John B Sanfilippo & Son Inc (JBSS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo and Son first-quarter and fiscal 2010 year-end earnings conference call. My name is Shamika and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

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, Shamika. First, we'd like to thank everyone for participating in our quarterly conference call for the fourth quarter and fiscal year ended June 24, 2010. With me today is Jeffrey Sanfilippo, our Chief Executive Officer; Jasper Sanfilippo, Jr., our Chief Operating Officer; and Rob Sarlls, our Senior VP of Business Development and Consumer Sales.

Before we get started, we'd like to -- 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.

Before I get into the results, I'd like to mention a couple of important accomplishments that have occurred recently. First, on May 21, we completed the acquisition of certain assets and the assumption of certain liabilities of Orchard Valley Harvest, Inc., or OVH, as we'll refer to it in this call.

Amounts mentioned in today's conference call include the results of OVH from the acquisition date to the end of the fourth quarter. Also, in June, we were included in the Russell 2000 Index and we think that's going to give our stocks some very valuable exposure to the investment community.

Starting with the income statement, the current quarter net sales increased by 11% or $14.1 million to $141.6 million in comparison to net sales in the fourth quarter of fiscal 2009. The increase in net sales came mainly from increased prices on sales of pecans and walnuts, and $4.0 million in net sales from OVH during the last five weeks of the quarter. Total pounds shipped to customers was relatively unchanged.

Sales volume increased in the consumer channel from increases in sales of fruit and nut mixes, and OVH produce products. Sales volume also increased in the food service channel from increased sales of peanut butter. The increases in sales volume in these two channels were almost completely offset by a volume decline in the industrial channel, mainly from a decline in the sales of raw peanuts to other peanut shellers and peanut oil processors, where gross margins typically are below our overall gross profit margin.

Fiscal 2010 net sales increased $7.8 million to $561.6 million from 2009 net sales of $553.8 million. The increase in net sales in the yearly comparison primarily came from the 3% increase in sales volume. The sales volume increase was generated from increases in sales of fruit and nut mixes, and walnuts in the consumer channel, and peanut butter in the food service channel. The sales volume increases in these two channels were offset in part by a decline in volume in the industrial channel on sales of pecans and peanuts, and on sales of walnuts in the export channel.

The current fourth quarter gross profit margin increased to 17.4% of net sales from 16% of net sales for last year's fourth quarter. The improvement in gross margin came mainly from increased margins on sales of fruit and nut mixes, almonds, and peanut butter, primarily due to lower acquisition costs for raw materials. The increase in gross profit margins on sales of products were offset in part by lower margins on sales of walnuts, macadamia nuts, and cashews, primarily due to higher acquisition costs.

Fiscal 2010 gross profit margin increased significantly to 16.9% of net sales from 13.1% of net sales in fiscal 2009. With the exception of walnuts, gross profit margins increased on the sales of the major products that we sell, chiefly due to lower acquisition costs in the first half of fiscal 2010. Additionally, operations and efficiencies improvements also contributed to the significant increase in gross profit during the fiscal year.

Fourth-quarter 2010 total operating expenses increased to 13.2% of net sales from 11.9% of net sales for the fourth quarter of fiscal 2009. Decreases in spending for compensation, shipping and handling, and amortization of OVH intangible assets of approximately $200,000 led to the increase in total operating expenses.

Primarily as a result of increases in total compensation expenses, fiscal 2010 total operating expenses increased to 11.6% of net sales from 10.3% of net sales in fiscal 2009. For both the quarterly and the yearly comparisons, the increase in total compensation expenses was driven mainly by an increase in some compensation expenses due to the improved operating results in both periods.

Interest expense in the current fourth quarter declined to $1.5 million from $1.6 million for the fourth quarter of fiscal 2009. Interest expense in the current year declined to $5.7 million from $7.6 million for fiscal 2009. Despite the funding from our bank credit facility of the OVH purchase price of approximately $33 million in the fourth quarter, from our bank credit facility, we experienced lower debt levels throughout the current fourth quarter and fiscal 2010 year.

Lower total debt levels in both periods primarily led to lower interest expense in both the quarterly and yearly comparisons. Mainly as a result of improved gross profit margin and increased net sales, income before income taxes improved to $4.3 million in the current quarter from $3.3 million in last year's fourth quarter. For the same reasons, income before income taxes for fiscal 2010 more than tripled to $22.9 million from $6.7 million in fiscal 2009.

In respect to making comparisons of net income and EPS for the fourth quarters and fiscal years, it's important to note that these items included a tax benefit of $700,000 for the fourth quarter of fiscal 2009 and a tax benefit of $300,000 for fiscal year 2009. Conversely, income tax expense for the current fourth quarter and fiscal year included normalized income tax expense of $1.5 million and $8.4 million, respectively.

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. The improved results in our fourth quarter and fiscal 2010 year-end demonstrates the successful execution of our strategic plan and the positive impact of the investments we are making in our people, our processes, our customers, and our brands. I'm proud of the success that our employees have achieved in what has been a challenging economic environment. And it was a busy year across every department in the Company.

Fiscal 2010 marks the first increase in year-over-year unit volumes sold since fiscal 2004, which was during the popularity of the low-carb diet trends, such as Atkins. The 2.6% increase in unit volume over fiscal 2009 occurred as a result of focusing our efforts to expand our business for both Fisher and private brand products with existing customers in the consumer and food service channels.

In many cases, the expansion of our business with existing customers was achieved by introducing new, innovative products. In addition to key unit volume growth, fiscal 2010 marked the fourth highest net income for the Company at $14.4 million. We also had strong gross profit generation of $94.8 million, and a near doubling of operating income from $15.6 million to $29.7 million in fiscal 2010 marks the second straight year of top-line sales growth, shareholder equity, and increasing EPS.

Another key achievement in fiscal 2010 was the strategic acquisition of Orchard Valley Harvest. Our merger/acquisition philosophy is to pursue opportunities where JBSS gains new capabilities, gains access to new products and markets, or gains people talents and expertise. The acquisition of Orchard Valley Harvest accomplishes all these objectives. OVH has positioned JBS to become the largest full service nut solution for retailers in the three major categories in the store where our products are sold -- namely snack, baking culinary, and now produce.

OVH has diversified us into a number of nut and dried fruit products new to JBSS, which are both healthy and indulgent, and help us deepen key relationships with a number of retailers, and will serve as a platform to develop a diversified national program for the produce section of large and mid-size food retailers.

In addition, the dedicated and talented employees at Orchard Valley Harvest bring JBSS new expertise in the produce category, where the OVH team has built a successful $50 million to $60 million business committed to a customer-centric value proposition. Our two cultures are well-aligned and we are excited to leverage our strengths going forward.

Over the past two years, the Company has built a stronger management team. As Mike mentioned, compensation expenses increased in the yearly comparison, and a significant portion of this increase stems from investment in our people, as we added approximately 15 experienced individuals to our sales, marketing, quality, and innovation teams to position us to further execute our key growth strategies.

In fiscal 2010, we filled key new positions, including a Vice President of Global Marketing and Innovation; a Fisher business manager; a microbiologist; a Director of Continuous Improvement; a club store business manager; an additional international business manager responsible for Latin America, and an additional food service business manager responsible for the Southeast; a marketing analyst; and two Research and Development scientists.

We have the team in place now to drive top-line growth, establish category marketing leadership, increase speed to market for product innovation, and enhance our food safety goals for fiscal 2011.

As I've mentioned on previous calls, people and talent are our top priority in our organization. Our Human Resources Department created a road map for John B. Sanfilipppo and Son to be a learning organization. We talk about our commitment to expertise in our corporate vision, and I believe our employees create a competitive advantage for our Company in our industry. We will continue to focus on differentiated capabilities, performance acceleration, leadership development, and the establishment of a talent culture.

With a strong group of leaders in place, we are focused on pursuing growth opportunities to provide nut and nut-related solutions to valued customers and a growing consumer base. The overall nut category remains strong, with pound sales up 8.2% and dollar sales up 6.7% for the year.

Category growth slowed a bit in the fourth quarter but remained healthy, with pounds up 4.5% and dollar sales up 5.7%. The produce section of the store was the biggest driver of growth. That segment of the category was up over 19% for the year in pounds and 13% in the fourth quarter, and now accounts for about one-quarter of nut sales.

By comparison, the snack segment pound sales were up a little over 4% in the year and 2.8% for the quarter. The baking/culinary segment was up almost 5% for the year while declining 6% for the fourth quarter in pounds. The OVH acquisition positions JBSS to capitalize on the increase in produce, nut, and dried fruit purchase trends.

Nuts continue to offer consumers three great benefits -- great taste, health and wellness, and convenience -- all benefits that are important to consumers today and, hence, fuel the growth of the category. Category private brands continue to play a significant role in the nut category, with a 31.8% share of pounds for the year.

Private brands in the category finished the year strong, with a half-share point gain in the fourth quarter, as pound growth accelerated to 6.1%, ahead of overall category growth. We believe the private brand part of the category will continue to show strong growth as consumers continue to try to stretch their food budget and seek better values.

The JBSS private brand business had a very good year in fiscal 2010, with pound volume in the consumer channel growing ahead of the private brand category. Growth was driven primarily by strong growth at existing customers, as we leverage the Company's innovation, quality, and category management expertise to partner with key retailers to grow their nut categories. For example, we launched close to 150 private brand items/new products with our retailer partners. Our new products address the key consumer trends in convenience, health and wellness, and adventurous bold flavors.

JBSS was recognized by PLMA, the Private Label Manufacturers Association, for innovation. PLMA featured our crunchy baked and pearlescent chocolate- covered milk products in their new innovation items showcased at their conference this year. We were also recognized for the seventh consecutive year with a Category Kernel/Private Label Buyer award for Nut and Seed category. Voting is based on responses from retailers, and it is an award we work hard for each year. It demonstrates our leadership and product quality, innovation, and category management, as we assist retailers to drive their private brand volume, profits, and competitive differentiation.

The Fisher brand turned in a solid year as well. Based on Nielsen home-scanned data, which includes food/drug en masse in the consumer channel, Fisher was up 4.6% in pounds and a 3.9% in gross sales. Fisher's strong performance was driven by strength in the baking/culinary nut segment. Fisher dollar share of baking/culinary at retail was 18.6%, up 2.6 points.

This strong performance was driven by a number of factors -- strong merchandising at key retailers during the November/December holiday season, and competitive pricing on key nut types. Second -- successful new items, the Fisher Fusions buy more than doubled in size in fiscal 2010, fueled by the launch of three new items -- Energy Blend, Cinnamon Roll, and Ice Cream Sundae, which was recently featured on the Food Channel's Unwrapped program. And third, a 26% increase in advertising and marketing, which increased the brand's investment in advertising to almost 6% of gross revenue, which is up 1.2 percentage points.

The investment in marketing was in targeted media vehicles, such as the Food Network on TV, Cooking Right and Food Network Magazine in print, and targeted online advertising. Fisher again was a featured partner in the Pillsbury Bake-off, where the $1 million winning recipe included Fisher chopped walnuts.

We also enhanced brand equity with relevant online promotions, such as the Fisher 4 challenge. Fisher 4 gave consumers the opportunity to submit their favorite five ingredients recipes using Fisher Nuts, and then have fellow consumers vote for their favorite online. Looking forward, we plan to continue to invest behind the Fisher brand, with a focus on targeted vehicles that most efficiently reach our consumers.

Turning to overseas markets, the international sales channel gained new distribution for Fisher snack items in China. In addition, the international team almost doubled their business for consumer and industrial sales in Scandinavia. This was done by adding new value-added products developed for new customers. Global expansion is a key part of our five-year growth plan, and we will continue to explore both organic and strategic opportunities, such as alliances, joint ventures, and acquisitions to fuel international growth.

Other achievements in fiscal 2010 included SQF, Safe Quality Food's Level II certification for all our shelling facilities and our corporate headquarters. We are now working on SQF Level III certifications.

Our Operations teams were successful in improving employee safety, which resulted in significant reductions in Workers' Compensation costs. In addition, the Operations team worked closely with the Continuous Improvement Department, and were successful together in reducing our cost-per-produced-pound, which contributed significantly to our gross profit improvement.

Moving forward, our main focus is to develop innovative nut solutions and marketing programs to drive profitable volume across all our sales channels, especially our consumer, food service, and international businesses. The sources of increased volume during fiscal 2010 demonstrate our commitment to executing key growth strategies. We are creating a culture that focuses not only on the current needs of our customers and consumers, but those unmet needs that create blue ocean opportunities.

We are allocating appropriate resources more effectively in order to fulfill changing customer and consumer demand, and to target new markets that are consistent with our customer-centric value proposition. Evidence of this can be found with our recent launch of two new innovative branded snack products. We have developed a Hispanic product line, which targets not only the culture of the Hispanic consumer, but also mainstream snack consumers looking for flavor and excitement. The product line consists of [Five Star bag] snack items such as salsa verde, crunchy baked peanuts, and a dulce de leche cashew.

We also introduced a new Lifestyle brand of snacks aimed at the millennial generation of 14 to 24-year-olds who are very excited about these two new launches.

In closing, I am very proud of our employees and management team for their accomplishments and the strong results we had in fiscal 2010. As we execute initiatives in fiscal 2011, we have a great deal of work to do and there are new challenges we will face. We anticipate much higher costs for cashews and pecans in the coming crop year and a slight increase in peanuts. Our sales and marketing team are working on managing and communicating price increases to mitigate the margin impact due to a higher cost of goods.

In addition, we anticipate there will be increased promotional activity from the national brands as they try to regain market share and sales volume from private brands. But we believe our new product offerings provide differentiation to attract new consumers. We are confident in the new people that joined the JBSS team, as they bring new skill sets to our organization. Combined with the knowledge and expertise of our long-term employees, I believe we will accomplish great things in the coming years.

We will maintain a disciplined approach to procurement, operations, sales, marketing, finance, and new business opportunities. Our priorities remain clear -- establish strategic partnerships with key customers to provide category leadership, and innovative nut and nut-related solutions; drive profitable, value-added volume growth, especially in the consumer, food service, and international channels; and continue to improve operations.

Our Company will stay focused and we will continue to execute our strategies to create value for our customers, our consumers, and our stockholders. 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, thanks, Jeff. Before we open the call to questions, I just want to remind participants, as has always been the case, that category information including data related to the Fisher brand has been derived from data provided to us from ACNielsen.

At this time, we will open the call to questions. Shamika, please queue up the first question.

(Operator Instructions). Jeff Gaggin.

Very nice quarter. It looks like you made substantial improvement. (multiple speakers) A couple questions. When thinking about gross margins on a forward-looking basis with the introduction of a variety of new and exciting retail product, how should we analyze that margin?

Well, I think probably the best way to think about that is -- and you probably have seen this over the last couple of years or so -- we continue to shift our business away from lower margin business -- for example, selling raw peanuts to peanut shellers and oil processors -- to higher margin business in the consumer food service channels. So assuming those -- some of those products or a substantial amount of those products are successful, then that should help improve the gross margin percentage.

With respect to operating expenses, what seems like a fairly consistent, roughly 150 basis point delta on period-over-period, is that a fair assessment? Or would you have us think about that differently?

Okay. Well, I think, as Jeff mentioned earlier in the call, we've staffed up our sales and marketing teams to a level that we think can drive growth in the future. So, at this time, I think we're pretty much done with that initiative. I'll also let Rob Sarlls (multiple speakers) --

Yes, this is Rob Sarlls. Also, there was additional compensation for bonuses for staff based on the great year that we had. We're always happy to pay those.

I would agree, too. So the question really is, how much of that delta in OpEx margin is tied to bonuses versus just a ramping up? And presumably, that ramp-up is more of a fixed cost so that as gross revs improve, we should -- I would think we'd see some of that OpEx margin start to taper down somewhat.

Well, there's no doubt if we can -- if we grow that top-line, which all these steps that we've taken is intended to do, then it should come down -- especially considering that we've fully staffed those two departments.

Great. And it's an impressive group of people you've brought on. I'm really glad to see that.

Second and final question, regarding the OVH acquisition, I'm under the impression that there might be some cross-selling going on of the Fisher brand into their channels and the OVH product into the Fisher distribution. Is that a fair assessment? Is there any way you can kind of validate and quantify what that might be going forward?

Jeff, Rob Sarlls here again. We're not selling Fisher into produce; that's really what the Orchard Valley initiative is about. So, the focus in produce is on selling the Orchard Valley Harvest brand as well as their premium private label nut, dried fruit, and indulgent items throughout produce departments in the country.

I will tell you, though, that there has been a tremendous amount of what I would call cross-pollination between the Elgin side of the house and the Modesto side of the house, and that we have active dialogs and pitches going on with retailers across all different formats, in terms of offering the OVH type of product to other retailers. And there's pretty strong interest.

I would add -- Jeff, this is Jeffrey -- that one of the exciting things about the OVH acquisition is it brings new technology to JBSS. They've got a hermetically-sealed [belly] container tub, which is very rare in the industry.

And so we see applications in our food service channel; we see potential applications in our international channel. And when you look at the grocery and a typical retailer, there's almost a wall between the produce category and the grocery category.

And we see the opportunity to really build a strong national produce brand with Orchard Valley, as well as then take our leverage and what we're doing in the grocery side with private brand, apply that same expertise to grow private brand retailers' own brands in the produce section. So, great synergies with their brand and their capabilities with what we're doing across the board.

And when should shareholders expect to see evidence of these synergies starting to hit the top-line?

I would anticipate -- obviously, we're focused on the integration still, but we should see -- we're working on some private brand programs right now. We just developed a team now to go out and sell both the Orchard Valley brand and the private brand capabilities, so I would say within the fiscal 2011, you should see starts of the -- some results closer to the back half, maybe Q3, Q4.

Great. And last question -- and I know you're still digesting OVH -- I assume that with Rob's addition to the team, there may be other accretive acquisitions in the works or at some point in the future?

Well, we're always looking at good opportunities, Jeff. (multiple speakers)

No, Rob's done; he's earned his pay. (Laughter)

Good. Well, it's --

Yes. No, the standard line -- we're actively involved both domestically and internationally in looking at other opportunities to expand our footprint.

Great. Well, keep it up. We look forward to hearing more.

(Operator Instructions). We have no further questions in the queue. I would like to turn the call back over to management for closing remarks.

Okay, Shamika. Thank you. Again, we'd like to thank all of the participants for their interest in JBSS. And this concludes the call for our fourth quarter and fiscal year 2010 operating results.

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