John B Sanfilippo & Son Inc (JBSS) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Q2 2004 John B. Sanfilippo & Son earnings conference call. My name is Jean, and I will be your conference coordinator today. At this time, all lines are in a listen-only mode. After our presentation, we will open the call to questions. (OPERATOR INSTRUCTIONS)

At this time, I would like to turn the call over to the Chief Financial Officer, Mike Valentine. Sir, you may proceed.

Good afternoon. Thank you for participating in the JBSS quarterly conference call and webcast for our second quarter of our fiscal 2004. I would like to start off by giving some highlights for the quarter. As you probably have seen, our sales are up $33.3 million, or 24 percent -- again, this is for the quarter. Gross margin as a percentage of net sales was up slightly -- in dollars, our gross margin dollars are up about 25.7 percent. Selling and administrative expenses are up slightly. In terms of percentage of net sales, they're up 0.4 percent, and in total dollars, they're up $3.4 million. Then finally, net income is up 26.8 percent. It was a record quarter in that respect. It went from $8.2 million to $10.4 million.

So at this point, I would like to pass this on to -- or open this up for questions. Joining us today is Jasper Sanfilippo, Executive Vice President of Operations; Jeffrey Sanfilippo, Executive Vice President of Sales and Marketing; and Jim Barker, Senior Vice President of Sales and Marketing.

(OPERATOR INSTRUCTIONS) David Rosen (ph), Whitney and Company.

Hi, good afternoon. A couple of quick questions on some of your end-markets. I was just wondering -- I know peanuts are a fairly large part of your sales. And I know Wal-Mart is one of your largest customers. And you guys have been able to increase your margins on that. I was wondering if you saw any pressure from Wal-Mart or other of your customers in trying to reduce your price? And I have a couple of follow-up questions.

Okay, I think it's pretty safe to say that, regardless of whether we're talking about peanuts or any other product, there is always interest on our customers' part to lower our prices.

Have you seen any kind of pressure on that in the near-term, or something that you would expect --? Or do you think it's just -- you think that you can maintain the current margins?

Well, we're not sure what the future is going to bring in terms of our ability to hold our prices. But as you can see, at least for this quarter, we have convinced our customers that our prices are fair, and that -- I don't think they see any need right now -- or at least, historically speaking, to challenge us on that.

Okay. I have a question on the almond front. I know almond prices have actually gone up pretty significantly since, I guess, probably when you guys contracted with your growers -- and I know you do it on a pooling basis. I was wondering if there is a risk that you guys will have to make additional payments to those growers, and whether or not you factor that into your cost of goods sold currently?

Well, we -- and as we have disclosed, we do buy our almonds on a pooling basis. And with a lower supply, you know, there is always that risk. We feel that at least as of the end of this quarter, we have fully factored in that potential risk in our standard cost for almonds.

Great. And I guess a couple of questions on the other two lines. Pecans -- the market for pecans looks great. It looks like pricing has held out a lot better than I'd expected, which is really wonderful. And I was wondering if you felt the same way, or if you were a little bit anxious about where pecan prices are going?

Okay, David, I will turn that one over to Jeffrey Sanfilippo, who is our pecan expert.

I don't know about expert, but -- yes, we are actually surprised that the prices have held out as strong and are getting stronger as we speak. The consumption in pecans has been dramatic, just like it's been with most other nut types. So, you know, with the smaller crop coming in this year, the prices just escalated based on the -- especially the current USDA estimate (ph) coming in about 1.7 million pounds less than predicted in November. So we continue to watch the strength in the market and on the consumption growth, as well.

And then I guess finally on the mixed nut side -- I know pricing on all of that has gone up. And I know most of that you actually contract out because you don't -- a lot of that aren't U.S.-based crops. And I was wondering if you think that you'll be able to pass on some of that costs to your end customers?

Well, you're certainly right. The markets on (ph) some of the key components of mixed nuts are up -- and in some cases, are up pretty dramatically. We have always attempted in situations like this to pass on our commodity cost increases to our customers. It is a long, drawn-out negotiating process, and we're certainly working on that right now. How it's going to turn out -- you know, I just can't predict that.

Okay. And the final question is -- I know you guys have changed around the way that you report your revenues. And I was wondering if you looked at your revenues this quarter kind of on an apples-to-apples basis on how you were reporting in the past, what your revenues would actually have been?

Okay, we actually did not disclose that, so I cannot give you that information. But I can tell you, if this will help you -- for the first quarter of fiscal '04 versus the first quarter of fiscal '03 -- oh, I'm sorry, first quarter of fiscal '04, that adjustment was $3 million. And for the first quarter of fiscal '03, that adjustment was roughly about 2.2 million dollars.

So roughly -- and I kind of did this -- I actually did that analysis earlier today. So that's about roughly 2.5 to 3 percent.

Yes, I think it calculates out that way.

Patrick Winton, Sterne Agee.

Hi, guys. Can you talk about what we saw and some of the benefits that we achieved last -- in the second half of last year versus what you're currently seeing in the market and as that relates to kind of year-over-year comparisons as we begin to think about where we're going in the second half of this year?

Okay, and Patrick -- when you're talking about benefits, are you talking about consumption? Anything specific there?

Consumption, operational efficiencies, capacity -- and I think you pretty well covered some of the commodity benefits that we have had.

Okay.

Patrick, this is Jeffrey (technical difficulty) consumption (ph) side or at least is (indiscernible). And we picked up a lot of new customers in fiscal 2003. And some of the double-digit growth that we're seeing today is a result of that new business we picked up, as well as the increase in consumption really across all the different business channels that we sell into. And we expect that to continue.

You know, last quarter, a lot of the growth came from what I would term pure organic growth. Was that the same for this quarter, or did we see the addition of some new clients?

No, for the most part, the new -- the growth this quarter has been just organic growth.

Okay, and can you touch on where we are at in terms of capacity? I know we are getting up there.

That is correct Patrick. We're well utilized, especially in the Chicago area plants. And when we get into the last four months of the calendar year, which is what we define as our busy season, we well near -- or reach full capacity during that time frame.

Peter Park (ph), Park West Asset Management (ph).

Can you help us understand what you think the cost of peanuts might be for the next couple of quarters?

Well, actually, that's pretty much fixed right now. And it should be pretty close to the statutory loan rate (ph). Of course, then next fall -- then we start over.

Got you. And then separately, can you help me understand what the components of your cost of goods are?

Well, roughly 80 percent of our cost of sales are raw material costs. And then probably the second largest component would be labor.

Larry Bernstein (ph), Amber Mountain (ph).

Thank you. I noticed in your S-3 (ph) today that management is going to be selling a million shares of stocks. Can you explain their motivation?

Yes, the selling shareholders -- a sizable amount of their wealth is tied up in the company, and they just need to diversify.

So it doesn't represent a change in their forecast of the company?

No, no. It's -- the selling shareholders -- most of them are executive officers -- are in here for the long haul. And we still maintain control of the company.

Great. My next question has to do with gross margins. Gross margins have been picking up since last year. What is your expectations for gross margins going forward?

Well, that will be dependent on what happens with some of these key commodities, especially the ones that go on mixed nuts, and of course, cashews. Those commodities are on the upswing. And as we discussed in a previous question, it will be very important in this respect to get some of these costs passed on and get some price increases.

Right. When I reviewed last quarter's conference call, you talked about the critical variable being the prices paid for peanuts and the other nuts. And then during the quarter, in fact, prices went up substantially. So is it fair to say that you've been able to pass it on? Or are these previous prices already locked in, and we don't have a flavor for how it will affect margins in the following quarter?

Actually, our -- with the exception of almonds, most of the costs of our raw materials stayed pretty much the same as they were in the first quarter. It's really January forward where those increased markets are really going to have an impact.

So it's still uncertain as to how these nut price increases will pass itself through?

That's right. And the main reason is -- again, with respect to the increases -- almost all of these increases are being driven by demand, not supply. So if demand continues -- and I'm talking about worldwide demand for nuts -- as it has been, those costs will continue to go up.

Right. You know, I'm not that familiar with the nut business over the long term. You guys have been (technical difficulty) in business for obviously several economic cycles. How -- what is the normal gross margins for your business? And what do you think it will -- its long-term sustainability is, in terms of what that number is?

Well, up until this year, where we've experienced the amount of growth that we've experienced, they probably are about maybe 1 to 2 percent lower than what we have seen today -- assuming the same kind of peanut costs that we're paying right now. Where it's going to go in the future -- as we look at our historical numbers, you see that it can bounce around quite a bit. And again, that reflects the fact that some 80 percent of our cost of sales are in our raw commodities -- or come from raw commodities. So it's difficult to predict.

I also imagine the transportation expenses are also very important. Do you include that in your raw material costs?

You're talking about transportation cost to get the raw materials in?

Yes.

Yes. That is correct.

And is that number -- I know that rail and trucking prices have gone up sharply this year. Has that affected business or your margins?

Well, actually those costs have been going up probably every year for the last four years in some sort of significant manner, so it's definitely a meaningful number. And yes, it always affects our business.

And my last question -- I was reading your S-3 risk factors, and you mentioned that one thing you were concerned about was if customers started buying bulk nuts through the Internet. Can you comment at all if that market exists, and how that would affect your business?

Well, we weren't specifically talking about bulk nuts, but -- and this has already occurred. Customers do put their business up for bid on the Internet. And it does take some of the selling out of the selling process, which we think we're very good at. So that's one of the reasons why we're concerned about that.

This is Jeffrey. On the other side of that coin is it also opens up opportunities for us, and accounts that we were not able to get into or didn't have a relationship with -- when they do go out on the Internet, we have been able to pick up business going through those bid processes, as well, because we're such a low-cost producer of a lot of the different nut items.

One last question -- you also discussed that you were considering combining some of your Chicago-based plants. What are your plans there?

Okay, that's in the very early stages. I do refer you to S-3, and you can read a little bit more about that. But, again, let me stress we're still in the very early stages of that project.

In the context of your earnings, it doesn't sound like your capital expenditures are that material. And that -- this being kind of way out in the future, it doesn't sound like that big of a deal. Is that a fair assessment?

Well, I think you are right. Our capital expenditures generally are more kind of depreciation-type level. But, you know, a project like this will be substantially more than that.

Peter Park, Park West Asset Management.

Can you give us an update on the DOJ subpoena? Have you complied with their information request, and have they come back with anything else?

You know, we have no update on that. We do have a discussion of that, again, in our S-3, and I refer you to that. Whatever is in there is basically the latest information we have on that.

Got you. How often do you set prices with large customers, such as Wal-Mart or Costco?

I'll let Jim Barker, our Senior Vice President of Sales and Marketing, answer that question. (multiple speakers)

Typically, we go through with all of our customers on private-label a 1- to 3-year review of prices. And we come to an agreement. If it's a 1-year, it kind of regenerates itself on an annual basis. If it's longer than that, we have periodic reviews is done on a predetermined (indiscernible) -- basically (ph), we go in and review (ph) commodities and take (ph) the necessary adjustments.

On Fisher, we really don't get into set prices. We have a set continental (ph) pricelist. And then the promotion program out (indiscernible) other brands in the industry. We adjust that once a year based on our fiscal year.

Got you. So the next adjustment that you'll do for Fisher, for instance, is in the middle of the year?

I'm sorry. I didn't hear you.

So the next time you do a price adjustment for Fisher is in the middle of the year?

Yes, the middle of the calendar year, which would be the beginning of our next fiscal year, typically.

Okay. Separately, will you do a roadshow for the offering? I'm sorry -- can you hear me?

Yes, one second, please. Peter, we really would prefer not to discuss what we intend to do as far as marketing the offering goes (ph), since we're in the registration period Right now.

Okay. And last question -- after you do the offering, will you still need to potentially raise capital for the potential plant consolidation in Chicago? Or would you just do sort of just straight bank financing for something like that?

I think we go into some detail about that in the S-3 in the facility. I think we have a section in facility consolidation where we talk a little bit about that. It's a little bit -- at this point in time, it's difficult for us to actually say for certain how that's going to work, because we are still studying the project and accumulating numbers. And we haven't quite yet fixed completely what that whole project is going to cost.

Do you have a timeframe for when you're going to tell shareholders what that plan is going to be?

No, it's still a little too soon to say on that. It's a very complicated thing -- at least as it looks right now. And it's going to be difficult to say when that's all going to be nailed down.

Thank you very much.

(OPERATOR INSTRUCTIONS) I am showing no questions at this time. Sir, I'd like to turn it over to you for closing remarks.

Okay, again --

I apologize, I have a follow-up question from Gene Rowe (ph) of CRI Investors (ph). Did you want to take it at this time?

Yes.

Why are accounts receivable up so much?

Because our sales are up.

Not 73 percent.

Well, we had quite a lot of sales near the end of the second quarter.

Super -- so the third quarter should be wonderful.

What's that?

The third quarter should be wonderful.

Well, we'll see.

No questions at this time, sir.

Okay. Again, I'd like to thank all for participating in our quarterly conference and webcast. And I hope you all have a good day.

Ladies and gentlemen, thank you for joining us on today's call. You may now disconnect.