John B Sanfilippo & Son Inc (JBSS) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter 2009 John Sanfilippo & Son Earnings Conference Call. My name is Madge and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting 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, sir.

Okay, thank you Madge. First we'd like to thank everyone for participating in our quarterly conference call for the first quarter of fiscal 2009. Before we start we want to remind everyone that we may make some forward looking statements today. These statements are based on our current expectation and involve certain risks and uncertainties.

Factors that could negatively impact results are explained in the various SEC filings that we have made including forms 10K and 10Q. We encourage you to refer to these filings to learn more about these risk factors.

Starting with the income statement, first quarter net sales increased by 1.5% to $134.8 million from $132.8 million for the first quarter of fiscal 2008. Net sales increase came mainly from price increases for walnuts, cashews, peanuts and mixed nuts.

Unit sales measured as pounds shipped to customers declined by 11.3%. Pounds shipped declined on all major product types except pecans and fruit and nut mixes. Pounds shipped declined in all distribution channels led by a decline in the industrial channel.

The decline in the industrial channel came mainly from declines on sales of peanuts to other shellers and to peanut oil processors due to the fact that we shelled fewer tons in our Bainbridge Georgia facility. The reduction in the tons of peanuts shelled was planned in anticipation of a large 2008 peanut crop and falling consumption of snack peanuts from price increases in the category. Sales of these peanut items typically are low margin sales or sales of excess inventories and sales of by products.

Despite the decline in sales volume, the first quarter gross profit increased by $2.4 million and the gross profit reported in the first quarter of fiscal 2008. As a percentage of sales, gross profit margin increased to 10.5% from 8.9% in last year's first quarter.

The improvement in gross profit came primarily from price increases, a decrease in redundant costs in the old Illinois facilities as they've now been closed, a decrease in moving expenses and improved efficiency in our new Elgin facility. The improvement in gross profit was offset by a decline in gross profit on the sales of peanuts, mixed nuts and cashews due to higher acquisition costs in the quarter.

In the first quarter we were forced to purchase peanuts and cashews at -- in a high priced spot market to cover delays in shipments against lower priced cashew peanut purchase contracts. We anticipate that the peanut contracts will be fulfilled by mid-November and that the cashew contracts will be fulfilled by the end of our third quarter.

As a result of increased costs for pecans acquired in the current quarter, gross profit was also negatively impacted by a charge of $3 million to reduce the quarter end value of pecan inventories associated with outstanding fixed price industrial pecan sales contracts. These contracts are expected to be fulfilled in the second quarter at prices that are below costs of pecan inventories before considering this charge.

Gross profit margins improved on sales in the food service and export channels and declined in a consumer industrial and contract packaging channels. First quarter operating expenses, as a percentage of net sales decreased from 9.7% in 2008 to 9.1% in the current quarter -- or in the current year.

The decline in operating expenses came mainly from lower consulting costs and a reduction in the estimated liability to withdraw from a multi-employer pension plan. For the fist quarter of fiscal 2009, interest expense decreased to $2.1 million from $2.7 million in the first quarter of fiscal 2008. The decrease in interest expense arose primarily as a result of lower short term interest rates. The income tax benefits for the first quarter of fiscal 2009 was limited to $33,000 or 7.9% of the pretax loss.

As of the end of the current quarter we had a tax valuation allowance of $4.2 million. We will reflect additional tax benefits to offset tax expense as income is realized in the future. Turning to the balance sheet, total inventories increased by $1.0 million or 0.8% compared to the value of inventory on hand at the end of the first quarter fiscal 2008.

Pounds of raw input stocks fell by 37.6% of 18 million pounds. The decline in quantity of raw input stocks is led by declines in the inventory of peanuts, walnuts and cashews. The average cost per pound of raw nut input stocks increased by approximately 70.6% as a result of change in the product mix from lower cost peanuts to higher cost pecans.

The value of finished goods inventories increased by 3.5% and the pounds of finished goods declined by 11.5% in comparison to the first quarter of fiscal 2008. Now, I'll turn the call over to Jeffrey Sanfilippo, our Chairman and CEO who will make further comments about first quarter results.

Thank you, Mike. Good morning everyone and thank you for your interesting John B. Sanfilippo & Sons. Yesterday we held our annual stock holders meeting in Elgin and reviewed the results for fiscal 2008. In my Chairman's speech, I highlighted many of the company's accomplishments this past year. We executed several important initiatives to not only improve our current financial performance, but to create conditions for long term success.

As was the case in our fourth quarter fiscal 2008, positive benefits of many of these initiatives were realized in our first quarter of fiscal 2009, gross profit increased by 20.2%, operating expenses declined to 9.1% of net sales from 9.7% and income from operations was $1.9 million compared to a loss of $1.1 million in the first quarter of fiscal 2008.

The management team and our employees continue to focus on several key areas to drive value in our organization. We have two key priorities, first improving operational efficiencies in Elgin. During the current quarter, efficiency improved significantly in our Elgin facility in comparison to efficiency measures for the fourth quarter of fiscal 2008.

Our operations team in Elgin worked hard and was successful in the current quarter to increase run speeds and reduce downtime. Our Purchasing and Scheduling departments were successful in reducing the inventories of finished goods on hand by 11.5% while improving service levels for our customers.

Second key priority is sales volume growth. Our Sales Marketing and research and Development departments continue to develop new value added products across all of our business channels.

During the fourth quarter of fiscal 2008 and first quarter of fiscal 2009, many potential new customers toured our Elgin facility and were very impressed with its capabilities. As a result of this and other factors, the company was awarded significant new private brand business with existing customers as well as a new program with a new customer which includes both snack and baking retail products and shipments are expected to start in January 2009.

Consumer products companies are experiencing extraordinary times as the US economy undergoes a transformation. While consumer behavior change is notoriously slow and gradual, changes in purchasing and shopping behavior over the past year have occurred with remarkable speed and frequency. A testament to the severity of economic hardship many consumers are experiencing.

Our company is evaluating advertising, pricing, promotions, merchandising, product development and product assortment to ensure we are aligned with shifting consumer and business priorities. Consumer preferences are expected to shift towards increased trial of lower cost private brand alternatives, increased coupon use, increased at home food preparation and less frequent shopping trips.

We anticipate these shifts will create opportunities to expand our private brand programs and pursue Fischer brand growth in the super center, club, drug and dollar store channels. Turning to our distribution channels, starting with industrial, sales were $20.9 million, down 26% compared to sales of $28.4 million in fiscal 2008.

Several of our industrial contract customers are running behind on their contract withdrawals for pecans and walnuts which we believe reflect changing consumer purchase patterns for some food products such as bakery goods which use pecans and walnuts.

But the primary decline, as Mike mentioned, in sales was due to a purchasing strategy for peanuts which reduced the amount of low margin peanuts normally sold to the industrial channel to other processors.

The food service channel, sales were $18 million in the first quarter fiscal 2009, up 3% compared to sales of $17.5 million in Q1 of 2008. This increase was mainly due to higher prices passed on to customers as a result of higher commodity costs. Unit buying for the quarter was actually down 3% in the food service channels.

Recent trends are showing consumers are eating out less and we believe that this may have a negative impact in the short term on our food service sales. However, to align with changing customer trends, we launched three new Fischer food service items and we are working on several other value added items and promotions to maintain our volume and create new demand for nuts and salads and cooking recipes in the food service channel.

In our contract packaging channel, sales were $13 million, up 17% compared to sales of $11 million in the first quarter of 2008. Although pounds were down 2% in this channel, the significant increase in sales dollars are as result of several new value added nuts and mixes developed for customers in this channel which demand higher prices.

Turning to our export channel, sales for the first quarter fiscal 2009 were flat at $7.6 million compared to similar sales in Q1 of 2008. However, pounds were down 12% in the channel and we're starting to experience a minor shift in sales from our industrial type customers to our consumer customers within this channel. For example, we've been successful in gaining new Fischer retail distribution in Mexico and Korea over the past two quarters. In addition, our Fischer extruded snack business has grown dramatically as we gain new customers overseas.

Last channel, our consumer channel, sales were $75 million in fiscal 2009 first quarter, up 10% compared to sales of 68 million in Q1 of fiscal 2008. Experienced positive growth with retailers in our super center, dollar store and alternative store divisions within the channel.

Now, turning to consumption trends in the consumer channel. According to AC Neilsen, the entire nut category inclusive of snack, baking and produce is up 4.9% in dollars for the last 52 weeks and flat in units. The dollar growth is attributed to two things, the first being price increases that were implemented across all categories.

The second, the categories witnessing a slight product type mix shift with strong unit growth seen in the snack category by almonds and pistachios and in the produce category by almonds, pistachios and cashews. And we are seeing similar product type mix shifts in our own shipping patterns.

Private label continues to be strong with a total category increase of 11.2% in dollars and 6.7% in units for the last 52 weeks. Private label increases are being driven by the strong growth in mass and drug channels with the grocery channel on a slight decline.

This is consistent with the reported shift in consumer shopping patterns, the grocery channel experiencing revenue declines as consumers shift their share of wallet to super centers, clubs, and drug stores in search of better values to help make less frequent shopping trips.

Some JBSS highlights from the quarter included our private label business gained distribution at a major grocery chain. Our fiscal year to date, our public relations efforts generated over 25 million consumer impressions for the Fischer brand. This is attributed to a continued focus on our new culinary touch salad topping line and a general Fischer brand awareness campaign.

The Fischer brand launched its advertising campaign supporting the launch of its culinary touch salad topping line and from September through March consumers will see both prints and outdoor advertising executions. We expect to generate well over 107 million consumer impressions.

To address the increase in consumer coupon clipping to help drive Fischer sales, we launched our freestanding insert campaign in September as well as partnered with UPromise and their online ecoupon program. And Fischer Fusions were featured on the Salty Snack segment of Unwrapped in October on the Food Network and it is currently in reruns now, so please watch for it. We're excited about our momentum and look forward to good things in the coming months.

In closing, we improved operating results for our first quarter fiscal 2009 compared to the first quarter of fiscal 2008, although we still recognize a loss before income taxes. We are moving in the right direction and I'm confident the initiatives we have executed over the past year-and-a-half and the projects we are currently executing will continue to positively impact our financial performance.

We still have a lot of work to do and our priorities are clear, increase production efficiencies in our Elgin facility and drive profitable value add volume growth. 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 however for your industry and our company with volatile costs for nuts, energy, packaging materials and an economic downturn in the US.

However with the strategies we have in place and through the hard work, commitment and efforts of all of our talented employees, we are well positioned for the future. 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.

Thanks, Jeff. At this time, we'll open up the call for questions. Operator, can you please queue up the first question?

(Operator Instructions). And your first question comes from the line of [Jeff Gigon] from [Melqui Private Wealth]. Please, proceed.

Good morning.

Good morning, Jeff.

Mike, can you just clarify your gross margin at 10.5% improved as a function of redundant cost reductions. Do you expect that to continue in the future and are there further cost reductions that may lead to improved gross margins?

Well, in terms of comparisons over the next three quarters we will favorably compare because we had substantial redundant costs in the old facilities in fiscal 2008.

The $3 million charge or expense that was built into costs of sales, I assume when those contracts come to term, do you expect to keep continue with the same customer profitable?

yes, we do.

Have you broken out your sales by distribution channels so as a -- in analyzing your business we can look at gross margin by channel. I don't know that I've seen that in the past.

No Jeff, I don't believe we've every don't that. But what we have stated in the past is generally food service and consumer are our highest margin channels and then that's followed by the other three channels and in some cases one of those three may be better than the others, but a lot of that depends on commodity costs.

On the OpEx line, is the elimination of these consulting costs leading to a 9.1% expense, is that a normal -- kind of a normalized line number or will we see better or worse in the future.

Well I think that -- historically speaking, that's probably one of our lower first quarter percentages for selling and admin. Even if you take out this restructuring credit, and I suspect that in the larger quarters, like in the first quarter and the second quarter we'll see lower percentages, but don't forget them, when we get into Q3 that probably will jump up closer to 10.

Okay, and on the inventory line that you talked about, can you explain what happened there with the different valuation there on the various product or raw materials or finished goods you have?

Yes, as far as raw materials go which pretty much drive the inventory value, pecans went up significantly versus the fourth quarter, peanuts also went up significantly, cashews held relatively steady, walnuts held steady. And I think I've just covered -- and almonds I think held steady too.

All right. And question for Jeff, you mentioned that you've got some significant new business that's been awarded that you expect to materialize in January of '09. Can you give us any sense of the dollar value of that business on a run rate going forward?

Really, it's going to depend on the timing and the total number of SKUs that they're going to launch in the program, so it's difficult for us to say exactly what the dollar value would be at this ten.

You don't have any budgeted numbers that you're looking at?

Not that we've been sharing yet with anyone.

Jeff, we're still working with the customer as we're trying to expand the line, but it is significant.

All right. And lastly, I guess just a general macro question, what makes Sanfilippo well positioned going forward versus competitors in this challenging economic environment particularly in an environment where we've got a stronger dollar which may work adversely against your export business.

Well, two fold, number one export is only 7% of our total sales, so it's fairly small. But because we've got a strong national brand with Fischer and we are a large private brand manufacturer, there's obviously already a shift or trend towards more private brand purchasing because consumers are looking for a lower cost on the shelf and so we've got --we're positioned well with our private brand customers.

In addition is there's a channel shift from people going to -- instead of going to grocery stores, they go to super centers and club stores and drug stores and we've got a strong Fischer brand, we can developed items or promote items under the Fischer brand quickly to meet consumer demand in those channels as well. So it's really -- we're in a position to balance both the Fischer brand with our private brands.

Yes, one of the things I'd like to add, and this is Jasper by the way, we spent a lot of money on putting this plant together an the consolidation of our Illinois facilities and I think if you look at the industry, there isn't anybody out there that's spent more money and invested more time and effort in looking at ways of driving costs out of our system, rather than doing things with -- trying to grow the brand. I mean we really focused the last three years on ways of driving costs out of our system.

And Jasper, I've been through the facility and I think it's a really a credit to you and your father and the whole leadership team there. It's beautiful, it's well thought out. The issue now is can you get the volumes out of margin to utilize the facility and bring that -- all that hard work to the bottom line and I think that has yet to be seen.

Correct. I mean certainly with the amount of innovation and new products that we're launching, I think there's certain capabilities that we have here that our competitors don't and our customers seem very interested in those products and really I think our innovation, our pack sizes, and our pack styles will really be the key to growing the volumes through the plant.

All right. Thank you.

I was going to add Jeff, that we've really invested resources in research and development and in creating new value added products, not just a typical roasted, salted peanut of cashew and because of that new value added product line we can demand higher margins because there's not as much competition for specific items like that in the marketplace.

Well, good. We look forward to seeing that strategy bear fruit.

Thank you.

(Operator Instructions). And your next question comes from the line of Gregg Hillman from First Watch Securities. Please, proceed.

Yes, good morning gentlemen. Can you just follow up on the last question that was asked, exactly what are some of the value added products that you were alluding to?

Well at our facilities here we have both hot panning which we create praline items, butter toffee items as well as cold panned items such as chocolate coated, yogurt coated products. We have extruded snack operation in the facility.

We have enrobing lines here in the facility and because of those additional capabilities, we can expand not only the mixes that have been growing I the category, but also ingredients in some of our other channels that would use unique type of flavors and unique type of coatings for innovation and product differentiation with our customers.

Okay. And just another question. I think that raw contract that you lost a year or two ago, I think that came up for bid. Was that ever rewarded?

Repeat the question again?

I think there was a large contract that hurt your sales about a year and a half ago that you lost that came up for rebid, what's the status of that right now?

Greg, we can't comment on what our customers are doing in that respect. It did come up for bid, but that's as far as I can go with it.

Okay. And then in terms of the whole question of contracts in place with your customers and the ability to pass through pricing increases, do you have any -- your new contracts that are more flexible so you'd have less danger with raw material price increases, less risk to you. I mean how do you -- are you been able to restructure any new contracts differently than you have in the past?

Its not really a matter of restructuring contracts, we've made some strategic decisions when we're guying and selling to not contract materials that we don not already have the inventory for or have confidence in what we will paying for those -- for the cost of goods, the industry is typically an industrial contract, we'll be assigned a specific time commitment, say a year and a specific volume commitment, say its 100,000 pounds.

So those contracts are firm but we've just changed the strategy on what types of things we're contracting with the timeline is that we contract and the amount or the quantity. We've mitigated some of the risk that we've seen in the past couple of years as a company and really as an industry on booking or contracting without having a secure idea or really true understanding of costs of goods.

What happened with the pecan situation, or -- that you can avoid in the future?

The pecan situation was more of a timing issue. We contracted pecans in January of 2008, there were still some pecan contract balances left on our books at the time that we adjusted some standards, but we do have the pecans to cover the contracts at the agreed upon price originally. It was just a timing issue when we started to buy some new crop for a go-forward business.

Okay. And then, just a question about your packaging and the shelf life. Exactly what is the shelf life of peanuts or other nuts for that matter.

Depending on the type of product, it can range from anywhere from six months for say a salted and shelled peanut up to 18 months for a -- a roasted salted almond in a can.

Okay and has your packaging been able to increase that life, your new packaging or --

No, not really because we're packing things at less than 2% oxygen and whether it be in a can or whether it be in a package, that's about as much as we can get.

Okay, and then what's innovative about your new packaging that the consumer likes about it.

Well, one of the things is when you look at all the new items being launched, obviously not ever item actually bears fruit and has a sustainable life cycle to it. And the packaging material associated with discontinuing items and then relaunching them is something that we've always had to concern ourselves with in the past and what we've done now is look at ordering more base stock type of films and then blowing labels on there. So our true exposure to that particular product will be labels rather than minimum orders worth of film.

Okay, that's interesting. And then Mike, did you release a cash flow statement? Did you release the Q or?

Yes, the Q was filed yesterday afternoon.

Just off the top of your head, what was the operating cash flow.

I think it was about $5.5 million.

And what was CapEx?

CapEx was about $900,000.

Okay, so that's a positive. And then just going into -- I think the December quarter is normally your strongest quarter. Would this big about -- the problems with the pecans, would this blow the December quarter, or do you still expect to do a strong December quarter?

No, we expect pecans to have normal margins in the second quarter.

Okay. And then, maybe Jasper, or you made a comments that consumers are staying home more and cooking more and I don't know maybe even like storing more food. Could you give us some documentation for that or -- I mean what was your sense of that? I mean its --

Well, we're just looking at the different third party reports that are out there, whether its IRI or Neilson, or even PWC has put out some reports now on disconsumption trends in general, so we're really basing some of our information on what we've seen on reports, but also some of our shipment trends as well. We have seen a slight decrease in shipments in our food service channel and an increase in shipments to our super center or club store type of channels. But both internal shipments that we've seen as well as some of the third party reports that are out there.

Has home baking increased?

Food preparation is increased. If you look at the baking category, it's relatively flat in units, but up in dollars as a result of price increases that have been passed on from many manufacturers, but overall, the unit volume in baking is relatively flat.

Okay. Okay, well thanks. And then also, your salad toppings thing. Has that been a success or what's the feed back you're getting on that?

It's a relatively new product launch and its one of the -- its really the program that we developed over the last couple of years and we just see a need for a demand for nuts for salad toppings and the only place you could find nuts for salad toppings was in the product section or unless you were in the bakery aisle.

So we created a nice program to be positioned in the grocery aisle the salad condiment section next to dressings and croutons. And we -- not only -- and we developed the program for unique type of salads, we saw people in their food service channel, we saw demand for blends and mixes of cranberries and almonds or walnuts and raisins for toppings for salads so we applied some of that information to the Fischer brand of culinary touch salad toppings that we crated.

Okay, so you make it like have a salad if you want to do -- it describes on the packaging what kind of salad you can make with it?

Right, exactly, it would be a recipe or a usage on the salad -- on the packaging.

Okay, that's great. And I guess you could expand that later to include other things like artificial bacon bits or something like that.

Sure, sure.

Okay, thanks very much.

Okay, Greg, thanks.

(Operator instructions). And your next question comes from the line of Michael Curran from Wachovia Securities. Please proceed.

Thank you. I'd like to focus just a bit more on the new Elgin plant and I'm curious as you finish up this calendar year, your second quarter. What would be your estimation of the plant capacity utilization?

At the end of this quarter you're probably going to be about 60%.

Very good. And as you go forward, assuming moderate success in your quote significant new customers and business, how would you end the 2009 calendar year in terms of capacity utilization?

It's hard to say because our business is relatively cyclical. If you looked at what third quarter would be in terns of capacity, obviously we'd have a lot more capacity here. I think if you look at the plant overall, you're probably somewhere between 50 to 65%.

Okay and in the margin categories, your new significant unnamed, undefined customers, would that fall into your higher margin product line?

Yes, that's correct, Michael.

Very good. So it would be reasonable to assume that the overall blended margins out of the company would be going up on increased sales.

All things being equal, that would be correct.

Very good. And one final question. This new customer, is he lumpy?

What is lumpy? How do you define that?

I define lumpy by -- since you're going to begin shipping in January of '09, I got a 90 day snapshot when you talked to me.

Okay.

But then again, if he's up and down, he's called lumpy.

Okay, I don't know whether I'd consider it lumpy. No. and the reason we don't talk customer names is, if it was a Fischer product that would be one thing. But private brands a lot of our customers are sensitive about acknowledging who their manufacturers are. So that's one of the reasons why we don't acknowledge the name of our specific customers on our private brand side.

Okay, no terrific. Look forward to talking to you next quarter. Thanks.

Okay, thank you.

You have no question at this time, sir. And I would now like to turn the call over to Michael Valentine for closing remark.

Okay, since there are no further questions, again we want to thank everyone for participating on our first quarter earnings conference call and we also thank you for your interest in JBSS. Have a good day.

Thank you for your participation in today's conference. This conclude the presentation you may now disconnect. Good day.