John B Sanfilippo & Son Inc (JBSS) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the fiscal year 2005 earnings conference call. My name is Carlo and I will be your coordinator for today's presentation. At this time, all of our participants are in a listen-only mode and we will be facilitating a question-and-answer session towards the end of today's prepared remarks. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mike Valentine, Chief Financial Officer. Please proceed, sir.

Thank you. Thanks, everyone, for participating in our quarterly conference call for the year end and fourth quarter of fiscal 2005.

Before we start, we want to remind everyone that we make some forward-looking statements today. These statements are based on our current expectations and involve risks and uncertainties. The factors that could negatively impact results are explained in our recent SEC filings and we encourage you to refer to these filings to learn more about these risk factors.

Starting with the income statement, for the quarter, net sales grew 16% to $144.1 million from $124.5 million in the fourth quarter of 2004. The primary drivers of sales growth in the quarter were -- there was one extra week that accounted for almost one half of the overall sales increase; prices were higher in all channels when compared to prices in the fourth quarter of 2004; volume increases in the contract packaging and industrial channels also contributed to the sales increase. Though overall unit volume was down slightly when factoring out the extra week in the quarter.

Net sales for the fiscal year grew 12% from $521 million to $582 million, and this increase was primarily attributed to the same factors that drove the quarterly sales growth, though volume was down in the industrial channel for the entire fiscal year.

Additionally, volume increases in food service channel contributed to sales growth in the fiscal year. Again, as was the case with the quarter, overall unit volume was down slightly in comparison to volume for fiscal 2004 when factoring out the extra week. So gross profit dollars increased 8% in the current quarter over the previous year's fourth quarter. The current quarter gross margin profit as a percentage of sales was 14.3% versus 15.3% a year ago. The quarterly gross margin declined because of higher commodity costs in comparison to a year ago, especially in the case of pecans, macadamia nuts, hazelnuts and walnuts. The increased costs of these nuts also led to a sizable decrease in mixed nuts gross margins, which are typically one of the top contributors to our gross margin. Gross margins improved on cashews and almonds during the quarter.

A shift in sales mix towards contract packaging and the industrial distribution channel, which typically carry a lower gross margin than the other channels, also led to the decline. Additionally, the fourth quarter gross margin was favorably impacted by an increase in our estimate of in-shell pecans on-hand at the end of the fiscal year, as we have now nearly shelled out the 2004 pecan crop, which leads to a more accurate estimate.

Fiscal year 2005 gross margin as a percentage of net sales declined from 17.6% in 2004 to 13.5%. As was the case for the fourth quarter, the fiscal-year gross margin decline was costs primarily by higher tree nut costs and a shift in sales mix towards the industrial and contract manufacturing channels, which again typically delivered lower gross margins than the ones we get in the other channels.

Fourth-quarter selling and administrative expenses were relatively unchanged as a percentage of net sales when compared to the fourth quarter of 2004. The savings from the absence of incentive compensation costs, which are tied to EPS, were mostly offset by increases in corporate governance and advertising expenses.

Selling and administrative expenses for the fiscal year declined from 9.8% in fiscal 2004 to 8.9% in the current fiscal year. Again, the absence of incentive compensation costs, coupled with the fact that certain expenses remained relatively fixed in relation to sales increases, led to the decline in the percentage.

Interest expense increased in the current quarter by about $1.4 million over the fourth quarter of fiscal '04. Interest expense for the fiscal year increased by about $560,000 over the previous fiscal year. Higher borrowing levels for both period comparisons, which were caused by higher inventory levels and the issuance of the $65 million long-term debt facility in the second quarter, coupled with higher interest rate on the revolving credit facility, led to an increase for both period comparisons.

Net rental and miscellaneous income increased by approximately $547,000 in the quarterly comparison. This increase was mainly generated by rental income earned on the property purchased from Panasonic in the fourth quarter.

Net income was relatively unchanged for the quarter at $3.5 million. For the fiscal year comparison, net income declined from $22.6 million to $15.5 million as a result of lower gross margins, which were again mainly caused by higher tree nut costs during the year.

Diluted EPS fell from $2.35 a share in '04 to $1.35 for the current fiscal year. With the exception of almonds, tree nut markets began to stabilize in the fourth quarter and in some cases, such as with pecans and cashews, we are now seeing signs that the market for these nuts may decline in calendar '06.

Looking at the balance sheet, inventories have increased by approximately $90 million with pounds up about 36% while the total value was up 71%, demonstrating the impact that higher tree nut costs have had. Inventories of almonds, peanuts, walnuts and cashews were up in both dollar and pound terms.

Our notes payable is up significantly too, as our revolving credit facility rose with the inventory increase.

At this time, I would like to ask Jeffrey Sanfilippo, our Executive Vice President of Sales and Marketing, to give us a brief update on the facility consolidation project.

Thank you, Mike. Our new headquarters and facility consolidation project is moving forward on schedule. The Company purchased a 100-acre site located in Elgin, Illinois, which is about 26 miles west of our current headquarters. The property formerly owned by the Matsushita Panasonic Company consists of two main structures. One is a 400,000 square feet office building, of which about 160,000 square feet is being leased back by Panasonic. The remaining office space is being marketed to potential tenants at this time.

The second structure is a 656,000 square feet production and distribution building. We just broke ground this week on a 330,000 square foot expansion to this building.

Once completed, we will begin installing new state of the art manufacturing equipment and then start the process of moving out of the six facilities we currently occupy. This past quarter, the Company also actively marketed our existing buildings in Elk Grove, Arlington Heights, and Des Plaines, and were successful in finding strong buyers for all the locations.

We got orders of intent signed and are about to begin due diligence. Each property has a lease-back period, which coincides with our consolidation schedule in order to prevent any disruptions to our business.

Thank you, Jeff. At this time, I'll ask Jeff Sanfilippo and Jim Barker, our Senior Vice President of Sales and marketing, to make a few comments pertaining to the various distribution channels.

This past quarter, as Mike mentioned, and really the entire fiscal 2005 has been a challenging and a successful time for the Company and the nut industry. Never before have we seen historical all-time high commodity prices, not just for one but four major nuts types -- almonds, Brazil nuts, hazelnuts, and pecans. At the same time, we were successful in maintaining our strong base customers and growing sales and volume in channels such as food service, contract packaging and industrial. The Company was focused on reducing expenses where we could and passing through price increases were necessary without jeopardizing the customer relationships and hurting consumption. Looking at each channel, I'll let Jim start out by talking about the consumer division.

Thanks, Jeff. When you look at the consumer channel, overall consumer volume, when you factor out the extra week, was up in dollars for both the quarter and the fiscal year, but was down in units. Our success in dollars was driven by the Fisher brand. Our slow, methodical approach to working on distribution growth across all retail channels continues to work, as reflected in some of the Nielsen reports that have been shared over the past quarter, and we continue to improve in the marketing and sales execution of the Fisher brand.

Private-label volume is down. The units continue to be down and that's driven by retailers continuing to be reluctant to promote private label in light of the closing of the retail gap between Planters and also a change in their merchandising mix for the various items where we are seeing a shift from tree nuts because of the higher cost back to peanuts.

When you look at AC Nielsen, also, the growth continues to slow in both the snack and baking nut categories. For the 52-week period ending July 30th, which are the most recent numbers, unit growth in snack nuts for the twelve-month period is up 4.1%, but we continue to see declines in the trailing six and three months. Snack nut unit volume for the six-month period is down 2/10 of a percent and for the three-month period is down 2.7%. So we continue to see the slowing that we had seen over success of our previous reports and we reported on previous conference calls.

Baking nut unit volume also was slowing. For the 52 weeks, it is up 0.9%, but then down 0.5% for the six months, and then we're seeing a recent rebound of 1.3% growth for the trailing three months.

Fisher continues to outpace the AC Nielsen grocery category. When you look at the last three months, Fisher growth was 9.7% in dollars, 4.2% in units versus category overall growth of 1.8 and 2.7. So we are very confident we're going to continue the Fisher volume growth.

We expect unit volume to stay flat to down internally as well as reflected in the AC Nielsen numbers for the near term. We're going to start cycling against some private-label volume losses that occurred last year as we did take some price increases. The promotion mix changes will affect unit and dollar volume, but we expect Fisher to continue to grow in spite of this. Back to you, Jeff.

Thanks, Jim. Moving to the food service channel, and all the numbers I'll give are factoring out the extra week. Quarter sales were up 12.8% in the food service division; fiscal year end up 22.8%. Continue to see strong growth in the food service sector, driven by our top two food service accounts as well as picking up new divisions at chain accounts and also independent distributors in the food service sector. We also implemented several price increases this past year, which account for the increase in sales.

Looking at the pound volume, we saw growth not only in the fourth quarter but throughout the year. We continue to see new products on menus that include nuts and just in general the dollars spent on food are shifting to the food service sector, so we will continue to pursue that channel aggressively.

Moving to the industrial channel, quarter sales were up 19.1%; fiscal year end, were up 17.7%. Sales growth in industrial is primarily driven from increased commodity prices, but we also saw additional volume growth from new customer product launches and increased business with major current customers. The focus in our industrial channel is to continue to work with major food companies to develop product lines that include nuts. In fiscal '05, we provided nuts for over 11 new product launches this year. Fiscal 2006, we're currently working on 19 potential product launches, which may hit the shelves in fiscal '06. These include products for cereals, confections, ice cream, bakery and snack products.

The export channel. For the quarter, export was down 6.4%. What we see in the export channel is, especially into Europe and some markets in Asia, more price sensitivity. So a lot of the customers in Europe reduced the amount of almonds, walnuts that they normally would use as part of their products. The quarter sales were flat. The second factor was the off grades that we did not have available to ship into some of the accounts this past year.

The strong fiscal '05 results of 12.7% were driven by the addition of five large new customers in Europe and Asia, as well as higher commodity prices. We have recently gained strong distribution that will go into effect in fiscal '06 in both France and in Mexico with our Fisher retail products, as well as seeing a lot of interest in the Asian market, for not only Fisher but other product lines as well. We're also going to focus on our food service channel. We began implementing some programs in Mexico and in Canada through the food service channel in our export division.

And last, contract packaging, up 16.8% for the quarter, up 12.7% for the year. Driven by strong growth with several new customers who introduced products that include nuts, but also, we experienced increases with our existing customers as they continue to expand product lines that include nuts with their own products.

Thank you, Jeff. We thank everyone for their time and interest in JBSS. We'll gladly take your questions now. Operator, would you please queue up the first question?

(OPERATOR INSTRUCTIONS). Scott Van Winkle, Adams Harkness.

A few questions. First, what was the dollar benefit in the quarter from the pecan estimates?

We'll disclose that in the K.

Okay.

It was a significant number though.

It was or was not?

Was.

Was, okay. If you look at inventory, it sounded like you said your inventories were up in cashews and pecans. Is that right?

Certainly in dollars. They are up, I think in pounds on cashews, but not on pecans.

Okay. And your almond inventories -- are they lean?

Actually, our almond inventories are up a bit, which is exactly where we want to be as that market continues to rise.

That was my question. I just wanted to make sure that you're up in the products that are probably going to hold price or go up and down a little bit in the products that are going to see price decreases.

Right.

And maybe you are going to disclose this in the K as well, but can you give us actual sales dollars by channel?

We'll disclose that in the K, Scott.

Okay. And on the interest expense, it was a little more than I thought. Obviously, the facility purchase had an impact there. Can you run through maybe some guesses on timing of expenditures? And maybe -- talk about those letters of intent you have on the facilities, the three facilities, an idea of when some cash comes in from the sale of those facilities if you can?

Well we don't have sale dates completely fixed yet, but we do hope to have all our buildings sold some time in the next three months.

Okay. So at this point, would you expect interest expense to kind of stay relatively flat on a quarterly basis?

Well, as you know, our inventories are up pretty dramatically compared to a year ago. So that will continue to drive higher interest expenses.

And you're probably going to -- but you're probably going to burn through inventory in the next quarter then build in Q2 again?

That's correct, but we are going to go in with -- for example, you brought up the case with almonds. We're certainly going to go in with higher almond inventories than we have in the past because that's where we really need to be in comparison to the market. So you have to factor that in too.

Okay. And this is probably a question for Jim. How has the mix changed in consumer between private label and branded?

Well, from a merchandising standpoint, you're seeing more people moving from tree nuts, so your mixed nuts and cashews specifically, to peanuts. And then as far as the overall split in just terms of consumption, that really hasn't changed. But peanut dollars are down while the pounds are ahead. Cashews have slowed down and mixed nuts are staying about the same, but there are so many different items classified in mixed nuts, you get some trail mixes and things in that as well.

Now the growth you've seen in branded versus private label for your own business, has that been the same across the entire category?

Well, with branded, our Fisher brand growth is outpacing, as you know. Our private label growth is probably a little bit behind just because if you'll remember, we did walk away from some private-label business last year with some sizable customers where we weren't willing to give price negotiation concessions where it would have hurt our margin. So we're probably trailing the category a little bit.

Okay. And then one last question on the industrial. If we go back six, nine months ago, you guys made a pretty significant effort to not get into any contracts that could put you under water. But industrial has grown right through that. What can you comment on? Have the customers been more willing to be a little less fixed on price? Has the entire channel just grown and everyone has gone up? Has there been less competitive pressure? Just any insight into that trend.

It's really been a combination of things, Scott. One is, we really as a Company have focused on going after more value-added type of customers, where we're moving away from a commodity price sale, and so we're really trying to add value to the product, whether it's a coating or a special roast or a special size. So that's helped us to maintain some margins in the industrial channel. But also just nut consumption in general and the growth of food companies using nuts as part of their product line, especially the four major food companies -- the volume is so large with some of them that unless you're a major manufacturer and you've got quality systems in place and made some of the investments that a Company like JBS has done, there's very few other processes that they can go to for product development. So that's helped us as well, with not only grow the sales in industrial channel, but really maintain and increase our margins.

Great. Thank you.

Bob Simonson, William Blair.

Good morning. A couple of questions. Again, back to that question on interest, you had about 2 million in the fourth quarter of interest expense, but you ended the year with about 4 million. Could we be talking about a doubling in your interest expense in the current fiscal year?

No, I don't think so. And the reason is is that with commodity costs leveling off or coming down in calendar '06, that probably wouldn't be the case.

So somewhere between 2 million and 1.5 million a quarter? Something like that?

Bob, I can't nail it down to the dollar like that, but I think a doubling of the interest expense is unlikely, given the direction we think commodities are going.

Okay. And do you have the numbers for CapEx and depreciation for what they were in the year just ended as well as an estimate for this year?

I can't disclose those now, Bob, but as you probably expect, you'll see that in the K.

And how long does it take you to get that filed?

We're planning on filing that second week in September.

Second week in September. Okay. And will you include in that or are you willing to chat about now some general guidance for where you would like to be in this new fiscal year? You have got a lot of volatility in this past year.

Well, you know, as you know, Bob, we typically don't give guidance and it's probably a good idea we don't, as what we have seen over the last six quarters. So I don't expect we'll do that. But we may make some mention of the direction commodity markets are going and if we have some good visibility there.

Okay. Thanks very much.

Greg Macosko, Lord Abbett.

Thank you. The pound volume on inventory was up 36%, I think you said. Is the level of inventory now, given some of the changes in the business and obviously the way you're dealing with almonds, do you expect that -- what kind of a level in terms of a -- do you expect that to experience over the next year time frame?

Well, I think -- well, if we're talking pounds, we expect to buy more pecans this year, simply because it's going to be a bigger crop. We're going to buy more peanuts this year because it's a bigger crop. Almonds, it will be a slightly smaller crop, but I think we've got a good start on our purchasing there, so that may go up in pounds. Certainly, there's a big demand for a lot of these nuts on the industrial side and we need to be in a position to take advantage of those opportunities.

And if I heard right, just overall in terms of, particularly in the consumer side, peanut volumes were positive?

Peanut unit volume growth is positive, yes.

And I would assume that the margins on that business are perhaps below the average for the group?

Now, are you talking about our margins or --?

Yes, the margins on the peanuts.

Peanut margins have been very stable over the last two or three years. So essentially unchanged for us.

Okay, but as a factor in the mix, is that a positive or a negative?

That would be a positive.

Okay. And then looking forward, in terms of the advertising and promotional expenses, that's up, or is it relative to, as a percentage of sales? Or is that stable? Give me a sense of that in the consumer area.

Advertising is up as a percentage of sales, and that's just a factor of the additional Fisher distribution that we've gotten to support that. Promotional activity, Jim?

Well the promotional activity on a trade basis, it is up, as we are trying to gain merchandising events to drive short-term and hopefully long-term volume. And also, as we've increased markets, we've increased both our support marketing expenditures as well as just a general marketing and advertising to promote the brand, (technical difficulty) awareness (technical difficulty) people will buy the product as we open up new distribution.

Is -- can we look at or consider advertising as a percentage of say the consumer distribution? Is there a range that we should look at going forward?

There is, but I'm not ready to talk about that today.

Okay, thank you very much.

Stephen Weiss (ph), Mindflow (ph) Capital.

Thank you. A couple of questions. As an investor, (inaudible), it seems like you guys are doing very well by opening up new channels for sales and obviously, that's shown by the sales volume increase you guys have shown. What's more concerning to me and I'm sure to a lot of my fellow investors as well, margins have steadily declined. And what I'd like to know -- obviously, commodity costs are what they are -- what are you guys doing in the future now, since that's a big concern, to handle your supply chains -- reduce supply chain costs and overall distribution logistic packaging costs and just get those margins up where they should be?

Okay. Well, first of all, we think the facility consolidation project itself will benefit margins -- certainly make us much more efficient on the manufacturing side. But at the end of the day, almost 80% of our cost of sales come from raw commodity costs, and in most cases, there's not much we can do about controlling those costs. There's no way to hedge commodity purchases in our industry.

Right. We all know that; commodity costs are what they are. How are you looking at driving your total supply chain and taking into account freight, packaging, everything so those actually commodity costs with your suppliers can be -- you have better options? How are you looking at your total supply chain?

We certainly take steps constantly to reduce our packaging costs. For example, by finding new packaging structures that are cheaper, but yet effective. Jasper Jr. could probably add to that.

Yes, we currently, at all of our shelling plants, due to the high commodity costs, when we lose a percent of the shelling plant, has a much more impact on our financials. And we're currently looking at new technologies and always looking at ways to reduce our yield to get more pounds through the plant more efficiently. The supply chain, as it relates to getting the raw, inbound materials into our plants, our plants are currently located in very strategic locations across the country to minimize the transportation costs into it. For example, having a plant in California and the Central Valley, where we could receive walnuts and almonds, I believe (ph) from both the southern valley and the northern valley; having our pecan shelling plant in the heart of Texas, where we could receive crop both from west Texas, New Mexico as well as Southeast; having our peanut shelling plants in a growing area for both the Virginia as well as the runner type. We are constantly looking at ways. The thing that we think that will affect our margins and the yield is really new technologies and new developments in the shelling plants themselves.

And are you guys looking at any type of volume breaks or long-term contracts with these buyers to keep prices stabilized? Do you know down the road what your prices are or what are you guys doing?

No, the grower base that we deal with as well as the grower base in the industries are very reluctant to do forward contracts.

Okay. And how are you guys handling distribution costs? Has that been a concern? Is that a priority and challenge for you guys?

Well we certainly have increased -- part of our price increases to our customers has been our increased freight as well as gas prices.

So you're trying to just basically pass along those to the customers. Are you looking at more of a customer facing by definition rather than looking back in the supply chain, or --?

Well, the other thing we're doing too is we have distribution facilities in Selma, Texas and in Gustine, California, which we have expanded, both from a distribution capability and manufacturing capability so that we can manufacture our goods closer to where our customers are in the Western part of the country to help offset some of these increased distribution costs.

Okay. And it sounds like you guys have a lot of great initiatives on board (ph). When do you foresee these really being shown in the bottom line? I mean, when do you actually see margins improving because of these great implementations (multiple speakers)?

In the case of the facility consolidation project, it's going to take about three years. We will begin to see benefits from that starting in year two and then it will ramp up until it's completed. As I mentioned before, we are going to increase our distribution capabilities even further in Selma, Texas and Gustine, California to service our Western United States customers, and that is probably about a year to two years out.

Right. I really like it when I hear it sounds like you guys have a lot of good challenges you are accepting and facing head on. Final question then, I guess a little concern to myself and my fellow investors, are there any other challenges or concerns regarding costs that you guys are going to tackle head on and how are you going to plan to tackle those?

Well, outside of commodity costs, which, again, I think next year will be easier than it was this year, certainly, freight costs are rising dramatically, as you know. I'm just looking at some numbers here. It's becoming a significant part of our selling expense and we are going to need to continue to work with our distribution company that we outsource our distribution with to get fuller truck loads and take advantage of some of the efficiencies there. Jasper, do you have anything to add on that?

So, you know, we're in the process of continuing to evaluate our visibility to our third-party logistics partner to increase the number of LTL trucks that we can consolidate into full truckloads as well as continue to send more freight from California via rail versus over-the-road trucks.

Okay. Perfect. Thank you very much. I really like what I'm hearing. Continued success down the road.

Scott Van Winkle.

Going back to the question that was towards Jim on marketing, I realize you didn't want to give out the number, is it a significant percentage of your selling expenses?

No.

Thanks.

Bob Simonson.

Jeffrey, you went a little bit fast on your discussion of the update on the consolidation. I can get some of those numbers from the transcript, but I don't think you updated us on the completion date -- your best guess on the completion date for the project.

Okay. The completion date for the complete move will be December of 2008. That means we'll be out of all of the current facilities, completely up and running in Elgin, Illinois. So the time schedule is, we broke ground this week on the expansion. We expect to complete the expansion by spring of 2006, at which time, we will start expanding manufacturing over there and begin shipping potentially in late spring, summer of 2006. And then we'll begin to move from the current headquarters in the end of 2006 and then the other facilities will follow suit. So the complete move will be scheduled for December of 2008.

Okay. And Mike or Jeffrey, can you -- a lot of the expenses are obviously capitalized, but can you give us some guidance as to what expenses associated with the consolidation went through, in dollars, went through last year, and did it go up or go down this year?

Actually, I'm going to turn this one over to Bill Pokrajac, our VP of Finance, and he can give you, directionally anyway, what kind of numbers we have capitalized.

In the project?

For example, interest expense coming in.

Yes, just very minor amounts. It hasn't been significant whatsoever on those costs; it's just been a few thousand dollars, really. It hasn't been a significant number.

In this past fiscal year?

Right. That's correct.

And is that likely to be the -- through the years until you do complete or is there (multiple speakers)?

Well no, as we invest, it will go up.

The other thing, Bob, too, to realize is that we're not going to flip the switch in December of 2008 and then we're in service. This will actually be -- we'll see some capitalization building up and then it will start to come down simply because we're going to putting this facility in service in phases.

I assume from an accounting standpoint, certain expenses have to run through the income statement as incurred, and those are the ones I'm wondering whether that's an appreciable number in this current fiscal year. It sounds like it wasn't much last year.

No, there really wasn't much in '05. In '06, like for example, all of the equipment that we start to put in place in fiscal '06, if it's not in operation, we're not going to see any depreciation on that. So and same with some of the interest that goes with it. Yes, '07 is where you're going to start to see a lot of expenses start to hit the P&L.

Okay. Thank you, Bill.

Brian Black, LAMB Partners.

Two questions. One is, at this point, do you guys -- I hope you consider your stock to be undervalued, and if so, given what we think is capacity on your balance sheet, would you consider buying back or stepping up a buyback? And -- or I guess I'll just take one at a time.

Well, as far as the buyback goes, as you know, we've raised quite a bit of capital to fund this project. We are not ready to reverse course in that respect. We're really going to stay focused on the project and use that capital to bring the return on that (technical difficulty) expect.

Do you think that there's -- obviously, the project makes sense as the priority use of balance sheet capacity, but do you see sort of additional debt capacity to utilize for a buyback, or that sort of taps you out?

No, I don't think it taps us out. There's more capacity, but what is left, we want to keep that as dry powder in case an acquisition opportunity arises or there's another substantial capital expenditure that makes sense for our business.

And given that we're -- I understand given the volatility of the business it's difficult to make any real -- to give guidance, but given that we're the bulk of the way through the new quarter, can you give us a sense on sales and gross margins qualitatively on what's going on?

No, we can't do that.

All right, thanks.

Gentlemen, we have no further questions at this time.

Okay. Thank you, again, for your time and interest in JBSS.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.