Ladies and gentlemen, thank you for standing by, and welcome to the John B. Sanfilippo & Son, Incorporated Third Quarter fiscal 2020 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Mike Valentino – Valentine, sorry, Chief Financial Officer. Sir, please begin.

Thank you, Norma. Good morning everyone, and welcome to our 2020 third quarter earnings conference call. We 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, we want to alert you to the fact 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.Starting with the income statement. Net sales for the third quarter of fiscal 2020 increased by 4.9% to $211.6 million, compared to net sales of $201.8 million for the third quarter of fiscal 2019. The increase in net sales was attributable to a 13.7% increase in sales volume, which we define as pounds sold to customers.The increase in net sales from the sales volume increase was offset in part by a lower weighted average selling price per pound, as the majority of the sales volume increase was driven by growth and lower-priced trail and snack mixes and peanuts. Lower selling prices for pecans and cashews which resulted from lower acquisition costs, also contributed to the decline in the weighted average selling price per pound.Sales volume increased in the consumer channel by 19.3%, which came primarily from increased sales of trail and snack mixes and peanuts and to a lesser extent, increased sales of cashews, almonds and mixed nuts to existing private brand customers. Sales volume increases for Fisher snack nuts, Orchard Valley Harvest produce products and Southern Style Nuts snack mix products also contributed…

Thank you, Mike. Good morning, everyone. The third quarter of fiscal 2020 marks the fifth consecutive quarter in which we reported record net income and diluted earnings per share. This quarter’s results were the second highest for any quarter in the company’s history. This solid performance was driven by strong volume growth in our consumer distribution channel. We’ve talked a lot in the past about our strategies to make our consumer sales channel a larger portion of our overall business.I’m happy to report that sales volume in the consumer distribution channel accounted for approximately 70% of our total sales volume in the current third quarter. The increase in sales volume, as Mike mentioned, was driven mainly by increased sales of private brand products complemented by increased sales for our Fisher snack nuts, Orchard Valley Harvest produce products and Southern Style Nuts snack mixes.Prior to the COVID-19 impact on sales volume, we had strong volume with 6.8% growth in the first-half of the current fiscal year, a 9.1% growth for January and February. Our employees were already working very hard to deliver these results, when the March sales volume surge occurred.During March, our business required even more effort, and our employees delivered with the majority of our orders shipping on-time and complete. This truly demonstrates how committed our team members are in fulfilling our obligation to provide food to American consumers during these difficult times.While we are meeting these unprecedented challenges, we took many measures to improve the safety of our employees. The company established a COVID-19 crisis management team that meets daily to discuss risks faced by the company and mitigation strategies.We quickly began implementing work-from-home requirements for the majority of our office employees, staggering shifts and breaks for our production employees, installing partitions on lines where social distancing could…

Okay. Thank you, Jeff. We will now open the call to questions. Norma, can you please queue up the first question?

Thank you. [Operator Instructions] Our first question comes from Chris McGinnis of Sidoti and Company. Please begin.

Good morning. Thanks for taking my question and nice quarter. Can you maybe just dig in a little bit just around COVID and the pantry loading that you talked about. Just maybe the impact you’ve seen on business in April, does that benefit continue, at least, on the consumer side?And then I know you talked a little bit on the commercial side already. But obviously, as restaurants are closed, that will be a negative impact. But we’re starting to see states open. Have those conversations started to change just on that side of the business? If you could just – I know it’s still early, but maybe just a little bit more update on what you saw in the more recent trends? Thanks.

Sure. Good questions. So we did see a little bit of pantry loading and volume increase in the very beginning of April. There were still states that had just started closing in April, so we saw pantry loading at that time. We see the trend leveling off. But I would say that as these stay-at-home orders and travel restrictions continue, you’re seeing more consumers either eat at home and cook at home or they’re ordering online for delivery. And so we expect to see that continue until these stay-at-home orders are lifted. So we should see a little bit of a bump in our consumer demand going forward.As far as foodservice as states do open up, we are watching and monitoring them closely. And as they do open up, we are ready to start supplying those distributors and foodservice customers in most states with product. And we’re starting to see a little – but it’s very early, because they’re just starting to open up now and a lot of the restaurants have limited capacity, but they’re allowed to let people in. And so we don’t anticipate that foodservice channel coming back quickly anytime soon. But if the more states that lift restrictions, the better that will become in the future.

Sure, understood. And I guess, just thinking about the commercial side, how much inventory – I don’t know how much that impacts the demand on your side that you think the distributors are holding. And maybe, I don’t know, if you think about that in months. Is that a few months of maybe excess inventory that they have, or do they move through that pretty quickly?

Yes. Typically, it’s a month to month-and-a-half of inventory. We are working with a lot of our distributors that, specific for our example, airline distributors, with their travel restrictions. We’re working with them to try to move the inventory that they might have in-house to other locations such as food banks or places that are putting together meal kits for families.

Okay. And then just thinking about the 9% growth that you were seeing before that, can you maybe just dig in a little bit about what was driving that? Is that newer account wins? Is that a factor of pricing in the marketplace? Can you maybe just dig in a little bit more? Because that was obviously some pretty solid growth.

It’s a combination really. There was no one specific thing. Some of it was new business that we picked up last year, especially in private brands. We’ve had good success with our Oven Roast Never Fried Fisher distribution as I mentioned. So we saw growth there. We saw some growth with new distribution in other areas of our business. So it really was a combination of a lot of different things.

Okay, great. And then maybe if we can just move on to the margin front real quick. I don’t know if there’s a way to quantify maybe a margin benefit in the period, if there was one, just due to the extra volume coming through. And then maybe on the reverse side of that, the higher compensation, safety measures are coming in, how do you see that playing out going forward if you don’t mind on that? Thank you.

I’ll start with the impact of volume on gross profit. So as you know, our gross profit dollars increased by – let me just look out here, okay, by about $4 million and roughly, 25% of that is just related to manufacturing efficiencies and the other $3 million is just generated from the additional volume that we sold.

Okay. So maybe a third of that, 75% is what, roughly, I guess, you would think?

A third of what?

Of the COVID, maybe the extra volume coming in from COVID. I was just wondering if that played anything material on the margin front so a little bit, I guess?

No, it’s proportional to what we saw with sales.

Exactly. Okay, great. And then maybe just going forward, just with the new measures in place and then also the pay increases? Thanks.

So yes, as far as the business going forward, again, we’re going to watch foodservice. It’s unfortunate, because we had a lot of good new distribution in our foodservice channel leading up to COVID-19, especially with noncommercial places that don’t sell food as their main priority. And so a lot of that has stopped now with these travel restrictions and stay-at-home orders.So – but we are going to watch what happens with these – when these states lift their orders to follow-up on that piece of our business. The team is looking at other opportunities, e-commerce, for example, in the consumer channel. We’ve seen enormous growth there.So we’re going to follow what happens in e-commerce, both for our brands and for some of the private brand options that we produce, they are pursuing more e-commerce platforms. And then the cooking at home has become a big thing now that people are staying home. And so we see growth in the recipe nut category and we see growth in this – potential further growth in the snack category.And so – and as far as employees, we’re going to continue to monitor the situation with our employees. We extended our – the increase in compensation through May 7, and we’ll continue to monitor things. And if we need to do that further, we will do that to take care of our people.

Great. I appreciate it. Thank you very much for taking my questions and good luck in Q4.

Okay, Chris. Thanks.

Thank you. [Operator Instructions] Our next question comes from Tim Call of Capital Management Corp. Your line is open.

Congratulations on a great quarter, again.

Thank you.

And your interest expense keeps going down partially as you pay down debt over time. Do you think you might be debt-free within two or three years?

Well, that’s – it depends what time of the year you’re talking about, Tim. We’ll always be drawing on a revolver from time-to-time. And just as a reminder, that revolver usually peaks near the end of our third quarter. So at that time of the year, I’m sure there’ll be some debt. I think we have about three years left on our mortgages, and we have quite a few years left on our financing obligation for our Selma facility.

The special dividend is, this is a little bit earlier in the year than when you usually announce a special dividend. Does that – and you have higher inventory now for seasonal reasons. So does that just mean you’re that profitable of a company that you can pay a special dividend earlier in the year?

Well, we want to be cautious about this. Obviously, we had, as Jeff mentioned, the second best quarter we’ve ever had in our history. And for that to be a third quarter, it’s pretty unusual and remarkable. But we felt like given the performance in the quarter, it made sense for us to go ahead and pay a spring dividend. But obviously, there’s a lot of uncertainty going forward. And if it turns out that we may have to reduce our special dividend that we typically pay in August for this dividend, we’re prepared to do so. Hopefully, it won’t come to that. And we certainly are committed to paying our regular annual dividend in August.

The headwinds you face from losing a recipe nut customer, have those annualized now, or is that no longer a headwind starting with this next quarter?

Yes, that’s really annualized now. We’re seeing some stable and actually growth in the recipe nut category, as I mentioned before, because people are staying at home and cooking. But we’ve cycled against the lost distribution on the shelf that we experienced. So you should see those numbers normalize for Fisher going forward.

Some competitors like Smucker’s have put out announcements saying they’re cutting promotional activity and just focusing on getting product on the shelves. Are you considering a similar move? And how do you see the competitive environment changing in recent months?

Yes. So from a retail perspective, we’re doing the same thing. A lot of it is actually being initiated by retailers who want to limit the number of people in their stores during this crisis. And so they’re reducing their promotional activity and just focusing on the key staples and the key high-volume items that consumers are looking for as they come into the store.So we have seen a decrease in trade spend and promotional spending as a result. Also a little bit less shippers and different distribution vehicles that we used to use and promote our products, you’re seeing some of that get mitigated as well as a result of more clean store environments and less people in the store.

Well, thank you, and congratulations on the new products and a great quarter.

Thank you.

[Operator Instructions] Our next question comes from [Bruce Winter], [ph] investor. You may begin.

Yes. Thank you. When you sell ingredient nuts to – for the use in power bars and stuff like that, do you sell fried ingredient nuts or Oven Roasted Never Fried ingredient nuts?

For the ingredients, it’s anything from raw materials to roasted products. The Oven Roast Never Fried is our – is in our branded portfolio – our Fisher branded portfolio. So we don’t really use that or offer that type of product in the ingredient channel. It’s not a focus for us. But you’re right, our businesses do use roasted or dry roasted nuts in their bars.

Are your Oven Roast Never Fried healthier than what goes into those bars?

Well, if it’s a dry roasted nut that goes into a bar, it would be just – it would be very similar to our Oven Roast Never Fried. Correct.

Okay, got it. Thank you.

Sure.

Thank you. I’m showing no further questions. I’d like to hand the call back over to Mike Valentine for any closing remarks.

Okay. Thank you, Norma. So we appreciate everyone’s interest in JBSS and joining us on this call today. And this concludes our call for our third quarter of fiscal 2020 operating results.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participation. You may now disconnect.