important at this stage as well.

Is there a way you said five new retailers additional distribution at current retailers, anyway to see how many doors you gain during the quarter?

Yeah we don’t think -- I haven’t calculated the actual number of stores with those five retailers, collected the total amount, sorry.

Looks like for the first time Fisher snack underperformed at retail compared to the rest of the industry plain and simple is this another way to say just say you’re losing market share for the first time?

No, that is -- part of that is specifically timing with two major retailers. Promotions were pushed out from Q1 to Q2. So that is mainly a timing issue there, not that we’re losing distribution or market share. We lost market share because of those volume, but that was a timing issue.

So going back to what Mike said a couple of minutes ago when he said I would have looked too much into more promotional activity that we’re doing now in the second quarter. You’re telling me right now something about another timing issue, could there be a wind fall -- a slight wind fall from additional spending right now as compared to a year earlier or…

Remember we only talk about Fisher snack specifically. So Fisher snack is not a huge portion of our total top-line sales. But when you slice it down the promotional activity is very important to the volume for that brand in that category.

Yeah Francesco this is Jeffery. One of our strategies in the coming years is to expand beyond our current retail distribution base for our Fisher snack program. Right now we’re highly leveraged in two major retailers with our Fisher snack program. So thus the reason to expand our product portfolio with the Nut Exactly program, but also looking outside of our current base of existing customers to expand our Fisher snack program, because we’re relying on two major retailers and we got to diversify that customer base.

Okay. Noticed that during the first quarter it higher manufacturing cost per pound due to higher manufacture spending, but then when I look at where your inventory is I see that your finished goods inventory was down, but your work in process is up, going into the second quarter could we see this manufacturing cost per pound statistic possibly be driven down since we’re sitting on less finished goods?

Yeah Francesco this is Jasper I think you can expect that. With the higher pound throughput through the plant, we got to leverage the fixed costs so to speak that we have in manufacturing.

Right. With everything now on a per pound basis and operating in a flat volume environment, as the overall industry sort of contraction side you’re stealing share and just sort of maintaining the flat volume that you have, are there any -- are you guys looking at cost cutting at all, I know during periods of time when volume was up 10% or 11% year-over-year you were sort of growing not necessarily expecting volume to continue at that rate, but you took on more employees, you took on additional cost and now that you’re operating in this flat environment have you thought about maybe any sort of cost cutting that could drive gross margins or operating leverage going forward?

Yeah Francesco this is Jasper again, when we started calculated the additional cost of healthcare on the employees, certain CapEx projects that wouldn’t necessarily meet our hurdles in years past are starting to actually meet our hurdles now. And so as we look at CapEx projects one of the big areas that we’re focusing on are reducing headcounts by using automation as well as investing in projects that also increased our yield. Remember good chunk about costs of goods is raw material, so we can get a half a point or a percent improvement in yield, is worth a lot more than say reducing headcount by 5 or 10 people.

So right now going forward operating expenses in a flat volume operating environment for JBSS should pretty much be consistent with where it was probably a year earlier slightly up a little bit just given where it was in the first quarter?

Francisco you’re talked about SG&A, right when you talk about operating expense?

Yeah.

Yeah we have no plans of making any significant changes on those two lines.

Okay. Finally I know you touched on this at the very end about what’s happening in the M&A space and with this whole Diamond and Kellogg acquisition potentially there being reported on Friday. Was there ever a level of interest by JBSS for maybe one of the brands, I mean the California or the Emerald brand and look, I get it you’re not just acquiring a brand you’re also acquiring like walnut shelling facilities something that you might not necessarily need, so when I ask was there any consideration was it maybe just a consideration of approaching them about acquiring the brands that are shelling operations was there ever a level of interest on JBSS as part to maybe get into this -- jump into this M&A activity?

Francesco this is Jeffrey. So we have we’re constantly looking at M&A activity whether it’s another nut brand or some other product line that we believe make sense strategically for the company. And so there has been activity obviously as I mentioned with M&A in the market between Diamond, ConAgra out there as well there’s a couple of other brands. So we have reached out and we’re constantly looking at brands like Emerald and Diamond to see if they would fit with our portfolio. So those conversations are at least interest has been made.

So I know back couple of years ago you acquired Orchard Valley Harvest, I would think that the Emerald and Diamond of California brands would come at a lot higher of a price point and not to say that it would be transformative because you wouldn’t necessarily be entering into a new industry, but you consider levering up the balance sheet to the extent that it would probably take to get one of those two brands?

Francesco this is Mike. We would consider doing that, but in this case unlike the Orchard Valley Harvest where we entered into a completely new category that had a lot of float potential. Between the Fisher recipe nut brand and the Diamond brand both brands combined have roughly about a 50 shares on the recipe category. It’s pretty difficult to grow share beyond that especially when the remaining shares held by private label. So that does tend to put kind of lower the valuation at least from our point of view.

Alright. Very helpful. Right now that’s all from me I’ll jump back in queue if I have any more question, I’ll queue up again. Thanks, again guys.

Thanks, Francesco.

Thank you. So at this time we have no questions waiting. [Operator Instructions]. Thank you I would now like to turn the call over to Michael Valentine for closing remarks.

Thank you, Sue. Again we’d like to thank everyone for their interest in JBSS. And this concludes our first quarter fiscal 2016 earnings call.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Thank you for joining and have a very good day.