Good day, ladies and gentleman. And welcome to the John B. Sanfilippo & Son Incorporated Second Quarter Fiscal 2017 Operating Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference Mr. Franc Pellegrino, Senior Vice President of Finance. You may begin.

Thank you, Vicky. Good morning, everyone. And welcome to our 2017 second quarter earnings conference call. Thank you for joining us today. I am here today in place of Mike Valentine, our CFO, was unable to make this call this morning. On the call with me today is Jeffrey Sanfilippo, our Chief Executive Officer; and Jasper Sanfilippo Jr., our President and Chief Operating Officer. 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. Starting with the income statement, net sales for second quarter of fiscal 2017 decreased 10.6% to $249.9 million in comparison to net sales for second quarter of fiscal 2016 of $279 million. The decrease in net sales was primary attributable to significantly lower selling prices for almonds and walnuts. Sales volume declined by 3.8% due to decrease in sales volume in the commercial ingredients distribution channel. The sales volume decline in the commercial ingredients channel resulted from the loss of a common butter customer and lower sales of farmer stock peanuts to other peanut shellers and bought inshell walnuts to international customers due to the fact that we were not carrying excess inventories of farmer stock peanuts and inshell walnuts as it was case last year. Sales volume increased in the packaging and distribution channel from increase sales of peanuts and trail mixes to existing customer. Sales volume increased in the consumer distribution channel primarily from increased sales of our Fisher Recipe Nuts and Orchard Valley Harvest branded products,…

Thank you, Franc. Good morning, everyone. Coming up the strong momentum from our first quarter of fiscal ‘17 net income and diluted earnings per share reached record levels for any second fiscal quarter for the company. This is the fifth consecutive year the company has reported record second quarter operating results for net income and diluted earnings per share. In addition to this as Franc just mentioned, we're pleased to announce our dividend policy. We believe to acknowledge the time to begin the practice of paying an annual dividend to our stockholders. This dividend policy advances our goals of creating long-term stockholder value and expanding our stockholder base and is supported by our strong financial performance. The Board will also continue to consider the declaration of special dividends around the time of each annual meeting of stockholders just as we did this past year. In November Q2 at the annual stockholders meeting the Board of Directors declared a special cash dividend of $2.50 per share on all issued and outstanding shares of Common Stock and Class A Common Stock of the company. A special dividend was paid on December 13, 2016, to stockholders of record at the close of business on November 30, 2016. This would not be possible without the hard work and dedication of our management team and every one of our employees. I thank them for their hard work, leadership and supports. We continue to execute our strategic plans to grow JBSS brands, expand consumer reach and provide best-in-class integrated nut solutions for key partners. We also remained focused on operational efficiencies to reduce costs and add production capabilities throughout our manufacturing and supply chain. I will talk about changes in the core strategy to expand consumer reach and pursue alternative customer channels. We are making progress…

Thanks, Jeff. We will now open the call to questions. Vicky, please queue up the first question.

[Operator Instructions] And our first question comes from Francesco Pellegrino with Sidoti and Company. Your line is now open.

Good morning, guys.

Hi, Franc.

So, first off, the special dividend, it seems there has been something in the works for quite some time now. Congrats on that. But just want to hear your thought process behind it, why we are sorting out with a modest dividend just in the first quarter as compared to maybe spreading it out evenly amongst all four quarters and maybe where the dividend can go going forward and also if you will still be considering special dividend as well? Sure. Francesco, this is Jeffrey. So we have talked about a dividend policy over the last couple years, actually something I have focused on and I wanted to do for a long time, obviously, our financial performance has been extremely strong and it always us to put a policy in place. The $0.50 minimum that we’ve talked about was something that we felt comfortable with putting out there initially. We will be considering special dividends throughout the year as well, just as we have done in the last couple years, usually announced our stockholders meeting in -- at the end of the year.

Okay. So the, look, you guys are reporting record results, it seems like quarter after quarter after quarter, is there right now certain loss that the company could incur, while still maintaining this $0.50 dividend, if you incur $10 million loss, let's say, next year, let’s say in 2019, would you still be able to support the dividend going forward in the first quarter of 2020, for example.

We don’t anticipate losing $10 million anytime soon but based on our availability we believe that no that’s stable for awhile.

Okay. So regardless of the volatility in earnings you guys will be able to just consistently payout this dividend, it sounds like given just how modest it is?

We believe so.

No, it’s a, Francisco, we really focus on managing that volatility, I think, we have proven that over the last couple years. We are not the same company we were even three years ago with our focus on building our branded business, adding value at key customers and now expanding our consumer reach. So I don’t anticipate we are going to have a huge fluctuation in commodity impact that we've seen in past years. That’s why we are confident in establishing the dividend policy today.

Without a doubt and you guys have done a phenomenal job of just growing out your brand which has almost created like this nice branded mode around the commodities that you ultimately buy and then sell. I just want to move over to volume, so I guess, when it looks, given my expectations for the quarters, just where nut prices are going and that we would get a little bit more turnover in the quarter, but when I think about some of the elevated volume sales that you had in the, what was it, the commercial ingredients line that, you sort of have done a really great job of, sort of telling us, hey, probably you are going to be there in Q2 whether it would be almond butter or it was the inshell walnuts sales or it was peanut sales to other peanut processors. I get why volume was going to be up next, but is there would maybe quantify what that volume was in the year ago period?

For those three items, those three items slightly represented over 5 million pounds for the quarter.

So they represented over 5 million pound essentially if we strip that out from the year ago period volumes are basically up.

Yes.

And the volumes are up on our Fisher brand which is the part of our business we are focusing on, combined Fisher brand volume was, I think, up approximately 8% quarter-over-quarter.

Okay. I'm sorry, what was that, start again.

Our volume is up on in the Fisher brand business and the consumer channel I believe volume is up around 8% for total Fisher which includes recipe and snack.

Okay. I noticed in the first you guys also give us a volume performance against the consolidated brand, as well as private label, noticed that sort of what’s there in the 2Q release, anyway to get that, if you have it handy?

It’s in the press release, the private label is flat for the quarter.

Okay. And branded was…

Total brand is approximately 8%.

Okay. So, based upon some of the things that I may able to back into, I see branded revenue up 7%, branded volumes up 8%, so that's pretty nice. But then I see private label revenue down 13%, make sense it’s lower selling prices, would have thought you would have got a little bit more turnover. I see that you did address why volume was flat year-over-year with what I'm thinking it probably maybe a single large customer is flat volume just maybe a concern in 2Q or can we expect the volumes to sort of rebound in Q3 and Q4 for this private label business?

This is Jeffrey, Francisco. So there were some dynamic that we had no control over, some of the things that some of our key retail partners did with their shelf allocation and some of the category management decisions they made that had negative impact on their private brand volume. We anticipate that they are going to make some positive changes going into our Q3 and Q4 to turn that volume around.

Okay. Contract packaging, when I just think about that distribution channel, I see you guys have new distribution, looks like new additional volume from trial mix and peanut sales. Is this with a single customer, a single -- one of your bigger customers or is it sort of spread out just be a greater distribution amongst the collective host of customers?

Yeah. Francisco, this is Jasper. I would say that it’s kind of mix of a small handful of contract manufacturing customers currently equally.

Okay. Looking at the Fisher snack, I saw that was down almost Fisher snack down, Fisher snack nuts were down 12% on volume, is it the timing thing with the promotional spend?

Yeah. Part of its timing, part of it, you saw we are seeing retailers look at cleaner lower policies, where they are not putting as much distribution on the floor during Q2, so which reduces some of the merchandising opportunities that we have the prior year. So little bit of is changing merchandising strategy at the retail level, but some that is also timing. We anticipate to make some that up.

Okay. I got a couple more questions, but I am willing to come back in queue, if anyone has anything.

Thanks, Francisco.

Thank you.

[Operator Instructions] And we do have a follow-up from Francesco Pellegrino with Sidoti and Company. Your line is now open.

Okay. I am back. So let’s talk about Sunshine Country for a minute. Right now is Sunshine Country, is the volume base for that brand larger than OVH?

No. It's not.

Okay. It’s not, what's happening with that brand and to be honest with you, when I think about produce, a large part of the conversation has really been around the stellar performance of OVH and I don’t say Sunshine Country has been a neglected brand, but I would just think that, I don't know if there's distribution problems or maybe there's more excitement around OVH, that's where the focus is, is there retrenchment strategy that maybe happening behind the scene with Sunshine Country that allows you to maybe focus more on building the brand equity within OVH, something is happening and I'm just wondering if maybe that brand might be having some problems behind the scenes?

Sure. Just to clarify, Orchard Valley Harvest is our premium produce brand. It is -- the positioning is after the health and wellness consumer. Sunshine Country is a control. We consider a control brand. It is our lower and product mix, lower price point. It’s really with one key retailer at this point. If that key retailer changes some other dynamics from a shelf allocation standpoint, that’s where you are seeing such an impact on Sunshine Country brand. It is funny that we are still focus on. There are still a great opportunity for lower price point brands in the produce category, something that our sales and marketing team is working on to look beyond the current customer that has -- that takes Sunshine Country and expand that distribution, because there is an opportunity to grow that brand as well.

Okay. With pecan market, so it doesn't sound like if there's any like really supply issues and I think, I actually saw that the pecan yield or the total harvest is going to be up slightly and it -- I've heard that there was like the irrational pecan buyer out there that sort of causing pecan prices to remain elevated and continue to run? And I'm just wondering since you are vertically integrated for pecan, are you being maybe a little bit less aggressive now in your purchasing habits and potentially seeing lower prices later on in the year? I'm just wondering where this market is going and what’s the rationale behind prices continuing to be at this level?

Francisco, this is Jeffrey. So lot of dynamics happening in the pecan industry, first of all, the supply this year was at average level something there was last year and really for the last subsequent years. We have not had a major increase in the pecan supply for quite a long time. So while the supply has been fairly stagnant, demand is continue to grow especially in China. We anticipate China will import close to 90 million pounds of pecans this year and so part of this is supply standpoint being stagnant, demand is growing internationally. So that is one piece that’s driving reasons for increases. Second one there has been dynamic changes within the buyers for sheller of pecans. There has been some consolidation in the industry. Private equity has invested in a couple pecan shellers recently. So we got more cash available to buy the pecan crop and we did see some what we would consider unrealistic purchasing habits by some of these new entrants in the marketplace. So it has driven the inshell supplier. The demand don’t remain strong and so the meat market has remained relatively strong as a result.

Okay. And final question for me, so, in the first quarter you were lapping first quarter from 1Q ‘16 where volume was flat, setting you up like a nice volume opportunity to beat in 1Q ’17, which you did with 10% -- with the 10% increase in volume. We just lapped the really difficult quarter from the year ago period unless you had 9% volume growth. Now we got volume down 4%, but I guess, when we look at some of the earlier questions that I had, you had some elevated lower margin business that’s really not in 2017, going forward in the second half of 2017 and I know you guys don't give guidance on volume sales, but should we be thinking about in regards to this tough comp that’s going to be happening in the second half?

The volume for the second half, again, we had a very good comp last year. We have to in order to meet that comp we have to make up this right way this almond butter business. And please remember last year in Q4 we had an extra week, so this year we don’t -- this year we don’t have that extra week. So it’s even more difficult to meet last year’s volume.

On that I would add Francisco, the sales and marketing team are very focused on volume growth. They’ve done a great job margining up the business and really focus on building the brands. We are keenly aware that we need to look at the new distribution, the new strategy of expanding consumer reach is going to be critical to go after new volume growth. So we have a lot of headwinds going into the back half with the loss of that major industrial almond butter customer. The categories are down. If you, the recipe nut category is down overall domestically and there are couple other headwinds from a consumption standpoint domestically that we need to overcome. But we are -- that’s why it’s so important that we expand our consumer reach, getting to new customers and new channels and really focus on developing new innovative products for our key partners.

But when you talk about these headwinds and I guess what we saw with, what happened to the overall volume number this quarter. You guys could have lacked to down volumes sales and still be producing recordable -- maybe not recordable EPS in the third quarter, but maybe record EPS in the fourth quarter, because you guys have really reduced your selling expense and administrative expenses in 2017 as compared to the year ago period. So are we just getting maybe the right product mix or is there too many different dynamics occurring on a quarterly basis that it's really hard extrapolate these trends going forward?

There is a lot of dynamics happened once, if you recall, we are -- we have streamlined some of our SG&A expenses and we do have a better price mix, now since we don’t have that lower margin industrial customer any longer, so we do expect margins to improve going forward. Again, there is a lot of mix volume and pricing awesome play.

Okay. Perfect. Thanks again.

Thanks, Francisco.

And our next question comes from the line of Stefan Mykytiuk with ACK Asset Management. Your line is now open.

Hi. Good morning.

Good morning, Stefan.

So just following up on, a little bit on what Francisco was asking and Jeffrey you alluded to this earlier, but going back 10 years or 12 years, this is a very different company, I think you said before even three, four years ago, this is a very different company. So you lost, you shed 5 million pounds of what I would expect is low margin business this quarter and it sounds like we will have some continued flow through of that certainly from the almond butter in the next couple quarters. But the history of this company seems to be that you're moving your mix, you are bidding, but you have done that over the last 10 years at times and then recapture that volume through higher value-added either branded or private label or contract packaging business. So is this, the 5 million pound this quarter is this part of that whole kind of game plan to keep moving the value-added mix up and continue to improve the complexity of this business?

That’s correct, Stefan, that’s exactly what we are doing. We are shifting a lot, as I mentioned, the shift from our inshell walnuts internationally into more domestic shelled branded products and is an example of that. The almond butter in the industrial chattel making up that volume, we are really focusing our efforts on the branded piece of it and also our key partners that we provide their private brands for, there is lot of growth opportunities with them as well. So some strange industry dynamics happened this past two quarters really. We anticipate that they are going to be refocusing their efforts on the snack nut category to turn that volume around. Yes, we have shifted the volume from that lower margin industrial business and in some cases some of the international business to more profit business here.

And also, this is Franc, that’s also through the consumer channel, back couple years ago our private label consumer channel was probably low in the branded piece of our consumer channels [ph] probably (36:21) low 30% and this quarter we picked that 43%, so we are shifting from private label to branded, just part of strategy.

That’s 43%...

Of the consumer channel.

Of the consumer.

Yeah.

Got it. Got it. So as I look over the next few years, is it fair to assume we should expect or your game plan is to resume volume growth of overtime and then as you improve the mix that we should see improving margins in the business?

Absolutely.

Okay. Terrific. Thanks very much.

Thank you.

And I am showing no further questions at this time. I would now like to turn the call back over to Mr. Franc Pellegrino for closing remarks.

Again, thank you for your interest in JBSS. This concludes our call for our second quarter fiscal 2017 operating results.