John B Sanfilippo & Son Inc (JBSS) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son fourth-quarter and fiscal 2009 year-end earnings conference call. My name is Fab and I will be your coordinator for today.

At this time, all participants are in a 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.

Thank you, Fab. First, we would like to thank everybody for participating in our quarterly conference call for the fourth quarter and fiscal year ended 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 expectations and involve certain risks and uncertainties. The factors that can negatively impact results are explained in the various SEC filings that we've made in the past and in the current year's Form 10-K, which will be filed shortly. We encourage you to refer to these filings to learn more about these risks and uncertainties in our business.

Starting with the income statement, the current quarter net sales increased by 1.8% or $2.2 million to $127.5 million in comparison to net sales in the fourth quarter of fiscal 2008.

Total pounds shipped to customers increased by 9.5%. Pounds of almonds, cashews, fruit and nut mixes, mixed nuts, peanuts, snack mixes, and walnuts shipped to customers increased in the quarterly comparison. Pounds shipped increased in the consumer, industrial, and export channels and decreased in the food service and contract packaging channels.

The increase in net sales was driven mainly by the addition of a new customer and increased shipments to an existing customer in the consumer channel. Increased supplies of walnuts fueled the increase in pounds shipped in the industrial and export channels.

Fiscal year net sales increased to $553.8 million from fiscal 2008 net sales of $541.8 million. Total pounds shipped to customers decreased by 1.8%.

Decreases in pounds of almonds, pecans, peanuts, and walnuts shipped to customers were offset in part by increases in pounds of cashews, fruit and nut mixes, and snack mixes shipped to customers in the yearly comparison. Pounds shipped declined in all distribution channels except the consumer and contract packaging channels in the yearly comparison. The majority of the decline in pounds shipped occurred in the industrial channel, particularly in respect to sales volume for peanuts, almonds, and pecans.

The bulk of the decline in peanut sales volume was attributed to a conscious decision to buy fewer peanuts for shelling, to reduce relatively unprofitable sales of excess peanut shellers and peanut oil processors.

Fourth-quarter gross profit margin increased to 16.0% from 14.6% for last year's fourth quarter as a percentage of net sales. This significant improvement in gross margin came mainly from improved margins on sales of almonds and walnuts due to lower acquisition costs. Additionally, a significant improvement in manufacturing efficiencies in the Elgin facility in comparison to efficiencies in the fourth quarter of fiscal 2008 also contributed to the improvement in gross profit margin.

Fiscal 2009 gross profit margin, again as a percentage of net sales, increased to 13.1% from 12.2% in the previous fiscal year. As was the case in the quarterly comparison, improved margins on sales of almonds and walnuts, in addition to improved manufacturing efficiencies in the Elgin facility, led to the overall improvement in gross profit margin in the year-over-year comparison.

Fourth-quarter 2009 total operating expenses as a percentage of net sales increased to 11.9% from 10.6% for the fourth quarter of fiscal 2008. Increases in spending on advertising, consumer marketing, broker commissions, and incentive compensation largely led to the increase in total operating expenses in the quarterly comparison.

Fiscal 2009 total operating expenses as a percentage of net sales remained unchanged at 10.3% in comparison to total operating expenses for fiscal 2008. Increases in advertising and consumer marketing expenses were largely offset by the nonrecurrence of restructuring expenses that were recorded in fiscal 2008.

Interest expense in the current fourth quarter declined to $1.6 million from $2.5 million for the fourth quarter of fiscal 2008. The decline in interest expense in the quarterly comparison was driven mainly by lower short-term interest rates and lower total debt levels.

Interest expense in the current year decreased to $7.6 million from $10.5 million for fiscal 2008. Again, lower debt levels and lower short-term interest rates also led to the decline in interest expense in the yearly comparison.

In addition to the impact of making scheduled principal payments on long-term debt, lower inventory levels also contributed to a 29.1% decline, total debt levels during fiscal 2009. For example, the values of inventories on hand at the end of fiscal 2009 fell by $20.7 million or 16.3% from the value of the inventories on hand at the end of fiscal 2008. The decline in the value of total inventories on hand came mainly from improved inventory management practices, as evidenced by a 21.2% decline in finished goods on hand in the yearly comparison.

In addition to lower inventories, a return to profitability also fueled an increase in cash flow from operations from $29.6 million in fiscal 2008 to $43.4 million in fiscal 2009. In furtherance of our efforts to improve cash flow, we also continue to focus on controlling capital expenditures in the wake of the completion of the facility consolidation project, as capital expenditures declined considerably from $11.6 million for fiscal 2008 to $5.9 million for fiscal 2009.

In the fourth quarter of fiscal 2009, we received new information from our customers in respect to their total costs associated with pistachio recall. Consequently, we reduced our estimate of the costs related to the pistachio recall from $2.4 million, net of the reduction in incentive compensation expense, to $1.7 million. The $700,000 reduction in recall costs is comprised of a $200,000 increase in net sales and a $500,000 reduction in administrative expenses, again net of the corresponding increase in incentive compensation expense.

Mainly as a result of improved gross profit margin and lower interest expense, earnings per share diluted improved to $0.37 per share from $0.25 per share in the quarterly comparison; and improved to $0.65 per share from a loss of $0.56 per share in a yearly comparison.

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 and fiscal year.

Thank you, Mike. Good morning, everyone. Our fourth-quarter and year-end fiscal 2009 results demonstrate that the decisions and efforts made by our management team and driven by our 1,350 dedicated employees were the right ones for our customers, our shareholders, and our Company. We accomplished a great deal this past year and returned to profitability in fiscal 2009.

As Mike pointed out, we reduced our debt level significantly; we limited capital expenditures and increased cash flow. At the same time, the Company improved operational efficiencies, grew our sales with key accounts, and aligned our workforce to respond quickly to changing customer and consumer demands.

We have made very difficult but necessary decisions over the past three years to build a more competitive company and to execute initiatives that support our strategies for the future. I have commented several times on previous calls that our management team and our employees continue to focus on two key priorities to drive value in our organization -- profitable volume growth and operational efficiencies. And we are succeeding.

In addition, our improved financial position allows us to devote more resources to become a stronger, strategic partner for our value-added customers globally.

Over the last several months, our senior management team developed a five-year strategic plan and built a framework from which we intend to maximize the potential of our brands, our people, and our processes. The newly adopted strategic plan deepens our focus on resource allocation in several key areas.

First, growth opportunities. The Company will expand efforts in the consumer, food service, and international channels while maintaining a strong base of innovative, premium customers in the industrial and contract manufacturing channels. In the consumer channel, we are committed to grow our Fisher and private brands business in club stores and alternative channels, as well as develop a stronger presence in produce departments. Additional resources will be allocated to the food service and international channels as we pursue strategic partnerships and expand our product lines to meet changing customer needs, especially in the areas of health and nutrition.

Product innovation. New products contributed nearly 4% of our total annual revenue in fiscal 2009. Many of these products were launched in the fall and winter this past year. New products include the Culinary Touch baking and cooking blends, as well as a single-serve assortment under the Fisher brand for our consumer and food service channels. Line extensions to our successful Culinary Touch salad topping and fusion lines also were launched.

We are the first in the nut industry to use earth-friendly sustainable film substrates to package our Fisher Chef's Naturals baking ingredient nuts and our food service 2-pound product offerings. We also launched numerous products in our consumer channels, private brand segment, and in our contract manufacturing channel. Overall, we launched nearly 200 new products across all sales channels.

A key strategy is to increase our speed to market for new product development and be a better resource for our customers for innovative research and development.

With the Fisher brand we will allocate additional resources to expand our distribution of Fisher across multiple channels. Just this past year, we focused on the Fisher brand, launching a multilevel advertising campaign for both our Fisher Culinary Touch salad toppings and our Fisher snack assortment. This messaging, partnered with aggressive trade programs, new customer business in our consumer, food service, and export channels, and relevant new product development, has helped grow the brand in snack and baking combined over 16% in dollars and 24% in units this past quarter. We show a 3.2% increase in dollars and 3.7% increase in units for the past fiscal year.

In the snack category, Fisher witnessed a substantial increase of 17.4% in dollars and 33% in units for the quarter. This unit growth is at a greater rate versus the last 12 and six months' growth of 8.8% and 21% in units, respectively. This positions the brand for future growth in the upcoming year. We continue to increase our promotional efforts for the brand in many markets and have witnessed great results.

Strategic focus also is on food safety and quality assurance. Our fiscal 2010 plan calls for increased spending in food safety, food defense, and quality programs. Although our food safety systems are rigorous, we are committed to enhancing our existing processes and executing proactive programs to meet additional customer requirements and more stringent government regulations.

We are expanding our QA staff to include a microbiologist who will be responsible for internal audits of our manufacturing facilities and those of our vendors. In addition, we increased the frequency and requirements of our testing procedures of both raw and finished goods.

A fifth key strategic focus is on continuous improvement. And I will pass the presentation over to Jasper to make some comments about our continuous improvement programs.

Thanks, Jeff. The Company formally created a Continuous Improvements Department to work on improvement projects in both manufacturing and nonmanufacturing areas, as well as to create a culture within our organization that is always looking for a better way to do things. As a result, inventory management improvements led significantly to a 21.2% decline in finished good inventory dollars, while concurrently the Company improved and maintained our average service levels to our customers to that above 99%.

As Mike stated earlier, improvements in our Elgin efficiency production lines has also led to improvements in our gross margins. We've also made improvements in material scrap accounts that relate to both Elgin production lines as well as yield improvements in the shelling plant operations.

We have also consolidated packaging material suppliers, which has allowed us to further leverage our purchasing power while increasing the overall quality of our packaging materials, which helps us improve the equipment efficiencies in our Elgin operations.

Our group has also looked at optimizing our freight and our cost to ship products throughout our operations by utilizing Ram where applicable and then also negotiating vendor contracts with our freight carriers. Now I will turn it back over to Jeff.

Thank you, Jasper. To execute the strategic plan, another key focus and something that's extremely important is focus on people. Our Company will continue to expand and diversify our management team and workforce with experienced leaders with multiple areas of expertise. We will be expanding our sales and marketing departments in the consumer, food service, and export channels. And we will expand our management team.

Many of you may have seen the press release we sent in May announcing the hiring of Robert Sarlls to fill a newly created position of Vice President, Strategy and New Business Development. A critical part of our growth strategy is new business development, finding blue oceans, and meeting unmet consumer needs. Having specialized exclusively on the food industry for more than 10 years, Rob brings excellent experience and leadership in mergers and acquisitions and will be instrumental in pursuing strategic alliances, acquisitions, and joint ventures to expand our market presence both domestically and globally.

Now turning to results for fiscal 2009, our net sales were $553.8 million for fiscal '09, a $12.1 million or 2.2% increase over fiscal 2008. While pounds shipped decreased marginally in fiscal '09, pounds shipped increased over 9% for both the third and fourth quarters compared to fiscal '08. The increase in sales volume has allowed us to utilize the extra production capacity generated by our new production facility in Elgin. But there are still enormous opportunities and available capacity to grow.

Let me comment on some of the highlights from our business channels. First, consumer. Net sales in the consumer channel increased by 7.8% in dollars and 5.5% in volume in fiscal '09. Private label consumer sales volume increased by 7.3% in fiscal '09, primarily due to a significant new customer for the last half of fiscal '09; expansion of business at select existing customers; and a general increase in sales of private label products due to current economic conditions.

Fisher brand sales volume increased 3.2% for fiscal '09 compared to '08, primarily due to an increase in in-shell peanut sales to a major customer, partially offset by decreased sales to other customers.

Food service channel. Net sales in the channel decreased by 5.1% in dollars and 4.1% in volume in fiscal 2009 compared to 2008. This decrease is primarily due to the effects of current economic conditions, as consumers are spending less money at restaurants. However, our Company was successful in establishing a partnership with DOT Foods to reach a new segment of food service customers, smaller restaurants and re-distributors; and we anticipate making up a portion of the volume declines going forward.

We launched several new value-add items in the fourth quarter which generated additional volumes of pounds shipped. Many of those products are distributed through DOT Foods.

The Company also introduced Fisher brand food service products in sustainable 2-pound packaging, and shipments just started during the first quarter of fiscal 2010.

Our contract packaging channel. Net sales increased by 17.5% in dollars and 6.7% in volume in fiscal 2009. The significant sales volume increase is primarily due to increased business with our major contract packaging customer, who continued strong efforts to grow their distribution of snack nuts, rolling out new items with a focus on product innovation and promotions. In addition, we were successful in building distribution in the club channel with another customer who launched several premium snack items.

In our industrial channel, sales decreased by 14.7% in dollars and 23% in sales volume. The sales volume decrease is primarily due to lower raw peanut sales to other peanut processors and oil processors, resulting in part from the planned reduction in peanuts shelled at our Bainbridge facility; increased price competition from processors who are directly aligned with nut growers; a decrease in the availability of our supply of tree nuts for the industrial channel; and a decrease in demand in the industrial distribution channel for nuts.

Our industrial customers retrenched and made the least number of new product launches this year as we have seen in a long time. However, in spite of that, new product launches in the cereal bar segment represented new value-added sales for us of approximately $3.4 million made up of roasted cashews, honey roast cashews, roasted pecans, and roasted macadamias.

International channel. Pounds shipped in the fourth quarter increased 30% mainly due to additional in-shell walnut business. In addition, several current customers expanded their snack product lines, which contributed to the growth. This included both consumer and industrial accounts in the Middle East, Japan, and Scandinavia.

Fiscal 2009 year-end net sales in the export channel decreased by 5.6% in dollars and 3% in volume compared to fiscal '08. The decrease in volume is primarily due to lower overall sales to our industrial export customers, in part as a result of a reallocation of some commodities such as shelled walnuts to our consumer and food service channels.

In closing, although we accomplished many of our initiatives in fiscal 2009, there were a few projects that will be carried forward. We were unsuccessful in selling the original Elgin property we purchased in anticipation of the facility consolidation project. We will continue our efforts to market and sell this 85-acre property; but with the real estate markets as they are today, we are not too optimistic a deal will be completed in fiscal 2010.

Customer development and retention is also a key initiative going forward. Although we had several successes and built great partnerships, we can and will become a better resource for and provide additional value to our customers. When we evaluate growth opportunities, we will focus on select current customers across all our channels who value product and packaging innovation. We will leverage our quality, industry expertise, and innovation to grow our customer snack, baking, and ingredient nut business. And our sales, marketing, and R&D teams will continue to utilize the insights we gain from customers across our channels to develop products to meet unmet consumer demand.

We will maintain a disciplined approach to procurement, operations, sales, marketing, finance, and new business opportunities. As we become a more customer-centric organization, it is critical that we continue to maintain this discipline and stay focused on executing our initiatives and strategies.

Our priorities remain clear -- drive profitable value-added volume growth, continue to improve operations, and execute our strategic plan. We believe that with the strategies we have in place and through the hard work, commitment, and efforts of all of our 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 provide value for our customers, our stakeholders, and our shareholders.

I appreciate your participation in the call and thank you for your interest in our Company. I will now turn the call back over to Mike.

Thanks, Jeff. At this time, we will open the call to questions. Operator, would you please queue up the first question?

(Operator Instructions) Bruce Baughman, Franklin.

Good morning. Congratulations on another nice quarter.

Obviously, the developments on the balance sheet are welcome and very nice to see. Would you anticipate a continued debt reduction during the coming year? And do you have a particular leverage metric in mind that you consider an appropriate one?

Bruce, first of all, as you probably recall, we did generate a lot of cash from reducing inventories. There is still a little bit more room there; but certainly not to the extent that we experienced in fiscal 2009. But we do expect to generate a significant amount of cash flow, a good portion of which will be used to invest in our Fisher brand and other parts of our consumer channel.

But compared to, say, the previous three fiscal years, we do expect to reduce debt further.

Okay, is there a level of debt or some kind of benchmark metric that you can cite as a point place, where once you arrive there you consider yourself appropriately capitalized?

Well, I think even the level that we have at the end of this fiscal year I would characterize as appropriately capitalized. If we do reduce it further, that doesn't necessarily mean that's where we want it to stay. If there are good investment opportunities, both in say the Fisher brand or even other M&A activities, then we certainly would take advantage of that.

Okay, and then just getting back to working capital for a moment, in your comments you suggested there is still some opportunity there. How much of that opportunity might come from continuing to improve efficiency at the plant versus other steps you might take?

I'll let Jasper Sanfilippo, Jr., take this one.

Well, as Mike stated before, we still have improvements within the managing of our inventories. As you know, we're vertically integrated in some of our major commodities. And with respect to making improvements in our inventories there it is difficult, although we will continue to look at that.

Our main priorities are looking at all raw materials purchased from outside vendors as well as continuing to focus on our finished good inventories.

We have a substantial focus in terms improving the efficiencies of the lines. We really can't quantify how much improvement we expect in terms of cash flow or working capital. Although we continue to increase the inventory turns of our finished goods, that is a direct result of having higher and more efficient lines, because we can run finished good orders much closer to ship.

So you kind of have that double-whammy. By increasing the efficiencies of our lines we reduce our operating expense, but it also helps us turn our inventories quicker.

Okay, thank you.

Mike Trainor, Milwaukee Private Wealth.

Hey, good morning, gentlemen. Congratulations on the nice quarter. Just two real quick questions.

What was the capacity utilization for this quarter, and then for the entire fiscal year '09? And how did that compare to Q4 '08 and I guess fiscal year '08 as well?

I can't really nail it down to the quarters, but in terms of year-over-year, as you know you saw our volume dip a little bit in terms of pounds shipped to customers. However our actual produced pounds -- mainly because we shifted to more value-added items -- was up in the end. So just roughly speaking, I'd say our utilization probably went from roughly about 50% here in our Elgin facility to probably somewhere around 55%.

Okay, thank you.

(Operator Instructions) [Peter Abramson].

Thank you. Nice quarter. I have a question on retail distribution. Do you have plans to distribute Fisher in grocery stores? Or maybe in particular the Chicago market, are you in grocery stores in Chicago like Dominick's and so forth? Can you get in those stores, or are you already in there on the private label side?

Actually -- this is Jeffrey -- we do have distribution in the Chicago market and it is one of our core markets, obviously, since our corporate headquarters is here. We did have some success this past year in growing Fisher distribution in the Chicago market. We've invested additional marketing dollars in the market.

In Chicago just this past year, Fisher snack gained 2.2 points in unit share and 2.6 in dollar share for the last 12 months. So we have some successes in the Chicago market.

Obviously, the grocery channel is extremely competitive. We've got strong competitors with Planters and Emerald and private brands in the marketplace. So we're very selective on the areas that we invest in, really focus more on product innovation in the Chicago market and really in grocers across the country.

Okay, and then in food service, I noticed food service was down. Where does the product end up? Is it Chinese restaurants, or McDonald's? I know you're in McDonald's and on their dollar menu they have those sundaes. So I didn't know if that was driving some sales for you.

I don't know if you could comment on the mix in your food service channel and where the product ends up.

Sure, we've seen a shift in the food service consumption. People -- we saw a shift from the white tablecloth type of restaurant to more of the fast food McDonald's type of restaurants. So we did see a lift in our granulated peanut product that we supply to McDonald's.

But really the bigger piece of that is through companies like US Food Service and Sysco where we package both Fisher products for them as well as their own private brands. And that is going to restaurants around the country where they are using nuts in salads, as ingredients in main courses, as well as desserts.

Okay. Any update on the leasing front for the office building?

We actually just have a new tenant that has just completed the contract. They will be a tenant in May of 2010. It's actually a university that will be coming on board in our building. And we continue to actively seek new tenants for the facility.

Okay. How many years is the lease and how much space do they take?

It's a seven-year lease, and it's about 14,000 square feet of space.

Okay. Is your ultimate goal with that building to get it leased up and then do some sort of sale leaseback transaction at some point? Or do you have a long-term strategy for it?

Our strategy is -- this is Mike Valentine. Our strategy is to get the space leased out by 75%. The other 25% is not developed.

In addition to that, we do not have enough parking to lease out that space. It would be a considerable capital expenditure, probably somewhere in the neighborhood of about $10 dollars. We don't believe the return on that is as good as the return we could get by investing in our own core business.

So again, our goal is to get the building 75% leased out. Right now, it's pretty close to about 50%.

Okay, thanks. Appreciate the update.

There are no further questions in the queue. I would now like to turn the call back over to Mr. Michael Valentine for closing comments.

Again, on behalf of all my colleagues here, we would like to thank everyone for their time and interest in JBSS; and we wish everyone a good day. Thanks again.

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