Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son Incorporation’s. Second Quarter Fiscal 2016 Operating Results Conference Call. At this time, all parties are in a listen only mode. And we will facilitate a question-and-answer session towards the end of today’s presentation. [Operator Instructions] And I would now like to turn the call over to Michael Valentine, Chief Financial Officer.

Thank you, Lauren. Good morning, everyone and welcome to our 2016 second quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey 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 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. Turning to the income statement, net sales for the second quarter of fiscal 2016 increased by 11% to $279 million, in comparison to net sales for the second quarter of fiscal 2015 of $251.4 million. The increase in net sales was attributable primarily to a 9.4% increase in sales volume which we measure as pounds sold to customers. Sales volume increased in all four distribution channels and sales volume increased for all major product types except the almonds and pecans. The increase in the consumer channel volume was primarily attributable to increased sales of private brand peanuts and mixed nuts to existing customers. A 20.7% volume increase for Orchard Valley Harvest and Sunshine Country produce products also contributed to the sales volume increase in the consumer channel. Fisher recipe nut volume decreased by 1.1% primarily due to the unfavorable impact of higher retail prices on consumer demand for almonds and pecans. Fisher snack nut volume declined by 10.3% primarily as a result of reduced merchandising activity and promotional events that occurred in the second quarter of fiscal 2015 that will not occur until the third…

Thank you, Mike. Good morning, everyone. As you’ve read in our press release and heard from Mike, great results, I’m very proud of our management team and every one of our 1400 associates for their leadership and efforts to drive our company performance and achieve record second quarter earnings for the fourth consecutive year. We had a strong quarter in respect to sales volume across all of our business channels. This included a return to sales volume growth in the commercial ingredients and international distribution channels. These results are especially meaningful when you take into account this was another quarter where sales volume for almonds declined significantly due to higher prices. Overall, our brand performance for the quarter was strong compared to the nut category at retail in the consumer channel. Distribution gains for Orchard Valley Harvest and Sunshine Country produce products on a combined basis helped drive our overall sales volume growth. For Fisher recipe nuts, so our sales volume was down slightly in the quarter. Fisher outperformed the recipe nut category at retail with only a five-tenths of a percent decline in pounds, while pounds for the entire category declined by 7.7% according to IRI data. For Fisher snack nuts, it was a challenging second quarter as they underperformed in the snack nut category at retail with an 18.2% decline in pounds, while pounds in the entire category declined by only nine-tenths of a percent. The sales volume decline was attributed to a lack of promotional activity at a major customer which Mike mentioned. A key focus for our sales and marketing team is to diversify our customer base for Fisher snack nuts. On a positive note, if we look at our core geography in the Midwest and exclude the one major customer decline, our Fisher snack brand…

Thank you, Jeff. We will now open the call to questions from participants. Lauren, would be kind enough to please queue up the first question?

Okay. [Operator Instructions] Our first question comes from Francesco Pellegrino.

Good morning, guys.

Good morning.

Hi, Francesco.

Thanks in advance. Obviously, there's a lot of moving parts to this quarter. Always seems [ph] like that every time you guys report a record quarter. But I just want to start off with the really impressive performance of Orchard Valley Harvest and Sunshine Country , the 21% increase, could you sort of put that in relation to maybe what it represented overall as a percentage of the company wide 9.4% overall volume increase [ph] percentage? Was it a small percentage?

Give me a moment here, Francesco.

I always start off with a tough question.

Yes. I would say overall it represents almost about 10% of the total volume increase. Francesco, while Mike is looking at specific numbers, this is Jeffrey, so the sales and marketing teams have done a great job on really finding the right product mix, the right pack sizes in the produce channel with our Orchard Valley Harvest brand, the Sunshine Country. Orchard Valley Harvest brand is our premium produce brand, a non-GMO, no preservatives and it’s really just perfect for that consumer looking for health and wellness in the produce category. We’ve also had some success expanding it beyond just the produce category which is exciting news, partly attributes to the increase in the volume. And then our Sunshine Country produce brand is really focused as lower tier brand something where we could be more competitive from a pricing standpoint and that's been extremely successful as we’ve launched that.

[Operator Instructions] Mr. Pellegrino, your line is open.

So, back here again. So, Jeffrey, the only reason why I brought it up was, I know you don’t break out the brand and usually when you start seeing increases in volumes for these types of brands off of a small base, it's really not that impressive, but this 21% increase for these two brands, it sort of seemed that they are becoming more of a sizeable part of your branded business, is that correct?

That is correct. And the main, big focus for our organization, absolutely.

Okay. I noticed another thing you guys spoke about in the release from yesterday was it’s this phenomenon of your peanut shelling operation selling peanuts to other shellers, what's behind that?

There’s actually two things behind it. First of all, we are showing basically 40% more than what we have shelled in recent years. So we are generating more peanut crushing stock, peanuts that are intended to be crushed for oil. So that lifted sales in the commercial ingredients channel as a result of that. And then the second part is, we also – when you buy peanuts, they are basically segregated in the three categories and two of those categories are – peanuts aren’t suitable for human consumption without further processing and conditioning. Normally, we will perform that and then use those peanuts after those additional processing steps, but because we're selling so many peanuts, we are shelling so many more peanuts than we normally do, we did have to sell some off to other shellers. And that part of the sales of [indiscernible] peanuts accounted for roughly about 20% of our total volume growth in the quarterly comparison.

This different type of peanut that you are shelling, is it superior or an inferior grade compared to just I guess your, what is it, the Virginia peanut?

No, no, it is – I am talking about runner peanuts and there’s neither superior or inferior to any other variety. In fact, they are the common variety. Just our increased shelling and our increased peanut purchases have and will result in additional peanut sales volume to other shellers.

You keep on talking about the increase in the shelling volume, I would think that your peanut shelling operations would be a low margin business that as you take on more and more volume, you're able to create greater operational leverage, is that a correct way of thinking about it?

Sure. When you increase the amount of peanuts you shell by 40%, it’s going to have a meaningful fixed clause absorption benefit.

All right. You guys had mentioned also some reduced merchandising activity that didn't occur in Q2 fiscal 2016, that did occur in the year ago period, is it like trade, the trade spending that you guys incurred last year like $2.2 million or this just an additional different type of expense?

That’s exactly what it is. When we look at our Q2 of last year, a little bit overspent on trade on some key customers and so this was a result of looking at our trade spend overall and trying to mitigate any kind of big increases the we saw last year at this time.

So, if you are going to be pushing this trade spending into the third quarter, will it have maybe more of a focus on maybe Fisher snack and they performed in [ph] the category so significantly, is it – I wouldn’t think it’s private label business, what direction will the elevated trade spending that you are pushing on into the 3Q really be directed towards?

We anticipate similar spending that we saw in Q3 of last year, some of the volume decline – a lot of it was attributed to promotional activity that didn’t occur in Q2. Some of that we do expect to see in Q3. But I would anticipate similar trade spend for Q3 and Q4 going forward.

Just to clarify, Francesco, the timing issue here is related much more to merchandising than it is to promotional activity. So we just didn't get the kind of display activity that we got last year and that will occur with one major retailer in Q3.

Okay. I know you made some comments about the performance of the Fisher snack nut, Fisher snack nut declining in the category greater than your peers. I know you mentioned that it happened at a significant – at a single customer. Is there an ability to get this business back? What really caused the customer to switch away from the Fisher snack nut product at their locations?

And so, we still have the major customer, a lot of it was due to fires [ph] in the category – for example, first not [ph] adding so many peanut promotions in a given period. So some of it was just different direction that the retailer took for that category for the quarter, some of it was the promotional activity that I mentioned that we pulled back on the trade spend, had a little bit of an impact on the volume we saw in that quarter. So some of it is timing and some of it is promotional trade spend, some of it was just the direction that the retailer took at that time period. And so we anticipate obviously as Mike mentioned from a timing standpoint on that promotional activity, seeing some of that come back in Q3.

So just let me get this straight if I am thinking about this correctly. Overall, Fisher snack nut performed worse than the overall category, but when you isolate it at a certain retail location, you weren't necessarily underperforming to the degree in which you were for the overall category, but everyone at the single retailer just wasn’t pushing promotions across the board?

Correct.

And they were moving to a different product. So if you are an [indiscernible] of nuts, they were maybe moving to something else like, I don’t know, some other healthy indulging alternative, is that a correct way of sort of interpreting it?

Yes, that's exactly right. If you were to take the Midwest, for example, is one of core markets. If you pull out this one specific customer from that market, actually our Fisher snack sales were 20% higher, 20% growth versus the category was only 4.4% growth. So taking out that one customer, we are still having success in building our Fisher snack program, ahead of the category. The goal really is to diversify that customer base and get less reliant on one to two major customers and find much better distribution, more retailers that won’t have – so if we do have a hiccup, it doesn’t hurt our brand as much from a volume standpoint.

But it seems as if this could be an easy fix for 3Q as it was more of a timing thing?

Yes, I would agree with it.

Okay. Jeffrey, you spoke about impact that lower almond and walnut prices could have, sort of what is the high pecan pricing? You guys are vertically integrated for that, what could we really start expecting with high pecan prices, is there an opportunity maybe for consumers to transition consumption patterns with different type of nuts? I would just think that a elasticity is really being pushed [ph] right now.

Yes, you are absolutely right. And if you look at the almond, volume in almond prices, you are trying to hit that threshold where consumers are shifting from almond consumption to other snacks, other nuts specifically. We believe that – as we look at the rise in cashew consumption, the almond industry is losing some of those consumers to cashews because of the higher retail prices. And so, we see that both in the recipe category as well as the snack nut category. So with the higher prices for pecans, you can anticipate some lower consumption trends in pecans both in mix, snack mixes and as well as in the recipe category. And so, what our sales teams are focused on is really obviously as almond prices and walnut prices come down, working with our key customers, because they are just as concerned as we are with top line revenue. And so, looking at upsizing some of the bags, looking at other promotional activity that we can enhance to drive volume for those nut types and our sales and marketing teams are working closely on doing that now.

Okay. And lastly, I want to ask – well, you are vertically integrated for pecan, so when do you see yourself getting aggressive in your pecan purchasing activity, especially with how elevated this part of the market is?

Sure. So the markets – the harvests really start in September, October, we are in January now, so the harvest is actually almost finished. So, the harvest was a little bit earlier than normal. And so, we’ll be buying a little bit more through February into early March and then we will be done. And so that procurement is almost – we are probably about 90% finished at this point.

Okay. And just the last thing I wanted to just touch with you guys, but I think that [ph] this might not have been a position you really have ever really been in since you consolidated your operations in [indiscernible] and you create a bunch of different synergies, but the free cash flow you guys have generated in the first half of fiscal 2016 is about $6.25. Usually, in the first half of the year, you generate some nice free cash flow which is then offset substantially in the third quarter as you finance your inventory purposes. I know you put a cautionary twist on the almonds and walnut prices coming in and how it’s going to -- just the changes it’s going to do in your average blended selling price, your average costs, average cost per pound. But it seems as if for the first time in maybe quite some time, you are going to be generating some significant free cash flow in the third quarter and you are generating significant free cash flow in the third quarter if you're being able to finance lower inventory purchases at lower cost and you could really be driving some really nice free cash flow in fiscal 2016. I guess my question for you is, what’s going to be the priority of your usages of cash? I know always paying off the revolver is going to be one of them, but you only have $13 million outstanding on your revolver. You always do a nice special dividend, but you do a nice special dividend every year, always looking at acquisitions. Just maybe want to hear what you guys are thinking about priority usages of cash going forward?

Well, first, Francesco, we don’t anticipate having positive cash flow in the third quarter

Okay.

We never do. I think the better way to characterize that is our negative cash flow that the typically occurs in the third quarter will be lower than it has been in recent years, it’s probably a better way to look at that, but you are correct when you think about it further out that, at least, for the next few quarters lower almond and walnut prices will probably result in better cash flow than we’ve seen last year. So that will ultimately manifest itself in a lower loan balance over the next couple of quarters than we saw last year, and then, of course, with that additional borrowing capacity, then we have to make some decisions and look at options on how to use that capacity, whether that’s to increase our investment, maybe CapEx, possibly higher dividend or even M&A.

In regards to M&A, anything out there or maybe different category penetration that you would be looking at, is it just a nut business or would you extend into maybe some different ventures like we saw Snyder's-Lance take out Diamond. They are taking on the nut segment of Diamond’s operations, something they are not really that familiar with. We are seeing a lot of companies sort of going outside of their comfort zone. How willing are you guys to extend outside in nuts?

This is Jeffrey, Francesco. So we're always looking at M&A activity where we have our [ph] businesses that are up on the market are going to be coming to market, so something that we’re very interested in pursuing. We just have not found the right deal or the right business yet. When you look at the space, the salty snacks base continues to grow. When you look at the popcorn space right next to nuts, as a result of what we saw in popcorn, it’s one of the reasons we launched the Nut Exactly brand to try to expand the portfolio from just nuts to other salty snacks. And we look at the nut butter category which is continuing to grow as well, at opportunities and the bar category, the snack bar category is another area that we look at that's growing. Somewhere [ph] where there is a nut is an inclusion in the product, but something else that it’s also category growth what we see in the future. So, those are the type of M&A things we look at and the categories.

Okay. Going to be interesting to see how this occurs, but I appreciate the time guys. Thanks again.

Okay. Thanks, Francesco.

Thank you.

There are no other questions in queue.

Okay, Lauren, thank you. Again, we want to thank everybody for their interest JBSS and this concludes the call for second quarter 2016 operating results.

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