John B Sanfilippo & Son Inc (JBSS) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for your patience. Your conference will begin shortly. Good day, ladies and gentlemen, and welcome to the Q1 2004 John B. Sanfilippo & Son earnings conference call. At this time, all participants in a listen-only mode, with a question-and-answer session to follow the presentation. My name is Mike, and I'll be your conference coordinator today. If at any time during the call you require assistance, please press star followed by 0, and a conference coordinator will be happy to assist you. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Chief Financial Officer, Mike Valentine. Please proceed, sir.

Thank you, Mike. Participating today will be Jeffrey Sanfilippo, Executive Vice President of Sales and Marketing, James Barker, Senior Vice President of Sales and Marketing, and Jasper Sanfilippo, Junior, Executive Vice President of Operations. At this time I would like to make a brief statement about forward-looking statements. The contents of today's presentation may be forward-looking. They are based on the company's current expectations and involve risks and uncertainties which could cause the company's actual results to differ materially. Please refer to the company's most recent press releases and SEC filings for further discussion of these risks and uncertainties. As some of you may know, John B. Sanfilippo is a leading processor and packager and distributor of nut products and peanut products. In addition to those items, JBSS also processes and packages candy and other snack items. JBSS, Inc. sells its products into the consumer, industrial, food service, export and contract manufacturing distribution channels, and primarily those items are marketed under a myriad of private labels and also the Fischer brand.

The purpose of today's call is to discuss the results of our most recent quarter, which is our first quarter of fiscal 2004. So at this time I would like to make a brief presentation on that. As many of you have seen in our press release that went out on Tuesday, or excuse me, yesterday, sales were up 31%, earnings per share was up over 328%, and I will also point out that this was a record for our first quarter. And at this time I would like to open up the call for any questions that any of the callers may have.

Ladies and gentlemen, if you wish to ask a question, please press star-1 on your telephone. If your question has been answered or you wish to withdraw your question, please press star-2. Once again, if you would like to ask a question, please press star-1. Please stand by for the first question. And the first question comes from Patrick Winton, with Sterne Agee & Leach. Please proceed.

Thank you. Great quarter, guys. Just a couple questions. One, in terms of capacity, where are we at off of this quarter. Obviously, it was a good quarter and a lot of volume coming through the business. Mike, can you review that, where we're at on capacity?

Sure, Patrick. As you may have seen in our 10-K, many of our facilities are well utilized, and that would be primarily our primary production facilities here in the Chicago area, and also our Selma, Texas, pecan shelling facility. So with this additional growth over and above last year, we are getting near the top there on capacity. On peanut shelling, we still have quite a bit of excess capacity.

Okay. You know, I was in the fortunate position to be with the company last year during that exciting time. Can you just give us some anecdotal evidence, I mean, how does this year, how is this year shaping up in your view, compared to last year?

Well, I think the first quarter is certainly going to be very different from the first quarter last year and a lot of that has to do with the fact that we now are in the new peanut program where we weren't in the 2003 first quarter. So, after this quarter, we'll start cycling again for the benefit that the new farm bill brought us. So they'll start to look a lot similar to what you saw last year in that respect.

Okay. And clearly there's been a number of articles out there, including the FDA giving the claim to nut consumption, for consumers. What's your sense on other potential positive press or, you know, where are we going with the overall view on the nut consumption?

I'll let Jim Barker handle that question as he is most familiar with consumers.

As you look at the health claim, not only are the health claims out there for the consumers, not only to learn from, but also to act upon. So a number of our customers in the retail channels that are trying to leverage that through increased promotional activity as well as increased education and awareness to try to drive people into the nut categories and nut-related products. So, we think that the health message is going to be a key contributor to future growth within the snack nut and baking nut categories.

Okay, great. And Mike, can you comment on the competitive landscape, particularly in terms of the industrial sales segment. I mean, I think we're all very familiar with the private label, the competitive nature in the private label business, but how does that relate or what's kind of the outlook for the competitive landscape for industrial sales?

I'll let Jeff Sanfilippo take that question.

For the competitive landscape we've seen a lot of consolidation, obviously with our industrial customers on the food processing side, and you've seen the same type of consolidation on the supplier side, but we're in a very strong position with our vertical integration to provide peanuts, pecans, almonds, walnuts to customers that used to buy from four or five different vendors. So on the industrial side, the competitive landscape, I think we're positioned well to take advantage of the consolidation that we're seeing.

Okay, great. Hey, keep up the good work, guys.

Okay, Patrick.

And our next question comes from David Mudd, with Heartland Funds. Please proceed.

Good afternoon, guys.

Good afternoon.

The previous caller asked a lot of my questions. I guess the one question I have is there's really very good growth across the board on all parts of your distribution. Can you kind of add some color as far as what may be driving that going forward and opportunities you see in some of -- some of your various channels?

Okay, David, I'll start with Jim Barker on consumer.

As we look forward in the consumer division, based on AC Nielsen data as well as customers on the retail channels, merchandising plans indicate, we see the categories continuing to grow. When you look at the AC Nielsen data for the Food/Drug/Mass channel, the category has grown in snack nuts 9.9% in dollars and 8.3% in units, and that's representative across all nut types and on nut blend types. In the baking nuts, while a smaller growth, still grew 3.1% in dollars and almost 1% in units. So we see the categories growing within consumer and when you couple that with our customers looking to increase distribution on some items or do increased merchandising plans, we see the Nielsen trends to continue.

And then Jeff Sanfilippo will take export, food service and industrial.

In the data on the food service side, what we're seeing is not a lot of huge growth in the sector, but we are seeing a lot more consumption or usage of nuts in the food service sector, with chefs using nuts in different recipes, people are eating out more, so there has been some growth in that sector, and we expect that to continue. On the export side, with the success of our facility out in California, we have got a lot of opportunities with our almond processing to pursue new business in exports. Also, with the weakness of the dollar we've seen substantial growth into Europe [inaudible]. On the industrial side, as Jim alluded to with the health benefits, we're seeing a lot more food manufacturers using nuts in their products, whether it’s ice cream or cookies or bakery items. So we expect to see continued growth on the industrial sector as well. Thanks, Jim.

David?

Yes. One other question that I had was related to the impact of the new farm bill in terms of your margins going forward. Can you talk how that may play out for rest of the fiscal year?

Well, we have a pretty good sense of what the peanut crop looks like this year, and it is a very large crop, so we feel like there should be some good stability in our cost in that respect. As far as how we -- at what prices we sell those at, that's still somewhat of a question mark and I'll let Jim Barker talk a little more about that.

Okay. Well, as far as peanut or peanut-based items within the consumer channel under both branded and private labels, we anticipate pretty much following the same trade marketing plans as last year. We continue to see growth in peanuts. Peanuts have grown 5.2% in units, and 3.2% in dollars, according to AC Nielsen. It still commands the lion's share of the snack nut consumption across the Food/Drug/Mass channels.

Okay.

Thanks, Jim.

Okay, thanks, guys, that's all I have for now.

Okay, Dave.

Appreciate it.

Okay.

And our next question comes from Scott Van Winkle with Adams, Harkness. Please proceed.

Hi, guys. A couple questions. First, how do you market the health benefits of nuts? I mean, recognize there's a claim that's out there, but how do you get the consumers to understand that?

Jim Barker.

There's a couple of things. First off, a number of the nut boards have developed some continuity marketing programs to consumers, specifically the almond and walnut boards continue to spend money targeting promotions that retailers and we tried to piggyback on. Also, as retailers, or our retail customers are looking to get the message out, we're working with them on different point of sale campaigns to try to get that out. And also, secondary placement, where nuts could be merchandised such as [inaudible] items, possibly within diabetic type centers or NCAPS and things like that. And then finally, as the FDA is allowing some qualified claims, we're looking at ways to try to incorporate that in the packaging as well as collateral material to support our private label and Fisher brand.

I would, just to add to what Jim said about getting the claim on our packages, there are several packaging initiatives out there that we have to follow in the next 12 months, specifically trans-fatty acids and we would prefer to make all those changes at one time just to keep our costs under control. In addition to that, we may have to state the country of origin for peanuts. So all of that is out there, too, and we hope to do that all at the same time.

What is the trans–fat profile of your products?

Our products are not roasted in hydrogenated vegetable oils so there will be no trans–fat issues with our products.

Is that the case for peanut butter in general? If peanut butter had trans-fats, you’d kind of get thrown into a bad group?

Peanut butter does have a minuscule amount of hydrogenated vegetable oil in it as a processing aid, but it does fall within the de minimus exception, so there will be no trans-fat issues there either.

Okay. And the sales internationally, Mike, could you give us an idea of how much the currency benefited you in the quarter?

Well, we sell in dollars to every customer except one in Canada. So, you know, I'll let -- Jeff knows a little more about export sales than I do. Jeff, can you tell us if that helped us at all?

[Inaudible] mainly in Europe. We didn't really see growth in the Asian market. Just in Europe, where the Euro is so much stronger than the dollar.

Is Europe a big piece of sales? Small piece?

In this quarter, Europe actually did play an important part in our export distribution channel.

Okay. And back to consumption. The entire snack category, the salty snack category has been generally pretty good over the last year or two. It sounds like this category, the nut category, is growing faster. What do you think it's displacing, if anything?

Jim?

I don't know if it's displacing anything, because you don't see any reduction in retail customers, frequency of other categories. I think the retailers are recognizing the power of nuts, as you've got a larger retailer trying to grab the lion's share of that business and the fact that nuts carry a much – or on average, a higher average dollar range than other snack type categories, and it has displayed very good growth for the last number of years so retailers are putting that more in their mix and actually expanding the overall aisles, merchandising plans and programs.

Okay, thank you.

Okay.

The next question comes from Jeff Feinberg with JLS Asset Management. Please proceed.

Thank you very much, and congratulations, guys, on the terrific execution. A couple questions, the first probably for either Jeff or Jasper. I'm just curious, in terms of the history of the nut business, looking back over a couple decades, if you will, has there been any similar time period with the precedent we have, and I guess two major macro-secular drivers with both these protein-related diets, Atkins and the like, as well as the health-related benefits that you all are alluding to, both coming into a confluence of factors at the same time.

We'll give that one to Jeff, Jeff.

Part of the increased growth percent is obviously we're seeing advantages from the health benefit, but also just the investment we've made in the manufacturing, especially on the almond side. We're able to take advantage of the health benefit and go after new customers and also grow our current business, just on almonds just because of increased capacity we have out there.

Okay, but I'm just curious, it sounds like there's some major, I guess, big picture drivers that would cause this to have a real sustaining multiyear factor. Are there any periods, looking back in the history of the nut business, that would be analogous?

No, this is definitely is in a class by itself this year.

Okay. And just knowing the business as you all do, it sounds like these types of things don't typically peter out after a few quarters. This has a longer tail wind to it.

Well, we're no expert in dietary, what would be the word, I don't want to use the word fad, but trends, so you probably know as much about that as I do.

Okay. The second question, I just wanted to get a little perspective on was, obviously you had some terrific results through the September time frame. If you can just update us all here on the format in terms of how things are progressing in terms of October and the forward look.

Well, we don't want to get into any specifics, but right now as we see consumption numbers, you know, feedback from our customers and feedback from Nielsen, consumption is still holding steady.

Meaning the strong kind of growth that you had experienced?

So far it serves us well, you know, so we're optimistic.

Okay. Thank you very much.

Okay.

And the next question comes from Greg Hillman with First Wilshire Securities.

Hi, Greg.

One question about new products. Under the Fisher label, I think you had like a trail mix or something like that. How is that doing? Do you have any other exciting new products?

Greg, I think you're talking about the Nature's Nut Mix. Jim Barker will take that question.

As far as the Fisher Nature’s Nut Mix, it was an item that was developed last fiscal year and launched to try to take the best of the health benefit message of various nuts and a few dried fruits and package those and try to communicate eating this would have a positive health benefit. We've had some good success not only with that item but also variations of it under a few private labels, and we're very optimistic about that item, and as we get some more data, depending what the data says, we look to a sustained distribution.

How many markets are you in with that and is it primarily a private label thing or a brands thing?

It is both actually, we have two private label items that we're tracking right now, and on the Nature's Nut Mix we have it in two markets but not in 100% distribution.

So that gives you a lot more [inaudible]. Are you trying to promote it?

Are we trying to promote it? We're trying to promote it within the mix of the category, and trying to gauge the incremental sales and consumption that it is bringing back to the category.

Okay, and could you just talk about segment percentage like for brand and private label food service, industrial, export, et cetera, could you break that out?

As far as the category goes?

Yeah, for the last quarter.

Okay. We have not disclosed the exact percentage of our total sales mix. Those all make up [inaudible] and we'll discuss that further in the queue.

Don't do any kind of segment reporting?

No, we don't do segment reporting in the sense that I think you're talking about, but we do report what percentage of sales each of our distribution channels makes up of our total sales and we report that every quarter. So you'll see that in a few weeks.

Okay. And could you talk about just the top, let's say the top five nut categories. Do you know what the pricing was, this year versus last year, in terms of what you're getting? I don't know, that might be – maybe, let's say, in the private label category, or I don't know, your branded category, or food service or could you give us some sense of that?

Well, we prefer not to discuss, you know, our approach -- pricing approach with our customers.

Okay. How about for what you buy the nuts at? I mean, you've only really talked about peanuts. How about some of the other categories, have you been getting better pricing?

Okay, I'll let Jasper Junior take that one.

We have seen a consistent trend within the last several years where the supply of all our major commodities, perhaps with the exception of pecans, has continually grown dramatically, and I think part of that is I think a little bit more science on the farm and part is a lot more new acreage coming into fruition. Other origins are certainly planting a lot of nuts in their countries, and as a result of that, we have seen much larger supply. Now, one of the effects that the weak dollar had was put a tremendous amount of demand on our crops sold into Europe, primarily almonds and walnuts, and it has had a positive effect on the supply as well as having a corresponding effect on pricing. So, the general trend is they are becoming more efficient in the field, but it is not that more efficient where it's making up the significant increase in demand.

Okay. So basically, the reduced price at the farm level is not being necessarily translated to a reduced price in the stores?

Well, I can’t really speak to that, but in terms of our purchases with our growers, obviously they're making significant investments to produce that higher yield per acre, but the demand that we have is really outstripping that increase in efficiency.

Okay. Great. And one last question, if I could, please. You know, Mike, I think in the past you said on the private label side, when you win a lot of customers, usually that cycles out because your competitors bid stronger in subsequent years to win some of the customers back, so the customers rotate back and forth. And you've had a lot of wins lately. Have you been losing some customers in private label, when the empire strikes back?

No, we have not lost any major private label customers, but -- if you look at it over a long-term period, market share is pretty constant among the various suppliers.

Okay, well, except the fact that you have Wal-Mart. Wal-Mart is growing faster than the other people, so you must be growing as a percentage of the private label business.

Unfortunately, Wal-Mart doesn't share their scanning information, so, you know, that would be a pure guess on our part, but theoretically you're probably right.

Okay, fine. Thanks very much.

Okay, Greg.

The next question comes from Ron Strauss with Peckin Singer. Please proceed.

Thank you. At the rate you're going, gentlemen, you're going to be out of debt in -- over the intermediate period of time. What are you planning on doing with all the cash you're going to be building up?

Well, Ron, you know, you're right on long-term debt side, but we'll still be in on the short-term side, we'll still have some debt there to fund our working capital needs, so that's where it will go.

Okay. And you talk about consolidating your physical facilities. Which ones are you consolidating, how much is it going to cost, when are you going to do it, et cetera, et cetera?

We're actually studying the consolidation of our Chicago area facilities, and we're not that far in the process yet where we can answer the rest of those questions.

Is there any risk to earnings once you do it?

We're still studying the whole thing.

And what share of the category does private label have?

Jim will take that question.

Private label in the snack nut category and baking nut category fluctuates between about a 20 to 25 share of the category depending on reporting period, and reporting cycle over the last few years.

And your share of that sector is what now? Roughly?

It's hard to say because private label is reported as one number, and because large retailers like Wal-Mart and Costco and other channels don't report in. It would be a guess that I believe I would miss, so I'd rather not guess.

Okay, thank you very much.

Okay, Ron.

Once again, ladies and gentlemen, if you would like to ask a question, please press star-1. Please stand by to see if there are any further questions. And we have a question from Greg Hillman with First Wilshire Securities. Please proceed.

Mike, this is a follow-up question about your packing lines. You know, in Costco, they have a real good mixed nut thing that's in like a big plastic jar thing, do you have a packing line that can do that same big jar thing?

Yes, we do.

When did you get it?

We installed that during fiscal 2003.

Okay, are you utilizing it yet with any of your customers?

Yes, we are.

And it's just for other mass nuts retailer type guys?

That's correct.

And do any -- I notice the nuts at Costco taste better than the nuts in Wal-Mart, but in terms of the mix but I think that's intentional. Do you have any customers that are asking for like a high quality mix that you can get in a retail store?

Jim Barker will take that question.

We have a number of customers that we're either in development on or have rolled out upscale or unique mixes under our private label brands. So, that trend has started and continues across various pack sizes.

And does Wal-Mart carry a high end mix that you make?

I believe, you know, when you look at private label, all of the mixes are to the specifications of the customer that they carry under their label. So, I believe all of them are good quality mixes.

Okay, thanks very much.

Okay, Greg.

And we have a follow-up question from Patrick Winton with Sterne, Agee & Leach. Please proceed.

Thanks. Just real quick, guys. And I know Mike, we don't want to go into specifics in terms of guidance and we're going against tougher comps from last year, but is it conceivable that we could replicate a similar performance that we had last year?

Well, I think, you know, obviously anything's conceivable. I would say that consumption is really going to be the key, and as you've seen and what you all know about dietary and nutritional trends, there's certainly good reason to be optimistic. The one thing I want to stress, though, is that as far as our profitability goes, it's very dependent on what happens in the market for the crops that we shell. Those crops are not harvested yet. They're in the process of being harvested and those markets are not established yet, and that really will determine, you know, whether we have another astoundingly profitable year like we've had so far, or whether things are more normal.

And some of that placing takes place in the month of December. Is that correct?

I think, well, with the exception of pecans, I think most of the markets will be established in December, pecans may be more like January or February.

Okay, thank you.

Okay.

And we have a follow-up question from Scott Van Winkle with Adams, Harkness. Please proceed.

Just basing on this earnings in the quarter and again, I don’t want to push you on guidance, what is the seasonality, quarter by quarter, if you could run through percentages Q2, Q3, Q4 from here? You know, pickup, drop off, sequentially, anything like that you can guide me towards?

As a general rule, we'll see obviously the bulk of our sales will be in Q2, and then followed by Q1. Q2, you know, probably I'm going to use a rough calculation here is probably somewhere in the neighborhood of 35-40%. And then, as I said, Q4 and Q1 are very similar quarters. Sometimes I've seen Q1 outpace Q4 and I've seen Q4 outpace Q1, but for the most part they probably combine to make up maybe another 40% and then Q3 would pick up the balance.

And profitability, obviously, you know, higher volumes means more leverage. Is there any seasonal change in your cost structure?

You know, as far as -- you're probably right, volume definitely will be a determining factor in our cost structure, as we absorb more overhead cost. In addition to that, you know, Q1 is always -- Q1 and the early part of Q2 are very important points during the fiscal year where we do establish new standard costs for the crops that we shelf. So they can be pivotal, too.

A couple questions before, it was asked about the mix and higher quality. Would it be fair to say that peanuts are making up a smaller percentage of the mix year after year?

Well, you would think that peanuts, at least in dollar terms will start to slip in terms of percentage of our total sales, simply because their prices have come down under the new farm bill. We hope to make that up with increased volume, and you know, one of the arguments that we're making is that we should promote peanuts more so that we can maintain that volume and maintain that revenue.

Thank you.

Okay.

We have a follow-up question from Greg Hillman with First Wilshire Securities. Please proceed.

Mike, could you comment on that lawsuit thing on the part of the farmers against I guess the shellers?

There really have been no new developments other than what you've read in the press release that we issued on that matter.

Okay. Okay, that's what I wanted to hear. Thanks very much.

Okay.

There are no other questions at this time, Mr. Valentine. Please proceed with your closing remarks.

I would like to thanks everyone who participated and those who also joined us on the webcast in our first earnings conference call, and we look forward to speaking with you all next quarter.

This concludes your conference call. Thank you for your participation today. You may now disconnect.