John B Sanfilippo & Son Inc (JBSS) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 John B. Sanfilippo & Son earnings conference call. My name is Shamika 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, Chief Financial Officer. Please proceed, sir.

Thank you. First, we'd like to thank everyone for participating in our quarterly conference call for the third quarter of fiscal 2009. Before we start, 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, including forms 10-K and 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties that are inherent in our business.

Shortly after the end of the third quarter, we received notices from our primary supplier of pistachio, Setton Pistachio of Terra Bella, it was voluntarily recalling pistachio products that it shipped to us since September 1, 2008. In response to these recall notices that we received from Setton, we issued recall press releases and notices to our customers for products that contained, in whole or in part, the recall pistachios. We estimate that the total impact of the pistachio recall is approximately $3.5 million, which has been recorded as a charge in the current third quarter to cover sales credits that will be issued to impacted customers, lost profits of certain impacted customers, retrieval and disposal costs for impacted customer inventories, and write-offs of our inventories that were impacted by the recall.

As a result of recording this charge, we reduced our incentive compensation expense by $1.1 million because charges of this nature are considered in determining incentive compensation awards. Consequently, the net impact of the pistachio recall in the current quarter and corresponding year-to-date period was $2.4 million. Amounts reported during this call shall be as reported pursuant to GAAP unless they are accompanied by a reference to the impact of the pistachio recall. Please refer to our fiscal 2009 third quarter earnings release that we issued yesterday for a reconciliation of GAAP amounts to non-GAAP amounts.

Beginning with the income statement, the current quarter net sales increased by 6.6% to $113.8 million from $106.7 million for the third quarter of fiscal 2008. Sales volume or total pounds shipped to customers increased by 9.2%. Sales volume increased in the quarterly comparison due to a considerable increase in volume in the consumer channel from expanding private-label sales with new customers and with existing customers. Net sales increased in the consumer, contract packaging and export channels and decreased in the industrial and food service channels. The charge for the pistachio recall included a reduction to net sales of $1.9 million, of which $1 million occurred in the consumer channel, $800,000 in the contract packaging channel, and $100,000 in the food service channel. Excluding the impact of the pistachio recall on net sales, net sales would have increased by 8.4% in the quarterly comparison.

Current year-to-date net sales increased by 2.4% to $426.4 million from $416.5 million for the same period in fiscal 2008. Sales volume declined by 5.3% in year-to-date comparison, due to a decline in shipped pounds in the industrial and export channels from lower sales of peanuts and walnuts respectively. Net sales increased in the consumer and contract packaging channels and decreased in the industrial, export and food service channels.

The current third quarter gross profit margin decreased to 11.6% of net sales from 12.0% of net sales for the third quarter of fiscal 2008. The pistachio recall had a negative impact on gross profit of $2.2 million for the reduction in net sales and the write-off of our impacted inventories. Gross profit for the current quarter was favorably impacted by a corresponding reduction in incentive compensation expense of $200,000 as a result of the recall. Excluding the net impact of the pistachio recall, the current quarter's gross profit margin would have been 13.2% of net sales. Excluding the net impact of the recall, the 120 basis point improvement in gross profit margin in the quarterly comparison came mainly from increased absorption of fixed costs from increased production volume. Production volume increased as a result of increased sales volume during the quarter.

The current year-to-date gross profit margin as a percentage of net sales increased to 12.2% from 11.5% for the same period in fiscal 2008. Excluding the impact of the pistachio recall, the gross profit margin for the current year-to-date period would have been 12.6% of net sales. The improvement in the gross profit margin in the year-to-date comparison before considering the impact of the recall arose as a result of lower equipment moving expenses and improved manufacturing efficiencies.

Total operating expenses in the current quarter as a percentage of net sales increased to 12.2% from 11.9% for the third quarter of fiscal 2008. Total operating percentages as a percentage of net sales for the current year-to-date period declined to 9.8% from 10.1% for the same period in fiscal 2008. Total operating expenses for both the current quarter and year-to-date period included a charge for the pistachio recall of $1.3 million and a corresponding reduction in incentive compensation expense of $900,000. Excluding the net impact of the pistachio recall, total operating expenses would have been 11.7% of net sales for the current quarter and 9.6% of net sales for the current year-to-date period. Before considering the net impact of the pistachio recall, the decline in operating expenses in the quarterly comparison occurred primarily because of lower shipping costs. The decline in operating expenses in the year-to-date comparison occurred primarily because of lower shipping costs and the absence of restructuring costs.

Interest expense in the current quarter declined to $1.8 million from $2.7 million for the third quarter of fiscal 2008. Interest expense in the current year-to-date comparison declined to $6.0 million from $8.0 million for the same period in fiscal 2008. The declines in interest expense in the quarterly and year-to-date comparisons arose primarily as a result of lower total debt levels and lower interest rates. If we exclude the $2.4 million net impact of the pistachio recall in the current reported periods and the $6.7 million debt extinguishment cost in last year's reported periods, the loss before income taxes for the current quarter would have been $400,000, while the loss before income taxes for the third quarter of fiscal 2008 would have been $2.6 million. Similarly, the income before income taxes in the current year-to-date period would have been $5.7 million, while the loss before income taxes for last year's year-to-date period would have been $2.4 million.

Taking a quick look at inventory. Inventories at the end of the current third quarter declined by approximately $16 million or 11.3% compared to total inventories on hand at the end of the third quarter of fiscal 2008. Pounds of raw nuts on hand declined by about 2.7 million pounds or 3.9% in the year-over-year comparison. Primarily because of lower walnut acquisition costs, the weighted average cost per pound of raw nut input stocks decreased by 8.1%.

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

Thank you, Mike. Good morning, everyone. As Mike mentioned earlier, excluding the impact of the pistachio recall, our year-to-date income before taxes would have been $5.7 million and the quarter results would have been posted a $400,000 loss. The third quarter is historically our toughest quarter due to high raw nut inventories purchased after harvest, combined with our lowest volume sales quarter as a result of moderate nut consumption and usage during the first three months of the calendar year. We continue our steadfast commitment to increase sales volume and improve operations through such initiatives as reducing our material inventory levels. The results of our third quarter are an improvement over last year and these results are approaching levels we experienced back in 2002, 2003 prior to the major increases in operating profits driven by the spike in demand as a result of low-carb diet trends.

Our gross margins for the quarter, excluding the impact of the recall, increased from 12% to 13.2% in fiscal 2009. And although we are moving in the right direction and our results are favorable, there are still additional opportunities for improvement. Our management team and our employees continue to focus on two key priorities to drive value in our organization. Those priorities remain profitable volume growth and operational efficiencies.

First, let me comment on sales growth. Our net sales were $113.8 million for Q3, a $7.1 million or 6.6% increase over 2008. This increase is primarily due to a 9.2% increase in overall pounds shipped. The largest increase in the quarter came from the consumer channel, which realized a 21.6% volume increase and a 17.3% increase in dollars. This growth was achieved through a combination of increases in private brands and Fisher sales. We began shipping new private brand customers in January, and we expanded the private brand programs of several existing accounts. Our consumer sales and marketing teams are working hard to develop exciting programs for retailers to promote and expand their private brand programs. At the same time, Fisher brand sales volumes increased by 7.9% in the third quarter.

Looking at nut consumption trends, for the last quarter, the total nut category, inclusive of snack, baking and produce, was flat in dollars and remained down in units by 5.9%. Looking at specific segments, the snack category remained down 1.8% in dollars and 7.4% in units. The baking category increased 5.2% in dollars and was flat in units. And the produce category decreased 1.3% in dollars and 5.2% in units.

Many factors continue to make an impact on the nut category, including a challenging economic climate, erratic shifts in consumer shopping behavior, where they shop, what they purchase and the frequency of their trips and their food consumption habits. For example, we've witnessed an overall consumer purchase pattern shift from traditional grocery stores to super centers. In a recent Nielsen analysis, the grocery channel gave up sales in a majority of its departments to super centers. In addition according to Nielsen, cooking from scratch is making a comeback and sales of cooking and baking supplies are on the rise. We can attribute the quicker recovery of the baking category as a result of this comeback as more consumers are eating at home, if they still want a chef-inspired meal with gourmet ingredients. And there is also a market shift to private brands, which has put extreme pressure on all national brands. However, I'm happy to report for the third quarter, Fisher brand witnessed an overall increase of 4.9% in units and 8.3% in dollars in combined snack and baking categories.

In the snack category specifically, Fisher witnessed an increase of 11% in units and 12.6% in dollars for the quarter. The growth of the Fisher brand in snack can be attributed to strong promotions and new products we develop to complement the existing product assortments at retailers. In the baking category, dollar volume increased 1.9% and units were down 1.7%. This unit decrease is at a lesser rate compared to the 6.4% decline reported last quarter. This is a big improvement and a nice recovery for the Fisher brand.

Our momentum continues to grow and it's been a busy quarter. Some highlights from the past quarter are continued marketing efforts that include additional couponing, freestanding inserts, our Upromise partnership and specific customer promotions. In the third quarter, we launched 25 new Fisher products, which included two new Fisher Culinary Touch Salad topping items, three new additional Fisher Fusions lines such as Energy Blend, Ice Cream Sundae Mix and Cinnamon Roll. We launched a brand-new single-serve line targeted for the front of store in the convenience channel. This line includes 13 core and flavorful options to choose from. A brand-new innovative line we launched in the baking category is called Culinary Touch Cooking and Baking Add-Ins and Toppings. There are five new SKUs totally unique to the baking category. They are pre-measured and pre-prepared blends that the consumer can just add to their meals and baked goods, giving them that chef-inspired meal and dessert made easy. We also added two new items for our airline program, a Mixed Nut Blend and a Berry Nut Blend. Both of these items feature a resealable zipper, so airline passengers can reseal the bag for later consumption.

Our new products are addressing key consumer needs; taste, convenience, innovation and quality. To date, we have seen extremely positive reaction to these new product categories and have secured placement with many customers. A few comments on our other business channels. Net sales in the industrial channel decreased by 10% in dollars and 12.8% in pounds shipped. We continue to experience declines in our industrial channel as a result of four things. One, a planned reduction in peanuts shelved at our Bainbridge, Georgia facility. Two, increased price competition from grower/processors. Three, a planned decrease in availability of our supply of tree nuts for the industrial channel. And four, decrease in demand in the industrial channel for nuts, as fewer new products with nuts as ingredients have been developed.

Net sales in the food service channels decreased by 13.9% in dollars and 6.9% in pounds. This decrease is due to the effects of current economic conditions, as consumers are spending less money eating out at restaurants. Turning to our export channel, net sales increased by 10.1% in dollars and 31.9% in pounds. The main reason for the increase in the export channel is due to sales of in-shell walnuts. The in-shell walnut sales in Q3 made up for a portion of the in-shell walnut sale declines we experienced in Q2.

Turning now to improving operational efficiencies, the increase in sales volume has allowed us to utilize some of the extra production capacity generated by our new facility located in Elgin, Illinois. But there are still opportunities the Company is aggressively pursuing to drive additional profitable volume in order to gain the full extent of the planned benefits of the Elgin operation. Continuous improvement is one of our Company's core values. We are persistent in executing initiatives to drive costs out of operations, improve quality and streamline our supply chain.

At this time, I'm going to pass the presentation over to Jasper Jr. to cover some of the highlights from our third quarter.

Thanks, Jeff. The operations management team continues to focus on reducing the efficiency variances in our operations. Some examples of what we have accomplished both year-to-date and for the quarter is to increase our run efficiencies by finding the sweet spot run rates for each piece of equipment, where it runs at an optimum rate with as little downtime. We continue to focus on our procedures and training our operators on how to better utilize our equipment. We're also focusing on reducing our downtimes by having a formal preventative maintenance program on all of our production lines and we're improving our changeover cycle times by continuous improvement initiatives Jeff mentioned, coupled with better and proper documentation and proper training to go along with that new process.

We've also focused on reducing our material waste by making enhancements in the production lines, as well as putting a more robust weight control policy in place for each of the facilities. The operations will continue to focus on food safety, as it is a very important part of our operations and we continue to get equipment validated for almonds, peanuts and various other tree nuts at all of our facilities and have successfully done so in Elgin, Texas and Gustine with respect to almonds and we have our Georgia facility currently validated for peanut roasting. The Company will continue to work on better raw and processed nut segregation, as it has become paramount with respect to the possibility of cross-contamination.

Our warehousing operations at all of our facilities continue to make improvement in order pulling efficiencies, inventory accuracy levels, as well as loading and unloading of trucks. One of the other things that we've accomplished through the fiscal year is, we've been able to reduce our freight expense by increasing to optimize our consolidated loads using more rail where applicable and able to negotiate better freight rates.

At this time, I'll turn it back over to Jeff.

Thank you, Jasper. In respect to the pistachio recall, though our food safety systems are rigorous, we recognized that the risks of product recalls in our industry have increased recently. We are committed to enhancing our existing process of continuous improvement in this most critical area. Jasper talked about some of the measures that we're taking to improve our operational efficiencies. Other things we're doing specific to improving food safety is additional testing requirements for the suppliers of our raw materials and we're actually in the process of bringing on a microbiologist on board to assist us not only in monitoring our own facilities, but also required to set -- go out to vendors and monitor their operations as well. So, we take this very seriously and we will do -- dedicate additional resources to improving the food safety of our supply chain.

In closing, our business is growing, especially in the consumer and contract manufacturing channels. Despite a volatile economy, our commitment to investing capacity and capabilities that differentiate us from the rest of our industry is the right strategy for our Company. We will continue to invest in our brands, our processes and our people to leverage this competitive advantage and continue to grow our business. There are many challenges ahead, as consumer preferences continue to shift and food retailers and food manufacturers respond to economic pressures and changing consumption dynamics both in the United States and globally.

In addition, our industry has been challenged to improve food safety, as we anticipate increased efforts by regulatory agencies to require changes to improved food safety, specifically in the nut industry. The investments we made over the past three years in new production capabilities, research and development, and quality assurance programs have positioned our Company to overcome these challenges. Our priorities are clear, drive profitable value-added volume growth and continue to improve operations. We believe that with these strategies we have in place and through the hard work, commitment and effort of all of our talented employees, we are well positioned for the future. Our management team has worked hard to create a value-driven culture within our Company and we will continue to provide value for our customers, stakeholders and shareholders. We appreciate your participation in the call and thank you for your interest in our Company.

At this time, I'll turn the call back over to Mike.

Okay. And at this time, we'll open the call to questions. Shamika, would you please queue up the first question?

Yes. (Operator Instructions). You have a question from the line of Gregg Hillman of First Wilshire Securities. Please proceed.

Yes, good morning. Are you cash flow positive right now on a current run rate basis?

For this fiscal year?

Yes, or just you know --

Yes, we are.

Yes, and currently?

Well, we're typically not cash flow positive in the third quarter, although the negative cash flow that we had for the third quarter is about the lowest I can recall, but year-to-date we are cash flow positive.

Okay. Okay, thanks. And just in terms of, you mentioned you brought a new customer on in the quarter -- in the first quarter of this calendar year. Do you know how much that accounted for in sales or you'd rather not say?

We'd rather not say, Gregg.

Okay. Okay, that's fine. Thank you very much.

Okay. Thank you.

(Operator Instructions). You have a question from the line of [Greg Renick], Smith Barney. Please proceed.

Good morning.

Good morning, Greg.

Is there any update on, you have two pieces of real estate, one for lease and one for sale. And on the real estate that's for lease, are you -- is that being depreciated fully even though it's empty or essentially empty or is it being depreciated just on a occupancy basis.

Okay. Starting with just the status report on the sale of the original sites, as everyone may recall, we did have a buyer near the end of -- or last year and near the end of last year, last calendar year. Because the buyer had difficulty getting financing, that deal fell through. We still have that property on the market, but as you can imagine, it's probably going to take a while to get some viable buyers. In respect to the office building, we're still aggressively trying to lease more space. There is some considerable interest out there in the space, but as is the case with selling the original site it's probably going to take a little time given the current market conditions and finally we are depreciating that building fully.

Okay. Thank you.

Okay, Greg. Thanks.

There are no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

Okay, again we would like to thank all the participants for their interest in JBSS and this concludes the call for our third quarter operating results.

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