Ladies and gentlemen, thank you for standing by and welcome to the John B. Sanfilippo & Son, Inc., Third Quarter Fiscal 2021 Operating Results Conference Call. . I would now like to hand the conference over to your speaker today, Mike Valentine, CFO. Thank you. Please go ahead, sir.

Thank you, Dee. Good morning, everyone, and welcome to our 2021 Third Quarter Earnings conference call. We thank you all 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 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.

Thank you, Mike. Good morning, everyone. As was the case in the second quarter of fiscal 2021, we reported record net income and diluted earnings per share despite the continuing challenges we faced in our food service business and our contract packaging distribution channel and with our Orchard Valley Harvest brand due to the impact of COVID-19. These record results were, again, driven in large part by lower commodity acquisition costs, as Mike mentioned, for all major tree nuts and strong sales volume growth for private brand products in our consumer distribution channel. And we continue to see improvement in our foodservice business as we did in the first 2 quarters of fiscal 2021, with dining out and air travel having increased. Our record performance over the last 2 quarters put us in a strong position to pay a $2.50 per share special dividend during the current third quarter. Team members from every department across our organization worked hard and led with dedication and commitment to deliver these strong results and service our customers and consumers. At this time last year, our company established a COVID-19 crisis management team that had met daily to discuss risks faced by the company and mitigation strategies.

Okay. Thank you, Jeffrey. At this time, Dee, can you please queue up the first question?

. Your first question comes from the line of Chris McGinnis of Sidoti & Company.

I know you mentioned increases in freight, and it sounds like pallet, but outside of that, the raw material is coming down. I think you're probably the only industry I cover that sees deflationary raw material cost. Can you just talk about maybe the outlook there? How confident or what you think in terms of raw material costs over the next maybe 12 months as you see it, ag has obviously seen increase in some pricing. So I'm wondering how that could possibly impact you longer term?

Yes. Chris, this is Jasper. As it stands now, we're covered through the fall. Obviously, we bought our crops last year. So our positions are very good through fall. Certain crops have not really developed yet. For example, pecans and walnuts are just coming off of bloom. It looks like we have a decent almond crop. Cashews are pretty tight. So we're not necessarily seeing that there's going to be anything that could be really impactful from a major price increase unless we have some disasters as these crops are developing. From a labor standpoint, there's nothing really that we're seeing as well that's going to cause any effect there. So I think commodities will stay stable for the first half of our year. And then depending on harvest and crop sizes, we'll determine the back half of the year.

Yes. And Chris, I would also add that we have some pretty significant carryovers on just about all the tree nuts, except cashews. So that should also keep a lid on those market prices.

Great. And I guess just that -- I don't want to call it elevated because it's been here for a while, but just that margin profile that you've been hitting that on the growth side. Should that be sustainable for the next few quarters given the commentary you just gave me?

Yes. Chris, this is Jeffrey. I would expect that at home demand to still continue. I think people are still slowly getting back into traveling and eating out. But I expect this next probably two quarters, you'll see that slowly. I think you're going to see that maintain, but you'll slowly see that increase, as I talked about in the foodservice channel and the contract packaging channel as people are more comfortable going out again.

Okay. And just on the impact of that margin profile. Okay. I understand that. And I guess just in thinking about some of the loss, I guess, the changes with maybe Fisher, maybe the recipe. Can you just talk about some of the lost channels, how you're going to approach that? You made some commentary that you're kind of refocusing a little bit on some of the loss share. Can you just talk about how you're going to change that strategy going forward and take that back over the next 6 to 12 months?

Sure. So if you look at -- start with Fisher recipe, so that business was up for bid at 2 major retailers. And unfortunately, we lost that distribution to another brand. But that business comes up again in the next year. I think both of them come up in the next year or so. So we're working hard to build our brand equity, looking at the product innovation in the category. I mentioned the nut flower, which we're having great success in getting new distribution there. So really doing better at positioning the brand equity and the product portfolio. So when those bids come back up, again, we're positioned really well to pursue that business. At the same time, I talked about velocity. And so when you need velocity, it's how much you're turning in a store where you have distribution. And we've done a great job at building that velocity through promotional activity, through consumer engagement. So we've got great success stories at other retailers where we have Fisher distribution and our goal is to take those success stories and demonstrate to retailers where we don't have distribution why they should have Fisher in their sets. So that's Fisher recipe. Orchard Valley Harvest, our health and wellness brand and produce brand. A lot of work being done there on understanding our consumer and how we can differentiate that brand and product portfolio. So the team is working hard on something you'll see in the coming months. We've been in the test market with something called chickpea chips with our OVH brand. Our R&D team has developed some great new flavor profiles for that brand. So you'll see us enter that market in a stronger way in the salty snack section. And then Squirrel is our indulgent brand. A lot of work being done there. We did a great Valentine's promotional program with a brand, a product called Ruby Royal; very successful on QVC. And so we're looking at that product portfolio as well and elevating the type of products that we put in under our Squirrel portfolio to engage new consumers and build that brand. So a lot of opportunities on the branded side. Heavy lifting being done now, as I mentioned, to build those brand positioning and develop consumer engagement, but very excited about what we're going to do with the brands in the future.

I really appreciate it. That's very helpful. Just to touch on the trail and snack mix, obviously, pretty strong the last few quarters. How much room does that still have to grow? Is that more of the change in consumer, the expansion with the distribution customers. Can you just talk about that because that's been a really strong channel for you for a while now.

Sure. Yes. So trail mix has always been a very strong segment in the category. We did see some shift to lower cost trail mixes, especially with peanuts as consumers looked at the economy and just income in general. So we did see a shift to lower cost trail mixes. But we also see growth in the health and wellness trail Max. If you look at something like a keto mix, which is relatively new to the category, we're seeing substantial growth with that type of health and wellness, trail mix. And I think you'll continue to see more development in that segment of trail mixes with more health and wellness type of products.

I appreciate that. And then you just mentioned the competitive landscape increasing a little bit in some components. Can you just maybe discuss that broadly across any of the portfolio? Have you seen any real change in strategy in terms of pricing?

Not really. I think people have been very, I think, really just trying to manage through the pandemic. We haven't seen any huge competitive price changes. Obviously, as the -- we saw price deflation, a lot of that was passed on to consumers through lower retail prices. But also what it's allowed us to do is create more meaningful promotions when we saw these lower commodity costs coming through, trying to attract new consumers to the nut category and hit price points that we were never able to hit before. And so I think all of the competitors have been very focused on getting through the pandemic, but also managing their pricing and making sure that they're driving promotions like we are. We've got -- obviously, with competitive activity, we know of Hormel's acquisition with Planters. We haven't seen any changes yet. Obviously, it's relatively new, and that process is still going through. But we would monitor that and expect to see some things come out of that transition once Hormel takes over the brand.

And then just, obviously, a strong balance sheet. Just your thoughts around capital and any M&A opportunities out there that you see?

Sure. Chris, we're always looking at M&A. It's important to look at what's outside of just our current product portfolio or capabilities. So we've looked at a few companies. We're constantly looking at businesses. I think this past year, our focus has really been on our base business, our core products, reimagining our brands, taking care of our workforce. But M&A definitely will be something -- it's something we always look at and something that will continue to be part of our strategic growth plan.

And then, Chris, we're also making a major investment to enter a new product category, that investment has already started and will continue through fiscal 2022, and then we'll start to see some benefits of that investment in fiscal 2023. It's a major project for us.

Is that a new product offering that has been announced? Or is that a new product offer not -- not yet announced.

It has not been announced.

Soon.

Yes.

Your next question comes from the line of Tim Call with Capital Management.

Congratulations on a strong quarter. This seemed to be your last quarter with hard comparisons. And yet you reported strong quarterly results. And so with easier comparisons and volumes down in quarters in the previous year. Should we expect to see an acceleration of fundamentals?

Well, actually, our fourth quarter was a monster quarter last year because of pantry building. So we still have one more quarter of a challenging comp. But I agree with you after that, we should be able to build some momentum there.

And also add, Tim, that we -- as I mentioned during the call, we are seeing a strong recovery, especially in our foodservice channel. Our industrial channel is coming back. The consumer group -- really, all of our sales and marketing teams have done an extraordinary job, putting us in a strong position with distribution and new product placement and strategic partnerships that will really matter as the economy changes and as the market changes post pandemic. You're starting to see those results flow through, as I mentioned, the back order log now.

So contract manufacturing might come back. Food service used to be 10% of your overall sales and your branded products are sold through a lot of stores that were closed during the pandemic. So should we -- are you able to handle all the increased demand that might occur from all those areas at the same time. And when we think of companies that could greatly benefit from the reopening of America, should we think of your firm?

Yes, Tim, this is Jasper. From a capacity standpoint, we're well prepared to be able to handle the increased demand. Some of those product lines like food service, for example, have dedicated equipment. So if we get back to normal levels, the equipment that we have will be sufficient to meet that demand. And we've always been continually investing on our retail side, either through rigid packaging like PET jars, cans or standup bag. So I think we'll be -- we're in good shape on capacity.

And you mentioned Planters, and hopefully, there's some disruption there, but their last calendar year had sales of roughly $1 billion of those Planters product lines that were sold. And the sales price was around $3.35 billion, cash. Your last fiscal year, you had you had sales of around $0.9 billion. And your market cap and the stock market is around $1 billion; very little debt. There seems to be a vast difference in valuation of what the market was paying for Planters and what the market is paying for your firm, what do you think can be done to narrow that gap? Do you think just more investors need to find out about John B. Sanfilippo?

Yes. So Tim, one of the big things, and we were surprised at the multiple was paid for Planters. It's a great brand. It's the heritage brand. I think Hormel will do a nice job with it. But I think when you look at our comparison in profit, but in valuation, brands are important to investors, as we all know, high margin, much better control in some cases over -- or the future growth of the brand. And so as we continue to build our brands across our portfolio, in addition to complementing our private brand and industrial business and contract packaging business. I think that's where we'll see that multiple start to grow. The stronger brands that we can have, the stronger market share, the bigger distribution we have across the country, I think the stronger multiple you'll see in the company.

Well, thank you for all your hard work. It's great seeing it pay off. Congratulations on a great quarter.

. I'm showing no other questions at this time.

Okay. Since there are no other questions, thank you again for your interest in JBSS, and this concludes the call for our third quarter of fiscal 2021 operating results.

Thank you again for participating in today's conference call. You may now disconnect.