John B Sanfilippo & Son Inc (JBSS) 2008 Q2 法說會逐字稿

Good morning and welcome to the second quarter 2008, John B. Sanfilippo and Son, earnings conference calls. My name is Stacey and I will be your moderator for today. At this time all participants are in a listen only mode. We will be conducting a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today, Mr. Michael Valentine, Chief Financial Officer. Please proceed, sir.

Thank you, Stacey. Thank you, everyone for participating in our quarterly conference call for the second quarter of fiscal 2008. 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 certain risks and uncertainties. The factors that could negatively impact results are explained in our various SEC filings that we have made. We encourage everyone to refer to these filings to learn more about these risks and uncertainties.

In the second quarter, and early in the third quarter, we completed several profitability enhancements initiatives that had a negative impact upon second quarter results and will have a negative impact on third quarter results. For example we have closed two of the three existing Chicago area facilities; one of which has an existing lease that has not yet expired. We will no longer ship our products to customers through our store-door distribution program, as this mode of distribution is no longer profitable. We anticipate that approximately 50% of the $2.5 million in sales made through this distribution mode in calendar 2007 will migrate to more conventional modes of distribution such as shipping direct to customer distribution centers. We have recently eliminated approximately 1,200 items that were either not profitable or had low annual volumes that caused significant inefficiencies in our manufacturing operations. As a consequence of the completion of these initiatives, we have reduced our work force recently.

The current quarter net sales declined slightly from $177.7 million for the second quarter of 2007 to $177.0 million. Net sales increased in the consumer, food service and export distribution channels and decreased in the industrial and contract packaging channels. Total pounds shipped to customers decreased by 6.7% Decrease in volume was driven by declines in the consumer industrial and contract packaging channels. Volume declined in the sales of peanuts, almonds, walnuts and pecans. Peanuts declined primarily because of increasing prices and a decline in sales of raw peanuts made to other peanut shellers. Almonds declined because of the discontinuance of the almond handling operation in the third quarter of fiscal 2007. Walnuts and pecans declined mainly as a result of lower supplies of these nuts in the market place. Year-to-date net sales fell from $311.4 million to $309.8 million. A considerable decline in the sales of almonds in the export and industrial channels, primarily led to the decline in sales in the year-to-date comparison.

As was the case in the quarterly comparison, the discontinuance of the almond handling operation in the third quarter of fiscal 2007 was the main driver for the decrease in almond sales. Second quarter gross profit margin increased to 13.2% from 10.9% for last year's second quarter as a percentage of net sales. This considerable improvement in gross margin occurred despite the negative impact of the following items that were related to the move of the existing Chicago facilities and our item rationalization initiative. There was a $2.9 million increase in unfavorable labor and efficiency variances caused chiefly by shutdown and start up costs for lines that have been moved into our new facility in recent months. Redundant manufacturing expenses in the Chicago area facilities amounted to $1.0 million dollars. We incurred $.5 million in cost for outside contractors, which were caused by the acceleration of the move of the equipment from existing Chicago area facilities. And we also wrote down inventory that was associated with discontinued items in the amount of $300,000. Before considering these items, gross profit margin for the current quarter would have been approximately 15.8% of net sales. . Gross profit margin increased in all distribution channels except the contract packaging channel in the quarterly comparison. Price increases for peanuts, walnuts and mixed nuts and lower acquisition costs for all other major commodities except pecans led to the improvement in gross margin.

Year-to-date gross profit margin as a percentage of net sales increased of 11.3% from 8.1% for last year's second quarter. As was the case in the quarterly comparison, improvement in gross profit margin for the first two quarters occurred despite the negative impact of $10.4 million for unusual cost associated with the shut down and start up of the move production lines, redundant manufacturing expenses in the Chicago facilities and the acceleration of the equipment move. Before considering the negative impact of these unusual costs the gross profit margin for the current year-to-date period would have been approximately 14.7% of net sales. In the year-to-date comparison gross profit margin improved in all distribution channels and sales of all major commodities except pecans. Quarterly total selling and administrative expenses as percentage of net sales decreased from 8.7% for the second quarter of 2007 to 8.6% for the current second quarter. The decline in total selling and administrative expenses was driven mainly by a decrease in shipping, distribution and broken commission costs. The decrease in these expenses was mostly offset by an increase in compensation expenses and $200,000 in consulting fees related to the item rationalization and store door migration initiatives.

Operating expenses also included 1.4 million in restructuring charges that were related to the closing of one leased existing Chicago facility and the migration of our store door distribution operation. Included in the restructuring charges is an expense of $1.2 million which is our current estimate of our portion of the underfunded multi employer pension plan that covers our unionized store door route drivers. We expect that this amount will be paid in fiscal 2009. We also anticipate that we will incur $600,000 in additional restructuring charges in the third quarter for store door truck lease terminations and for severance costs related to the item rationalization and store door migration initiatives.

The year-to-date total selling and administrative expenses as a percentage of net sales decreased to 9.1% from 9.6% for the same period last year. Total selling and administrative expenses for the current year-to-date period include $1.0 million in consulting fees related to the item rationalization and store door migration initiatives. Lower shipping distribution and broker commission costs led to the decline in total selling and administrative expenses as a percentage of net sales. Because of higher short-term debt levels and higher interest rates, interest expense in the current quarter increased to $2.6 million from $1.8 million for last year's second quarter. Short term debt levels increased because we were not in compliance with certain financial covenants in both our short term and long term credit facilities. Under these circumstances and pursuant to the inner creditor agreement, we could not pay down our short term credit facility from operating cash flow without being required to pre pay a portion of our long term credit facility. Because of this restriction, we also had a significant amount of cash on hand at the end of the current quarter. For mainly the same reasons; interest expense increased by $1.9 million in the year-to-date comparison. The improvement in gross profit primarily led to 159% improvement in net income in quarterly comparison.

Looking at inventory, inventory at the end of the current second quarter declined by approximately $19 million or 12% compared to inventories on hand at the end of the second quarter of fiscal 2007. Pounds of raw nuts on hand declined by 23 million pounds or 26% in the quarterly comparison. Primarily because of significantly higher peanut and walnut acquisition costs, the weighted average cost per pound of raw input stocks increased by 7.4%.

On February 7th we completed the refinancing of our bank credit facility of long-term note. Refinancing will result in a third quarter charge of $6.7 million which is comprised primarily of pre payment penalties and write-offs of deferred financing fees. The new credit facilities consist of $117.5 million revolving credit facility secured by inventory, accounts receivable, machinery and equipment, intellectual property and also includes a $45 million mortgage secured by most of our real estate assets. The new revolving credit facility and the mortgage contain minimal financial covenants with which we expect to comply during the remainder of the current fiscal year. At the time of closing, the weighted average interest rate for the new facilities was approximately 110 basis points lower than the weighted average interest rate that existed for the refinance credit facilities.

At this time I'll turn the call over to Jeffrey Sanfilippo, our CEO who will provide additional comments on performance in the current

Thank you Mike. Good morning everyone. I appreciate your interest in our company. Although we still have a lot of work to do, it is evident that the initiatives the Company executed over the past year are beginning to demonstrate positive results. It has been a challenging time for our company, but through the hard work, commitment, and effort of all of our employees, we are pleased and proud of the 159% improvement this quarter.

Let me briefly summarize the profitability enhancement initiatives we executed. First, expediting the consolidation of our Chicago area facilities into Elgin, we are now done moving two facilities. The lines remaining at the third facility will be moved by the end of fiscal 2008. We eliminated the cost of duplicative inventories and personnel, and also reduced transfer freight costs between plants. In addition, the resources dedicated to moving the lines faster helped insure smooth transitions for production. The most difficult production line to be relocated was our peanut butter operation, which moved from Elk Grove Village to our Bainbridge, Georgia facility. We successfully moved the operation within a 45 day time period without supply disruptions. And are now producing excellent quality Fisher and private brands peanut butter in Georgia.

We commented on restructuring initiative in our press release. One of the most difficult decisions,as you know, a management team makes is restructuring an organization, but it was necessary for our company to look at all business channels and react to changing customer needs. The migration of our route distribution system to warehouse programs was an evolution that occurred over the past several years. Our major customers service through direct store delivery moved to receiving goods to their own or third party warehouse programs. The division which once consisted of 60 trucks on the street had been reduced to just six trucks this year. And although I believe it is the best way to service the nut program, especially baking nuts with such a wide assortment of items,the system was costly and unfortunately became unprofitable. In addition to looking at distribution channels, the Company also completed an extensive SKU rationalization initiative. Items were evaluated based on sales volume, order frequency and profitability. As a result of our analysis, 1,200 items are being eliminated. Sales of these items were approximately $20 million, but represented almost 50% of production work orders. While several items had similar pack sizes where we will transition those customers to another GBS product we, do anticipate a decline in sales from customers purchasing the unique items we discontinued. As a result of this initiative, the Company recorded a restructuring charge before taxes in the amount of $1.4 million. As a follow-up to optimizing our product portfolio across all channels, the company also initiated new requirements for developing new sales programs and new items. We set forth establish minimum order and volume requirements which we believe will maximize the efforts of our sales and marketing departments and better utilize our human and financial resources. This initiative will also allow us to dedicate more time and capital to build the nut programs of our valuable customers.

Turning to our sales for the quarter, there were positive increases in the consumer food service and export channels. Our sales teams have continued to develop key partnerships with major retailers, restaurant chains and international distributors and food manufacturers. And their efforts showed strong results in the quarter. The sales teams are supported by an expanded research and development department in our organization. We are working closer than ever with customers on new product development and product line extensions. The games and consumer food service and export channels were partially offset by declines in the industrial and contract manufacturing channels. In the industrial channel we experienced declined in almonds as a result of the Company discontinuing our almond handling operation as we have talked about in the past.

Let me take a moment to comment on top line trends in the snack and baking nut categories at retail and also our Fisher brand. The entire nut category,inclusive of snack, baking and produce has grown 3.62% in dollars over the last 52 weeks. This is being primarily driven by the produce and baking categories which grew 8.3% and 4% in dollars respectively. The snack nut category remains stable with a mild 1.6% increase in dollars. The Fisher brand witnessed a total dollar volume decline of nearly 16.8% versus a year ago appear AC Nielsen. This decline can be attributed to lower Fisher promotional activity rates versus a year ago, and in addition, an increase promotional activity rates from our direct competition. However we anticipate this number to rebound as we increase our promotional activity to a level that is indicative of the total category. The Fisher brands marketing activities increased over the past quarter and we were awarded some very exciting new business. We have generated over 13 million consumer impressions due to our PR efforts. An additional 1 million impressions were seen for our print efforts.

As you may know, the Fisher brand is a sponsor of the Pillsbury Bake-Off. In December, the finalists were an announced and we are excited that over 30% of the finalist recipes included nuts. This is a clear indication of the importance of nuts for not only snacking, but for baking and cooking. New product placement included three new Fisher SKUs placed in a major mass retailer's in line set, as well as nuts promotional programs for our Fisher Fusion snack nut line and honey roasted peanut product. Also Fisher secured a co-branding opportunity in food service channel as well as eight new products. And lastly, private label grew with the addition of nearly 20 new items to various retailer mixes.

Our sales and marketing departments are more focused than ever on developing strong partnerships with our key customers. They continue to have tools and resources necessary to provide value and build nut programs for our key partners around the world.

In closing, the second quarter results showing 159% improvement over the last year are significant. The Company has made difficult, but necessary changes to our business model and we will continue to execute strategies to improve our financial performance and provide improved products and services to our valued customers. The three key areas we will focus on in the coming year are improving our manufacturing efficiencies in our Elgin facility; we are going to focus on driving sales volume through targeted growth opportunities across all business channels, and we are going to continue to focus on managing both packaging and raw material inventory levels. We have strong momentum going forward and we appreciate your participation in this call and interest in our company.

I will now turn the call back over to Mike for closing comments.

At this time we would like to open the call to questions. Stacey, could you please queue up the first question.

(OPERATOR INSTRUCTIONS)

Please be patient while we assemble the list. Your first question comes from the line of Adam [Strauss] with PSS Asset Management. Please proceed.

Hi. Good morning.

Morning.

I would like to better understand some of the volume trends you're seeing. Excluding the items that you discontinued what kind of volume decline did you see during the quarter?

Well, this is Jeffrey. It was a combination, we're seeing volume declines in the industrial channel as we mentioned mainly pertaining to almonds, as we exited the almond handling operation we were doing in the past year it reduced the amount of by-products that we generated in processing almonds. So we see volume declines as a result of not having those by products in our inventory to sell.

I guess what I'm trying to ask is forgetting about the items you discontinued, for the items that you have this quarter and also the items that you were selling a year ago, what kind of volume trends are you seeing?

Overall, from consumption trends as I mentioned, it's the category's relatively flat, the snack category. Our volume declines are coming from as I mentioned, well the almond handling, but also we are seeing some flatness in pecan volume pertaining to pounds, walnut volume pertaining to pounds, just because of the lack of availabilities of those products in our inventories.

Okay, great. Also a question about the adjusted gross profit margin of 15.8%. Is that a good representation of the kind of gross margins you expect to generate in this new facility during the busy season or are there further improvements we should expect to see going forward?

Adam, there are further improvements. We do have a lot of work to do on efficiency, which we think can add some significant benefits to our margins. And I think Jasper

Good morning, Adam. The amount of resources that we had dedicated to moving our existing equipment out of our old facilities has now been reallocated to work with the new work force or substantially new work force or substantially new work force that we have in the Elgin facility as well as going back and fixing some of the equipment issues and transitional issues that we had on the lines as they stood in Elk Grove. We have a relatively new management team that we have hired from the outside that we think has the expertise and the experience to drive a cultural change in our operation with respect to starting up on time, minimizing production waste and driving the efficiencies. The organization is also spent a lot of time creating production reporting tools and we have gone in and 5S'd four out of our five facilities to make the operation more efficient. We really have spent a lot of time visually communicating where the production lines are at at any given hour to continue to bring that heightened awareness of production goals and on top of that we have also put a lot of information out departmently with our managers with respect to where their spending and production pounds are at year-to-date so they can give a better overview of what the staffing plans need to be. The Company's gone through a lot of activity with respect to forecasting and we have driven that forecast down into our production planning to give better visibility to our scheduling and our purchasing group and material management group to make sure we're carrying the right inventories, carrying the correct amount of inventories and scheduling production runs that are efficient on production lines rather than some of the small production runs that we have suffered in the past.

Great. Thank you, I appreciate that. A couple questions for Mike. What was the Company's operating cash flow and CapEx during the quarter?

The operating cash flow was about $30 million, $35 million and the Ca Ex for the quarter was about $4 million.

Okay, great, thank you. And do you have any asset sales remaining which could become a source of cash for you this year?

Well, we do have the original site that is currently held for sale. We do have an agreement with a buyer on that property. There are a couple other smaller properties that we're looking at as far as selling possibly in fiscal 2009.

And do you have any sense as to what kind of cash you're likely to generate from those asset sales?

From the original Elgin site, it will be more than $5.7 million that we currently have on the books. The other two properties we have not gone far enough down in the process to make that determination.

Okay, thank you very much. Appreciate it.

Thank you.

Bye.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Joe Christifano], Milwaukee Private Wealth Management. Please proceed.

Hey guys, thanks.

Morning.

In reference to the refinancing that you did what kind of savings can we see through the interest expense next quarter.

You can figure roughly about 100 to 110 basis point savings and, you know, and we expect that that level is to be pretty similar to where they were last year.

Okay. As far as your running at capacity; once you do reach capacity what type of financial impact do you expect that could translate to on your income statement?

It's difficult to say, but, you know, currently we're probably operating at something like about 50% utilization here in the Elgin facility. So as you can imagine because it's a new facility with a lot of new equipment there's a lot of fixed cost. So it certainly would deliver benefits if we, you know, reached, you know, say 75% utilization level.

What's a realistic time frame to see that level reached?

That's, that's a tough question, because the one thing we don't want to do and I'll let Jeff speak more about that, is we don't want to go out and capture unprofitable sales and end up where we were last year. So we're going to go out and look for high quality sales and I think Jeff can speak more about the strategies.

Sure.

Yes, Joe, we are focused on value added customers. We have targeted specific retail accounts, food manufacturers, food service companies to grow their business and grow our business. It could be a five year horizon, by the time we get fully utilized out of this facility. We have a lot of new production lines in. We're still understanding the additional capacities that they are going to allow us with the efficiencies that we are working toward. We are going to focus on profitable business and really taking customers through this new plant and making sure we meet their needs, help them grow their business and expand our research and development area where we become a better resource to help them grow their accounts.

Okay. As far as the consulting fees that you're being charged, when do you expect to be finished with that consulting, and eliminate those charges.

All of those engagements have expired.

Okay. And in reference to the previous caller, and where you could see gross margins at going forward, can you give us a sense for an actual--you spoke to how you would improve those margins, but can you give us a sense for the actual number you expect to see.

We don't provide guidance.

Okay. All right. That's all for me, thanks.

Okay, thanks Joe.

Your next question comes from the line of Ross Levin with Arbiter Partners. Please proceed.

Hi guys. Our understanding was 2007 represented a sort of a tough year in terms of competition from Emerald and I guess to a lesser degree Planters. I was wondering if you could comment on the competitive sort of picture and also how that might relate to your ability to win back some of the private label business that went away when you sort of carried out pricing.

Sure. This is Jeffrey. We continue to see strong promotional efforts from the national brand Planters, we continue to see promotional efforts from Emerald, from Blue Diamond as well, but we also see a renewed interest in private label. We are working with many of our private label accounts now, to develop new items for their programs. We're seeing increased promotional activity which we have talked about in the past. We're seeing renewed interest in promotional activity, especially at some of the major mass retailers. So we're confident we will make up some of the ground we lost in the prior, really two years, with our private brands. Then also rebuild our Fisher brand we have lost a lot of market share as a result of heavy promotional activity we are seeing from other brands. We're positioning new items in the marketplace. We anticipate regaining some of the market share from them. Again a lot of it will rely on how much more money the national brand puts into the market. They have been very aggressive in not only promotions, but pricing in general.

Thank you.

With no more further questions in the queue I would like to turn the call back over to Mr. Michael Valentine for closing remarks.

Okay, thank you Stacey. At this time if there are, since there are no further questions we would like to again thank everyone for their participation in our call and their interest in JBSS. This concludes our call for our second quarter operating results. Thank you.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a good day.