John B Sanfilippo & Son Inc (JBSS) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2010 John B. Sanfilippo & Son earnings conference call. My name is Caitlin 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's call, Mr. Mike Valentine, Chief Financial Officer. Please proceed.

Thank you, Caitlin. First, we'd like to thank everyone for participating in our quarterly conference call for the second quarter of fiscal 2010.

Before we start we want to remind everyone that we may make some forward-looking statements today. These statements are made on our current expectations and involve risks and uncertainties that are inherent in our business. The factors that could negatively impact results are explained in our various SEC filings that we have made, including Form 10-K and Forms 10-Q. We encourage you to refer to these filings to learn more about these risk factors.

Starting with the income statement, net sales for the current quarter was $180.1 million compared to $177.8 million for the second quarter of fiscal 2009. Net sales increased in the consumer distribution channel and decreased in all other channels. Sales volume, which is measured in pounds shipped to customers, increased by 9.7%. Sales volume increased primarily in the consumer channel, and also increased to a lesser extent in the industrial channel.

Net sales for the first two quarters of the current fiscal year decreased from $312.6 million to $306.9 million. Net sales increased in the consumer channel and decreased in all other channels. Sales volume increased by 5.8% in the year-to-date comparison. Sales volume increased primarily in the consumer channel and increased to a lesser extent in the industrial and contract packaging channels. Sales of new private label trail mix products and sales of Fisher baking nut products to existing customers led to the increase in total sales volume in both comparisons.

Second quarter gross profit margin increased to 18.2% from 13.8% for last year's second quarter as a percentage of net sales. Gross profit margin for the first two quarters of the year increased to 18.4% from 12.4% for the first two quarters of fiscal 2009. The increase in gross profit margins in the quarterly and year-to-date comparisons came mainly from lower commodity costs. Significant improvements in manufacturing efficiencies throughout the Company also contributed to the improvement in gross profit margins in both comparisons. Efficiency improvements accounted for roughly 25% and 20% of the gross profit increase in the quarterly and year-to-date comparisons, respectively.

Total operating expenses as a percentage of net sales increased from 8.7% for the second quarter of fiscal 2009 to 9.6% for the current second quarter. Total operating expenses for the current year-to-date period increased to 10.3% of net sales from 8.9% for the second quarter of fiscal 2009. The increases in total operating expenses as a percentage of net sales in both the quarterly and year-to-date comparisons are mainly attributable to increases in advertising and marketing expenses to support the Fisher brand. An increase in incentive compensation expenses, which resulted from improved operating performance, also contributed to the increase in total operating expenses.

Because of lower debt levels interest expense in our current quarter decreased to $1.3 million from $2.1 million for last year's second quarter. For the same reason, interest expense for the current year-to-date period declined to $2.8 million from $4.2 million for the first two quarters of fiscal 2009. Debt levels were lower in both comparisons because of significantly improved cash flow over the last four quarters.

Net cash from operating activities for the current second quarter was $12.1 million compared to $15.6 million for the second quarter of fiscal 2009. Net cash from operating activities for the current year-to-date period was $36.1 million compared to $20.9 million for the same year-to-date period last year. Net cash from operating activities over the last four quarters was $58.6 million compared to approximately $15.2 million for the four quarters that preceded that period.

Taking a quick look at inventory, inventories at the end of the current second quarter declined by approximately $6.6 million, or 5.1%, compared to inventories on hand at the end of the second quarter of fiscal 2009. Pounds of raw nuts on hand increased by approximately 4.3 million pounds, or 6.3%, from the second quarter of fiscal 2009, mainly because of lower pecan, almond, and cashew acquisition costs. The weighted average cost per pound of raw nut input stocks decreased by approximately 6.2%. Primarily because of lower acquisitions cost for these commodities, the value of finished goods on hand at the end of the current quarter declined by 7% compared to the value of finished goods on hand at the end of the second quarter of fiscal 2009.

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. Jeff?

Thank you, Mike. Good morning, everyone.

The results of our second quarter of fiscal 2010 demonstrate a continued trend of improved financial performance. It was one of our most profitable December quarters since we became a public company in 1991. The improvements in our financial performance validate the smart decisions and strong efforts made by our management team and dedicated employees. As was the case last quarter, lower commodity costs for some of the key nuts we purchase contributed to an increase in gross margin and, as was the case last quarter, our operations team focused on manufacturing efficiencies which led to a $2 million improvement in our second quarter.

Continuous improvement is one of our core values at JBSS and it is part of our culture. I had a chance to visit our California and Texas facilities recently with our former Chairman and CEO, Jasper Sanfilippo, Sr. I was proud to see his reaction to the progress these manufacturing plants have made to engage their employees, streamline their operations, and implement 5S processes. We have seen significant improvements as a result of these commitments and efforts.

We participate in an extremely competitive industry, and it is our responsibility to continue to provide increased value to our customers and our shareholders. And we are doing this through driving down operation costs while investing in our people, investing in our product quality and innovation, and investing in our brands. And when I refer to brands, I include both our Fisher brand and the private brands and ingredients we manufacture for our partners. We will continue to focus on improving operational efficiencies and we will focus on executing our five-year strategic plan. I will highlight our progress of our strategic plan execution in the quarter.

First, growth -- the key priority for our company is to develop innovative nut solutions to drive profitable volume growth across all our sales channels. We have allocated additional resources to expand our sales and marketing departments to strategically grow our consumer food service and international channels. For the consumer channel we recently hired a business manager to focus on the produce segment, and we are in the process of hiring a sales leader dedicated to growing Fisher distribution across multiple classes of trade.

For the food service channel we just added a business manager to cover the Southeast United States. For the international channel we added a business manager to cover Central and South America. To support our strategic partnerships with key domestic retailers, we expanded our marketing department to allocate dedicated analysts to assist with category reviews, product trends, and SKU recommendations.

Second priority is food safety and quality assurance. This is a key strategic focus and our fiscal 2010 plan calls for increased spending in food safety, food defense, and quality programs. We recently hired a microbiologist to lead our corporate QA audit programs and establish expanded food defense programs.

Continuous improvement -- I'll pass the presentation over to Jasper, Jr. to highlight the Company's efforts in improving operational efficiencies.

Thanks, Jeff, and good morning, everyone.

The operations team, as well as our continuous improvement team, have been focusing on six major areas within the operations. Those areas are direct labor, indirect labor, material management improvement, discretionary spending, cost of poor quality, and equipment utilization.

As we attack each of those categories, the primary things that we're looking for is reductions in direct labor, as they relate to improving the lines' efficiencies, improving the time that it takes for lines to change over from one product to another, and reduction in downtime. And as those lines improve, we see that the indirect labor components to our manufacturing operations also can be streamlined, as handoffs between quality control, inventory management, demand planning and scheduling have allowed additional production time, which relates in less changeovers and less downtime.

The material improvement efforts that we have undertook have contributed greatly to our profitability in this quarter, particularly as it relates to the walnut and pecan shelling plants, as they have continued to focus on material improvements as it relates to mill loss through their shelling operations.

Our teams have also focused on discretionary spending as it particularly relates to repair and maintenance, cost of poor quality, and the last quarter our company has implemented dashboards in our facilities where we can see on a line basis quality issues that we've had. We've been able to trend these quality issues out and we've been able to attack root-cause problems that are causing rework and quality issues as they relate to the production lines.

One of the other things that we have continued to focus on is our inventory management. Our finished goods, supplier material, purchased material, farmer stock inventories, packaging materials and WIP remain the focus of our efforts here. We have now dashboards set up to manage each one of these as they relate to days on hand and capital charge as it relates to our expense. Our teams will continue to focus on reducing our finished goods inventories and our supplier-purchased raw materials by working with our demand planning, sales, scheduling and production management teams to make sure that we have the right inventories when we need them, and only the right inventories as we need them.

And throughout our continuous improvements for the last six months, one of the major milestones that our operations have achieved, was we've been able to maintain service levels over 99.3% for the last 30 weeks, a true milestone for us and a testament to the efforts that our operational teams are making while driving costs out of our system, but maintaining superior service levels to our customers.

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

Thank you, Jasper.

Let me take time to turn to consumption trends with food, drug, and mass retailers in the US. We are beginning to see consumption in the nut category rebound after the negative impact of challenging economic conditions. The total nut category, including snack, baking, and produce, year over year has increased 2.8% in dollars and 1.3% in units. This growth has accelerated recently, resulting in increases for the last three months of 6.9% in dollars and 8.8% in units. This growth is a result of gains in snack and produce, but primarily the produce segment.

There are many factors that contribute to the positive growth of the nut category, but we continue to note consistent trends. Two key contributors include the consumer's continued behavior to seek better-for-you products that can help contribute to their health and wellness. And also, a change in lifestyle behavior where consumers are still eating more at home, leading to increased indulgent food purchases and creative cooking and snacking.

We closely monitor consumer behavior and trends. This combined with consumer research helps guide our product development platforms. Value will continue to be a top priority for the consumer and private brands will continue to play an important role and retailer focus has never been stronger to differentiate themselves from their competition.

Total private brand unit sales continue to grow, but at a slower rate than national brands, as manufacturers continue to invest to gain and maintain their market share. For the last 52 weeks, total private brands increased at 3.9%, while national brands had a slight increase of 0.2%. However, over the last three months, national brands showed signs of a strong recovery, with growth of 10.4% compared to private brands increase of 5.2%.

Turning to specific nut segments, over the last 52 weeks, the snack nut category increased 2.1% in dollars, but was flat in units. However, during the last quarter the category increased 4.7% in dollars and 5.4% in units. Private brands in the snack nut category continue on the trend up, experiencing an increase of 2.3% for the last 52 weeks and 3.8% for the last three months. Fisher snack has grown 8.7% year over year, and was flat in dollars over the last quarter. However, our unit sales grew 14.9% year over year and 12.6% over the last quarter. This is due to increased promotional activity and coupons. Fisher's snack market share remains stable at a gain of 0.1 unit points to 1.1 for the last 52 weeks.

Turning to the baking category, over the last 52 weeks, the total baking nut category declined 4% in dollars, while unit growth was stagnant at 0.6%. However, private brands baking programs are strong, with growth of 8.2% in units over the last 52 weeks and 4.9% growth over the last three months. Fisher baking declined 2.1% in dollars and 3.9% in units year over year. This is consistent with the market contraction. In addition, we are cycling out of products that were a part of two customer strategies to transition select Fisher items into private brand items, which JBS now manufactures for them.

As part of our strategic plan, we are expanding the support of the Fisher brand by increased investments in promotional and advertising efforts, as Mike mentioned. Last quarter we launched our first integrated marketing campaign for the Fisher brand. The message "Simply Brilliant" embraces everyday brilliance and obvious "ah-ha" moments as the consumer uses our baking nuts. The message is relevant to our brand mission to inspire and educate the consumer.

The campaign included print on Food Network Magazine and Cooking Light, online on dozens of sites, including Food Network, Wham, Chow, MyRecipes, Shape and TV -- 15-second commercials that ran on Food Network, and also sponsorships of major Food Network shows. This campaign supported the brand, along with couponing via FSIs and U-Promise. It was well received by our customers.

Looking at calendar year 2009 and going forward, Nielsen has predicted its top consumer spending trends for 2010. First, restraints remain the new norm. Americans' confidence has been slower to rebound compared to other parts of the world. The need to save money, unemployment, and other economic issues continue to be top of mind with consumers, suggesting that any return to past behavior may take some time, if at all.

Second top trend, value is a top priority. With no signs of readiness to open wallets, a focus on low prices at the expense of all other variables threatens margins. Value messaging must also include some point of differentiation beyond pricing. Manufacturers and retailers that drive the recession wave and take an active role in innovation and ad spending are likely to be the big winners. When you look at our Fisher strategies and synergy, our fall ad campaign to promote the Fisher Chef's Naturals nuts and Culinary Touch cooking and baking blends, and our partnership with U-Promise, which we -- where we offer online couponing has helped support and aligned well with the key trends estimated over the next coming year.

Also, go-forward flavor innovation and new product launches as we focus our Fisher products, both baking and snack, on innovative flavors and new usages for nuts -- we continue to look at innovative opportunities across our channels.

Third trend -- store brand growth continues. Even with year-end 2009 softness in store brand dollars, share growth as retailers cut prices across the store to be more competitive, unit share growth continues and retailer focus has never been stronger. Our private brand synergies are aligned well with this continuing trend. We have partnered with strategic retailers to deliver on innovation, and we treat their brand as a national brand and help best position their brand to maximize sales.

I'll take some time to turn to our sales channels. Turning to sales results for our second quarter, as Mike mentioned, net sales increased by 1.3% and sales volume increased by 9.7%. The increase in sales volume occurred primarily in the consumer channel. Net sales increased $13.3 million in the quarter, driven mainly by expanding business with current customers in the baking category. Retailers supported additional promotions and shipper displays for the holidays. In addition, the consumer channel gained new Fisher distribution, which also attributed to the net sales growth.

The food service channel -- the trend mentioned earlier of people staying home more continues to negatively impact sales in the food service channel, as consumers go out to eat less or trade down to lower priced menu items or quick-serve restaurants. Net sales in the food service channel declined by $3.3 million or 18%, while volume measured in pounds shipped was flat. These sales declines are partially offset by new sales distribution through our partnership with Dot Foods.

The contract packaging channel -- net sales in this distribution channel decreased $1.9 million, or 11%, in the second quarter. This is primarily due to a major customer delaying the relaunch of their pistachio product line after a recall that occurred last year. The new products are -- have just began shipping in January, and we expect to make up some of the sales declines in our third quarter as we fill pipeline distribution.

The industrial channel -- net sales decreased by $2.8 million, or 12%, while pounds shipped increased over 600,000 pounds, or 8%, in the second quarter. The pounds increased as a result of opportunities for spot pecan sales in November and December. I mentioned on the last call that our business managers and R&D teams continue to focus on developing new applications for nuts as ingredients in a multitude of products. And we just began shipping some of the new ingredients in the beginning of January.

Our international channel -- net sales declined $2.8 million, or 18%, while total pounds shipped declined 370,000 pounds, or 5%. The sales and pounds declines are primarily a result of two factors -- one, lower in-shell walnut shipments into Europe due to a decrease in product availability. And in the second, the decision of a major customer to discontinue a holiday snack nut program. Our international business managers continue to focus on value-added consumer, industrial, and food service product lines and we just started shipping new snack products to a major customer, which should offset some of the prior sales declines in the international channel.

Some of the challenges we face going forward -- our industry had favorable commodity costs last year. Our procurements department did an exceptional job buying tree nuts, peanuts, and dried fruits and balance our inventory positions to optimize our costs. We were able to pass this cost advantage on to customers in the form of lower prices, while still improving our margins. But as new crops were harvested last fall, demand for pecans, walnuts and almonds from China and other export countries increased dramatically.

To give you an example of how serious and dramatic this increase was, in-shell pecan sales to China are projected to be approximately 25% of the total North American crop of pecans, which is more than 100% increase over the 2008 crop. Grower prices for the 2009 crop are 38% higher than 2008 crop, according to the USDA. Walnuts -- total shipment for walnuts through December are 61% above last year's crop, according to the California Walnut Board. In-shell shipments to China through December are 28.9 million pounds, versus 0.5 million pounds through the same period last year, which is a 5,600% increase.

For almonds, total shipments through December are 19% above last crop year, while the total supply is 4% less than the last crop year, according to the Almond Board. In-shell shipments of almonds to China through December are 45.2 million pounds, versus only 16.7 million pounds through the same period last year, which is 170% increase. Since 70% of the almond crop is exported, the weak US dollar partially offsets higher prices to export customers, while increasing prices in the United States. So, quite a few challenges going forward.

In closing, the results of our second-quarter fiscal 2010 are the culmination of many decisions and executed over the last two years to drive down operating costs and to become a strategic partner for key customers. We still have a great deal of work to do and our industry will continue to face challenges over the next year, as I mentioned. At this time, our business managers and sales leaders are in discussions with customers to educate them on the volatility of commodities going forward and they're implementing price increases across all our channels.

We will maintain a disciplined approach to procurement, operations, sales, marketing, finance, acquisitions, 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. Our priorities are clear -- drive profitable value-added volume growth; continue to improve operations; and execute our strategic plan.

We appreciate your participation in the call and thank you for your interest in our company. At this time, I'll pass the call over to Mike.

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

(Operator instructions.) Your first question comes from the line of Peter [Abrahamson.]

Okay. Great. Thanks. Nice quarter. It's good to see consumer channel up in terms of sales and shipments. I have a question for you I guess really regarding -- I guess the first question, in prior quarters you've talked about large programs possibly on the horizon for new customers. Do you have any of those in the pipeline you're working on right now?

Peter, this is Jeffrey. We are constantly working on new programs with new customers. We've talked about on past earnings calls, the drug channel is an area that we don't have a lot of distribution or sales, so we're focused on a couple of key drug chains to build both the private brand programs with them, new product development, and also some new Fisher items that we anticipate launching in the coming year.

The club store channel, we -- I made a comment on the last quarter call that we hired a business manager to focus exclusively on the club store. So we're actively pursuing opportunities, both private brand and Fisher in the club store channel.

And then the other additions -- the produce addition we made, the international sales business manager and the food service. All those positions are focused specifically on either regions of the country or specific customers to develop new programs with them.

Okay. How should we think about gross margins going forward, given the outlook for commodity costs? I think recently you've been in the 18% range, versus 13% in prior periods. I mean, should we think about back to prior periods, 100 basis point deterioration, or what should we -- how should we think about that?

Well, this is Mike, Peter. As we mentioned, we're anticipating some pressure on our gross margins over the next -- remainder of the crop year, which is about the next three quarters. It's difficult to quantify, though, because first of all we can't predict when our price increases will take effect. So that's a variable. And then, additionally, we're not exactly sure at this point in time what our walnuts are actually going to cost. Those prices are actually set at the end of March -- or beginning of March with our growers. We're still buying pecans. And we don't have a good handle on what the new cashew crop, which becomes available in June, what those prices will be.

So it's difficult to say. But, unlike in prior years, where a substantial part of our business was based on fixed-price sales contracts, because of changes we made in synching up our purchasing and selling activities, we don't have that exposure to the degree we've had in past years in these situations.

Okay. In -- what prior period would you say was similar in terms of experience in these type of commodity increases?

Well, I think if you go back to, I want to say, fiscal 2005, where we saw most of the commodities go up in price, it would be similar to that. Although I should say that, in that particular timeframe, prices accelerated at a much faster pace and reached much higher levels than we anticipate.

Okay. So kind of '04 to '05 was a similar --

More like '05, '06.

Okay, '05 to '06, similar but higher increase in --

Yes.

Okay. You've done a very nice job -- the consolidation and return to solid profitability and a lowering of debt. Are there any thoughts at the exec- -- (technical difficulty) or at the board level about implementing a dividend?

Our credit facilities prevent us from being able to do that.

Okay. Okay. And then, I guess in terms of trends, it's interesting that the snack products is up. And there was a comment about kind of wellness. Is there a return to kind of -- I don't know if it's an Atkins diet or are there major diet-type programs out there recommending nut consumption?

This is Jeffrey, Peter. Diets are not really considered the trend. It's more health and wellness, people just eating better and not just trying to lose weight, but just eat healthier meals and foods and maintain a better balance of food and just life in general. I think that the stress of the economic conditions over the past years has forced people to reevaluate their lives in general, including what they eat.

The Almond Board, the Walnut Board, a lot of the trade associations have really done a great job promoting the health benefits and educating consumers on the health benefits of nuts. And so we're seeing a lot more demand. I think that's driving part of the growth. I think the people are looking at more flavors and innovative type of products, which the industry is meeting with new products being launched, especially in the dried fruit and trail mix category. I think it's a combination of really not diet so much, just people wanting to eat healthier foods.

Okay. Well, thanks for your time and congratulations on a strong return to profitability.

Thank you.

There are no further questions at this time. Oh, pardon the interruption. You have a question from the line of Mr. [Greg Finney.] Please proceed.

Hi, Mike. How are you?

Good, Greg. How are you?

Great. Hey, maybe I missed part of this, but did you all mention anything about utilizing cash for possible acquisitions for --

Well --

Pardon me?

We did mention that in our press release that the increased availability in our credit facility, short-term credit facility, does put us in a much better position to proceed with that strategy.

Okay. Is there availability out there? I mean, are there acquisitions, or potential acquisitions, available for you?

Well, as you know, we've hired Rob Sarlls, who came from the M&A world. And one of his primary responsibilities is to assist us in pursuing that strategy. And we think there are some good opportunities out there and we hope to accomplish something in that respect in this calendar year.

Mike, when you mentioned that there is a strong demand for nuts from China, does -- China comes over and buys them and them takes them back? I mean, is there something where you might add value here in the United States before it gets shipped back to China, a raw nut, where you might be able to do that for them, as far as an international market?

Yes. Right now, Greg, China's buying the in-shell and bringing it over to China. Pecans, for example, they buy in-shell pecans. They'll bring them over. They hand crack them partially. Then they roast them, and then they sell them in bulk and in packages as a snack in the shell, where people them take them out of the shell. So in that respect, there wouldn't be any value-add that we could provide. Walnuts, a very similar situation; they're taking them over and cracking them in China.

But there are opportunities. I mentioned the last quarter call that we just gained new distribution, or had our first Fisher shipments into China at Sam's stores and we're continuing to look at opportunities from a retail standpoint to supply products in China, which would be value added.

Okay. You mentioned Sam's stores. I've heard that Sam's stores is closing some stores here in the United States or possibly lowering the number of SKUs. I take it that's not going to be any impact -- is there any impact on you in that area?

No. No, we really have not a lot of distribution with Sam's stores domestically. That's why we have the, I mentioned, the business manager that's focused exclusively on the club store channel. So we have high expectations that we'll turn that lack of distribution around in the coming year. But that won't impact us. The changes that Sam's is making domestically won't impact what their strategies are for international.

Okay. On your credit line, you're down to, what is it, $5 million right now. And your inventory shows you're at $122 million. Am I correct, seasonally going in for the next two or three quarters, does your -- your inventory normally builds up. Is that correct?

Greg, they typically build up January, February and March. And then they start to come down after March.

So if we were looking at that, your revolving credit facility, this may -- that may now expand over the next two quarters, or next quarter. Is that right?

Right. We would expect that at the end of our third quarter, our short-term borrowings will be higher than they were at the end of the second quarter. That's pretty typical.

How much higher might they be, Mike?

That again depends on -- it primarily depends now on what the final walnut price is, Greg. And it's just difficult to say what that's going to be at this time.

Okay. And then I see, are you able --it says current maturities on your long-term debt. Is it $11 million that's -- you have two tranches of debt. So is the $11 million on the mortgage part of your debt that come due over the next year?

The $11 million is primarily for the two mortgage tranches that we have. Those are 15-year notes. And I think we're going into year three of that. In addition to that, the industrial revenue bond, roughly about a $5 million balance on that is also -- part of that $11 million is associated with that particular debt.

Okay. The real estate, excess real estate you have, is there any update on that? Is it still slow?

No, there's nothing to report on that. It's been pretty much radio silence for the last 12 months on that piece of property.

Okay. Thank you very much.

Okay, Greg. Thank you.

There are no further questions at this time.

Okay, Caitlin?

There are no further questions at this time, sir.

Okay. All right. Well, then, at this point we want to thank everyone for participating in our earnings conference call for the second quarter of fiscal 2010. And, again, as Jeff said, we appreciate everyone's interest in JBSS. This concludes our call. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.