Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son Inc. Fourth Quarterly and Fiscal 2016 Year-End Operating Results Conference Call. My name is Sue and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this conference is being recorded. And now, I would like to turn the call over to Mike Valentine, Chief Financial Officer. Please proceed, sir.

Thank you, Sue. Good morning, everyone, and welcome to our 2016 fourth quarter and fiscal year earnings conference call. Thank you for joining us today. Jeffrey Sanfilippo, our CEO will provide additional remarks on our operating results for the current quarter and fiscal year later in the call. Before we start, we want to alert everyone that we may make some forward-looking statements today. These statements are based on our current expectations and involve certain risks and uncertainties that are inherent in our business. 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. I’ll start the call by covering financial highlights for the 2016 fourth quarter and fiscal year. The current quarter net sales increased by 4.6% to a record $231.5 million, compared to net sales of $221.4 million for the fourth quarter of fiscal 2015. The increase in net sales in the quarterly comparison was due to a 10.4% increase in sales volume, which is defined as pounds sold to customers. The favorable impact upon net sales from the increase in sales volume was offset in part by a significant decline in selling prices, primarily for walnuts. Volume increased in all distribution channels and increased for all major product types, except pecans. The sales volume increase in the consumer channel was due in part to a 10.3% increase in sales volume with existing private brand customers. Increased sales volume for our branded products also contributed significantly for the volume increase in the consumer channel as follows: Fisher recipe nuts volume increased by 14.9%, mainly from increased sales of walnuts from the introduction of larger package sizes and from distribution…

Thank you, Mike. Good morning, everyone. I want to congratulate our management team and all of our dedicated employees on achieving another consecutive year of record performance. Fiscal 2016 net sales were a record $952.1 million, a significant 7.3% improvement over fiscal 2015, driven primarily by a 6.6% sales volume increase. We gained new customers, expanded distribution of our products, and increased market share with our brands. We continue to grow Fisher and Orchard Valley Harvest significantly in respect to sales volume. Our consumer channel sales and marketing teams were very effective in executing our most important strategy, which is growing JBSS brands. Our Fisher brand remains a number one brand in recipe peanuts domestically. We also experienced considerable growth in the produce category with our Orchard Valley Harvest and Sunshine Country brands due to new distribution gains. The company continues to return profits to stockholders and maximize stockholder value, while growing our business. As Mike mentioned, record operating cash flow allowed us to pay two special dividends, totaling $4.50 per share. In addition, our record $89.2 million of operating cash allowed us to reinvest over $15 million into the capital infrastructure of the company, the most since our 2007 facility consolidation project. I’m proud of these results and I thank our team for their leadership in executing our strategic growth plans to build our brands and create value for our customers and our stockholders. These accomplishments resulted in a record $2.68 diluted earnings per share. While it was a record year for the company, we did face challenges. Our gross profit declined in our third and fourth quarters, as a result of the factors Mike just mentioned. Our management team is keenly aware of the importance of margin expansion. And when the company reports decreases in margins, as mentioned…

Thank you, Jeff. At this time, we will open the call to questions from participants. Sue, can you please queue up the first question.

Thank you. [Operator Instructions] Pleas standby for your first question. Your first question comes from the line of Francesco Pellegrino with Sidoti and Company. Please go ahead.

Good morning, guys. Thanks for taking my question in advance.

Good morning.

Hey, Francesco.

Hey. So I wanted to discuss with you following the third quarter. This is a nice little rebound quarter setting you up – yourself up for a nice fiscal 2017. It appears, the dynamics in the third quarter, I understand that your average blended selling price per pound due to the walnut issue is clearing the previous year’s walnut expense of harvest, because your average selling price per pound did decrease more than your average cost per pound did in the third quarter. I thought that was just a one-off in the third quarter. And I thought maybe in the fourth quarter, you’d be setting yourself up for the average blended selling price per pound decreasing less than the decrease in your cost per pound would. And although, I calculated that your average blended selling price was down 5%. I saw your costs were down 4%. Can you maybe just talk about the dynamics in the fourth quarter that might have sort of created that little bit of an awkward relationship, because I thought you would have maybe been dragging your feet by reducing selling prices?

Francesco, I’ll take that. One of the interesting things that occurred in the fourth quarter was a shift in our volume towards peanuts, and that tends to bring down the weighted average selling price quite a bit.

So okay. So if you bring them – if you’re selling more peanuts through, that should be weighted towards a significantly lower price, not that, I guess, the way that I guess I’m balancing it right now. Could this be a concern going forward that you’re selling a lot more peanut volume that has a lower gross profit per pound going forward when just thinking about where your volumes are going to be in fiscal 2017?

Not necessarily, we’ll take pound growth wherever we can get it as long as we don’t lose pounds on the other significant contributors. I’d also want to remind everyone that we also had a shift in pounds towards lower price walnuts compared to the third quarter and last year, so that also contributed as we predicted.

So the shift in lower priced walnut, the volume bump you got during the fourth quarter, obviously, you’re vertically integrated for walnut, so you should see some nice margin expansion there. Could you just maybe talk about some of the pricing changes that occurred from the third quarter to the fourth quarter, were you able to get price increases in the fourth quarter, because I know that there was a lot of promotional activity during the third quarter, but significantly reduced your profitability in just, and maybe in addition, where it it was in the fourth quarter and maybe where you see it for fiscal 2017 as well?

And that’s correct. We did – we were aggressively promoting walnuts in our third quarter to move out our 2014 crop walnuts that were higher across, as you mentioned. That was – they’re really more of a temporary measure just to get back into the 2015 crop. And of course, as a result of that when we got into the fourth quarter, we did pare back our walnut promotional activity, but also benefited from significantly lower cost walnuts.

And I would add that we also took price increases on pecans that are reflecting in the – that just started in the fourth quarter.

Okay. So pecans crop hasn’t come in yet, right? So are you still short of pecans?

So our position is balanced on pecans. We’re actually in a very good position that the industry overall, we believe is fairly short going into new crop, but our position is balanced.

Okay. Maybe a question for Mike. So I saw fourth quarter balance sheet that the revolver is down to about $12 million. Could you maybe give us a little bit of commentary where the revolver stands so far in the first quarter? I would just think with what 2017 is looking like you might be able to pay the entire revolver off pretty soon?

Yes, historically, we generate cash from May through October. This year is no different. We continued to generate cash during this current first quarter. And as a consequence of that, we’re already out of the revolver. And it’s – I can’t remember the last time this has occurred. I would guess this probably has not occurred in the last 10 years. But just as a result of significantly lower working capital levels, just as you saw in Q4, that’s continuing into Q1.

It should be short-lived as you are well-balanced on your revolver, is that right? But you could be putting a balance back on – in Q3, if I am correct?

Yes, usually, actually – usually, we start to borrow for the nut, primarily walnuts and pecans, typically in November.

Okay. So if the revolver is paid down now, it looks like you’re going to get some sizable cash filled. You mentioned before that the company is still looking at another $3.50 special dividend for Q2 after looking at a $2.50 special dividend in Q1. You guys have been issuing the special dividends in Q2 of fiscal 2013, when I think you started it at $1, you’ve been increasing it, I think every year except for one year. At what point does the consistency of the special dividend maybe maintained? Rethink your dividend policy and come out with something a little bit more consistent on a quarterly basis, or what are some other uses of cash, maybe you see paying down long-term debt as a priority, or this – what are your thoughts there?

Okay, let me start with long-term debt. First of all, we only have about $30 million of long-term debt. Most of it is – falls in a Tranche A and Tranche B mortgage facilities. Those – both of those agreements have considerable prepayment penalties. So paying down that really doesn’t make a lot of sense. As Jeffrey mentioned before, we have ramped up our capital spending. I think we started that about three years ago. We’ll continue to have significantly above maintenance level CapEx in 2017. So that’s still a priority. We’re always looking at acquisition opportunities. We’ve seen quite a few of those in 2016. They just didn’t quite meet our criteria. But we’re going to continue to look at that. And then of course, again depending on forecast or availability for fiscal 2017 in our late October meeting, we’re going – as a Board going to again consider whether we should or can pay a special dividend in December.

So no thought about maybe issuing – approaching the Board about a consisting quarterly dividend?

Well, I don’t know if we would do a quarterly dividend. I did actually – I’m speaking with investors recently, who have brought up a similar questions. One of the ideas that were suggested was to have a regular – what I – what we would characterize and say a nominal dividend, something we can pay no matter what happens to nut costs or nut acquisition costs, and then supplement that with a special dividend or – yes, special dividend when we can. So that’s an interesting idea, and certainly, we’ll bring that to the Board’s attention and discuss that approach as a Board.

The CapEx increase that you had just discussed, is that for investments in new product lines or just maintenance of existing product lines and the overall facility and the overall business?

Hey, Francesco, it’s Jeffrey. So the CapEx investments, a lot of it is infrastructure with the new Food Safety Modernization Act requirements or FSMA. We’ve made a lot of investments across our plans to be compliant with the new regulations of segregation of raw and roasted product, a different food quality and food safety parameters. So part of its infrastructure, some of its investment in the brands as well. But I would say this big chunk of it this past year was infrastructure investments and new capabilities. We added some packaging lines to support our continued growth in our brands.

Okay. I’ll jump back in the queue. But I got some more question, if anyone else’s has any.

Okay.

Thank you. And your next question comes from the line of Tom Koch of Trancoso. Please go ahead.

Hi, good morning, Jeffrey and Mike. How are you?

Good morning. Good.

Good morning, Tom.

I had a couple of questions. And by the way, great to see you guys continuing leaving everyone on their toes with these paragraphs of all these changes in volumes and prices and whatnot. And pretty fun watching the stock this morning trading down two bucks now up 290 kind of crazy. So can you guys talk a little bit about this pretty sharp decline in the weighted average cost per raw inventory and kind of what affect you would expect that have on margins as we progress through the year?

Hey, Well, as I mentioned before, Tom, the big driver on that was weighted average cost of walnuts. Our acquisition cost declined, looks like by probably about 45%, and of course, walnuts are big part of our inventory at the end of fiscal year. So that was the big driver. And as we have mentioned in previous calls and for both walnuts and almonds, specific significant decline in acquisition cost will lead or have already led to significant declines in selling prices and consequently meaningful decline in net sales. We do expect to have margin plus expansion as result of that, which will help us maintain our gross profit dollars. However, as we said repeatedly to be able to have a favorable comparison on the gross profit line. It’s critical that we get a significant increase volume, especially on those two commodities.

Yes. And so you guys have talked to lot before about and we know seasonality that plays into this. So coming into the walnut season here now as far as selling, and I don’t know if walnut, I guess, almonds to kind of follow that since your – the calendar, I guess, fourth quarter is always a strong quarter for, I guess, for both. But anyway, what do you guys seeing or anticipating as far as volumes for the fall and from now through Christmas?

So this is Jeffrey, Tom. We anticipate a very strong holiday season for recipe nut specifically, and you’re going to be looking at walnut retail price half of what you would find the typical pecan price to be this coming year. So we anticipate some substantial growth in our wallet business. We’ll be retailing 32 ounce bag of walnuts similar to what we would be retailing at 16 ounce bag of pecan. So we expect to see maybe a little shift in volume consumption based on that. But we’ve got great distribution set up and lined up with our key customers, both from a display merchandising standpoint and also just distribution, in general, has extended, so great expectations are strong for a good Q – going into Q3 and Q – our Q1 and Q2.

Okay. And then kind of still trying to understand this margin issue. So as it pertains to almonds, so almonds had this significant price decline, both in acquisition costs and in your selling costs kind of over the last six months, I guess, going back to what November, December. How did that affect your margin in this last quarter? Was that a positive or negative?

Yes, both walnuts contributed positively. Now just I want to make a distinction between walnuts and almonds. As you know, we’re walnut sheller. When we move from one crop year to another. There’s an abrupt change in the acquisition cost, which is essentially what we saw near the end of our third quarter. But in the case of almonds, because we’re not a sheller, that ramps down much more gradually than what we saw with walnut. So though, we had lower almond costs in our third quarter and then a little bit lower in the fourth quarter, we’re not really all the way down to where the market is, at least, as of near the end of the fourth quarter. We’re really seeing that right now.

And that’s I assume, because you’re still selling out of inventory that was at a higher cost?

Well, it’s just, purchase contracts, we enter into purchase contracts with other almond shellers and we will buy forward, as the prices come down and average down. But I would say that what we have – what we will receive going forward are virtually everything we’re buying now and receiving will be aligned with the current almond market.

Got it. Okay, beautiful. So then lastly on this gross margin, so you guys called out the effect of, I guess, higher processing costs in peanuts due to poor crop quality. So that was the major cause of the decline in the gross profit margin in this last quarter?

That’s right. Now keep in mind, we were only off by about $600,000 or $700,000 in the quarterly comparison. So when we talk about additional processing costs for peanuts, which were major part of that number. Again, we’re talking about typically what are pretty small numbers.

Okay. But I mean, you did call that out as the major factor. What I’m wondering, is that going to continue going forward, or is that a one-time event?

We’re – we shelled basically the tail end of the crop in the fourth quarter, where we’re actually done shelling peanuts. And when you’re in a poor quality crop year what you shell at the end is typically the worst quality and the most costly to process. So we done with that. We’ll be receiving new crop peanuts here in probably about three weeks, and hopefully, we’ll get a better crop and get back to normal on peanut processing costs.

Okay, great. And then still one last one. So talking – you guys talked a lot about working capital. If prices in your products were to remain stable, as I know, they won’t, but let’s just say, if hypothetically from where they are right now. Would you anticipate that for fiscal 2017 in a whole for the entire year, you guys would be a user or generator or neutral as far as working capital?

Well, we’ll continue to generate cash just really off the balance sheet, because we’re going to have such a favorable cost comparison through the first two quarters of last year, then in the third quarter we will be a user of cash as we always are. And then [when we] [ph] get into fourth quarter typically especially after April, then we tend to generate cash. So I think, we’ll continue to have good cash flow in fiscal 2017, not as good as 2016, but still and above the average year in that respect.

Okay, because I mean, obviously, it’s rough $89 million in cash from operations, which is huge, and that’s contributes – that’s partially because of EBITDA or profit and working capital combined. And so I’m just trying to again zeroing on this working capital component if prices were to remain flat. Are you saying that working capital would be generally neutral and you would be generating your cash from basically cash flow?

That’s – yes, in the second-half of the year, if we apply your assumption then our cash generation would come from the income statement, not the balance sheet.

Right. Okay, great. Thanks a lot, guys I really appreciate it.

Thanks, Tom.

Thanks.

Thank you. And your next question comes from the line of Francesco Pellegrino. Please go ahead.

All right. Back again just want to touch on the subsequent event that you guys have disclosed about the customer for almond butter that’s about $90 million of business in fiscal 2016, or about 10% of your sales that’s going to be moving towards the competitor. But first option this have really have been expected since you’re not vertically integrated for almond, when almond prices plummet like this, they would go towards the low-cost producer, you’re more like a middleman for almond, is that a correct way of viewing this?

I don’t know who would call us a middleman, I mean, there’s a lot of investment in the actual manufacturing of almond butter. The challenge that we have is, because they are grower of almonds as well. They’re vertically integrated further upstream than we are, because we’re not growers. But they do have in some cases lower cost of goods from the raw material out of the field. So that was part of the competitive disadvantage that we had in that circumstance. But at the same time, we are not a grower, so we can buy from multiple growers and we can average competitive prices across many suppliers that was one of the competitive advantages we did provide to this specific account. So it’s nothing that we expected, it was a surprise actually. We were the sole supplier at this point until now. So,strategically it could be that they’re looking at this multiple suppliers, but we’re not really sure. But at this point, we just wanted to disclose that it’s a loss of business and we’re going to focus now on building other almond butter customers. We are focused on both in private brands as well as commercial ingredient and we’re looking at our branded business and how we can extend our portfolio to include almond butter.

But just looking at the loss business and I thought the way that you guys had placed it into the press release, it was very transparent, because I think a lot of companies would have just said, we’re looking to call high-volume, low-margin business. Is it correct? We assume that since it’s in the commercial ingredients channel, but this is very low-margin business?

Yes, that’s correct. As I mentioned in the press release, Francesco, it’s significantly lower than our overall gross profit margin for fiscal 2016.

So if you’re going to be losing $100 million in the commercial ingredients channel and that business would probably be starting like Q3 2017. You’re going to be getting a product mix shift towards your consumer distribution channel, which granted you might just maintain gross profit dollars at the level where they are right now? But could your margins be going above 20% in fiscal 2017 just due to that low – that lost low-margin business, which is such a significant part of your revenue?

I would say, Francesco, it’s – it depends on how we make that business up, where it’s made up. Obviously, we’ll see a shift in our total volume percentage towards the consumer channel, which is typically higher margin. Our focus really is on rebuilding that almond butter distribution in some of that commercial ingredient business with higher volume opportunities, which can depend on where that volume is made up.

Okay. Just going back to the balance sheet, Mike had mentioned that you guys had paid off your revolver, I’ve heard some rumors in the industry about a nut TPNG business that that shopping itself around. When I look at this what you guys have done over the past five or 10 years building out your branded platform just maybe, I don’t want to call it struggles for Fisher Nut Exactly, but that’s still a brand in its relative infancy. Could you just maybe talk about where you’d like to bring maybe your leverage, should I be thinking net-debt-to-EBITDA, because your – a majority of your cost of goods sold are commodities. But I don’t know if necessarily looking at a normalized EBITDA level is the best way to think about the way you guys were – maybe approaching acquisition or not. But – where the balance sheet is right now, I think it gives you guys a lot of opportunities to maybe look around the space and continue to grow the business. And I would just be interested in and I feel as every quarter I’m just asking you about the M&A space, but it seems as it’s right now you might have the balance sheet that set you up really nicely to do something in fiscal 2017?

And that is true. We do have a balance sheet that would do just that. But we need to find the right opportunity. We’ve never had a history of doing acquisitions at high multiples, unless we can identify a realistic synergies, realistic growth opportunities. And as everyone knows, the multiples up there now are pretty high, even for small targets, as we see larger CPG companies, if their toes in those waters. So if we do decide to do an acquisition, it’s going to make financial sense and our assumptions are going to be realistic.

Perfect. Thanks again, guys.

Thanks, Francesco.

Thank you for your questions. I would now like to turn the call over to Mike Valentine for closing remarks.

Okay, thank you, Sue. Before we end the call today, I just want to remind everyone that we will be presenting at the Midwest IDEAS Conference in Chicago on August 30, and we will be posting an updated investor presentation on our site that day in addition to filing their presentation on Form 8-K. Again, I want to thank everyone for all their interests or all your interest in JBSS. This concludes the call for our fourth quarter and fiscal year 2016 operating results.

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.