John B Sanfilippo & Son Inc (JBSS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son fourth-quarter and fiscal 2008 year-end earnings conference call. My name is Fab and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Mike Valentine, CFO. Please proceed.

Thank you, Fab. First, on behalf of everyone here at JBSS, we would like to thank all of the participants for joining our quarterly conference call for the fourth quarter and fiscal year ended 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 certain risks and uncertainties. The factors that could negatively impact results are explained in the various filings that we have made with the SEC, and we encourage everyone to refer to these filings to learn more about these risks and uncertainties.

Starting with the income statement, the current quarter net sales increased by 1.9% or $2.3 million to $125.3 million in comparison to net sales in the fourth quarter of fiscal 2007.

Total pounds shipped to customers decreased by 16.2%. There was a decline in the shipment of pounds of almonds, macadamia nuts, mixed nuts, peanuts, and walnuts in the quarterly comparison. Pounds shipped declined in all distribution channels except the food-service channel.

The increase in net sales was driven mainly by higher selling prices for almonds, cashews, fruit and nut mixes, mixed nuts, peanuts, and walnuts in response to increasing acquisition costs for the commodities that are in those products. Also, a shift in sales mix from the industrial channel to the consumer and food-service channels contributed to the increase in the overall weighted average selling price in the quarterly comparison.

Fiscal year net sales increased slightly to $541.8 million from fiscal 2007 net sales of $540.9 million.

Total pounds shipped to customers decreased by 9.7%. As was the case in the quarterly comparison, there was a decline in the shipments of pounds of almonds, macadamia nuts, mixed nuts, peanuts, and walnuts in the yearly comparison. Pounds shipped declined in all distribution channels except the food-service channel in the yearly comparison also.

The increase in net sales was driven mainly by higher selling prices for almonds, fruit and nut mixes, mixed nuts, peanuts, and walnuts in response to increasing acquisition costs for those commodities. Additionally, a shift in sales mix from the export and industrial channels to sales in the consumer and food-service channels, which typically have higher selling prices, contributed to the increase in the overall weighted average selling price in the yearly comparison.

Fourth-quarter gross profit margin increased to 14.6% from 8.5% for last year's fourth quarter as a percentage of net sales. This significant improvement in gross margin was achieved despite the incurrence of $600,000 in costs associated with the equipment startup, equipment move, and redundant manufacturing activities that occurred at the remaining facility in Elk Grove earlier in the fourth quarter.

The gross profit margin increased in all distribution channels in comparison to the margins in those channels for last year's fourth quarter. Gross profit margins improved on sales of all major product types except cashews and peanuts, because acquisition costs for these commodities increased at a greater rate than the rate of price increases that were implemented in the fourth quarter for those commodities.

Fiscal 2008 gross profit margin as a percentage of net sales increased to 12.2% from 7.6% in the previous fiscal year. Gross profit margin for fiscal 2008 was impacted negatively by startup costs for new and moved equipment, redundant manufacturing costs, and also equipment moving expenses which amounted to $12.3 million or approximately 2.3% of net sales.

Gross profit margins improved in all distribution channels and sales of all major commodities except peanuts and cashews and the yearly comparison.

Fourth-quarter 2008 total selling and administrative expenses as a percentage of net sales decreased to 10.6% from 10.9% for the fourth quarter of fiscal 2007. Declines in consulting fees, distribution costs, brokerage commissions, and bank fees contributed largely to the decline in total selling and administrative expenses as a percentage of net sales in the quarterly comparison.

Fiscal 2008 total selling and administrative expenses as a percentage of net sales decreased to 9.9% from 10.3% for fiscal 2007. The decrease in total selling and administrative expenses in the yearly comparison was driven mainly from declines in distribution costs, advertising, and brokerage commissions.

Total operating expenses in fiscal 2008 included $1.8 million in restructuring costs, while operating expenses in 2007 included a $3 million gain related to real estate sales that occurred that year. Primarily because of the 74.5% increase in gross profit in the quarterly comparison, operating income for the fourth quarter increased from an operating loss of $2.9 million to an operating income of $5 million. And primarily because of the 60.4% increase in gross profit in year-over-year comparison, operating income for fiscal 2008 improved from an operating loss of $11.1 million in fiscal 2007 to an operating income of $10.7 million in fiscal 2008.

Interest expense in the current fourth quarter declined to $2.5 million from $3 million for the fourth quarter of fiscal 2007. The decline in interest expense in the quarterly comparison was driven mainly by lower short-term interest rates and by lower total debt levels. Interest expense in the current year increased to $10.5 million from $9.3 million for fiscal 2007. The unfavorable comparison in interest expense for the fiscal year was mainly due to the fact that $900,000 in interest related to the facility consolidation project was capitalized in fiscal 2007.

Also, higher short-term interest rates in the prior revolving credit facility contributed to the increase in interest expense earlier in the fiscal year.

As a result of our refinancing of our revolving credit facility and notes in the third quarter of the current fiscal year, fiscal 2008 operating results included debt extinguishment costs of $6.7 million. The debt extinguishment costs primarily were comprised of prepayment penalties.

In summary, the loss before income taxes of $6.9 million for fiscal 2008 included approximately $20.8 million in unusual expenses related to the facility consolidation project, restructuring costs, and debt extinguishment costs.

Taking a quick look at inventory, total inventories at the end of fiscal 2008 declined by approximately $7.1 million or 5.3% compared to inventories on hand at the end of fiscal 2007. Pounds of raw nut input stocks declined by about 2.9 million pounds or about 6% in the yearly comparison.

The value of finished goods on hand at the end of fiscal 2008 fell by 12%, and the quantity of finished goods on hand fell by 13.6% in comparison to the value and quantity of finished goods on hand at the end of fiscal 2007.

The decline in the value and quantity of inventories in fiscal 2008 chiefly came from improved inventory management. This improvement in inventory management helped in large part to generate approximately $29.6 million in net cash provided by operating activities in fiscal 2008.

Now I will turn the call over to Jeffrey Sanfilippo, our CEO, who is participating via telephone on this call. He will provide additional comments on the quarter and fiscal year. Jeff?

Thank you, Mike. Good morning, everyone and thank you for your interest in John B. Sanfilippo & Sons. We wrap up fiscal 2008 with the culmination of several important initiatives executed and completed over the past year. The positive benefits of many of these initiatives were realized in our fourth quarter, as we saw considerable improvement in profitability over the same period in the prior year. We expect this improvement to continue in fiscal 2009.

To reiterate some key points that Mike had mentioned, the average net sales price per pound increased in all distribution channels as price increases were implemented in response to rising costs for commodities. The Company was successful in its focus on selling more value-added product lines and, as a result, we experienced a strategic shift in sales from the industrial and export channels to the consumer and food-service channels. This also contributed to the increase in weighted average selling price.

Fiscal 2008 gross profit margins as a percent of net sales increased from 7.6% in fiscal 2007 to 12.2% in fiscal 2008. It is important to note that gross margins improved for all distribution channels when compared to the gross margins for those channels in fiscal 2007. This improvement came in large part from the completion of numerous initiatives that we implemented since the latter part of fiscal 2007.

We achieved a great deal this past year and made difficult but necessary decisions to drive value in our organization. The management team and our employees focused on several key areas to accomplish this turnaround.

First, operations. We completed our facility consolidation project, and I am happy to announce the final production lines moved are now up and running in Elgin. The last piece of equipment we relocated was our extruded snack line which makes sesame sticks, cheeseballs, and curls, and our hot panning equipment which manufactures praline and butter toffee products. The machinery is now running in Elgin, and we are producing excellent quality Fisher extruded snacks to complement our Fisher snack nut programs and hot pan nuts to supply our consumer, food-service, and industrial customers.

Our procurement and materials purchasing department implemented further measures to reduce our material in packaged inventories. Their efforts were successful and led to a 5.3% decrease in inventory at the end of fiscal 2008 compared to inventories at year-end fiscal 2007.

In addition, we focused on our outside facilities as well and, for example, improved our walnut shelling operation to reduce mill loss in our manufacturing processes in our Gustine, California, facility.

Sales and marketing departments. The Company executed changes to our business model which included optimizing our product portfolio, finalizing the route division migration, and realigning our sales force and selling strategies. These sales and marketing initiatives were factors in driving the Company's 74.5% gross margin improvement in the fourth quarter. In addition, the initiatives allowed us to focus on value-added customer-specific growth while transitioning out of low-margin and low-volume items. Our sales teams align the Company with key customers to leverage our capabilities and product portfolio and to expand their dynamic nut programs.

Our human resources department worked hard to stabilize our workforce. As a result, the Company improved and enhanced the selection process for employees. Also, we have now been in Elgin over one year, and employees are acclimated to the new facility and sophisticated products and lines.

In the fourth quarter of fiscal 2008, our average weekly attrition rate in our Elgin facility declined by 62% in comparison to the average weekly attrition rate in the third quarter of fiscal 2008. We will continue to focus on improving manufacturing efficiencies through increased employee training.

Our finance department successfully completed the refinancing of our short-term credit facility and long-term notes, which delivered meaningful savings in interest expense, bank fees, and legal fees during the fourth quarter of fiscal 2008. We also improved our period closing process.

The facility consolidation and equipment move to Elgin is complete. The profitability enhancement initiatives have been implemented, and our refinancing is in place. Now, our Company's focus in fiscal 2009 and going forward is on two key areas.

First, improving manufacturing efficiencies in the Elgin facility. Our operations departments are executing three important initiatives to accomplish this.

First, reducing manufacturing spending through increased line efficiencies, thereby optimizing indirect and direct labor headcount. Second, increased efforts to reduce manufacturing spend on supplies and maintenance-related costs now that we are fully moved into Elgin. Third, reduce material scrap and overfill weights in the facilities.

Turning to our growth initiative, which is the second key thing we will focus on, we are in position to reverse the decline in unit volume sold, and will focus on pursuing profitable value-added growth. Our sales and marketing departments are more focused than ever on developing strong partnerships with key customers and have already been successful with two major retailers. They continue to have tools and resources necessary to provide value and build innovative nut programs for our key partners around the world.

We are reinvesting in our Fisher brand with both increased marketing funds and an increase in new product launches. For example, just this past year, we launched our Fisher Culinary Touch program of salad toppings located in the salad section of the grocery aisle.

In addition, we pursued cobranding opportunities and were successful in cobranding our Fisher brand with McDonald's granulated peanuts. We anticipate over 145 million units of granulated peanuts will be shipped to McDonald's over the coming year.

Lastly, sponsored the Pillsbury Bake-Off, where the winner of the million-dollar award was a recipe that included Fisher Dry Roasted Peanuts for a peanut butter cookie.

Let me comment now on topline trends in the snack and baking categories and overall nut consumption trends as they relate to our current economy. According to IRI, consumer change has been faster, more frequent, and less predictable than at any other time in recent history. This, partnered with escalating prices, has led to extreme price sensitivities; and we are witnessing changes in consumer behavior, such as eliminating or spending less on certain product categories; spending less on eating out; increasing the number of times consumers cook at home during the week; making fewer purchasing trips; opting to combine shopping trips and errands.

This has led to a slight channel shift to supercenters to save on fuel and drugstore purchases to fill in the gap. Consumers are reaching for private label and value-priced brands over their current national brands. They are increasing their coupon use, and we see consumers increasing spend on meal preparation necessities, shifting away from preprepared meals and convenience to opt to cook from scratch. It is reported that 53% of consumers are, in fact, cooking more from scratch versus six months ago.

All this combined puts JBSS in a unique selling situation. We are positioned to leverage our private label brand strength with our national brand strength and channel strength growth. Our unique channel diversification will allow us to utilize key insights from each channel, such as food service and consumer, and apply the relevant findings to maximize growth.

For example, focusing on our export markets and global opportunities, we will be able to diversify and mitigate any potential declines we may see in domestic consumption during this downturn.

I will close by saying we still have a lot of work to do and we will continue to execute strategies and initiatives to improve our financial performance and grow our business. We believe the plans we have in place are the right ones for our business and for our customers.

There will continue to be challenges for our industry and our Company, with higher input costs for nuts, energy, and packaging materials and a potential economic downturn in the United States. 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 on improving manufacturing efficiencies and growing value-added unit volume. Management has worked hard to create a value-driven culture within our Company, and we will continue to drive value for our customers, stakeholders, and shareholders.

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.

Okay, thanks, Jeff. At this time, we will open the call to questions. Fab, can you please queue up the first question?

(Operator Instructions) Ron Strauss from Pekin Singer.

Hello, Mike and Jeff. It turns out that the light at the end of the tunnel is not an oncoming train. I take my hat off to you guys for having got through this very difficult period of the last couple years. Terrific.

Thanks, Ron.

Thank you.

Did I hear you say, Mike, that you had almost $21 million of nonrecurring charges to the P&L last year?

Yes. That's the three items that we cited, Ron, the restructuring, the redundant costs, moving, and debt extinguishing costs add up to about that number.

So that is about almost $2.00 a share, by my calculations. Assuming there are no nonrecurring items in fiscal '09, will you be paying taxes at all in '09? Or is there a very substantial net operating loss carryforward that protects the cash flow?

Ron, we are actually going to release the valuation allowance and the benefit that is associated with that as we make profits. Sometime in the -- probably shortly after the second quarter, we will decide whether we will release the whole thing or not. But at this point in time, I can't tell you whether we are going to end up with zero tax, a leftover benefit, or expense.

So you don't know the magnitude of your net operating loss, is that what you are saying?

No, we know the magnitude of the operating loss. But we are not going to predict our profitability for '09 on this call.

Oh, I see. How big is that net operating loss carryforward?

Close to $4 million?

Well, $4 million is the (inaudible).

Yes, it's approximately $4 million is the potential benefit.

What do you expect your capital expenditures will be in '09?

As you can imagine, we are planning on reducing capital expenditures pretty dramatically and going to what we characterize more as maintenance CapEx, which kind of ranges between say $6 million to $8 million.

Would you expect that depreciation would be somewhere on the magnitude of '08's?

Yes, it should be very close to the '08 number.

Something around $15 million or $16 million?

Right.

Okay. So your cash flow is going to be fairly substantial in '09. How do you expect to allocate it? Are you going to be paying down debt, buying back stock?

No, it will automatically go to pay down the revolver.

What would you say your capacity utilization is in your Elgin plant today?

Ron, I mean, due to the seasonality of our business, if we looked at it over the course of the year, I would say we are about 60%.

60%? And based on your plans for the next year, what would you expect that capacity utilization figure to look like, let's say, 12 months from now? Give some sort of ballpark number.

You know, Ron, I think we are probably going to look at a similar number, only because going forward we are going to have -- be faced with high cashew prices on the shelf, high peanut prices on the shelf, and their impact on consumption is really going to determine what our utilization looks like at the end of the year.

Can you talk about the crop outlook for your major ingredients?

Sure, I will start with the ones that I do; and then I will turn the rest over to Jeff or Jasper.

Peanuts look very good. We're probably looking at something that may possibly be a record crop, but certainly close to it. The weather conditions have been perfect throughout the growing season, especially in the Southeast. The rain that they have received recently, I am told, has not damaged the crop at all and will probably actually helped it to mature further.

As far as cashews go, Brazil's already started; and there is no indication that they will have any kind of shortage as they did last year. India and Vietnam are still pretty far away. They don't really harvest till spring; but you know, right now there is no indications that we are going to see some of the reductions in crop size in Vietnam that we saw last year.

So hopefully that will play out, and we can start to get some relief next summer. Jeff, do you want to take some of the other tree nuts?

Sure, let me talk about pecans first. While this year will be the short crop in the traditional tree nut bearing cycle for pecans, it looks slightly more promising at this stage in the season than the typical short crops we've experienced in the past decade. There is large carryover inventory, which will help offset the short crop.

But what we have seen over this past year is continued strong in-shell exports to China for pecans, which drove prices up this past year. If those continue or increase, we could anticipate higher prices than otherwise might be expected coming into this short crop for pecans.

Walnuts, virtually everyone is expecting a record walnut crop. It is heavy nut sets, combined with favorable weather conditions, should result in a large crop with good quality.

The only growing region looks like reporting disappointing results is the Northernmost area of California that was severely affected by a late spring freeze.

But in spite of record low carrying inventories, last year's high prices have impacted consumption enough to what we feel keep things in relative balance until the supply pipeline can be refilled.

Okay. Well, thank you very much, gentlemen.

[Greg Hillman] from [First Wilshire Wells].

Good morning. Yes, I had two questions. One was about -- just for the move, I guess could you give me some concept of what you think the payback period is for the expenses you've incurred in the move?

As I think we've stated, the total investment is roughly about $150 million to $120 million. You're obviously not going to see a very short payback with an investment of that size.

Greg, until we actually -- first of all, we really have not -- we did not predict any meaningful savings in fiscal 2008 back in 2004 when we first conceived this project. So really fiscal '09 is the first year that we are projecting significant savings. Until we get beyond this inefficiency issue, it will be difficult to actually nail down a payback period.

Okay, and then another question maybe for Jeff about convenience stores, whether you can do like a private label program for a convenience store, and do like the whole nut section for them, and allow them to increase their margins for their snacks.

Yes, we do have an initiative for convenience stores, both for Fisher and we are working with a couple private brands right now to develop convenience store programs. So it's an opportunity.

Could you increase their profitability over, let's say, nuts that are carried by Frito or something like that?

The challenge is obviously Frito has got such major distribution throughout the United States and is a very competitive player. Unless a typical retailer would produce or develop a product that doesn't compete directly with Frito, either on ounce weight or specific products, there could be opportunities. But I would say going head-to-head with Frito on the shelf with the same item, impact size would be a challenge.

Okay, and do you have the capability to do like a nutritional bar or a health bar or something like that, that would have like nuts or sesame seeds or almonds or good, healthy stuff in it?

We don't actually -- I will answer that, Jeff. We don't actually have the capability of doing a bar format, but we can do mixes that would include the same type of ingredients that you would find in nutrition bars.

Okay. Then, I guess you addressed the pricing issue for all the nuts earlier in the call, so I will just get back in queue. Thank you.

[Michael Curran] from Wachovia Securities.

Thanks, gentlemen. Jeff, I am in Savannah, Georgia, and I can confirm. I checked what the farmers in South Georgia say. The peanut crop is very healthy this year. That tropical storm that came through gave it great rain. Although we did knock down a few pecan trees.

I have one basic question for you all. With I assume steady revenues going forward in the mid $500 million; but with the numerous manufacturing efficiencies you delineated et cetera, et cetera, my question is -- does management have a gross margin goal? And if so, where are you shooting? I understand you finished this year at 12.2%.

I will take that one, Jeff. For those who are on the call that haven't been on our calls before, the Company does not give guidance. We do obviously have a gross margin goal, and our goal is certainly to improve as we have talked about some of the initiatives we are going to put in place. But we will not quantify that on this call.

Oh, okay. Thanks, that was a terrific quarter. I didn't think you could turn it around so quickly. Well done.

Okay, thank you.

Thank you, Michael.

Joe Christifano from Milwaukee.

Good morning. Just a quick question on the old Panasonic building. Any updates on being able to rent that?

Which building is that? Oh, the Panasonic building?

Yes.

Yes.

We currently have -- as you can imagine there is not a whole lot of large tenants looking for space at this time. We have had fair interest with tenants that are looking between the 10,000 to 15,000 square foot range. But as of now, we have not found any tenants to replace Panasonic.

Do you plan to just hold the building indefinitely until you find a tenant? Or at some point would you put the building up for sale?

No, we will continue to own it.

Okay, great. That's all I had. Thanks.

(Operator Instructions) David Leibowitz from Horizon Asset Management.

Good morning. A few brief questions if I may. I may not have taken it down correctly. What did you say the potential revenue from the McDonald's contract was?

Go ahead, Jeff.

Yes, I was going to say, the unit volume we anticipate is 145 million units of that small 7-gram bag of granulated peanuts.

But I would just add it is not new business for us; it is a cobranding opportunity. Where before it was just a McDonald's bag, now it is a Fisher bag with McDonald's, cobranded.

Is there any risk that you incur with this contract?

Risk as far as pricing?

Inventory? Pricing? Returns?

No, this is something we have worked with McDonald's for over 10 years now on a product line for their salad toppings or their dessert toppings. So we don't anticipate any issue. This was just a great opportunity for us to get some cobranding with the Fisher brand with McDonald's.

Second of all, when was the last time you instituted price increases?

The last time? Well, we have had commodity increases, as Mike mentioned and I mentioned in the call, over the past year for commodities such as walnuts, peanuts, and cashews.

The most recent price increase we needed to implement was in cashews across all channels as a result of higher commodity costs.

Are your price increases maintaining the normal profit margins you enjoy? Or have you seen there is a pushback and your price increases are not enough to include the historic profitability of the particular line or product?

It really depends on the nut type, David. Obviously, we are concerned with consumption dropping as a result of some of the dramatic price increases. I would say we will see some margin pressure as a result of what we have seen, especially for cashew price increases or cost increases. (multiple speakers) everything on to consumers or customers.

As we look to the new fiscal year, which quarter would you consider the toughest one to match year-against-year quarter?

I will take that one, Jeff. I would say that right now I would say probably none of the next four quarters would be difficult to match year-over-year, simply because we have a pretty easy comparison to fiscal 2008.

Okay. The last question. Were you to get back onto historic trend line, do we show the profitability in the second half of this fiscal year? Or does it actually have to wait another year?

To get back to normal profitability?

Correct.

That really is dependent on price increases on cashews, for the most part. Just to put that into perspective, cashew costs have risen by as much as 60% over the last 12 months. As you can imagine, putting a 60% price increase on the shelves may not necessarily be in the best interests of the category, us and really everybody in the industry. So it's going to be interesting how that dynamic plays out in that respect.

Thank you very much.

There are no further questions at this time. I would now like to turn the call back over to Mr. Valentine for closing comments.

Again, as we stated before, we would like to thank everybody for their interest in JBSS. This concludes the call for our fourth quarter and fiscal year 2008 operating results.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.