John B Sanfilippo & Son Inc (JBSS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2007 John B. Sanfilippo & Son Earning Conference Call. [OPERATOR INSTRUCTIONS].

As a reminder, ladies gentlemen, this conference is being recorded.

I would now like to turn the presentation over to your host for today's call, Mike Valentine, Chief Financial Officer.

Sir, please proceed.

Thank you, Mike.

Thank you everyone for participating in our quarterly conference call for the third quarter of fiscal 2007. We may make some forward-looking statements today. These statements are based on our current expectations and involve certain risks and uncertainties. The factors that could negatively impact results are explained in our various SEC filings that we have made. We encourage you to refer to these filings to learn more about these risk factors.

Joining me today on the call is Jeffrey Sanfilippo, Chief Executive Officer; and Jasper Sanfilippo, Jr., Chief Operating Officer.

Starting with the income statement, the current quarter net sales declined by 10.1% to $107 million from $119 million for the third quarter of fiscal 2006. The decline in net sales is almost completely attributable to a 9.5% decline in pounds shipped to customers, as our weighted-average selling price per pound declined by less than 1%.

Sales in the consumer channel fell by $5.2 million and pounds shipped declined by 1.6 million pounds. The declines are attributable to a loss of a major private label customer in the fourth quarter, lack of promotional activity primarily at a major customer, and to a lesser extent our decision to discontinue unprofitable non-nut items at another major customer in the latter part of fiscal 2006.

Partially offsetting the private label decline was an increase in Fisher sales and pounds shipped of 15% and 7%, respectively. Fisher sales increased primarily because of new baking nut distribution obtained chain in the proceeding and current quarters. Sales in the industrial channel declined by $5.1 million and by 2.5 million pounds. Sales declined because of the volume decline as the weighted-average selling price remained relatively unchanged. A decline in pounds of raw peanuts sold to other peanut shellers primarily led to the decline in pounds shipped in this channel.

Sales and volume in the food service channel remained relatively unchanged. Sales in the contract-manufacturing channel declined $400,000 and pounds shipped declined by 900,000 pounds. The declines in this channel are attributable to lower promotional activity and the decision on the part of our customers late in the second quarter to discontinue some items.

Export sales declined by $1.3 million while pounds shipped remained relatively unchanged. The sales decline is mainly attributable to a 10% decline in the weighted-average selling price as the product mix shifted towards lower priced inshell walnuts from higher priced shell tree nuts. Pounds shipped of mixed nuts and peanuts in all channels, two of our highest margins items, declined by 16% and 14%, respectively.

Year-to-date net sales fell from $449 million to $419 million for the same period of fiscal 2006 while pounds shipped declined by only 1.5%. The 5.4% decline in the weighted-average selling price was the primary driver of the sales decline in the year-to-date comparison. The weighted-average selling price per pound for the industrial channel declined by almost 23%, as market prices in that channel adjusted quickly to the decrease in costs of most new Crabtree nuts. Pounds shipped in the consumer channel declined by almost 6%, primarily for the same reason that pounds shipped declined in this channel in the quarterly comparison. Pounds shipped increased in the industrial and export channels in the year-to-date period.

Third quarter gross profit margin increased to 5.6% from 3.8% from last year's third quarter as a percentage of net sales. The improvement in gross profit margin mainly came from increases in margins on the sales of almonds, cashews, and mixed nuts. An increase in the unfavorable overhead absorption variance of $4.5 million partially offset the benefits from improved gross margins for almonds, cashews, and mixed nuts.

The increase in the unfavorable variance was caused by almost a 22% decrease in pounds produced in the quarter compared to the previous year's third quarter, while manufacturing spending increased by almost 7%. Production pounds decreased in reaction to lowest sales volume, discontinuance of the almond handling operation, and a temporary reduction in peanut shelling operations to reduce shell peanut inventories. Additionally, seasonality contributed to the decline in volume in comparison to the first two quarters of this fiscal year.

Manufacturing spending increased mainly because a significant portion of our new facility has been placed into service while operations continue on a large scale at the existing Chicago facilities. The new facility accounted for 18% of our volume produced in the Chicago area facilities during the quarter. We estimate that the redundant costs of operating out of the existing and new facilities were approximately $2.5 million in the quarter. The declines in shipped pounds of mixed nuts and peanuts which delivered the highest gross margin percentages in the quarter out of all the product types that we ship, also contributed to the offset in gross profit dollar terms. Gross margin as a percentage of net sales for almonds improved considerably from last year's negative margins and are now almost abnormal margins.

Year-to-date gross profit margin as a percentage of net sales was 7.4% compared to gross margin of 7.6% for the first three quarters of fiscal 2006. In addition to those items that negatively impacted gross margin in the quarterly comparison, higher tree nut costs in the first three quarters of the fiscal year contributed to the decline in gross margin in the year-to-date comparison.

Reportedly, selling and administrative expenses as a percentage of net sales increased from 10% for the third quarter of fiscal 2006 to 11.3% for the current third quarter. The increase in operating expenses, as percentage of net sales, occurred mainly because of the offset to administrative expenses derived from a gain of $940,000 related to a real estate transaction in last year's third quarter.

Additionally, operating expenses remained relatively fixed in relation to the sales decline. Shipping expenses declined as a percentage of net sales as a result of lower fuel costs and an emphasis on improving consolidation of less than truckload shipments. For primarily the same reasons, the current fiscal year-to-date selling and administrative expenses as a percentage of net sales increased from 9.0% for the first three quarters of fiscal 2006 to 9.3% for the current year-to-date period.

Primarily because of the decline in sales and production volume the operating loss for the quarter was 5.7% of net sales which was an improvement over the operating loss of 6.2% of net sales for the third quarter of fiscal 2006. The operating loss for the first three quarters of the current fiscal year was 2.0% of net sales compared to an operating loss of 1.4% of net sales for the same period last year. Because of higher debt levels and higher interest rates, interest expense increased to 2.9 million from $1.8 million for last year's third quarter. That level has increased in the quarterly comparison, primarily because of the financing obligation related to the Selma facility lease transaction. For the same reason, interest expense increased expense increased to $6.3 million in the current year-to-day period from $4.5 million for the first 3 quarters of fiscal 2006. For the reasons discussed earlier, the net loss increased to $6.2 million from $5.9 million for last year's third quarter. The current year-to-date net loss increased to $9.8 million form $7.1 million.

Taking a look at the balance sheet, inventories at the end of the current second quarter declined by $37.9 million, or 18%, compared to inventory levels in the third quarter of fiscal 2006. Raw nut input stocks declined by $44 million while finished good inventories increased by $4.8 million. Pounds of raw nut input stocks fell by 31 million pounds or 30%. Declines in walnuts, pecans, and almonds contributed to most of the overall decline in raw nut input stocks. The average cost per pound of raw nut input stock declined by 1.3% compared to the cost per pound of these inventories on hand at the end of the third quarter of fiscal 2006. The cost per pound of involving raw input nuts (except pecans and walnuts) declined, and pecan and walnuts, in pound terms, had a higher percentage of the product mix in our inventory than they did in the third quarter of fiscal 2006.

Finished goods inventories increased over inventories at the end of the third quarter of last year as part of our customer service continuous improvement initiative. At the end of the third quarter, we were not in compliance with EBITDA covenant in the note agreement and we were not in compliance with the working capital covenant in both the note agreement and our bank credit facility for each of the three months in the current quarter.

We have requested waivers from both lenders, and at this time we have not received a commitment from our lenders to waive the noncompliances. We anticipate that we will be in noncompliance with these two covenants throughout the fourth quarter.

Now, I will turn the call over to our Chief Executive Officer, Jeffrey Sanfilippo.

Thank you, Mike.

Good morning, everyone. I would first like to start out by saying everyone on the management team is extremely disappointed with the results of our fiscal 2007 third quarter, and I know each of our shareholders and employees reading the Company's press release this morning shares the same disappointment. We have a bright, dedicated group of people throughout this organization working hard to improve our financial performance, cash flow, and sales volume, and we have seen positive results with gross margins increasing, especially in almonds. However, as Mike mentioned, a dramatic drop in sales volume across most of the business channels was unexpected and a key reason for the loss experienced in the quarter. You will notice that the Company included more details in our press release this quarter comparing sales and unit volume by business channel. We felt it was important for you to understand how the current dynamics in the industry are affecting net sales and pounds shipped to customers in each of our business units.

In the consumer channel, the 5.2 million decline can be attributed to three key issues. First, the Company continues to cycle against the loss of a major private label customer, as Mike mentioned, that occurred in the fourth quarter of fiscal 2006. Second, lack of promotional activity on the part of the some of the Company's existing private label retail customers. The brand leader continues to promote heavily in the quarter and maintain retail prices and empower with some of our private label brands. This caused some shifting in volume away from private label to the brand leader. Third, we continue to cycle against the product lines we exited last year in private label such as candy, coconut, and chocolate chips.

Still a decline in the industrial, as Mike mentioned, caused by lower average selling prices and the volume decline was caused by fewer pounds of raw peanuts sold to other peanut processors. Also, contributing to sales and volume declines in the quarter were contracted customers who are lagging a little bit behind last year's shipments in the same quarter. This is a timing issue for these accounts and we expect the sales and [inaudible] volume for these customers will be made up in Q4.

In the food service channel, both sales and volume were down slightly. Competitors in the channel offered higher than normal marketing allowances which drove prices down and put pressure on gross margins. Unfortunately, unit volume did not increase as a result of this increased marketing activity. Lower promotional activity by the Company's contract packaging customers led to decline in net sales and volume in the contract-packaging channel. Sales in the export distribution channel declined as a result of a shift in the product mix in favor of lower-priced inshell walnuts.

Although this was a disappointing quarter, I want to highlight some of the positive trends we see in the snack and baking nut categories, and review the performance of our Fisher brand. Beginning with snack, the good news is that the growth for the last 13 weeks has accelerated with dollars up 4.7%, units up 2.8%, and pounds up 3.3% versus increases from the 52 weeks of 3.8% in dollars, 1.8% in units, and 1.9% in pounds for the last 12 months.

In contrast to the growth that Fisher brand reported last quarter, for the last 52 weeks versus a year ago ending this quarter, the brand is slightly down 2.9% in dollars, 0.4% in units, and 4.5% in pounds but our market share remains stable. The decreased activity in our brand can be attributed to decreased promotional volume and activity over the past 13 weeks. The decline can also be attributed to the conversion of several Fisher SKUs to like private label items at specific retailers. Private label brands have shown solid increases all year and the 3-month trend versus year ago of 9.1% in dollars, 7.3% growth in units, and 10.2% growth in pounds. Reviewing specific nut sites in the snack category, almonds and snack mixes continue to drive category growth, positing double-digit increases in dollars, unit, and pound sales. In contrast, peanuts remain soft with a decrease of 4.9% in pounds in the past 52 weeks versus a year ago.

Moving on to the baking category, the category is still strong. Versus a year ago, dollars are up 4.3% and units are up 2.2%. However, pounds continue to remain relatively flat, with the marginal increase of 1.6%. This can be attributed to price increases that drove the consumer to shift to smaller pack sizes. The Fisher brand versus a year ago is up 26% in dollars, 36% in units, and almost 36% in pounds. These impressive results are primarily due to new distribution secured last year. Similar to last quarter, private label brands in the baking category are also very strong, reporting increases almost twice that of the category versus a year ago, with 8.3% in dollars and 4.1% in unit growth. Private label pound sales are recovering but remain relatively flat with a 0.5% growth.

The Company's strategy, partnering with customers to develop new and exciting programs is demonstrating successful results with the gain of three new private-label product lines this year. First shipments will begin in May for two of the program and we expect sales over the next year to exceed $25 million in new business for the Company in the consumer channel. In addition, our sales and marketing teams are working closely with our R&D department to develop several new value-added products, end-line extensions in our other business units, especially the industrial channel.

I also want to update everyone on the remediation plans discussed in our filings being executed by management to address the Company's [inaudible] status. As you will read in our Q, there were key plans that management has executed. First, was our market review of all items. We have gone through our product lines across business channels, looked at the lower margin contributors, looked at the profitability by customers, and over the past quarter took several price increases at major accounts. We have also initiated a SKU optimization program where we have already eliminated over 200 SKUs of smaller volume or low margin items. Merchandising programs also have been implemented to improve our gross margin, looked at the manufacturing materials we use for our shipper displays, make sure that we drive costs out of those operations and also look at our coupon redemption policy where over the past year we have some abuses in coupon redemption and we put together a strong policy to prevent that in the future.

Turning to operations, two critical plans were the facility consolidation in Elgin. We talked about the almond processing in Gustine, moving out of that manufacturing. Expediting the move to Elgin is something that we are considering at this point. We realize with the lower volume that we have got an opportunity to move out of the current facilities in Elk Grove and Arlington Heights sooner than our original plan, so we are reviewing the options to do that now. We are also focused on operational efficiencies looking at our freight, looking at our packaging materials, looking at ways to drive costs out of operations and we will continue to do that.

In closing, I would like to reiterate that our Company is going to stay focused on our strategies to partner with customers to provide complete nut programs and pursue value-added sales opportunities across all our business channels. We will continue to develop innovative products and packaging to grow our Fisher and private brand business and we will continue to focus on improving our manufacturing facilities to drive costs out of operations. The moving to alternative facility is on schedule. As I mentioned, we are going to look at expediting that move. We believe that these strategies along with the consolidation into Elgin, the investment that the Company has made in food safety programs, quality control improvement, and manufacturing efficiency will provide not only strong opportunities for the Company to drive growth in the future but also improve our financial performance going forward.

At this time, I'll pass the presentation back to Mike.

Okay.

Operator, that completes the opening portion of our presentation. At this time, we would gladly take questions from listeners. So, operator, would you please queue up the first question?

[OPERATOR INSTRUCTIONS]

Scott Van Winkle; Canaccord Adams.

A couple of questions. I guess first -- I mean the things you talked about, you know, the costs associated with the move, some customer losses that have happened in the past, what surprised you this quarter? I mean, did everything kind of play out as you expected, or what was the big difference that caught you by surprise in the last few months?

Hi, Scott. This is Jeffrey. Two things, one is the promotional activity by the brand leader really driving declines that we did not anticipate in a couple major private label accounts. That was a surprise. The lack of growth in our contract-manufacturing channel was a major surprise. We really anticipated a lot stronger sales result in the contract-manufacturing channel this year. Then, third, in the food service channel, we did anticipate substantial growth in that business unit; however, with competitive activity and some of the customers, specifically one major customer putting out an Internet bid last year, driving costs out of product lines but not passing that cost onto restaurants and maintaining that as an in-house program. It did not help drive growth in that category. So, those are really the three critical ones.

What about the cost of the move and duplications of efforts, things like that? Was that all within your plan?

One of things that we did through the quarter is we recognize an opportunity to move some of our larger manufacturing lines which are a bit more expensive to install and when we did that we did incur costs higher than what we had anticipated.

Okay. As you went into the plan for this quarter and the transition, did you expect to maintain compliance with your debt covenants?

By the end of January, we knew we would not be in compliance with any of the covenants, that I mentioned, throughout the quarter and at the end of the quarter.

So, you've been working on this for a while with the bank?

That's correct.

Okay. The expedited move into the Elgin facility given the lower volume, have you kind of worked through how that plays out with all your existing financial commitments on existing leases and all that or any incremental costs that you bear in that regard?

We are currently soliciting bids from contractors to move the equipment that is remaining at the existing facilities. Initially, we had planned on moving that ourselves over roughly a 2-year period. Once we get those bids in, we will have a good sense of what the incremental costs would be. We already have a good sense of what the savings per month by getting out sooner. We will put that together and we will make our decision. I would imagine that is probably 2 or 3 weeks away.

Okay. If you kind of put the numbers together, I saw [inaudible] facility costs, and I saw the numbers in the press release around the impact in gross margins. Can you give me kind of a net impact from all in regards of the cost associated with the move? I guess I am trying to ask you is what would the profit level have been in the March quarter had you not had anything in regard to the new facility, either impact on gross margin, overhead, SG&A? Would it have been profitable?

No. It would not have because of the volume.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS].

Gentlemen, currently no questions on the bridge.

Pardon me, we have a question from the line of Marlan Merhab; Smith Barney.

Just one question concerning the one large, presumably large, private label that you lost the account. Why was the account lost? Have you viewed that in light of what might happen going forward?

I will answer that. We talked about this on past quarterly calls. Obviously, there is competition in the industry. We've got some strong, private-label manufacturers in addition to our Company, and one of those manufacturers provided a value or solution to the account that felt was justified to make the switch. It was not an issue of price. It was not an issue of quality. It was a value proposition that one of our competitors offered the account, and we will add that same account. We are still working with them on pursuing other opportunities in other categories that we provide private label for.

Okay. So, presumably nothing to do with any subsequent problems, if you will, or anything with the crop, but just in the normal course of business.

No.

Yes. Thanks.

Okay. Thank you.

Bruce Baughman; Franklin Advisor Services.

In your disclosures about breaching covenants, and the outlook for covenant compliance going forward, can you give us any idea when, assuming that you're able to get waivers, when you might be able to back in compliance?

As we mentioned, with the third quarter, it is going to be very dependent upon volume, volume growth and also whether it makes sense for us to move out of our new facilities. As you probably know, our business is very seasonally. This is the lowest quarter. Typically the third quarter makes up roughly about 20% of our volume. So, as we just move into future quarters, volume will improve as a result of seasonality. In addition to that, the new customers that Jeff discussed will also be a tremendous boost to our volume in the plants and we expect to be fully absorbed in the first quarter.

Well, if you are fully absorbed in the first quarter, will that generate a level of EBITDA that gets you in compliance?

Well, we have not set EBITDA levels with our note holders for fiscal 2008.

Maybe you can elaborate on that. Does that suggest you don't know what your compliance test will be?

Right. It's our plan to set those with the lenders shortly before the end of this fiscal year.

Okay. Thank you.

Ladies and gentlemen, this does conclude the question-and-answer portion of the presentation. I will turn it back to management for closing remarks.

Okay. Thank you again for your time and interest in JBSS. This concludes our call for the third quarter operating results. Thank you and have a good day.