John B. Sanfilippo & Son, Inc. (JBSS) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the John B. Sanfilippo & Son Third Quarter Fiscal 2019 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 be given at that time. [Operator Instructions] I would now like to turn the call over to Mr. Mike Valentine, Chief Financial Officer. Sir, you may begin.

Thank you, Victor. Good morning everyone, and welcome to our 2019 third quarter earnings conference call. Thank you for joining us today. On the call with me is Jeffrey Sanfilippo, our CEO and Jasper Sanfilippo, our COO. Before we start, we want to alert you that we may make some forward-looking statements today. These statements are based on our current expectations and 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. Starting with the income statement. Net sales for the third quarter of fiscal 2019 declined slightly to $201.8 million, compared to net sales of $202.8 million for the third quarter of last year. The decline in net sales was attributable to a lower weighted average selling price per pound, and that was caused by a shift in sales volume from higher priced tree nuts, specifically almonds, to lower priced peanuts. The decline was largely offset by a 3% increase in sales volume, which came primarily from increased sales of private brand peanuts and trail mixes, and our consumer distribution channel. Now, taking a look at our brands. Sales volume for Fisher recipe nuts fell by 12.2%, primarily as a result of competitive pricing pressure from private label at a major customer, and as well as, the later Easter holiday this year which accounted for roughly 50% of the total volume decline for Fisher recipe nuts. 8.5% increase in sales volume of Orchard Valley Harvest produce products resulted from distribution gains for our new salad toppers line that was recently launched, and distribution gains with new customers. Fisher snack nuts sales volume decreased by 17.1%, primarily due to lower promotional activity at a major customer for inshell peanuts. That was offset in part by distribution gains for our recently launched Oven Roasted Never Fried product line. Sales volume for Southern Style Nuts decreased by 19.6%, due to a temporary reduction in sales to an existing customer in Mexico as a result of some importation delays that are now resolved. Sales volume decreased in the commercial ingredients channel from lower sales of bulk products to other food manufacturers. And sales volume decreased in the contract packaging channel due to a reduction in unit ounce weights and the discontinuance of a product line by an existing customer. Net sales for the first three quarters of the current year decreased to $659.4 million from $677.3 million for the first three quarters of last year. The decrease in net sales was primarily attributable to a shift in sales volume again from higher price tree nuts to lower priced peanuts. Sales volume was relatively unchanged in the year-to-date comparison. The 9.5% increase in sales volume in the consumer distribution channel was offset by sales volume declines in the contract packaging and commercial ingredients distribution channels. The sales volume increase in the consumer channel resulted from increased sales of private brand peanuts, trail mixes and Orchard Valley Harvest produce products. The sales volume decline in the contract packaging channel was due to the loss of some bulk business with an existing customer, in addition, to those reasons I cited in the quarterly comparison. And the sales volume decline in the commercial ingredients channel was due to the same reason I noted in the quarterly comparison as well. Third quarter gross profit increased by $5.7 million and gross profit margin, as a percentage of net sales, increased to 19.2% from 16.3% in last year’s third quarter. The increases in gross profit and gross profit margin were primarily attributable to lower commodity acquisition costs for walnuts, peanuts, cashews and pecans. The increase in sales volume also contributed to the increase in gross profit in the quarterly comparison. Gross profit for the first three quarters of the current year increased by $8.7 million and gross profit margin increased to 17.4% from 15.6% for the same period last year. The increases in both gross profit and gross profit margin were mainly due to decreased commodity acquisition costs for peanuts, walnut, pecans and cashews. Total operating expenses for the current third quarter increased to 11.6% of net sales from 9.4% of net sales in last year’s third quarter. This was primarily due to increases in incentive compensation, regular compensation, legal fees, consulting fees, advertising expense and shipping expense. The increase in shipping expense was due to increased sales volume in the consumer channel, and the increase in incentive compensation was due to the fact that we are accruing our bonus this year where we did not accrue a bonus last year. Total operating expenses for the current year-to-date period increased to 11% of net sales from 8.9% for the first three quarters of fiscal 2018. And that was due to the same factors I cited in the quarterly comparison. In addition, there was a $1.2 million increase in amortization expense, which was related to the acquisition of the Squirrel Brand business that occurred during fiscal 2018. Interest expense for the current third quarter decreased to $800,000 from $1 million in last year’s third quarter. And interest expense for the first three quarters for the current year decreased to $2.5 million from $2.6 million for the first three quarters of last year. The decreases in interest expense in both comparisons resulted primarily from lower average debt levels. Net income was $10.3 million, or $0.90 per share, both a record for a third quarter, compared to $8.6 million, or $0.75 per share, for last year’s third quarter, which was also the previous record. And then, net income for the first three quarters was $28.2 million, or $2.45 a share, compared to net income of $26.9 million, or $2.35 per share, for the first three quarters of fiscal 2018. Taking a quick look at inventory. The total value of our inventories on hand at the end of the current third quarter decreased by $5.9 million, or 3.2%, compared to the total inventories value on hand at the end of last year’s third quarter. The decrease in total value of inventories was primarily due to lower acquisition costs for pecans, cashews and walnuts. The lower acquisition costs for these commodities led to a 24.7% reduction in our weighted average cost per pound of raw nut and dried fruit input stocks on hand for the quarterly comparison. And now, I will turn the call over to Jeffrey Sanfilippo to provide additional comments on our operating results for the third quarter of fiscal 2019. Jeffrey?

Thank you, Mike. Good morning, everyone. As Mike mentioned, we reported another record earnings per share for the third quarter and very proud of our entire organization for executing the strategies we developed to strengthen our financial performance across our business segments. Third quarter diluted EPS increased by 20% to $0.90 per share. That was achieved after delivering a 35.9% increase last year, which was a record at the time of $0.75 a share. This record third quarter was driven by a strong performance in our consumer distribution channel, as it was this time last year. Our Orchard Valley Harvest produce line continues to grow with new distribution and expanded volume with existing customers. Our R&D and marketing teams are working on exciting new products that will launch in the coming months. I look forward to reporting on this new portfolio on a future call. Our Oven Roasted Never Fried product portfolio is doing very well. We continue to gain new distribution and expand outside our core Midwest markets. And we continue to invest in the Oven Roast line. Our management team is consistently focused on providing value for our customers and consumers, while also providing value for our shareholders. Our cross-functional teams work hard to drive cost out of our supply chain and optimize our operations. In addition, we are always laser focused on managing our inventory positions to align selling prices with cost of materials, and our results demonstrate this commitment. As Mike mentioned, gross profit increased by $5.7 million, and our gross profit margin, as a percent of net sales, increased to 19.2% for the third quarter of fiscal 2019, compared to 16.3% for the third quarter of fiscal 2018. Now, turning to review by sales channel. Consumer channel increased by 5.2% in dollars and 8.2% in sales volume in the third quarter. Sales volume increase was driven by increased sales of snack nuts and trail mixes with new and existing private brand customers. Sales volume for Fisher snack nuts decreased 17.1% due to lower promotional activity for inshell peanuts, which was offset in part by distribution gains for Oven Roasted Never Fried product line. An 8.5% increase in sales volume of Orchard Valley Harvest produce products was driven by distribution gains for the salad toppers product line and distribution gains with new customers. Sales volume for Fisher recipe decreased 12.2%, mainly as Mike mentioned, from competitive pricing pressure from private label products at an existing customer, and the fact that the Easter holiday occurred later in fiscal 2019, compared to fiscal 2018. A 19.6% decrease in sales volume for Southern Style Nuts was due to a temporary reduction in sales to an existing customer in Mexico. Priorities for the consumer sales team for the remaining fiscal year and into fiscal 2020 include further distribution gains on Fisher, Oven Roasted Never Fried snack line, expanding our Orchard Valley Harvest and Squirrel distribution in the club channel, and continuing to gain new customers for Fisher recipe. In the commercial ingredient channel, sales decreased by 17.3% in dollars and 6.5% in sales volume. The sales volume decrease for this quarter was primarily due to lower sales of bulk products to other food manufacturers. Priorities in the commercial ingredient division include developing new business with non-commercial customers and restaurant chains. We’ve had some small success, but we believe there are enormous opportunities for the company. In industrial business segment, we have struggled a bit, the past year, and the company has now replaced the volume lost in the prior two years. We’ll be assessing our sales strategy to optimize the resources invested in the industrial channel and find the right customer development profile. Turning to category updates, I’m happy to share some of the activities this past quarter. As always, the market information I’ll be referring to is IRi reported data, and for today, it is the 13-week period ending March 24, 2019, which I’ll refer to as Q3. References to changes in volume or price are versus the corresponding period one year ago. We look at the category and 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 breakouts of the recipe, snack and produce categories. And they are based on our custom definition developed in conjunction with IRi. And the term velocity refers to sales per point of distribution. First, let me review some category dynamics. The total nut category increased in sales dollars and pound volume in Q3, up 4% and 2%, respectively. Overall, prices in Q3 increased 2% versus the prior year. For the quarter, pecan and almonds sales increased 10% and 6%, respectively, as pecan prices declined 1% and almond prices remained flat versus a year ago. In addition, pistachios increased 28% and cashews increased 5% in sales. The prices on these two nut types actually increased 1% and 2%. Now, I’ll talk about each category in a little more depth, starting with recipe nuts. In Q3, the recipe nut category increased 3% in dollars and 4% in pound volume sales. Price across the three key nut types - pecans, walnuts and almonds - decreased versus last year. Walnuts declined 4% and pecans and almonds decreased 1%. Pecan volume increased 11% and walnuts and almonds increased 1%. Our Fisher recipe nuts decreased 1% in dollar sales and 14% in pound sales for the quarter versus last year. As a result, Fisher share in the category decreased 4.3 share points. The decline was driven by competitive pricing pressure from private label at a major retailer, which I mentioned earlier. This was partly offset by continued strength of Fisher in traditional grocery stores which in IRi is called U.S. Food. U.S. Food excludes club, drug, mass merchants and supercenters. Fisher increased in the third increased in the third quarter by 33% in dollars and 15% in pound volume in U.S. Food. The strong quarter resulted in continued branded share leadership of the recipe in that category for the Fisher brand in U.S. Food. Now, let me turn to the snack category. In Q3, the snack category increased 7% in dollars and 4% in pounds. Fisher snack increased 22% in sales dollars and 3% in pound volume and sales in Q3. The increase in sales volume for Fisher snack resulted mainly from distribution gains for Oven Roasted Never Fried product line. We launched our Oven Roasted Never Fried line in Q3 of last year as a differentiated brand extension to help us build share in our core franchise and expand to new markets. Fisher Oven Roasted Never Fried offers consumers a whole line-up of nuts that are dry roasted, not roasted in oil, including whole cashews, deluxe mixed nuts, mixed nuts with peanuts, almonds, pecans, and a unique almond cashew blend, as well as peanuts. With a large assortment of tree nuts in addition to peanuts, we are achieving a favorable mix and pack as revenue growth on Fisher snack exceeded the pound growth in Q3. With no extra added oil, the ingredient line is simply nuts and sea salt, which fits with the needs of today’s consumers who want simple ingredient lines. We’re supporting the brand with an integrated marketing plan of in-store merchandising and customer programing, radio, digital, and social media marketing and FSIs. And it is helping us expand outside our core franchise. Our ACV distribution increased 21% versus the prior year, driven by increased distribution in Texas and the Northeast. We have seen good consumer trial on Fisher Oven Roasted Never Fried and velocity at retail pricing metrics are in line with our expectations. And we expect to continue to expand distribution in the coming year. In Q3, the produced nut category was flat in dollar sales and declined 2% in pound volume. OVH, our produced nut brand, increased 7% in dollars and 3% in pounds at IRi reporting customers. OVH shared the category increased two-tenth in dollars and 0.1 points in pound versus last year. ACV distribution for OVH has increased by 3 points versus last year, as more retailers are accepting Orchard Valley Harvest into their sets. And Orchard Valley Harvest continues to grow due to increased distribution as well as new product introductions, like our Honey Roasted Mixed Nuts, Glazed Walnuts and Berries Salad Toppers. And Honey Roasted Sliced Almonds and Berries Salad Toppers are all convenient portion controlled multi-packs. Our Southern style brand increased 2% in dollar sales and declined 1% in pound sales. In closing, I am very proud of our management team and all of our dedicated employees. Leaders within our organization are working hard and working smart to provide exceptional value and service for our customers and consumers. We have tailwinds going into the fourth quarter with lower commodity prices. This will allow the company to drive volume growth with our key partners and promote snack and recipe nut programs across our business segments. The management team and all our dedicated employees have a steadfast commitment to develop products and opportunities that create shareholder value and provide relevant profitable value-added portfolios and services to our customers and consumers. 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.

Okay. Thank you, Jeffrey. We will now open the call to questions. Victor, if there are questions in the queue, can you please tee up that first question.

[Operator Instructions] And our first question comes from the line of Craig Bibb from CJS Securities. You may begin.

Hi, guys. Way to blow it out in the quarter. Obviously, the Easter shift is already reversed in Q4. The retailer didn’t pass through lower prices on recipe nuts. Is that also reversed in the current quarter?

Jeff, can you take that one?

Yes. Hi, Craig. It’s Jeff. We [indiscernible] not reflected yet at retail. We were hoping after Easter holiday that we would start to see those lower retail prices reflected. and we have not seen that yet.

Okay. And then, so you had a large retailer skip the promotion. Do they cancel the promotion on inshell peanuts, or is it delayed, or like you see that coming back later in the year?

Yes, in this case, we reorganized some other promotional activity at retail. And so we expect to see partly gain some of that promotion in the coming quarter and the next two quarters. We will makeup as total amount that we saw in Q3, but they do plan on further promotions in the coming quarters.

Okay. I believe you guys started shipping to another private label snack customer this quarter. Is there more to come? I mean, you’re making progress on adding distribution on [indiscernible] branded also?

Sure. Yes. So we’re very focused on our private brand, retail partners as well. This pipeline continues to grow in the category, and so it’s important for us to be active in that space. We did pick up a couple of new private brand customers that we started shipping in the beginning of fiscal 2019. And there is at least one more that we’ll start shipping by the end of this fiscal year.

Okay. I guess the focus with Southern Style was, you had import issue into Mexico, which is sort of now resolved. Away from that, are you making progress in adding new distribution?

So, it’s a little bit slower than we anticipated, Craig. We’re very focused on grocery, expanding the scroll in Southern Style nut program into the grocery channel, which they weren’t in before. We acquired the company. A little slower than we anticipated, but we believe we’ve got the right product line in pack sizes now to start doing all that distribution. And we’re also very focused on the club channel as well, little bit slower than we anticipated, but we do have some potential wins that we hope to report in the coming quarters in the club channel.

I noticed Southern Style in airports now. Is that new or that was there when you bought it?

No, that is new. So we’ve been very focused on expanding consumer reach and getting our products into locations where consumers are buying snacks and airports are a perfect example of that. So that is new distribution, and it’s a key focus for the company.

Treehouse’s future seems to be up in the air still. I know it doesn’t make sense for you guys, that’s probably going to end up with private equity. But are there opportunities, well, influx for you guys to take more share?

Obviously, retailers are always going to want quality products and they’re going to want proper service levels. So, we’ve seen opportunities come up where they’re not getting that contractor service that they expect or should receive. So, we believe there could be further opportunities to gain some private brand distribution in retailers.

Yes, might be a little bit slow. But I didn’t realize you are doing Oven Roasted tree nuts also. Did that started at the same time as the Oven Roasted peanuts or was that added after?

It was always part of the product line, Craig. We just felt there was an opportunity to expand what is considered drive all those peanuts in the category. And so really the focus was on the tree nuts originally with Fisher Oven Roasted Never Fried. Peanuts were just a compliment to that. But definitely that’s a big factor in Fisher Oven Roast.

Right. Okay. The increase in legal fees in the quarter, just, is there anything we should care about or?

No, there’s nothing notable there. It’s just happened to be a period where we had several things just kind of clumped together.

Okay. All right. Well, great quarter. So, that’s all I got.

All right. Appreciate it, Craig. Thanks.

Thanks, Craig.

Thank you. [Operator Instructions] And, at this time, I’m showing no further questions. I would like to turn the call back to Mr. Mike Valentine for closing remarks.

Okay, thank you. Again, we would like to thank everyone on the call for your interest in JBSS. And this concludes the call for third quarter operating results for fiscal 2019.

Thank you, ladies and gentlemen for participating in today’s conference. This concludes the program and you may all disconnect. Everyone have a great day.