John B Sanfilippo & Son Inc (JBSS) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 John B. Sanfilippo & Son earnings conference call. My name is Carma, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS.)

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

Okay. Thank you, Carma. First, we'd like to thank everyone for participating in our quarterly conference call for the third quarter of fiscal 2008.

Before we start, we'd like to note that 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 the various SEC filings that we have made. We encourage you to refer to these filings to learn more about these risks and uncertainties.

The current quarter was a quarter of significant accomplishment. For example, in February, we refinanced our revolving credit facility and long-term notes, which eliminated the cost and distractions that were associated with being in noncompliance with certain financial covenants in those credit facilities. Later in the call, Jeffrey Sanfilippo, our CEO will discuss several other accomplishments that occurred during the quarter.

Starting with the income statement, the current quarter net sales declined slightly from $107 million in the third quarter of fiscal '07 to $106.7 million. Total pounds shipped to customers decreased by 10.6%. Net sales increased in the consumer food service and contract packaging channels. The increase in net sales in these channels was driven mainly by higher selling prices and increased unit volumes sold in the food service and contract packaging channels.

Net sales declined in the export and industrial channels, primarily because of a decrease in the pounds of almonds and walnuts sold to customers. The decline in almond sales in these channels was attributable in large part to the discontinuance of our almond handling operation in the third quarter of last year. Walnut shipments to industrial customers occurred earlier in the current fiscal year than was the case last year when walnut shipping activity occurred to a greater extent in the third quarter.

So net sales increased in the consumer distribution channel. Pounds shipped declined, as some businesses lost when two customers did not accept price increases for peanut items. Additionally, higher peanut prices at retail also led to a decrease in pounds shipped in the consumer channel in the current quarter.

YTD nut sales fell from $418.5 million to $416.5 million. As was the case in the current quarter, a considerable decline in the sales of almonds in the export and industrial channels primarily led to the decline in sales in the YTD comparison.

Third quarter gross profit margin increased to 12% from 5.7% for last year's third quarter as a percentage of net sales. This significant improvement in gross profit margin was achieved despite the incurrence of $1.4 million in costs associated with the equipment startup, equipment move, and redundant manufacturing activities at the remaining Elk Grove Village, Illinois facility.

The gross profit margin increased in all distribution channels in comparison to the margins in those channels for last year's third quarter. The increase in the gross profit margin in the quarterly comparison was driven mainly by higher selling prices and lower pecan acquisition costs. In addition, there was a significant improvement in margins on the -- excuse me -- additionally, gross profit margins improved significantly on sales of almonds and walnuts when compared to the gross profit margins for those items last year.

The YTD gross profit margin as a percentage of net sales increased to 11.5% from 7.5% for the same period in the previous fiscal year. Gross profit margin for the current YTD period was negatively impacted by startup costs for new and moved equipment, redundant manufacturing expenses in the old facilities, and equipment moving expenses, which in total amounted to $11.8 million or approximately 2.8% of net sales. The gross profit margins improved in all distribution channels and in sales of all major commodities except pecans in the YTD comparison.

Quarterly total selling and administrative expenses, as a percentage of net sales, increased slightly from 11.3% for the third quarter of '07 to 11.6% for the current third quarter. Increased compensation cost was a primary cause of the increase in total selling and administrative expenses.

Total operating expenses also included $362,000 for restructuring expenses related to the item rationalization initiative and route migration initiative. The YTD total selling and administrative expenses as a percentage of net sales decreased to 9.7% from 10.1% for the same period last year. Total selling and administrative expenses for the current YTD period included approximately $900,000 for consulting fees related to the item rationalization and route migration initiatives.

In the YTD comparison total operating expenses also included $1.8 million for restructuring expenses related to the two initiatives I just mentioned. Primarily because of a 112% increase in gross profit, operating income for the current quarter was $130,000 compared to an operating loss of $6 million for the third quarter of fiscal 2007.

Interest and expense in the current quarter declined to $2.7 million from $2.9 million for the third quarter of fiscal 2007. The decline was driven in large part by lower interest rates, and a new revolving credit facility, and by lower total debt levels during the quarter, compared to debt levels in last year's third quarter.

Interest expense in the current YTD comparison increased to $8 million from $6.3 million for the same period last year. In the case of the YTD comparison, increased short-term debt levels and higher interest rates in the form of revolving credit facility led to the increase. As a result of refinancing our revolving credit facility and notes in the current quarter, we incurred debt extinguishment cost of $6.7 million. The debt extinguishment costs primarily were comprised of prepayment penalties.

Turning to the balance sheet briefly, inventories at the end of the current third quarter declined by approximately $26.6 million or 15.8% compared to inventories on hand at the end of the third quarter of fiscal 2007. Pounds of raw nuts on hand declined by about 2.6 million pounds or 3.6% in the quarterly comparison, primarily because of lower pecan acquisition cost, the weighted average cost per pound of raw nut import stocks decreased by 12.8%.

And, now, I'll turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance in the current quarter.

Thank you, Mike. Good morning, everyone.

Although the financial results were not as strong as we had planned, we did accomplish a great deal in the quarter. Several of the initiatives we began over the past year were executed and completed in our third quarter. Let me briefly summarize the profitability enhancement initiatives we completed.

We finished the relocation of the peanut butter line to our Bainbridge, Georgia facility. This was by far the most challenging and expensive production line to move, due to the enormous amount of piping and product flow controls involved. We are making excellent quality peanut butter in Georgia now, and we did make several improvements to the line, which allow us to improve our peanut butter quality and expand our production capabilities.

There are only two remaining lines in Elk Grove Village to move. First, the canister packing and extruded snack production machinery is scheduled to be moved in July. Second, the [hot panning] equipment, which manufactures our butter toffee peanut products, this line is also scheduled to be moved in July. We are planning our inventory builds now before the lines are moved in order to mitigate any supply disruptions during the move.

Two other projects executed and completed in the quarter were item rationalization and route migration initiatives. The Company made hard but necessary decisions to eliminate 1,200 items in our portfolio based on profitability, volume thresholds, and customer order frequencies.

We discontinued poor performing product lines, consolidated pack styles, and streamlined the number of private brands we supply. Although eliminating the 1,200 SKUs represents a potential sales loss of $20 million, the initiative is already delivering positive benefits. The elimination of unprofitable items was a factor in our 112% gross profit improvement this quarter. In addition, the elimination of low volume items, which represented 50% of our total work orders helped improve production efficiencies and contributed to the 38% decline in unfavorable labor and efficiency variances.

Now that these initiatives are behind us, we will continue to focus on improving manufacturing efficiency in our new facility through increased employee training, improved hiring practices, workforce stabilization and streamlined manufacturing practices.

Our procurement and production departments also implemented measures to reduce finished goods and packaging inventories, which led to a decrease of approximately 23% in the third quarter of fiscal 2008, compared to the total value of those inventories on hand at the end of our third quarter fiscal 2007.

I also want to mention that in addition to optimizing our product portfolio across all channels, the Company initiated new requirements for developing new sales programs and new items. We set forth established 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 building up programs of our valuable customers.

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

Turning to sales for the quarter, as Mike mentioned, overall nut sales for the Company deceased slightly, from $107 million to $106.7 million. There were positive sales and unit volume increases in the food service and contract packaging channels, as we continued to develop new programs for customers in those channels.

The consumer channel increased in dollars but decreased in sales volume, so we continue to see increased competitive pressure from the brand leader in the consumer channel. But our sales teams have continued to develop key partnerships with major retailers, restaurant chains, and international distributors and food manufacturers. The sales teams are supported by an expanded research and development department in our organization, and we are working closer with customers on new product development and product line extensions. Just in this past quarter in our consumer channel alone, we lost over 20 new private brand items with various retailers.

The dollar gains in consumer food service and contract packaging channels were partially offset by declines in the industrial and export channels. In the industrial channel, as Mike mentioned, we continued to experience declines in almonds as a result of the Company's discontinuing our almond handling operation. But we are now cycled against, past all of those declines from almonds from discontinuing the almond processing division.

Let me comment now on top line trends in the snack and baking nut categories at retail, as well as our Fisher brand. According to ACNielsen, entire nut category, inclusive of snack, baking, and produce, has grown 4% in dollars over the past 52 weeks, and 1.2% in units. The stronger dollar growth versus flat unit growth is attributed to the various price increases implemented in the snack, baking, and produce categories.

Over the last 52 weeks, we have seen a 3% increase in average retail prices. However, over the last 13 weeks the average retail price increase has reached 5.3% versus a year ago. The Fisher brand witnessed a total category decline of 21.4% in dollars. This is mainly driven by snack and produce categories as the baking category remains solid.

The Fisher brand is increasing our promotional activity to a level indicative of the total category to address this decline. Fisher unit market share for snack is 1.3%. Baking is 3.5%, and produce is three-tenths of a percent.

Private label continues to be strong, with dollar increases of 2.7% for snack, 13.6% for baking, and 29.9% for produce over the last 52 weeks. Private brands in the baking and produce categories continue to gain market share. Private label has gained 2.1% in dollars in the baking category, and 3.3% in the produce category.

We have some exciting news about Fisher. In March the Fisher brand launched three new SKUs in test market under the sub brand name Culinary Touch. These are nut blends found in the salad dressing aisle. We have a walnut raisin blend, an almond cranberry blend, and a toasted slivered almond. Early indications show that this line is being well received by consumers.

The Fisher [Fusions] line continues to do well where placed, and we have seen nice increases in sales and promotional activity. In addition, Fisher's golden roast peanuts was a key ingredient in the winning recipe in the 43rd Annual Pillsbury Bakeoff. Our Fisher nuts helped make someone a millionaire. This is a very exciting program, and we are very happy to have been a part of such a quality promotion.

Over the last quarter, in addition to the millions of consumer impressions that the 43rd Annual Pillsbury Bakeoff had generated for the Fisher brand, our PR, public relations team was busy generating over 20 million impressions for the Fisher brand. Placement included newspaper, magazine and online advertising. Additional print advertising featured Fisher.

And, lastly, private label grew with the addition of, as I mentioned, nearly 22 new items to various retailer mixes in our portfolio.

In closing, I would just like to say we still have a lot of work to do, and we'll continue to execute strategies and initiatives to improve our financial performance. We believe the plans we have in place are the right ones for our business and for our customers, and some of the positive results in this quarter demonstrates.

There will continue to be challenges for our industry and for our Company as we experience higher input costs for commodities, such as cashews, energy, and packaging materials over the next fiscal year. However, we believe that through the initiatives we are executing and through the hard work, commitment and effort of all our employees, we are well positioned for the future.

Our focus now is to grow value added unit volume by continuing to build innovative nut programs for our key customers. We have strong momentum going forward, and we appreciate your participation in the call and interest in our Company.

I will now turn the call back over to Mike.

At this time, we will open the call to questions from our participants. Carma, could you please queue up the first question?

(OPERATOR INSTRUCTIONS.)

And the first question comes from the line of Bruce Baughman from Franklin Templeton. Please proceed.

Good morning. Congratulations on all the good trends.

Thank you.

My question had to do with the unfavorable labor and efficiency variances described. The $7 million increase, is what's mentioned in the Q, what's that benchmarked off of?

I'll turn that question over to Herb Marros, our Director of Financial Reporting, who is responsible for the Q. What section are you specifically referring to?

It's our first bullet point, mentioned a couple times. The $7.0 million increase in unfavorable labor and efficiency, comparing the current year to the prior year. And most of that was due particularly to the start-up of the production out in Elgin as we moved the production lines over.

But does that -- but I mean is that an absolute dollar variance?

Yes, it is.

Or is it adjusted to reflect volumes or any of that kind--?

That's absolute dollar.

And once the new facility is up and running on a normal basis, with the employees up the learning curve and so on, wouldn't you -- would you expect the variance to be negative relative to the prior factory?

Yes, this is Mike. If we do the things that we noted in the press release, and most of those are already in place, then we would expect that the variances would improve.

So since there were still some of the negative variances in the third quarter, although much reduced, you would, on an all other things equal basis and a current run rate, you would expect the related expenses that show-up in gross margin to continue to come down, I guess, right?

Yes, we're -- well, I'll let Jasper Sanfilippo, Jr. talk more about this as he's responsible for operations, he could (inaudible).

Sure. You know, most of the efficiency in labor variances that you've seen were related to the startup of two lines with new people. We've also had some change in reportings with respect to giving us better visibility, in terms of the efficiency, problems that we had out there, particularly as they relate to changeover and down time due to either product mix or some of the small line of runs that we've had.

We've done a lot of work with training on new employees, we do have a [static] workforce now, that has been trained, and we continue to focus on the variances. We have full downtime reporting on all of our production lines, so with respect to going forward, we will see those numbers come down.

And I assume you mean not just the negative variances, but you'll see the variances swing the other way so that there's a net positive contribution from the move, I guess, right?

Yes, you will. I mean there's certainly, the way that we have our standard set-up, which is basically the basis for the variances, there is certainly as we get better at running, there'll be bring a potential for us to show favorable variances there rather than negative.

Okay. And can you, for those of us who are watching the operating margin, and trying to relate it to the current capitalization of the Company, can you give us any feel for what kind of margin improvements we might see going forward?

Sure. We cannot quantify that yet, as we've just implemented many of those steps to improve that.

Okay. Thank you.

Okay.

And the next question comes from the line of Joe Christifano from the Milwaukee Private Wealth Management. Please proceed.

Hi, good morning.

Good morning.

In a follow-up to that last question, what -- can you break-out what part of that efficiency increase is related to job reduction?

Oh, you mean the efficiency improvement?

Yes.

As it relates to the item rationalization initiative, is that the question you're asking?

You guys had mentioned a 38% increase in labor inefficiencies? The variances, rather?

Okay. They don't necessarily have anything to do with job reductions. What it really has to do with, eliminating the items that Jeff referred to that were low volume, and created quite a few inefficiencies in our plant, so that contributed to the improvement, along with the measures that we implemented in the latter part of the third quarter.

Okay. I had another question. Do you have, or do you know what your plans are yet for the Panasonic building that you were renting?

Well, at this time, we certainly are looking for tenants to occupy that space. The financial resources that we have are going to be committed to our core business, and that will require a new tenant to finance any improvements in the space, so it does limit the amount of tenants that are available.

And is that space currently being rented, at all?

We -- Panasonic, who was our largest tenant in the office building, terminated their lease in mid April and we're trying to find a replacement.

Yes, Mike, what's the financial impact of that termination?

We haven't disclosed that, but when we do disclose that publicly in our filings, we'll discuss it then.

Thank you.

(OPERATOR INSTRUCTIONS.)

And the next question comes from the line of [Adam Strauss] from [PSS Asset Management]. Please proceed.

Hi. Got another question about gross margin. When I address -- adjust your gross margin and operating margin during the quarter for the $1.4 million in startup cost, I calculated gross margin of 13.3% and an operating margin of 1.7%, which appears to be a record high margin for both in the third quarter.

So I'd like to understand better the sustainability of this improvement. So my question is to what extent is this improvement driven by cyclical or temporary factors, and to what extent do you think the improvement is driven by some of the efficiencies coming from the new plant and some of the other changes you've made to the business.

Well, I think the largest change, Adam, comes from discontinuance of the almond handling operation. We had a significant improvement in almond margins. I think in last year's third quarter it was somewhere in the neighborhood of 5%, and it's significantly higher, that helped a lot.

We did have a favorable position on pecans, as we mentioned, and also walnut gross margins improved dramatically, too, which has a lot to do with some of the measures we talked about several quarters back when we realigned the way we sell our commodities, with the way we buy our commodities, so that contributed a lot.

As far as efficiencies go, as I mentioned before, many of the measures that we put in place for efficiency really occurred in the mid to latter part of the quarter, so we're just starting to see the benefits of those, and the same is the case with the item rationalization initiative.

Great, thanks. The next question is about pricing. Looking forward, you know, we're seeing that the retailers are accepting fairly large price increases across the board without much resistance, given recent trends in agricultural commodities. So, looking forward, what's the Company's pricing strategy in this kind of environment.

Well, I wouldn't say there was much -- not much resistance from retailers, but I think they realized the increasing commodity costs, so I think they're, you know, there's no other choice in some cases to accept price increases. And it's going to be a challenge. You know, we've seen, as I mentioned, there's a 5% increase in average retail prices just in the last 13 weeks.

You know, we've already communicated to a lot of retailers the volatility in the cashew market right now, and we are going to try to do whatever we can from a procurement standpoint to mitigate any major increases. But we're going to work as closely as we can with our retailer partners and all of our customers, and try to communicate properly, and help them with the price increases and manage our inventories as best we can.

Okay. Thanks. The next question is about CapEx. What do you expect to spend in CapEx in FY '08 and also in FY '09?

Well, Adam, in FY '08 I think we're at somewhere around $11 million, and we don't really foresee any significant CapEx in Q4. Probably just some leftovers from prior quarters as we finish up projects. In '09, frankly, we have not set that budget yet, but we do expect it to be considerably lower than what we've done in past years and including, in comparison to fiscal '08.

Okay. So you expect depreciation probably will be higher than CapEx next year?

Well, considering depreciation is probably going to come in at somewhere in the neighborhood of $16 million, that should be pretty easy to do.

Okay. Great. Thanks. Given the two lines, that it appears you still have to move in the first quarter of next year, and maybe other things, as well, what further startup costs and onetime charges should we expect to see?

Well, one of the lines that's currently over at Zenith, we have production capabilities here. So most of the force, the workforce is already trained on that production line, so we don't anticipate any issue (inaudible). And I've already talked to operators that currently run the extruded snack lines over at Zenith, and they've -- they said they were making a commitment to come out here. That's meant we have management that's run that line before. The can line are like any of the can lines that we have here, so we probably would take and mix the people from existing equipment and put them onto those lines, so I really don't anticipate any real startup or any crew issues with those two lines.

Great. Thanks. Next question is about capacity utilization. What kind of progress are you making in bringing on larger new customers that could improve the Company's capacity utilization with this new plant?

Well, obviously, as I mentioned earlier, we're focused on our key retailers. There's a couple accounts that we're working with right now to try to develop some new business, that we currently do not do business with. And, you know, it's really a matter of coming up with some innovative nut programs to help them grow their nut business, both on the consumer channel, really across every single channel, we're working with some of the major food manufacturers to try to include nuts as an ingredient in one of their new product launches.

So it's really an investment in research and development to become a better resource and really be the go-to Company, if they're looking to develop a product with nuts. And we've got a lot of things in the pipeline. One of the challenges we have is the volatility of pricing, especially in our industrial channel. You know, many manufacturers are a little hesitant to use nuts in some cases because of the huge variance in cost for them, so that's something that we need to overcome.

Okay. Thanks. A final question, can you provide an update on the sale of the plant?

Yes, there exists an original facility that we purchased in Elgin. We are under contract right now to sell that program. We were hoping to have that closed by the end of this fiscal year. There's still some negotiations with the City as far as [TIF] funding with the buyer that need to be resolved, but we're optimistic that it's not closed in the fourth quarter, hopefully by the first quarter of '09.

Okay. Great. Thank you very much.

Okay, Adam, thank you.

And you have a follow-up question come from the line of Bruce Baughman, Franklin Templeton. Please proceed.

Do you anticipate any further decreases in working capital requirements going forward?

Well, I think just from the fact that we expect to curtail CapEx pretty significantly, I think that we'll reduce our need for working capital requirements. But I will qualify that by saying that we have not yet established our procurement plan for fiscal '09, as we're waiting for certain key events to occur in some of these crops, especially pecans and walnuts, and then we will address our working capital needs for those, when that time arises. So that may result in an increase in working capital needs, or it possibly may result in a decrease.

Would those increases or decreases relate to the price of the product?

That's both price and quantity.

Okay. And then my other question is a follow-up on a previous caller's, having to do with capacity utilization. Do you quantify utilization?

Yes, we do mention it in the K.

Okay. Can -- for our benefit, can you -- well, oh, in the K, and not in the Q, that is?

That's correct, yes.

Oh, can you give us a sense of changes since the last K?

No, we can't disclose that since we haven't disclosed it in our filings.

I think you actually could, but -- on a conference call.

Well, let's agree to disagree, but we will have that updated in about three or four months.

Going forward, will you begin to put that in the Qs?

I think that's a very good question, and we agree with you that it may become a much more significant item going forward, now that we're fully moved in here, and we'll give that serious consideration.

All right. Thank you.

Okay.

And we have no further questions. I would like to turn the call back over to Mr. Valentine. Please proceed.

Okay. Again, we want to thank everyone for their time and interest in JBSS. This concludes the call for our third quarter operating results. Thanks, again.

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful week.