John B Sanfilippo & Son Inc (JBSS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter fiscal year 2008 earnings quarterly conference call. My name is Jackie, and I will be your operator for today's conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, Mr. Mike Valentine, Chief Financial Officer. You may proceed, sir.

Thank you, Jackie. First, we would like to thank everyone for participating in our quarterly conference call for the first quarter of fiscal 2008.

Before we start, we want to remind everyone that we may 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 various SEC filings that we have made. We encourage you to refer to these filings to learn more about these risk factors.

Starting with the income statement, first-quarter net sales declined by 0.7% to $132.8 million from $133.8 million. Unit sales declined in the industrial, export and contract manufacturing channels. The decline in net sales and pounds shipped to the customers in the industrial and export channels were primarily due to declines in almond and walnut sales.

Almond sales declined during to the discontinuance of our almond handling operation in the third quarter of fiscal 2007. Walnut sales declined due to tight supply of walnuts throughout the industry. Sales in the industrial and export channels also declined as a result of management's decision to delay sales offerings of pecans, almonds and walnuts until cost of these commodities could be better ascertained.

Unit sales increased by 6.5% in the consumer channel and 11.5% in the foodservice channel, primarily driven by increases in both sales, volume and prices. Despite the decline in net sales, the first-quarter gross profit increased by $5.9 million from the gross profit reported in the first quarter of fiscal 2007. As a percentage of net sales, gross profit margin increased to 8.8% from 4.3% from last year's first quarter. The improvement in gross profit came from significant increases in the gross profit margins for sales of almonds, macadamia nuts, walnuts and cashews. Gross profit margins also improved in all distribution channels when compared to the prior year's first quarter.

Although gross profit and gross profit margin improved in the quarterly comparison, the current quarter's gross profit was impacted negatively by the following significant items related to the equipment move phase of our facility consolidation project.

There was a $3.1 million increase in unfavorable labor and efficiency variances over the first quarter of fiscal 2007, and this increase was primarily related to the shutdown and startup costs associated with the movement of production lines that were moved from the existing facilities and installed in the new Elgin facility during the quarter. An estimated $1.4 million in redundant manufacturing expenses also were incurred as production activities occurred at the existing facilities, while manufacturing spending in the new Elgin facility reflected increased production levels during the quarter.

And finally, a $1.5 million cost was incurred related to external contract charges or external contractor charges rather that were related to the acceleration of the equipment move from the existing Chicago facilities to the new facility here in Elgin. By the end of December, we anticipate that the equipment move will be completed and operations at all three facilities will cease.

First-quarter operating expenses as a percentage of net sales increased from 8.5% in 2007 to 9.7% in the current quarter as operating expenses for the first quarter of fiscal 2007 benefited from the gain related to real estate sales. Separately total selling and administrative expenses decreased from 11% to 9.7% as a percentage of net sales, and this was driven mainly by a $1.5 million increase in freight out expense.

The Company benefited from decreased fuel costs in the form of lower fuel surcharges, a shift to customer pickups and improved consolidation of multiple less than truckload orders and to full truckload shipments.

Selling and administrative expenses in the current quarter also included a $700,000 expense for consulting fees related to the Company's profitability initiative initiative and to design the implementation of a new incentive compensation plan.

For the first quarter of fiscal 2008, interest expense increased to $2.7 million from $1.7 million for the first quarter of fiscal 2007. The increase arose as a result of higher short-term debt levels and higher interest rates on both our short-term and long-term facilities. The first quarter of fiscal 2007 also benefited from the $600,000 of interest that was capitalized as part of the construction phase of our Elgin headquarters.

The income tax benefit for the first quarter of fiscal 2008 was limited to $450,000 or 11.3% of our pre-tax loss. The available tax benefit was limited to the net deferred tax liability that existed at the beginning of the quarter. The Company will reflect additional tax benefits to offset tax expense if income is realized in the future.

Before considering the $6 million expense related to the equipment move of the facility consolidation project and the $700,000 for consulting fees that I just discussed, our pre-tax profit for the first quarter would have been $2.7 million.

Turning to the balance sheet, total inventories declined by $20.4 million or 14.3% in fiscal 2008. Pounds of raw input stocks fell by 16.7% or 9.6 million pounds compared to those levels in the first quarter of fiscal 2007. The decline in the quantity of raw input stocks was led by declines in the inventories of peanuts, almonds and pecans.

The average cost per pound of raw input stocks decreased by approximately 13.6% as a result of a change in product mix and lower acquisition costs for almonds, cashews and macadamias. The (inaudible) of our finished goods inventory was relatively unchanged from the first quarter of last year.

In respect to our refinancing efforts, we have received waivers from both of our banks and note holders for all covenant violations that occurred in the first quarter of 2008. For the remainder of fiscal 2008, we are uncertain as to whether we will be in compliance with the EBITDA covenant that exists in both credit facilities, and we do not anticipate that we will be in compliance with the working capital covenant that exists in the bank credit facility.

Consequently we have signed a commitment letter with a new lender for a short-term credit facility and applied for mortgage with a new lender for a long-term credit facility. We expect that both credit facilities should close in fund by early December subject to the completion of due diligence and approval of final loan agreements by the Company's board and by the new lenders. Both credit facilities will be asset-based, and consequently they are expected to contain minimal financial covenants with which we currently expect to be able to comply.

It is anticipated that the expenses related to the refinancing, including prepayment penalties associated with existing credit facilities, will be approximately $4 million, and this will be an expense in the second quarter.

I will now turn the call over to Jeffrey Sanfilippo, our CEO, who will make further comments.

Thank you, Mike. Good morning, everyone. Last year at this time I discussed several initiatives the Company was putting into action to improve margins and focus on profitable growth. Cross-functional teams made up of our finance, sales, marketing, purchasing, and production departments worked incredibly hard to execute these initiatives, and their efforts are demonstrating positive results.

As Mike mentioned, gross profit margins as a percent of net sales increase from 4.3% to 8.8%. Margins improved in all distribution channels when compared to the gross profit margins from those channels in the first quarter of '07. We executed various profitability enhancement initiatives in the past year and made every effort to align our commodity costs with our prices.

Profit enhancement initiatives included operational efficiency improvements, revised procurement strategies, price increases and SKU optimization. The sales and marketing departments have assessed the profitability of over 4000 items and have taken appropriate steps to either initiate price changes or discontinue products.

The production efficiency initiatives included the following. We expedited the consolidation of Chicago area production facilities into Elgin. We discontinued almond handling operation in California, and we redesigned cleaning and processing equipment to improve shell removal and reduce mill loss in our Gustine walnut California operation.

The Company will continue to execute plans to reduce manufacturing costs, manage procurement and improve the profitability of our product portfolio. But we still have work to do. The company is completing a thorough analysis of every product we manufacture to determine where and how we can continue to drive costs out of production. But we will balance these initiatives with one focus, and that is to provide consistent quality and value for our customers.

I want to take a moment to update you on our facilities consolidation project. We are ahead of schedule on the move out of our Arlington Heights facility and will cease production there by November 9. In addition, we are on schedule to be out of our main Elk Grove facility by December 1, and there are only five production lines remaining to move.

Turning to sales by channel, consumer sales increased 6.5%, driven by a combination of increases in volume and prices. Many of the new items we developed over the past six months began shipping in Q1. In addition, there was increased promotional activity for both Fisher and private brand product lines, and we gained incremental sales in the dollar store consumer segment.

Turning to foodservice, net sales increased 11.5% driven again by both volume and price increases. The volume increases are a result of the combination of gaining new customers and expanding the current product portfolio with existing accounts.

In the industrial sales channel, net sales declined and volume declined approximately 16%. We continue to see strong interest in developing new products using nut ingredients, especially in the bakery and snack bar segments, and we are aggressively pursuing value-added opportunities to promote nuts as an ingredient. However, we anticipate sales and volume declines in the industrial channel to continue, especially for almonds, as a result as Mike mentioned, of the Company discontinuing our almond handling operation, as well as for walnuts as a result mainly of tight supplies this year.

We have had several existing and potential new customers across all business channels visit our new corporate headquarters. They are impressed with the capabilities and our commitment to research and development and to assist them in expanding their nut programs through innovation and improved quality. And we are very proud of our customer partnerships, and we are focused on growing distribution and sales in each of our channels.

Now turning to the category updated marketing effort. It was mentioned on the last earnings call, someone asked about the total snack category. In looking at the category, which includes all snacks such as chips, pretzels and nuts as reported by A.C. Nielsen, we show the category and units declined 1.3% to 5.2 billion units.

In contrast, the nut category witnessed a slight unit growth of 0.8%, which signified its overall positive performance versus the total category. And currently nuts represents 17.4% of the total snack, salty snack category.

Although still the largest part of the nut category, peanut unit sales dropped 6.1% versus a year ago. Growth drivers to the snacks nut category included almonds, trail mixes and mixed nuts which were at a 15.2, 6.8 and 3% unit growth respectively.

In looking at the baking category, we witnessed a slight unit growth rate of 1.8% versus a year ago. Growth drivers in the baking category include walnuts, almonds and pinenuts. As we enter the baking season this year, walnuts continue to be the number one nut type with pecans a close second.

We have some exciting marketing news. Our consumer private-label business for the fourth quarter -- fourth year in a row has won the Category Colonel Award. This is a prestigious award and is voted on by the retail community. In addition, we are a two-year recipient of the gold medal in superior taste from the American Academy of Taste. We received this award again for both our retail consumer Fisher products and our foodservice Fisher products.

This past quarter we were able to see the Fisher brand advertising in regional [SSIs], as well as in the Land O'Lakes Holiday Cookie Issue. We are very excited to be entering the last phase of the Pillsbury Bake-Off. To date the Bake-Off has generated over 500 million impressions for the Fisher brand. This past month 100 finalists of the Pillsbury Bake-Off have been chosen. Out of Bake-Off finalists chosen, 37 out of 100 finalists recipes included nuts. It was the number one secondary ingredient.

We found that nuts were not only used in baked goods, but they were also used in every category -- breakfast and brunches, pizza creations, entertaining appetizers and even in Old El Paso Mexican favorites.

Next steps for the cook Bake-Off will be included in store promotions, and the grand prize event will be held in Dallas April 13th through the 15th.

In closing, I want to say we have had several existing -- I'm sorry, in closing, we face significant hurdles. We recognize obstacles to profitability and growth and assessed the considerable strengths that make us a leading manufacturer of nuts. We will continue with our strategies and profit enhancement initiatives to transform our Company into one that will be truly competitive over the long-term.

Thank you. I will pass the presentation back to Mike.

At this time, we will open the call for questions. Jackie, would you please queue up the first question?

(OPERATOR INSTRUCTIONS). At this time, Mike, you have no questions in the queue.

Okay. Since there are no further questions or actually no questions at all, we will conclude the call, and again we thank everyone for your time and interest in JBSS. Thank you.

Thank you, ladies and gentlemen, for your participation in today's presentation. This does conclude today's conference. You may now disconnect, and have a wonderful day.