Good day, ladies and gentlemen, and thank you for standing by. Welcome to the John B. Sanfilippo & Son, Inc.'s First Quarter Fiscal 2019 Operating Results Conference Call. [Operator Instructions] I would now like to introduce your host for today's presentation, Mr. Mike Valentine, Chief Financial Officer. Sir, please begin.

Thank you, Howard. Good morning, everyone, and welcome to our 2019 first quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO. Before we start, please note 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. Additionally, I would like to take a moment to alert participants that in the current quarter, we adopted ASC Topic 606, revenue from contracts with customers using the full retrospective method. The adoption of this new standard resulted in our recasting certain amounts in our financial statements for last year's first quarter. We will continue to recast prior year's statements for the remainder of this fiscal year. All right. Starting with the income statement, net sales for the first quarter of fiscal 2019 decreased by 5.3% to $204.3 million in comparison to $215.7 million for last year's first quarter. The decrease in net sales came primarily from a 3.4% decline in sales volume which we define as pounds sold to customers. The decline in sales volume mainly occurred in our contract packaging channel from the loss of some bulk dried fruit business with an existing customer and a reduction in unit ounce weights implemented by another contract packaging customer for nearly its entire product line. Sales volume also declined in the commercial ingredients distribution channel due to lower sales of bulk cashews, peanut butter, and walnuts, primarily from lost…

Thank you, Mike. Good morning everyone. While we did not achieve a sixth consecutive year of record first quarter operating results, the first quarter of fiscal 2019 contains some successes. We continued our goal of returning profits to our stockholders by increasing our annual dividend by 10% to $0.55 per share and supplemented that with a special dividend of $2 per share. Additionally, sales volume for Orchard Valley Harvest brand continues to grow significantly which contributed to the growth in sales volume in our consumer distribution channel. Orchard Valley Harvest pound volume increased by 78% mainly from new item introductions and distribution gains while pound volume for the produce category actually fell by 3%. Fisher snack pound volume increased by 15% while pound volume for the snack category increased only 3%. The increase in pound volume for Fisher snack nuts as Mike mentioned was attributed in part to our lots of our oven roast, never fried product line. This was accomplished in spite of strong volume headwinds we faced which had a negative impact on our first quarter results. We experienced significant volume challenges in our contract packaging and commercial ingredient channels as Michael mentioned. And at this time last year, we learned that one of our major Fisher recipe nut customers was launching a private brand program that we would - where we would lose significant shelf space and distribution, and we continue to cycle against that volume loss in this quarter. Lastly, we faced higher shipping costs, as has the rest of the industry, which negatively impacted our margins. To mitigate the impact of these challenges going forward, we implemented our Fisher recipe nut holiday promotional and merchandising programs in October which is intended to allow Fisher to compete against private brand recipe nuts more effectively. As we…

Thank you, Jeffrey. At this time, we will open the call to questions. Howard, can you please queue up the first question?

[Operator Instructions] Our first question or comment comes from the line of Craig Bibb from CJS Securities. Your line is open.

So it was kind of a tough quarter, but your incentive comp was up. So could you talk about your outlook for the remainder of the year?

So obviously our compensation plan is based on full year, not just the quarter. Obviously, we had a difficult quarter which we’ve just shared. At the same time we see a lot of opportunities for growth in the back half of the year. And so we accrue our bonus compensation plan based on our expectations of year-end results. And so that's why you're seeing the numbers that you are because we're optimistic about our full-year end results.

So maybe a little bit more detail, I know you expect net prices to come in. You have an easy comparison in the current quarter on gross margin, and you highlighted that you picked up some new private-brand business. Am I missing anything?

We're continuing to focus on building our brands, Fisher Oven Roast. We've had great success in the markets where we've gained distribution. Our ACV on our snack program is only 12% nationally. And so we've got a lot of opportunity to expand our Fisher snack program across the U.S. So we see upside there. Our Orchard Valley Harvest brand continues to grow, and we're gaining new distribution. So we're very bullish on the growth opportunities for our brands, the Squirrel Brand, Hunter’s Mix, some of the new brands that we acquired back in 2018, really just starting to get our arms around gaining new distribution there. So we've got a lot of growth opportunities in the plan. And then I mentioned the private-brand customers that we recently picked up that will just start shipping - one just started shipping this quarter, and we've got two others that will start shipping in the back half of the year. So, very optimistic and bullish on the growth in the back half of the year.

So, I mean, given the volumes you just reported with Fisher snack nuts, obviously the Never Fried promotion went well. As you add new accounts, could your percentage of ACV move from 12% to 15%, or what kind of magnitude are we looking at?

So there's definitely opportunities a lot of the - we're working on gaining that new distribution now. The challenge is getting into some of those key retailers that the teams, the sales teams are presenting to now. But definitely the opportunity is there to grow that market share. It's still a very fragmented segment, the snack nut category at retail. And so we feel there's opportunity. We've got a great brand story, great success where we have distribution, and just - it's a health and wellness marketing and advertising promotional niche in the category that doesn't exist today. So we think there's a great opportunity for further distribution.

And then with Orchard Valley, you said your ACV was up 11% year-over-year. So what - at the end of the quarter, you guys are 45% of ACV?

We're currently at 46% with this quarter’s results. So, again, you've got another 54% of potential ACV. Difficult to get to 100%, but definitely a lot of upside in OVH as well at only 46% ACV today.

The volume decline and contract packaging obviously very material. Is there any likelihood that that would reverse later this year or just flow through the rest of the year?

Well, in respect to weight out, we mentioned that one of our major customers that's definitely going to flow through for the remainder of the year. Hopefully, that customer will take some measures to offset that volume decline because, of course, they are suffering that too and that may come in the form of additional shipper events or additional promotions. We're currently discussing those with them. So hopefully that will help offset that. As far as the loss of the dried fruit business goes, I believe we've lost that in the third quarter of last year, so we still have a couple of quarters yet to lap against that. In the meantime, the rest of their business that we do with that particular customer, primarily roasted nuts, is actually increasing, so - and we expect that to continue.

And with the decline you expect in net prices in calendar 2019, would that change the way they're approaching the business?

In the contract packaging channel or retailers in general?

Contract packaging via the per-package process.

Yes. I don't see them increasing unit weight at least for 12 months, maybe even for two years. Typically, when you make a change like that it's pretty costly in terms of changing packaging and it's not something that typically reverses very quickly.

Your competition with in-recipe nuts, the very large customer, it looks like they took share above and beyond the lost shelf space. Could you give us a little more detail around that?

Sure. So, today, we launched a private brand program. This time last year, it was really end of October when we started to see it show up on shelves and that's when they started to transition some of the shelf space from Fisher and other branded recipe nut companies to their private brand. Since then, back in January, February, they actually felt like they went too far over with private brands. So we've actually gained back some of our Fisher recipe nut SKUs on their shelves at retail. And then, in addition, there was a lot of - there was a bigger price gap going into the holiday season. And so, as I mentioned on the call, we just initiated our holiday pricing in October as we feel that that price gap will lessen between Fisher and private brand for this holiday season.

Our next question or comment comes from the line of Bruce Winter. Your line is open, sir.

This is about the contribution of the Squirrel nut acquisition to two metrics that you have in your press release. One is the gross profit margin as a percent of sales. What is - how has Squirrel Brands affected that? And secondly, total operating expenses as a percentage of sales, which includes incentive compensation which you've discussed, base compensation, shipping, and advertising expenses. So, the question is what has Squirrel Brands contributed to those numbers?

Okay. First of all, let me remind participants that we have been a contract packer for Squirrel Brand for some 20 years. So, in this particular acquisition, the incremental impact on sales and gross profit dollars is not as large as you would expect because we've already had our contract packaging sales baked in from the prior year. So, now, of course, we did pick up Squirrel Brands markup in our numbers this year on top of the markup we've always had as a co-packer. And then in the SG&A side, the Squirrel Brand impact primarily was just the amortization expense that we mentioned of $800,000. We also have about four people that we added primarily into the selling expense line. That also had an impact on both base compensation and, to a lesser extent, incentive compensation.

This is a few miscellaneous things about Squirrel Brand. You don't have an earn-out with them, do you?

No, we don't.

When do you intend to test the intangible assets?

We test them at the end of every fiscal year, and we did test those for our year ended June 2018.

And you’re not the ones behind Savanna Orchards and A.L. Schutzman, whatever, selling nuts that look like Squirrel Brands in Costco, are you?

No, we are not. That is not our company.

And then just my one last question is I would expect that your success on Orchard Valley Harvest would include their gross profit margin. Are you seeing that effect?

Yes. It’s typically brands, especially a successful brand like that, will tend to outpace, say, for example our bulk business and contract manufacturing. But I do want everyone to keep in mind that we really just launched the OVH brand about five years ago. So we're working off of a relatively small base compared to other parts of our business. So even though we've had great success, it isn't going to move the needle as much as you would have expected.

Exactly. Can you put some numbers around that?

Yes, we have. I think we mentioned it last in our fourth quarter that we expect the brand to reach about $50 million this year in sales.

And what margin increment is involved in that?

We don't discuss margins for brands but - or really for any components of business other than for nut types.

Yes, approximately. I mean, is it twice as profitable or…

Well, generally, there's a spread between some of our larger brands and some of the other parts of our business that can be range anywhere from 500 to 1,000 basis points spread, but a lot of times, it depends on what acquisition costs per nuts are.

[Operator Instructions] We have a follow-up from Mr. Craig Bibb from CJS Securities. Your line is open.

Can you - when are you likely to get a good read on when nut prices are going to settle out for next year?

So because we're actually just buying the market harvest now, so we won’t really have a good idea on our average pecan prices until probably February, March when the bulk of the harvest has been completed and we've purchased our needs. Walnut market is…

We'll have a better idea on walnut prices by the end of December. We're currently monitoring the market now to see what approximate sales are happening and what those market prices are, then we'll figure out what our acquisition cost needs to be relative to what walnuts are selling for.

And if you guys are guessing, obviously, prices are going to be down materially because of the tariffs in China. I mean, is the order of magnitude like 30%, 25%?

Yes. For pecans, it’s a little bit early. China has been very slow in getting into the market to buy pecans. Usually, they’re the - some of the first buyers for the large-sized pecans that are harvested at the beginning of the crop. They have not been very active in the marketplace They have not been very active in the marketplace, but it's still fairly early to see the impact of what that will be to prices. The hurricane in Florida or Georgia that came through impacted, we estimate, about 20% of the crop in Georgia, so still trying to understand the dynamic there. And then Mexico had some challenges as well. But overall we believe this crop will be larger than last year, but still too early to see what that - how that prices will shake out with the tariffs.

And do you guys have like a ballpark on what lower nut prices, how big a benefit that could be to gross margin?

It's too soon to say, Craig, because we haven't actually put together our new crop pricing that we typically implement with customers starting in January. But I do want to add that when we talk about pecans, walnuts, and even cashews, we expect acquisition costs to be meaningfully lower than they were in the prior year. We just can't put a quantity on that yet.

Finished goods inventory was up. Why was that?

There's really three reasons that inventory was up. The first reason is we needed to build inventory of recipe nuts on certain nut types so that we could start producing some of the other nut types as those crops came in so we can get the benefit of those lower acquisition costs there. We did react a little slowly to the softening in sales, so naturally those inventories were a little higher because we built a lot of inventories, particularly at this time of year, against forecast. Team has since dialed that down, so they're watching our open orders a lot more closely and building inventory plans against that. And then, finally, we did have some new distribution that we mentioned before that we needed to build some finished goods inventories up to start servicing a new customer.

And then my last one is actually related to that. How large is this new private brand contract sort of material?

So there are three different retailers significant. If you added all three of them together, they will make the top six customers in our portfolio.

Thank you. I'm showing no additional audio questions at this time. I'd like to turn the conference back over to Mr. Mike Valentine for any closing remarks.

Thank you, Howard. Before we end the call, please note that we will be presenting at the Southwest IDEAS Conference in Dallas on November 15. Our presentation is scheduled to begin at 3:50 P.M. Central Standard Time, and the presentation will be webcast live and may be accessed at the conference website www.ideasconference.com. Again, thank you for your interest in JBSS, and this concludes the call for our first quarter of fiscal 2019 operating results.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.