John B Sanfilippo & Son Inc (JBSS) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 John B. Sanfilippo and Sons, Incorporated earnings conference call. My name is Regina 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). As a reminder, today's conference is being recorded for replay purposes.

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

Thank you, Regina. First, we'd like to thank everyone for participating in our quarterly conference call for the first quarter of fiscal 2011. On the call with me today are Jeff Sanfilippo, our Chief Executive Officer; Jasper Sanfilippo, Jr., our Chief Operating Officer, and Rob Sarlls, our Senior Vice President of Consumer Sales Strategy and Business Development and we will all be available for questions later in the call.

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

Starting with the income statement, the current quarter net sales increased by 15.8% to $146.8 million, in comparison to net sales for the first quarter of fiscal 2010. The increase in net sales was mainly attributable to increased selling prices for virtually all major product types except peanuts. The increase was also due to a 4.8% increase in sales volume which is measured in pounds shipped to customers. Approximately 50% of the total increase in sales volume and net sales came from sales of products that are associated with the Orchard Valley Harvest acquisition, which I will refer to as OVH throughout the call. The remainder of the sales volume and net sales increase came from increased business with existing customers in the industrial food service and contract manufacturing distribution channels.

The first quarter gross profit margin decreased to 14% of net sales, from 18.8% of net sales for the first quarter of fiscal 2010, in gross profit dollars declined by $3.3 million. The decline in gross profit margin occurred primarily because of the need to purchase high-cost shelled walnuts and pecans in the spot market in the current quarter to meet increased sales volume. The spot market prices for these two commodities were high because of unusually low inventories in the industry.

Increase in cashew acquisition costs also contributed to the decline in gross profit margin in a quarterly comparison. Like walnuts and pecans, inventories of cashews in the industry are very tight.

Finally, the gross profit margin was also negatively impacted by a $1 million non-recurring inventory charge associated with the opening -- purchase accounting for the OVH acquisition.

First quarter total operating expenses increased by $2.9 million to 11.6% of net sales, from 11.2% of net sales for the first quarter of fiscal 2010. The increase in total operating expenses occurred mainly as a result of increased spending for advertising and other brand support activities, in addition to an increase in base compensation expense.

Also contributing to the increase of total operating expenses were a $600,000 increase in the OVH earn-out liability, as it is probable that the calendar year 2010 sales targets for the OVH product line will be achieved. Also, a $0.5 million increase in amortization expense for intangible assets purchased in the OVH acquisition. These increases in total operating expenses were offset in part by a $1.4 million decrease in incentive compensation expense. Interest expense was unchanged in the quarterly comparison.

The value of inventories on hand at the end of the current quarter increased by $16.3 million or 16.4% over the value of the inventories on hand at the end of the first quarter fiscal 2010. The increase in the value of total inventories on hand occurred primarily because of increased acquisition costs for almost all three nuts purchased during the current quarter. To illustrate, the weighted average cost per pound of raw nut input stocks on hand at the end of the current quarter was 59.7% higher than the weighted average cost per pound at the end of the first quarter fiscal 2010 and 35.2% higher than the weighted average cost per pound at the end of the preceding quarter.

As I mentioned earlier inventories of most tree nuts are at unusually low levels in the industry. Our raw nut input stock inventories on hand at the end of the current also reflect this situation. The pounds of raw nut input stocks that we had on hand at the end of the current quarter were almost 23% lower than the pounds of raw nut input stocks we had on hand at the end of the first quarter fiscal 2010.

Because of the decline in gross profit and the increase in total operating expenses that I noted earlier, net income for the current quarter declined to $1.1 million from $4.8 million for the first quarter of fiscal 2010. And now 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 2011. Jeff?

Thank you, Mike. Good morning everyone. The results of our fiscal 2011 first quarter demonstrate the investments we are making to execute our strategic plan are driving the company's sales volume growth. Highlights for the quarter include an increase in net sales of $20 million or 15.8% and an increase in sales volume of 4.8% in pounds shipped.

Sales volume increased in the consumer foods service, industrial and contract manufacturing channels, 50% of the increase in total net sales and sales pounds shipped was attributable to volume associated with the acquisition of Orchard Valley Harvest which was completed in the fourth quarter of fiscal 2010. OVH has positioned our company 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 produce.

Orchard Valley Harvest has diversified us into a number of nut and dry fruit products new to JBSS, which are both healthy and indulgent, help us deepen key relationships with a number of retailers, and serves as a platform to develop a diversified national program for the produce section of large and mid-sized food retailers.

Our sales teams have already been successful in expanding OVH produce distribution and we expect to realize increased sales volume for produce items with existing non-OVH customers in the second quarter.

Net sales in the consumer channel increased by 15.7% in dollars and 4.4% in volume in the first quarter. Net sales in the foods service channel increased by 20.5% in dollars and 13.4% in volume. The sales volume increase in the foods service channel is primarily due to higher peanut butter sales by food service distributors. Net sales in the export channel increased 1% in dollars but decreased 2.5% in pounds shipped. The decrease in volume is due primarily to lower almond sales to our industrial export customers. Net sales in the domestic industrial channel increased by 25.6% in dollars and 3.3% in volume. The sales volume increase is primarily due to higher almond sales, partially offset by lower pecans sales, mainly from a limited supply of pecans available for our industrial customers.

As Mike mentioned, there was substantial gross margin pressure in our first quarter due to high raw material costs. In order to meet increased demand and to support our customer's growth, the company had to go to spot market to purchase nuts, specifically pecans and walnuts. Shelled walnuts and pecans purchases were made in the current quarter to supply Fisher and private brand baking nut sales with existing customers and in many cases exceeded forecasted volume by a considerable amount.

We were also awarded significant cashew business with an existing strategic partner. Going forward, we anticipate that increases in sales volume for baking culinary nuts will continue into the second quarter when we will have new crop walnuts and pecans available from our shelling operations.

For those of you who remember the extraordinary increases in nut prices in 2004, 2005 the industry is now experiencing a similar situation. During the previous run-up on nut prices there was a double-digit increase in domestic consumption as a result of the low-carb diet trends such as Atkins. This year, certain economic conditions and increased global consumption are driving commodity cost increases. For example, there is greater global demand for nuts, especially emerging markets such as China, India and the Middle East.

I just returned from a 10-day trip to Asia and, while I was in China doing store checks, the shelves were packed with bags of roasted of in-shell and shelled pecans which have become a popular snack amongst Chinese consumers.

Net consumption is China is highly seasonal. The highest sales season for high-value US tree nut products span September through March when most Chinese celebrate mid-autumn festival and the China Lunar New Year festival. Industry sources predict that nut consumption in China is growing 10% to 15% a year due to rising urbanization. As super markets emerge in secondary cities nut products are becoming widely available as a snack food. In tandem with increased income and growing awareness about the health attributes of nut products, nut consumption has great potential to continue upward.

In addition to greater global demand for nuts, other factors causing commodities to rise include reduced exports from international exporters due to increased domestic consumption, increased speculator activity in commodity markets driving up prices and reducing the visibility of supply, a weak US dollar and the impact of the weaker US currency driving up prices, weather conditions impacting crop yield and supply, labor shortages driving higher costs in harvesting and processing, and US farmers shifting production to high-cash crops, primarily cotton and soybeans, further reducing supplies for peanuts, for example.

As some of you may know, raw commodities make up almost 80% of our cost of goods. So a dramatic increase across almost all nut types has a significant impact on gross margins and price increases cannot be passed on. This has been one of the most volatile crop years on record but our procurement department and field buyers have done a good job managing our inventories and maintaining a competitive market position. As a company, we are doing everything in our power to control costs. Every department is being challenged to reduce cost while maintaining the high quality and service levels our customers expect and deserve. However, we are in the process on passing some of the higher commodity cost to our customers and consumers through price increases.

The food service, industrial and contract manufacturing channels have already initiated many of their price changes. In our consumer and export channel, we announced price increases earlier this month and are implementing various changes. The majority of price increases in the consumer and international channels however will take effect in our third quarter.

Turning to US nut consumption trends, the total nut category experienced a softening in the first quarter of our fiscal year, with the category down slightly versus year ago by 1.8% in pounds and 0.2% in dollars. In comparison, the category was up 5.5% in dollars and 6.4% in pounds over the previous 52-week period.

All segments of the category were down in pounds sold versus the prior year. Snack nuts were down 0.6% in pounds and 1.1% in dollars. Baking and culinary nuts were down 6% in pounds and 0.8% in dollars. Produce section nuts were down 3.9% in pounds, but did experience dollar growth of 3.1%, due to higher per pound prices.

Category declines came at the expense of the national brand, which declined 4%, while private brands grew 2.9% in pounds. Private brands outperformed national brands in all segments for the category, up 2.8% in pounds in snacking nuts, compared to national brands being down 2.4%. Private brands were up 5.9% in produce nuts, compared to a decline of 6.6% for national brands. And private brands were down 3.3% in baking and culinary nuts, but national brands were down more at 7.1%.

The softness in national brands appears to be driven by declines in merchandising performance. For the last three months, incremental dollar sales due to promotional activity decreased approximately 12% in the food, drug and mass channels. Price increases are also contributing to the softness of the category, primarily in baking and produce, due to higher commodity prices throughout the industry. The base price per pound increased 7% in produce and in baking.

Higher commodity prices on pecans and walnuts are being reflected in higher retail prices, contributing to declines on those nut types. Other nut meats that have lower commodity prices or haven't increased as much in price, such as peanuts and almonds, continue to experience growth.

Based on the four outlet data food, drug, mass, plus Wal-Mart, Fisher grew 0.5% share points in the total category versus prior year. This growth was driven by the baking and culinary segment, where retail takeaway was up significantly due to strong merchandising and price promotion. Fisher had a 19.4% share for the period in the baking and culinary segment, up 4.9 share points.

Strategically looking forward, our main focus 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. We are allocating appropriate resources more effectively in order to fulfill changing customer and consumer demands and to target new markets that are consistent with our customer-centric value proposition.

I mentioned our launch of two new innovative branded snack nut products on the last call. We've developed a Hispanic product line, which targets not only the acculturated Hispanic consumer, but also mainstream snack consumers looking for flavor and excitement. The product line consists of five standup bag snack items and we began shipping products to a major alternative channel retailer in our first quarter.

We also introduced Arma, a lifestyle branded energy snack that provides a nutritious alternative to the energy beverage consumer. We introduced the product at the X Games in Los Angeles. We now have distribution in Southern California. A significant amount of the increase in marketing expenses in the first quarter went to support this exciting new brand launch for the company.

In closing, I am excited about our growth opportunities, but we will face challenges with higher raw material costs. The direction our company is taking, to focus on value-added nut and nut solutions for strategic customers and consumers, is the right one for our business especially during such volatile commodity markets. We will continue to invest in our brands. We must continue to work hard to drive cost out of operations and improve manufacturing efficiencies to offset the impact of rising material costs. I know our operations team is working on this diligently. At the same time, we need to execute price increases and I know our sales and marketing teams are working on this diligently.

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. I will now turn the call back over to Mike.

Okay, Jeff, thank you. At this time, we will open the call to questions. Regina, could you please queue up the first question.

(Operator Instructions). Mr. Valentine, it doesn't appear that you have any one queuing up to ask a question at this time.

Okay, Regina. Since there are no questions, we will end the call. And again we want to thank everyone for their interest in JBSS and we wish everyone a good day. Thank you.

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