John B Sanfilippo & Son Inc (JBSS) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2010 John B. Sanfilippo & Son earnings conference call. My name is Jennifer and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

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

Good morning, everyone. On behalf of everyone here at JBSS I would like to thank all of our participants for joining our quarterly conference call for the first quarter of fiscal 2010.

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. 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 everyone to refer to these filings to learn more about these risks and uncertainties that are inherent in our business.

First, we want to alert our participants to the fact that we issued a corrected earnings release at 5:17 p.m. Central Time yesterday that corrects and replaces our initial release was which was issued at 3:10 Central Time yesterday. The second release corrects the total current assets amount in the balance sheet for the current quarter from $1.822 million to $141.822 million. The initial release was correct in all other respects and the release filed with the Form 8-K yesterday with the SEC did not require any corrections.

Turning to the income statement, the current quarter net sales decreased by 5.9% or $8 million to $126.8 million in comparison to net sales in the first quarter of fiscal 2009. Total pounds shipped to customers increased by almost 1%. The increase in pounds shipped in the consumer contract packaging and export channels were offset in large part by volume declines in the industrial and food service distribution channels.

The decline in volume in those two channels occurred as a result of decreased pecan sales and the impact of the current economic environment upon these two channels. The decrease in net sales came mainly from price reductions on the sales of walnuts and almonds, in addition to the decline in sales volume for pecans that I mentioned earlier.

Despite the decline in net sales, first quarter gross profit margin increased to 18.8% from 10.5% for last year's first quarter as a percentage of net sales and gross profit dollars increased by $9.7 million. This significant improvement in gross profit margin and dollars came mainly from improved margins on sales of peanuts and cashews due to lower acquisition costs.

You may recall that in the first quarter of fiscal 2009 we experienced supply interruptions for peanuts and cashews which resulted in higher acquisition costs and lower margins on products containing those two commodities. Also a significant improvement in manufacturing efficiencies in Elgin contributed to the improvement in gross profit margin in the quarterly comparison.

First-quarter 2010 total operating expenses as a percentage of net sales increased to 11.2% from 9.1% for the first quarter of 2009. Increases in compensation and insurance expenses largely led to the increase in total operating expenses. In addition, the first quarter of fiscal 2009 benefited from a $300,000 reduction in an estimate of restructuring costs that was recorded in a prior period.

Interest expense in the current first quarter declined to $1.4 million from $2.1 million for the first quarter of fiscal 2009. The decline in interest expense in the quarterly comparison was driven mainly by lower short-term interest rates and significantly lower total debt levels. Due to improved cash flow, total interest-bearing debt at the end of the current first quarter decreased by $52.7 million or 41.3% to $74.8 million in comparison to interest-bearing debt at the end of the first quarter of fiscal 2009.

Net cash provided by operating activities was $24 million for the current first quarter compared to $5.3 million for the first quarter of fiscal 2009.

In addition to the impact of making scheduled principal payments on long-term debt, lower inventory levels also contributed to a decline in total debt levels at the end of the current quarter. For example, the value of inventories on hand at the end of fiscal -- end of the first quarter of fiscal 2010 decreased by $23.5 million or a little bit more than 19% from the value of the inventories on hand at the end of the first quarter of fiscal 2009. The decline in the value of finished goods inventory was 18% compared to the value of finished goods on hand at the end of the first quarter of fiscal 2009.

Pounds of raw nut input stocks increased by almost 15% or 4.5 million pounds for the current first quarter compared to the same period last year, while the value of raw input stocks declined by 23.8%. The weighted average cost per pound of raw nut input stocks declined significantly by almost 34% as of the end of the first quarter of fiscal 2010 compared to the same period last year.

Mainly as a result of improved gross profit margin and lower interest expense net income increased to $4.8 million or $0.45 per diluted share from a net loss of $400,000 or $0.04 per diluted share in the quarterly comparison. This net income was the highest net income that we have reported for a first quarter since we became a public company in 1991.

At this time I will turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our operating results for the first quarter of fiscal 2010.

Thank you, Mike. Good morning, everyone. The first quarter of fiscal 2010, as Mike mentioned, was one of our best first quarters in respect to profitability and cash flow since we became a public company in 1991. The only other first quarter more profitable was in fiscal 2004 during the extraordinary consumption growth the nut industry experienced as a result of the Atkins and low-carb diet trends.

These strong results continue to demonstrate that the decisions and efforts made by our management team and driven by our 1,350 dedicated employees are the right ones for our customers, our shareholders, and our company. As Mike mentioned, lower commodity costs for some of the key nuts we purchase contributed to our success. But I would also like to highlight our focus on continuous improvement in manufacturing efficiencies led to a savings of $3.4 million in the first quarter compared to the first quarter of fiscal 2009.

In addition, we continued to be successful in managing inventory levels by better coordinating selling and purchasing activities. The investments we made in warehouse management systems and supply chain and sales software have provided us with much better visibility of our raw material inventories and demand for finished goods. These efforts led to a considerable increase in operating cash flow and reduction in debt.

One of our key priorities has been cost reduction and our company will continue to focus on operational efficiencies, inventory management, and SG&A to streamline expenses. The other key priority for our company continues to be profitable volume growth. Last quarter I discussed the five-year strategic plan senior management developed as well as the framework from which we intend to maximize the potential of our brands, our people, and our processes.

I want to update you on our progress and highlight the trends we are seeing in the nut industry. First, turning to consumption trends. With food, drug, and mass retailers consumption in the nut category was negatively impacted, as were many consumer products, by the challenging economic conditions facing many people.

However, the total nut category is starting to show signs of recovery. In the last three months the total category has grown slightly at 3% in dollars, 3.4% in units, and 4% in pounds. This growth is a result of gains in snack and produce sections, but primarily in the produce segment.

The trends influencing the category continue to be consistent over the past six to 12 months. Consumers are still adopting healthier behaviors and looking for products that help them live healthier lifestyles. Consumers are still eating more at home leading to increased indulgent food purchases and creative cooking and snacking.

JBSS has conducted primary research to understand the habits, trends, and preferences of the consumer among the snack, baking, and produce categories, and found these to be consistent with the general market trends. A couple of key insights include consumers looking to find out about new products from the Internet and through coupon clipping. Consumers create a list before shopping and begin their shopping experience in the produce section. Flavor continues to be important as consumers are constantly looking for new tastes and flavor opportunities.

Total private brand nut unit sales continue to grow at 4.6% over the last 52 weeks and 5.1% over the last three weeks. National brands are showing signs of a slight recovery. With unit declines of 5.2% over the last 52 weeks to growth of 2.6% over the last three weeks, we are witnessing a slow shift of the consumer's share of wallet. We believe some of this can be attributed to heavy promotional activity over the last three to six months by national brand manufacturers.

In looking at the specific nut categories, the three-month trend shows the snack category is up 2.1% in dollars and 1.9% in units. The baking category is flat in dollars and shows a slight increase of 0.8% in units. And the produce category increased 7.3% in dollars and 10.8% in units.

Private brands continued to be strong, but showing a slight deceleration in unit sales growth over the last three months to 2.8% growth versus a 3.8% growth over the last 52 weeks. In baking private brands are strong with growth of 7.1% in units over the last 52 weeks and 10.1% growth over the last three months. This growth is reflected in our shipment sales and private brand baking nut activities, and we are pleased with the forward growth of this baking nut category.

Turning to sales channels; the results for our first quarter of fiscal 2010. As Mike mentioned, net sales decreased by approximately $8 million or 5.9% while pounds shipped increased almost 1%. The decrease in net sales can largely be contributed to price reductions of sales of walnuts and almonds and a decline in sales volume of pecans shipped in the quarter.

In the consumer channel we experienced positive growth in pounds shipped in a consumer channel up 3%. However, net sales were slightly down due to the same reasons we discussed before. The Company developed several new gift items launching at the end of Q1 for several major private brand customers and we anticipate strong sales going forward for many of the value-added products developed for seasonal programs.

In the food service channel, as I mentioned earlier as far as consumption trends and consumers staying home more, we see the food service channel negatively impacted by this trend where consumers go out to eat less or trade down to lower-priced menu items or quick-serve restaurants. The sales declined by approximately 17% and pounds shipped declined 9%. The softness in volume is consistent across all major customers in the food service channel.

These declines are partially offset by new sales distribution to our partnership with DOT Foods. The Company began shipping 60 new smaller distributors through DOT Foods in the first quarter. On the last call I mentioned our company introduced Fisher food service products in sustainable two-pound packages and we are getting positive feedback from many of our major customers in the food service channel.

In the industrial channel net sales decreased by 16% and pounds shipped declined 4% in the first quarter. Our business managers and R&D teams continue to focus on developing new applications for nuts as ingredients in a multitude of products. We are beginning to gain new business. We are a partner in several exciting new product launches that we expect to start shipping in Q3.

International channel; net sales declined 13% while total pounds shipped increased 2.8%. Again, we attribute a large part of the dollar sales decline to a reduction in prices. Our focus with global customers is to expand our value-added consumer, industrial, and food service product lines, and we are developing a trilingual -- French, English, Spanish -- retail line to be launched in our third quarter of 2010.

Across all our channels profitable growth is a key priority and we have allocated resources to expand our sales and marketing departments. The Company is also expanding our 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.

We recently hired a business manager to focus exclusively on the club stores segment of the consumer channel. We also realigned business managers to allocate more time and resources to the drugstore segment. The Company is committed to growing our Fisher and private brands business in club and drugstores and alternative channels, as well as to developing a stronger presence in produce departments.

In addition, we are in the process of adding sales personnel to both our food service and international divisions as we pursue strategic partnerships and align our salesforce and our product lines to meet changing consumer needs. Also, we are very focused on building the Fisher brand and have increased our spending for advertising and marketing to support the brand.

The Company has allocated additional resources to expand our distribution of Fisher across multiple channels. We launched a multi-level advertising campaign for both our Fisher Culinary Touch salad topping and our Fisher snack assortments, including a variety of unique items for the convenience store segment.

As a result, the Fisher brand is showing some exciting growth in the category. Fisher in snack has grown 10.9% in units over the last 52 weeks and 23.4% over the last three months. In comparison, the total category was down 2.9% over the last 52 weeks but grew slightly, as I mentioned 1.9% over the last three months. Fisher snack market share gained 0.1% unit points to 1.1%. Although our market share is small we are developing a niche of innovative products that meet the unmet needs of consumers and provide variety, quality, and value for customers.

Fisher in baking was flat in units over the last 52 weeks, but grew slightly to 0.4%. This is consistent with the category growth. Fisher baking market share gained of 0.1 unit points to 4.4% of the category now. We are pleased with the growth of the Fisher brand and can attribute this to aggressive branding and promotional efforts we have executed in the marketplace.

In our last call I mentioned one of our top priorities is a strategic focus on food safety and quality assurance. The 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.

As some of you may know, our company was involved in a product recall for walnuts last month. And although it was an isolated incident, we realize the importance of dedicating more resources to build our quality and food safety programs. It was a relatively small recall and virtually all the product has been accounted for. As a result, we expanded our efforts to ensure food-safe products.

We continue to work with the FDA and microbiologist consultants to eliminate any microbiological concerns. In addition, we increased the frequency and requirements of our testing and pasteurization treatment of raw and finished goods. We will continue these efforts with a sense of urgency and commitment across all our departments in our organization.

In closing, the results for our first quarter of fiscal 2010 are the culmination of many decisions made and executed over the past two years to improve the financial performance of our company and to become a more valuable resource for our customers. We still have a great deal of work to do and our industry will continue to face challenges over the next year.

We are currently in a favorable position on several commodities which contributed to our gross profit margin for the last two quarters, and we anticipate these positions will positively impact our second quarter as well. However, in the second half of fiscal 2010 we do expect certain commodities, such as walnuts, cashews, and other imported nuts, to increase significantly. These increases will likely put pressure on our gross profit margin.

In addition, there is a great deal of pricing pressure from competitors committed to growing their volume at what appears to be almost any cost. So we must focus on customer development and retention to provide additional value to our customers through product innovation and service. Our sales, marketing, and R&D teams will continue to utilize the insight 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. Our improved financial position allows us to devote more resources to become a stronger strategic partner for our value-added customers globally. 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 are clear -- continue to 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.

We 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.

Thank you, Jeff. At this time we will open the call to questions from participants. Jennifer, would you please be kind enough to queue up the first question?

(Operator Instructions) Jeff Geygan, Milwaukee Private Wealth.

Good morning, Mike and Jeff. Very nice quarter; we were glad to see that the hard work that you have done over the last couple of years is beginning to bear fruit.

Can you talk a little bit about your ad spend in terms of the dollars that you will be spending there and your anticipated outcome as a result of that spend?

Jeff, this is Jeffrey. We, over the last couple of years, have really lacked in this spending compared to our major brand competitors. So this year we have dedicated -- we are actually going to be almost doubling the investment in advertising and marketing to support the Fisher brand through trade promotions, advertising as well. And we expect great things from that. We are really doing this across all channels, trying to centralize and leverage the Fisher brand across multiple channels.

As for as the sales commitment, we have got high expectations for the brand. As you can see from the growth we have seen over the last quarter, the advertising spend and the promotional dollars we are committing to the brand are successful and we expect that to continue.

All right. With respect to future free cash flow, how would you anticipate that will be deployed?

First, Jeff, we want to remind everyone that we are moving into our heavy purchasing season, especially in respect to peanuts, walnuts, and pecans. As a general rule with all that purchasing activity we probably will see very low positive free cash flow or possibly even negative free cash flow in the second quarter and probably into the third quarter. But then, as was the case in '09, we will see that then drop dramatically in the fourth quarter.

That cash flow primarily will be used to pay down the revolver as it becomes positive again later in the year. As we mentioned in our presentation that we gave at the Canaccord Adams conference, we are looking at other ways to invest that cash flow not only in the Fisher brand, but also possibly in growing our business through M&A activity.

And do you have any non-maintenance CapEx plans going forward?

The bulk of our CapEx budget for fiscal 2010 is for food safety and maintenance CapEx.

Great, thank you.

(Operator Instructions) Bruce Baughman, Franklin Templeton.

Good morning. Congratulations. Was the Company a cash taxpayer in the quarter?

No, we didn't pay any cash taxes in the first quarter.

Do you expect to during the year?

Yes, we do.

Okay. Can you give us a feel for how much benefit you may get from NOLs and that kind of thing during the year?

The remaining NOLs are at the state level and a large portion of that is with the state of California. Those benefits have been suspended, as you may know, temporarily so it's a little difficult to say right now. But, again, I think our state effective tax rate is something like 4% or 5% so it shouldn't be too big of an amount.

Okay, thanks.

Okay, thank you.

[Peter Abramson].

Thank you, nice quarter. A couple of questions. Regarding the anticipation of higher commodity costs is that really a weak dollar story? And then the second part of that, I think in the past you used to have fixed commitments where you had to deliver to customers products at a guaranteed or set price. Do you have any of those contracts in place on these type of commodities?

I will take the first question. In respect to our comments about rising costs on imported nuts, at this time it's more related to supply issues than it is to the weak dollar. Surprisingly, we still do not see any impact on specifically cashews as a result of the weak dollar and the reason is because cashews are primarily traded in dollars.

As far as the second question on the fixed commitments, one of the strategic initiatives and changes we have made as an organization is to move some of our contracted sales in the industrial channel to more profitable sales in the consumer and food service channels. So we don't have that kind of risk that we had over the past couple of years as far as fixed contracts so we have made a conscious decision to shift those sales to other areas.

Okay, that is good. So the potential margin compression is really, I guess, an end-market story versus what the market will bear for the product versus the input cost?

Correct.

Okay. And then as a follow-up to that, what would you consider the nut categories substitute protein to be? Would it be soybeans, eggs, poultry, or pork?

I would say -- you have got soy nuts that are out there in the market from a snack perspective. Really not a lot of great proteins in the snack category. You have got I guess beef jerky and some of the meat items, but for the most part nuts would be probably one of the best protein sources in the salty snack category.

Okay. Yes, because thinking about commodities costs could go up in every category so in theory if the nut category goes up the same as everything else then maybe the end-market pricing won't be pressured.

The only other question I had is I have read recently that the peanut butter category has been really strong or having a record year. I don't know if you do much in peanut butter; historically I don't think you have done much. Is that something that you could do more of with your unused capacity or have you thought about peanut butter?

We are actually a major supplier of peanut butter mainly to the food service channel for restaurants and restaurant trade. We do handle some private brand customers in the consumer channel, as well as we have a Fisher branded program in peanut butter; relatively small.

You have got so many strong players between Jiff and Skippy and Peter Pan in the marketplace there is really not another place on the shelf space for another peanut butter brand. However, really our food service programs are very strong. We are looking at some niche areas with our Fisher brand for peanut butter consumption, not only domestic but also globally.

Okay. And then I just have one last question on inventories. Is the decline mostly from price deflation or on a pounds basis? Do you have enough pounds or excess pounds to support revenue? Could you harvest inventory more on pound efficiency?

This is Mike Valentine. The bulk of the decline in dollars really came from lower costs especially on walnuts. But we do have plenty of the inventory as we roll into our busy season to take care of our needs, which is a good thing because most of the crops are coming in later than they typically do.

Okay. Thank you for taking my questions.

[Benjamin Sexton], First Wilshire Management.

Good morning. The question I had was regarding -- just kind of trying to get a better sense of the margin and I was wondering if you could say anything about how product packaging is trending in this environment? Is that cost where it was or has it been pretty flat or is anything happening there?

Packaging costs basically across really all types has been pretty much flat this year compared to last year.

Did you expect any changes there?

Would you expect some to go up? Yes, because of the price of oil, resin-based packaging will probably go up.

That is all I wanted to ask. Thank you.

There are no more further questions.

Okay. Since there are no further questions, at this time we will conclude our call. Again, on behalf of everyone here we want to thank you for your interest in JBSS and we wish everyone a good afternoon. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful weekend.