John B Sanfilippo & Son Inc (JBSS) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2010 John B. Sanfilippo & Sons earnings conference call. My name is Kianna and I will be your operator for today. At this time, all participants are in a 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, Mr. Mike Valentine, Chief Financial Officer. You may proceed.

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

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.

On March 19th, 2010, we announced a voluntary recall of certain bulk and packaged snack mixes and cashew items containing black pepper as a precautionary measure, because the product may have been contaminated with Salmonella. Our recall was a follow-up to the voluntary recall of black pepper announced by Mincing Overseas Spice Company, a supplier to us through a distributor. Our total estimated pre-tax costs associated with this recall were approximately $600,000 after the corresponding reduction in incentive compensation expense. In comparison, the estimated pre-tax costs associated with the pistachio recall in the third quarter of fiscal 2009 were $2.4 million, after the corresponding reduction in incentive compensation expense.

Additionally, the operating results for the current quarter were also impacted by $2.1 million for investments that we made to support key growth strategies in our strategic plan. Jeffrey Sanfilippo, our CEO, will discuss those investments in more detail later in the call.

Starting with the income statement, the current quarter net sales decreased slightly to $113.2 million from $113.8 million for the third quarter of fiscal 2009. Sales volume, which is measuring total pounds shipped to customers, was unchanged. A significant increase in sales volume of trail mix products in the consumer channel was offset by a decrease in sales volume of peanut and tree nut products, except almond products. The decline in net sales was primarily attributable to a $1.3 million increase in promotional spending to support new Fisher distribution gain during the latter part of the quarter. Promotional spending, or promotional expenses rather, are accounted for as a reduction from gross sales to net sales.

Net sales for the current quarter was negatively impacted by $300,000 for a supply recall related to black pepper, as I mentioned before, while net sales for the third quarter of fiscal 2009 was negatively impacted by $1.9 million for a supplier-recall-related to pistachios. Net sales declined in consumer, industrial, and contract packaging channels, and increased in the food service and export channels in the quarterly comparison.

Current year-to-date net sales decreased by 1.5% to $420.1 million, from $426.4 million for the same period in fiscal 2009. Sales volume increased by 4.2% in the year-to-date comparison, due primarily to an increase in trail mix products in the consumer channel. Net sales decreased due primarily to a considerably lower weighted average sales price per pound in the first and second quarters of fiscal 2010 compared to fiscal 2009. And that reduction in the weighted average sales price was due to price reductions as a result of lower tree nut acquisition costs.

Net sales increased in the consumer channel and declined in all other channels in the year-to-date comparison. The third quarter gross profit margin increased to 12% of net sales, from 11.6% of net sales for the third quarter of fiscal 2009. The gross profit for the current third quarter was negatively impacted by the $1.3 million increase in promotional spending. The gross profit for the current quarter was also negatively impacted by $400,000 for the black pepper recall, while gross profit in the third quarter of fiscal 2009 was negatively impacted by $2 million for the pistachio recall.

The current quarter gross profit margin increase came mainly from increased margins on sales of all major product types except walnuts. In the case of walnuts, that was due to higher acquisition costs. The current year-to-date gross profit margin as a percentage of net sales increased to 16.7%, from 12.2% for the same period in fiscal 2009. The gross profit margin improvement for the current year-to-date period came mainly from increased margins on sales of all major product types except walnuts.

Total operating expenses in the current quarter as a percentage of net sales increased to 13.2%, from 12.2% for the third quarter of fiscal 2009. In the year-to-date comparison, total operating expenses as a percentage of net sales increased to 11.1%, from 9.8% for the same period in 2009. Total operating expenses for both the current quarter and year-to-date comparisons arose mainly because of increases in compensation, legal, and other advisory expenses. Total operating expenses for the current quarter and year-to-date periods included a $200,000 charge for the black pepper recall, while the total operating expenses for the third quarter of fiscal 2009 included $400,000 for the pistachio recall.

Interest expense in the current quarter declined from $1.4 million, from $1.8 million for the third quarter of fiscal 2009. Interest expense in the current year-to-date comparison declined to $4.2 million, from $6 million for the same period in fiscal 2009. The declines in interest expense in the quarterly and year-to-date comparisons arose primarily as a result of lower total debt levels.

Inventories at the end of the current third quarter declined by approximately $1.1 million, or almost 1%, compared to inventories on hand at the end of the third quarter of fiscal 2009. Pounds of raw nuts on hand declined by 8.4 million pounds, or 11.6%, in the quarterly comparison. The weighted average cost per pound of raw nut input stocks increased by 10.1%, again, primarily because of higher walnut acquisition costs.

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.

Thank you, Mike. Good morning, everyone.

The third quarter is always our most challenging quarter, with low sales volume after the holidays and substantial inventories after the completion of the majority of nut harvests. But the results in our third quarter of fiscal 2010 demonstrate the continued successful execution of our strategic plans, and a razor focus on investing in our people, our processes, our customers, and our brands.

Let me first talk about investment in our brands. As I've mentioned on previous calls, one of our critical growth strategies is to increase investment in our Fisher brand. We increased promotional spending $1.3 million to support new Fisher distribution that was secured in the latter part of the current quarter. This investment included support for both Fisher baking and snack programs across the consumer and food service channels. A substantial portion of the increase in promotional spending came from consumer free-standing inserts and IRC coupons. The industry has witnessed an increase in coupon redemption of triple digits. Fisher is also seeing coupon increases, which is consistent with the consumer redeeming and cutting coupons at a higher rate.

In the food service channel, we increased the levels of bill-backs and market allowances for new item placements for some of our Fisher products. The company has historically invested less than some of our major competitors as they build and grow their national brands, and it is critical that we continue to increase and expand investments in the Fisher brand to maintain and grow our distribution. Investment in people -- another key priority for our company is to develop innovative nut solutions and marketing programs to drive profitable volume growth across all our sales channels, especially our consumer food service and international businesses. In order to accomplish this task, we allocated additional resources to expand our sales and marketing departments.

We recently filled a newly created position of Vice President, Global Marketing and Innovation. We brought on Howard Brandeisky, who comes to us with over 25 years of experience in food marketing with Kraft Foods. We are very happy to have Howard as a new member of our management team. His experience in building brands and marketing programs will be very valuable as we invest in the Fisher brand and continue to build private brand programs with several key retailers. Howard will report directly to me. In addition, we added a trade marketing position, a consumer sales manager for the west coast, and a Fisher sales manager dedicated solely to gaining new distribution of Fisher products. We now have a complete team in place to execute our top-line growth strategies, and we look forward to positive results.

In addition to investing in the Fisher brand, building our private brand business with strategic partners and completing the expansion of our sales and marketing teams, the company also took steps to support our merger and acquisition growth strategy. The company amended its bank credit facility during the quarter. The changes allow us to use excess availability in our borrowing base to finance acquisitions. Costs related to the amendment and other preparatory acquisition-related matters primarily led to a $600,000 increase in legal and other advisory expenses in the quarterly comparison.

Another key strategic priority is a focus on food safety and quality assurance. The recent recall of black pepper that JBSS was involved in demonstrates the continued critical necessity for all food manufacturers to enhance their quality programs. Our fiscal 2010 plan calls for increased spending in food safety, food defense, and quality programs. Our QA and Operations teams successfully earned an excellent rating from SQF, or Safe Quality Food, on their audit of our Elgin facility. SQF is an organization that developed a system for managing food safety and quality, and is recognized globally by food companies. The audits and certifications are required by many of our major customers. We are in the process of having our Georgia, Texas, California, and North Carolina plants audited and certified, and expect to have all facilities SQF Level 2 certified by June 4th of 2010. Now let me touch on the sales channels. Turning to the sales results for our third quarter, as Mike mentioned, net sales decreased slightly by $600,000, while sales volume was unchanged. The decline in net sales is primarily attributable to a $1.3 million increase in promotional spending, as I mentioned earlier. The consumer channel -- net sales for the fourth quarter declined from $65.2 million to $62 million, or 4.9%, although sales and private brands were down as a result of a major customer transitioning business to a competitor. The losses were partially offset by significant increases in sales volume of trail mix products to other key customers under our Fisher Fusions product lines, as well as several new private brand trail mixes that were launched in February and March.

In our food service channel, net sales increased from $12.8 million to $13.9 million, or 8%. Shipped pounds increased as well. This growth can be attributed to new distribution gained at our two largest food service customers. In addition, we continue to reach new smaller customers through our partnership with Dot Foods. The industrial channel -- net sales were unchanged at $17.1 million in 2010 Q3, versus last year. 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 continue to ship new ingredients in the third quarter. In our contract packaging channel, net sales declined from $12.2 million to $11.1 million, or 9%. This is primarily due to less promotional activity by a major customer and the overall softness in the convenience store channel.

Our international channel -- net sales increased from $6.3 million to $8.9 million, or 43%, versus the prior year. Pounds shipped increased as well. The increase can be attributed to new products launched in our private brand offerings to a major Canadian customer. In addition, with our focus on building programs in Mexico, Central and South America, we gained new distribution with a major retailer across both Fisher and private brand product lines.

Turning to consumption and marketing trends, for the last quarter, the total category inclusive of snack, baking, and produce experienced an impressive growth, with an increase of 9.5% in dollars and 12.7% in units, as reported by Nielson. This reflects stronger increases as compared to the previous quarter. When looking at specific nut categories for the last quarter, snack nut category was up 7.8% in dollars and 10.5% in units. Baking category experienced a decline of 5.9% in dollars and a decline of 2.5% in units. And the produce category, which witnessed the most significant growth, was up 21.7% in dollars and 30.1% in units. Private brands continue to play a significant role in the nut category, as value remains a top priority to the consumer. For the last three months, private brands in the snack category experienced an increase of 9.5% in units and 5.3% in dollars. In baking, units increased 7% and dollars, 7.1%. And in the produce category, private brands increased 21.5% in units and 15.6% in dollars for the same time frame.

National brands continue to show a strong recovery, surpassing private brands growth in the total nut category. For the last three months, branded product witnessed an increase of 13.5% in unit sales, versus 11% for private brands. This trend can be seen in snack, baking, and produce, and can be attributed to manufacturers' continued focus on national brands by intensifying promotional efforts and increasing their emphasis on creating innovative products.

Although Fisher witnessed a slow growth for the last three months with some of our core items in the snack category, our value-added products such as our Fusions line continues to do well in the marketplace. Fisher's snack market share is up 0.1% in points, and units and dollars remained unchanged for the last 52 weeks. For Fisher in the quarter, we launched our 2010 holiday assortment. The assortment features three new products -- dark almond peppermint mix, mocha and French vanilla almond mix, and a dark and milk chocolate blue and silver peanut mix. Our Fisher social media campaign picked up as well. We launched a Facebook fan page, a Fisher blog, and are actively tweeting. You can go onto our fan book page, and take a quick quiz to discover your true nut personality.

We are happy also to announce that Fisher yet again was an ingredient in the $1 million winning recipe at the 44th Annual Pillsbury Bake-off held earlier in April. The winning recipe, mini ice cream cookie cups made by Sue Compton of New Jersey, uses Fisher Chef's Naturals chopped walnuts.

Value-added snacking is also a top trend as consumers look for healthier but flavorful snacks. In fact, many choose snacks based largely on taste, says IRI's snack study. Per Nielson's point of sale data, flavored snack nuts are experiencing an increase of 11.8% in unit sales for the last three months, versus 10% for core snacks, non-flavored items. Another factor contributing to the growth in the category is consumers' inclination to stay at home, leading to increased cooking and snacking. Consumers are also brown bagging in an effort to save money and eat healthier.

We at John B. Sanfilippo & Son take industry and consumer trends as a very important element in our business, as consumers look for brands that will meet their needs. With that being said, we have exciting things to come in our fourth quarter in all channels, and with the Fisher brand. We are gearing up to launch some really great products that will address the needs of the marketplace, and continue to execute our growth strategy for the brands. In closing, the results of our third quarter of fiscal 2010 demonstrate again our commitment to executing our strategic plan to build brands and develop stronger partnerships with key customers. We have expanded our sales and marketing departments, and have the right team in place to execute our initiatives. We will continue to maintain a disciplined approach to procurement, operations, sales, marketing, finance, and new business opportunities. Our improved financial positions allows us to devote more resources to become a stronger strategic partner for our value-added customers globally, and our priorities remain clear -- drive profitable growth, 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 will now turn the call back over to Mike.

Okay Jeff, thanks. At this time we will open the call to questions. Kianna, can you please queue up the first question?

(Operator Instructions) Our first question comes from the line of Greg Hillman of First Wilshire Securities. You may proceed.

Yes, good morning. Could you talk about the pricing for the various nuts and what your outlook is, and how the pricing affected the current quarter:

Okay, Jeff, I'll take that one.

Okay.

Greg, as you know, in the last two announcements we have alerted the market that we do expect nut prices to rise and put some pressure on our margins. That certainly was the case in the third quarter on walnuts. As far as the market outlook on nuts, we do expect pecans to continue to rise as we head towards what is considered the off year. Cashew market is higher than it was last year. Walnut prices continue to remain strong and so do almonds.

Okay. And is any new capacity coming online for any of those, that's significant that will affect it in years ahead?

No, not that I know of.

Okay. And could you talk more about the international market, what are you doing to develop relationships in distribution in other countries?

Sure, I'll take that Mike. We've looked at investing, and first of all we've expanded our international division, and really focused on a couple key markets. One is Mexico, Central and South America. Following some of the retailers we currently work with in the United States as they expand their share overseas, both for our Fisher programs as well as looking to develop private brand programs for them overseas.

Asia, key market for us, looking at investing in China specifically as far as trying to gain Fisher distribution in that marketplace. And then Europe, just still on the radar, a little more challenging with some of the duties and competitive nature of the European market. But really focused on leveraging our expertise and successes in the US, applying those learnings to our customers and partners overseas.

Canada would be the third market, obviously right across the border, very successful with developing and building private brand program up there with a major retailer. So really taking the expertise of what we're domestically, and applying that overseas.

Okay. And is it more appropriate to define you, you're becoming more of a snack company, which would mean that you would go into more non-nut items?

You know what, we're looking at, when you say "non-nut items," nuts will always be the core but if there's parallel items or items that would use a nut as an ingredient. If you looked at our portfolio of products and the percent of sales against peanuts, almonds, walnuts, you'll notice a big increase in snack mixes. All of those will include at least one nut or possibly dried fruits, but we don't want to deter too far from the nut category.

But yes, we are focused on more value-added type of products, whether it's a panned item, a chocolate-coated item, or roasted item, or diced. So moving a little bit away from just the bulk commodity selling, and focusing more on investing in value-added type of products and snacks.

But if your research product department came up with, so you would never direct your research department to develop a new, good tasting nutritional thing that doesn't have a nut in it?

I won't say we would never do that. We're very customer focused, so if a key partner comes to us and says, "Hey, we want to come up with this type of product line," if it's not too far out of our capabilities or expertise and it fits in with our wheel well somewhere, that's something we would consider. But we really want to keep to our strategic plan and not deter too far off from that.

Okay, thank you.

(Operator Instructions). Our next question comes from the line of Eric Avickser of Rubicon Partners. You may proceed.

Hi, I just have two questions. One is, were you able to recoup any of the cost of last year's recall, and if so, how much? That's the first question.

No, we have not yet. We continue to work with their insurance carriers to get that claim collected, but we have not collected anything yet.

Is your experience from the past that you were able to collect, and if so, what percentage of your actual cost?

I can't remember what the percentage was, but it's been pretty rare in the past. But I know that when we have collected it, but it usually takes about a year or two.

Okay. Second question -- in light of the amendment allowing you to use up to $15 million to acquisition and the recent spread of about 0.5%, I calculated that you can get up to about $600,000. I'm just wondering, what's your expected return on investment capital for any future acquisitions, and will you expect an acquisition to be dilutive to earning per shares in the first year or so?

Well, we're not sure about that yet. We're studying a lot of opportunities, so it's just difficult at this point in the process to answer that question.

Did you have any guidelines in terms of the return on investment capital that you're looking to reach?

Well, I think we certainly follow M&A activity in the food industry. We have a good understanding of what kind of multiples are being paid as a multiple of EBITDA or a percentage of sales, and certainly we don't anticipate working outside of what you're seeing in the rest of the food industry.

Okay. Just because I remember in the past, obviously you have an untapped capacity that you can use, but I remember in the past you regretting making not acquisition, but just growing your revenue without really paying too much focus on the marginable profit of that extra revenue. I just hope you guys are going to be more aware of it this time.

Okay.

Okay, thank you.

Thank you.

Our next question comes from the line of Tucker Golden of Solas Capital. You may proceed.

Good morning, thank you. I just have two questions. First, I was wondering if you could comment on the competitive environment within the snack category?

Sure, I'll take that, Mike. Nut category has always been extremely competitive when you've got major players like Kraft Foods trying to maintain and build their national brand with Planter's, and then Diamond Foods coming in and launching the Emerald just a few years ago. It's always been very competitive for shelf space.

But we're finding and our goal with Fisher is to come up with some innovative products that don't compete head to head, but that still create value and grow incremental sales for the category. Investment in marketing has always been much higher than we have done as a manufacturer, and I don't anticipate this changing. I think the competitive nature of the snack industry in general will remain very competitive.

Makes sense, thanks. And then on walnut costs, I know you called those out a couple times in the 10-Q and on the call, how much in percentage terms was your walnut cost and your acquisition cost higher versus last year?

We incurred no cost last year in respect to putting ourselves in a position to do acquisitions.

I'm sorry, with respect to walnut costs.

Oh okay, I thought you were talking about M&A acquisition.

I confused you. I said acquisition costs of walnuts, but yes.

Yes, I think the walnut market, and Jeff, correct me if I'm wrong but I thought it was up about 30%.

Correct.

Does that seem about right?

Yes.

Okay. How much of your inventory at the end of March, roughly how much is walnuts, percentage wise?

Yes, I would guess that walnuts typically run about 20% of our inventory. It's very similar to what you see on the sales table that's in our queue for the product types.

The sales is about 12%, 13%?

Yes.

Maybe returns a little more?

Yes, at least in quantity terms, that should be reflective of what our inventory make up is.

Alright, thanks so much, appreciate it.

Thanks, Tucker.

The next question comes from the line Jeff Geygan of Milwaukee Private Wealth. You may proceed.

Good morning, gentlemen.

Morning.

Jeffrey, can you address a question about the executive team, or the new team build out? And the question would be, are you done or do you anticipate additional hires?

We are actually done, Jeff. We've got the team in place now and we've looked at really the last six or seven months, building a strong or expanding our sales and marketing teams. We've got the team in place now, so we do not anticipate any additional positions being created or filled at this point.

Can you quantify the cost of that six to seven month period of additional head count?

Mike, do we have any numbers in the queue, or --?

As far as sales and marketing and team expansion in the quarter, that amounted to about $200,000. And that's where the bulk of the expansion has occurred.

And now that the team is in place and you're beginning to effect your strategic plan, can you add some color to what your expectations are with respect to increased top-line, potentially increased or improved margin, or any general change that might result from your new strategic plan?

Sure. What you should anticipate is, we've talked about focusing on the consumer channel, the food service channel, and our international channel. So the investments in the people and the marketing programs will focus specifically on those three areas, and we're on plan and we expect to meet our plans for fiscal 2010. Obviously we have a big growth objective for fiscal 2011, and I know the team is in place now to execute that. But the results you should see will be in the consumer food service and international channels.

Can you comment on your sales goals?

We really don't give any guidance, go ahead, Mike.

Yes, I was just going to say in response to the questioner, Jeff, we really can't disclose that.

Alright. And lastly, although it's a de minimis part of your overall revenue, you are exporting. Do you intend to or have you historically used any type of hedge for currency exposure?

Jeff, we actually get paid in dollars for the most part, with the exception of a couple customers in Canada. So there's really no need to do that.

Alright, thank you very much.

Okay.

Thanks, Jeff.

With no further questions in the queue, I would now like to turn the call back over to Mr. Michael Valentine for final remarks.

Okay. Again, we want to thank everyone for their interest in JBSS and joining us on our call for the third quarter of fiscal 2010.

At this time we will end the call.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.