John B Sanfilippo & Son Inc (JBSS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 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 presentation over to your host for today, to Mr. Mike Valentine, Chief Financial Officer. You may proceed.

Thank you, Caitlin. First, we would like to thank everyone for participating in our quarterly earnings conference call for the second quarter of fiscal 2011. Before we start, we want to remind everyone that we may make some forward-looking statements today. These statements are based on our current expectations and involve certain risks and uncertainties 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 on Forms 10-K and 10-Q. We encourage everyone to refer to these filings to learn more about these risk factors.

Starting with net sales, net sales for the current quarter was $223.6 million, compared to $180.1 million for the second quarter of fiscal 2010. Sales volume grew by 7.4%. Sales volume increased in the consumer, contract packaging and food service channels, and sales volume increase came mainly from increases in sales of almonds, chocolate-coated products, fruit and nut mixes, and cashews.

Approximately 39% of the net sales increase and 84% of the volume increase are attributable to products associated with the acquisition of Orchard Valley Harvest, or OVH, that was completed in the fourth quarter of fiscal 2010.

Also contributing to the net sales increase were price increases that were implemented in the first and second quarters in all channels except the consumer channel, and they were a primary driver of the growth in net sales.

Net sales for the first two quarters of the current fiscal year increased by 20.7% to $370.4 million from $306.9 million. Sales volume increased by 6.3% in year-to-date comparison. Sales volume increased primarily in the consumer channel, contract packaging and food service channels for all of our major products except peanut and pecan products.

Approximately 44% of the net sales increase and 98% of the sales volume increase were generated by sales of OVH products.

As was the case in the quarterly comparison, price increases were a significant driver in the increase in net sales, which were made in all channels except the consumer channel.

Second-quarter gross profit margin declined to 12.2% from 18.2% for last year's second quarter as a percentage of net sales. Gross profit margin for the first two quarters of the current year decreased to 12.9% from 18.4% for the first two quarters of fiscal 2010.

The decrease in gross profit margins in both the quarterly and year-to-date comparisons came mainly from significantly higher acquisition costs for tree nuts. This was especially the case for cashews and pecans. The increase in acquisition costs for tree nuts is mainly attributable to increased global demand, especially in China in the case of pecans and India in the case of cashews.

Total operating expenses as a percentage of net sales decreased from 9.6% for the second quarter of fiscal 2010 to 7.8% for the current second quarter. Total operating expenses for the current year-to-date period decreased to 9.3% of net sales from 10.3% of net sales for the first two quarters of fiscal 2010. The decreases in total operating expenses as a percentage of net sales in the quarterly and year-to-date comparisons are mainly attributable to a higher sales base.

In the quarterly comparison, total operating expenses were favorably impacted by a $1.1 million insurance settlement for the pistachio recall that occurred in fiscal 2009 and a $1.8 million reduction in our bonus bank liability due to lower profitability in the current year. These favorable items were offset in part by an increase in the OVH earnout liability of $800,000 and an increase in the accrual for pending litigation of $900,000.

In the year-to-date comparison, the above favorable items were mostly offset by $1.5 million for the accrual of the OVH earnout liability and $1.1 million in the accrual for the pending litigation.

Because of higher average short-term debt levels during the current quarter, interest expense for the current quarter increased to $1.6 million from $1.3 million for last year's second quarter. For the same reason, interest expense for the current year-to-date period increased to $3.1 million from $2.8 million for the first two quarters of fiscal 2010. Average short-term debt levels were higher in both comparisons due to increased prices for tree nut purchases.

In respect to inventory, the value of total inventories at the end of the current second quarter increased by $39.1 million, or 32.1%, compared to total inventories on hand at the end of the second quarter of last year.

Despite the need to carry more inventories of raw materials to support the OVH business, pounds of raw nut input stocks on hand decreased by 9% from the second quarter of fiscal 2010. As I mentioned earlier, acquisition costs for tree nuts are significantly higher than they were a year ago. As a result of this, the weighted average cost per pound of raw nut input stocks on hand at the end of the current quarter were 35.1% higher than the weighted average cost of this inventory on hand at last year's second quarter.

Similarly, the total value of finished goods inventory on hand at the end of the current quarter increased by 46.4% over the value of the finished goods on hand at the end of last year's second quarter.

Primarily because of the decline in gross profit, net income for the current quarter declined to $5.2 million from $8.8 million for the second quarter of fiscal 2010.

Now I will turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance in the current second quarter.

Thank you, Mike. Good morning, everyone. The Company experienced another strong increase in net sales and volume in the second quarter of fiscal 2011. The volume increase was led by an 11.8% increase in the consumer channel and a 9.6% increase in sales volume in the food service channel.

We consolidated our industrial channel and food service channel into one business unit called commercial ingredients. We did this to align our resources in sales, marketing, research and development and procurement to support our strategic plan and focus on value-added products and customers.

You will hear me refer to the food service and industrial channels as the commercial ingredients channel going forward. We will, however, continue to separate the two channels in our financial reports for the remaining fiscal year.

In the consumer channel, the quarterly increase in sales volume was mainly attributable to sales of Orchard Valley Harvest products into the produce category. As I mentioned on our last call, OVH has positioned our Company to become the largest full-service nut solution for retailers in the three major categories in the stores where our products are sold, mainly snack, baking/culinary and produce.

Orchard Valley Harvest has diversified us into a number of nut and dried fruit products new to JBSS, which are both healthy and indulgent, helps 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 midsize food retailers.

The OVH acquisition has been a resounding success. Not only has it added to top-line strength to JBSS, but the business standalone has shown continued growth, exceeding our expectations. Pounds and dollars are up double digits on a year-over-year comparison.

In addition to OVH, sales of cashews, mixed nuts and pecans to private-brand customers also contributed to the increase in sales volume in the consumer channel.

The Company continued to face substantial margin pressure in our second quarter of fiscal 2011. In spite of volume increases, gross profit dollars declined significantly on sales of some products to private-brand customers because price increases could not be implemented with retailers prior to the holiday season in an amount necessary to offset higher pecan and cashew acquisition costs.

Price increases have been agreed upon and are effective in the third quarter of the current fiscal year, which we anticipate will help mitigate the negative impact to our gross margin resulting from increased commodity costs.

Our industry is faced with historically high crop prices, especially pecans and cashews. The Company has executed several cost-containment initiatives to mitigate the impact of high commodity costs on our customers. First, we challenged every department in our organization to reduce SG&A and operating expenses. Second, our management team scrutinized planned capital expenditures and pushed out a number of projects for 2011.

Third, our sales and marketing leaders reviewed promotions, advertising and trade spend to optimize our investments using less funds. Fourth, our operations team began the consolidation of the Modesto Orchard Valley Harvest facility into our Gustine and Elgin plants. The moves should be completed in the third quarter. The consolidation will not only reduce manufacturing expenses, but will also enable us to expand our produce business east of the Rockies by manufacturing in Elgin.

The fifth initiative executed involves working closely with key customer partners to reconfigure package sizes and product components. Our R&D procurement and operations departments are quickly assessing smaller packaging options and revised product formulas for customers to maintain competitive price points.

On the last quarter call, I referred to the industry experiencing a run-up in nut pricing similar to what we faced in 2004 through 2006, with record crop prices due to a double-digit increase in domestic consumption. This year, certain economic conditions and increased global consumption are driving commodity cost increases. The industry continues to see dramatic increases in global demand for nuts, especially emerging markets, such as China, India and the Middle East.

Our Senior VP of Procurement, Bobby Tankersley, attended the recent Peanut and Tree Nut Processors Association meeting in Las Vegas earlier this month with other key executives from the Company. He reported back that the general consensus among the attendees is that global demand will continue to be strong, and the market dynamics have changed for the long-term.

We are successfully managing through this difficult market adjustment period. We recently centralized procurement under the leadership of Bobby Tankersley, and established internal disciplines to better coordinate sales and demand with our procurement activities.

We do not exactly know the long-term impact significantly higher commodity costs and, hence, retail prices will have on demand for snack, baking and produce nuts, but we are monitoring consumption trends and price points closely across all our channels.

Turning to US nut consumption, our Company continues to invest in people, and we recently hired a Director of Consumer and Customer Insights with experience from Sara Lee and IRI. This is consistent with our emphasis on bringing best practices across the CPG landscape to continue to transform JBSS and to be a more valuable resource to our key partners.

The total nut category experienced a softening in the second quarter of our fiscal year, with the category down slightly versus a year ago, 0.9% in pounds, and a slight increase, 2.7%, in dollars. In comparison, the category was up 4.3% in dollars and 3.1% in pounds over the previous 52-week period.

Note that we look at the category on a 12-week ending four-outlet basis, which includes food, drug and mass, plus Wal-Mart Homescan. This data is through January 8 of 2011.

Two of the three segment of the category were down in pounds sold versus prior year. Baking and culinary nuts were down 8.2% in pounds and 0.1% in dollars. Produce section nuts were down 10.2% in pounds and 3% in dollars. Snack nuts increased 6.1% in pounds and 6.7% in dollars.

Category declines came at the expense of the national brands, which declined 3%, while private brands grew 4.2% in pounds. Private brands outperformed national brands in two of the three segments of the category. In snacking nuts, private brands increased 4.4% in pounds compared to a 7.2% increase for national brands. In produce, private brands increased 4.5% compared to a decline of 13.3% for national brands. In baking and culinary nuts, private brands were up 2.7%, and national brands declined 11.4%.

Price increases are contributing to the softness of the category, primarily in baking and produce, due to higher commodity prices throughout the industry. Base price per pound increased 4% in baking and 10% in produce. 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 in the retail marketplace, such as peanuts and almonds, continued to experience growth.

Based on the four-outlet data, Fisher experienced share softness, losing 1.9 share points in snacking and 1.7 share points in baking. This is primarily due to higher average retail price increases versus a year ago than the snack, baking and culinary categories as a whole.

The Company reduced the level of promotional deals we offered on Fisher to mitigate some of the impact of higher commodity costs on margins. This reduction in promotion led to a price per pound increase of $0.06 for Fisher snacking and $0.12 in fisher baking.

To reverse the decline in market share, our marketing team is in the process of rebranding our Fisher line, launching products in new packaging and maximizing the trade spend we have against the brand. Watch for our new campaign soon. It is concentrated in key markets with key customers where we have distribution.

Strategically looking forward, 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 growth, especially in the consumer, commercial ingredient and international channels; and continue to improve operations. And we will continue to invest in our brands.

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.

This has been one of the most volatile crop years on record, but our procurement department and field buyers have the expertise to manage our inventories while maintaining a competitive market position. As a Company, we will do what is necessary to control costs, but still maintain the high quality and service levels our customers expect and deserve.

We anticipate consumer demand for nuts to moderate in the face of higher prices, offset by the strengthening US economy and the US consumer coming out of hibernation, as was signaled by December 2010 strong retail sales growth. The potential for accelerated 2011 US job growth also bodes well for potentially -- for snack nut consumption.

In closing, we will continue to face challenges with higher raw material costs, but I am proud of the coordinated and proactive efforts of our sales, marketing, procurement and finance teams to manage price increases across all channels and to work closely with our customers to help them optimize their product portfolio and price points for their customers. The Company's commitment to developing value-added nut and nut solutions for strategic customers and consumers is the right one for our business, especially during such volatile commodity markets.

But we must continue to work hard to drive costs out of operations and improve manufacturing efficiencies to offset the impact of rising raw material costs. I know our operations team is working on this diligently.

At the same time, we may need to execute further price increases, and I know our sales and marketing teams are prepared to do this if commodity costs continue to rise. We are prepared, and we will maintain a disciplined approach to procurement, operations, sales, marketing, finance and new business opportunities.

Our Company will stay focused, and we will continue to execute our strategies to great 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 turn the call back over to Mike.

Thanks, Jeff. Caitlin, at this time, we will now open the call to questions.

(Operator Instructions) Mike Lyons, Lyons Asset Management.

I have two questions. First of all, do you have any ability to take advantage of export markets with the increased demand being overseas?

And secondly, there have been a lot of moving parts in the last few years. Do you have any comment on seasonality in your business, what you think it might be going forward?

As far as the export demand, it is one of our strategic plans to expand globally. And we have expanded with value-added retail products, both private brand and our Fisher brand, in specific areas in Asia and in South America.

The challenge we have is the duties in some of the countries that we are targeting are prohibitive as far as selling into some of the markets, as well as the local manufacturers in a lot of the countries overseas make costs very difficult for us. But definitely some opportunities there that we are pursuing.

Second question.

Mike, I think in respect to seasonality, our business has always been very seasonal. Roughly about 40% of our sales occur between the months of September and December. There really is no way to really shift that, at least in respect to nuts. So I hope that answers your question.

Yes. So you don't see that changing too much going forward.

No.

How much CapEx do you feel like you shifted out of this year into next year or future periods?

It was approximately $2 million that we shifted.

Okay. And that is not a permanent deferral; it is probably a temporary deferral.

Correct.

Okay. Thanks very much.

(Operator Instructions) Jeff Geygan, Milwaukee Private Wealth.

Good morning, gentlemen. With respect to the consolidation of the OVH assets in California, what is your anticipated cost?

The cost to do the shift?

Yes.

Jeff, we actually haven't disclosed that cost, but it is pretty minimal. I think we only have to move like what --, maybe --

About five lines.

Five lines, so it won't be significant.

All right. During your annual meeting, someone within the Company suggested, at least I thought, that you may be selling product in China. Is that in fact true?

That is true, Jeff. We have retail distribution with our Fisher brand. We assigned a distributor in China about three or four months ago, and we've just started shipping in Q2 and continuing to ship in Q3 new distribution in China.

And then finally, regarding this vicious cycle that you seem to be caught in that dates back many years, but recently, 2004, 2005, 2006, and here we are again, with rising input costs, what is the real strategy going forward where you can improve margins, regardless -- or at least hold margins in the high teens, low 20s, regardless of what is happening to your cost?

Or should we just accept that your business is going to be very cyclical, with margins ebbing from the high single digits to the high teens?

If you look at just this current situation, it is extraordinary with the amount of increases we've seen, especially in the cashew market and the pecan market. I don't anticipate any way to mitigate some kind of margin pressure with such dramatic increases in commodities.

At the same time, though, we are a whole different company than we were back in 2004, 2005. We readjusted our whole industrial sales portfolio, the way we go to market with contracted customers for bulk. And so we've definitely mitigated the volatility in our gross margin as a result of some of those efforts.

Continuing to centralize our procurement department, having Bobby Tankersley just focus on procurement, having better visibility on both inventory positions, supply in the facilities and then tracking demand better will help mitigate some of that gross margin volatility as well.

And the key focus now, Jeff, is really the value-added items, focusing on our brands, where you can maintain a higher margin and mitigate some of that margin volatility because of higher costs by reducing or adjusting your promotional spend. So those are the key things we are working on.

And when would you expect to really see the full benefit of that strategy moving to these higher-value branded type of products?

We anticipate the price increases that we've initiated, you will start seeing some of that stability in Q3 and going into Q4. As far as the brands and mitigating the risk there, it is just a matter of our success in investing in Fisher with the new rebranding and the new products that we are launching and new packaging. So that could take some time.

All right, thank you. Good luck.

David Leibowitz, Horizon Asset Management.

Thank you very much. A few unrelated items. First, there is mention made of a litigation reserve of $1.1 million in the quarter. What does that relate to?

That relates to a labor cause of action that basically centers around two things. First, the plaintiffs are alleging that they were not paid for donning and doffing of uniforms. And actually, we feel the facts are very strong for us, because we actually do pay our employees for donning and doffing of uniforms, once that became required back in 2009.

And the other cause of action is related to time clock rounding, which our current time system rounds to provide for the amount of time it takes employees to get from the time clock to their workstation. And that is something that we continue to discuss with the plaintiffs in respect to settlement.

The second question, given your price increases for the third quarter, was there very much anticipatory buying by the trade?

We have learned lessons from past price increases, and we mitigate the amount of purchasing that customers can do, and we base it on just average purchases for the time of the price adjustment. So we've done a good job managing customer expectations and purchasing so they can't buy ahead.

Lastly, on the price increases themselves, is this anticipated to put you equal with your cost increases, or will this put you ahead of cost increases, and also permit you to go back to the profit margins on the products you enjoyed a year ago?

Actually, you will note in our earnings release that our price increases will, in effect, mitigate the commodity cost increases; won't take us all the way there.

So then profit margins will still be under pressure in the third and fourth quarters?

Right, but not nearly to the extent that you saw in the second quarter, unless we start to see some relief in the commodity markets. And as Jeff mentioned earlier in the call, we may be required to come back and do some price increases on certain commodities in the spring or early summer.

Lastly, in terms of some of your promotional efforts that you said you might be cutting back on, how much of your product sales right now go out via couponing?

It is a very small percentage. If you look at what we do compared to the other national brands in our space, we really are -- we underspend dramatically compared to them. And so the couponing is a very small piece of the business, although we did cut some of that back in the second quarter.

What we're going to look at as we do the rebranding and the relaunching in the new packaging, we will actually -- we are shifting some of the investments that we would have made in the first half to the second half to get back some of that share.

And how much --

Couponing is not a big factor for us.

And lastly then, what share of market do you believe you lost over the last six to 12 months?

It is about 2.2% share.

And that is on branded.

Right.

We actually picked up share on private label.

Right. Yes, we've seen a shift -- and this is just not Fisher, but in some of the national brands as well -- we've seen a shift to private brands from the national brands in some areas.

Thank you very much.

[Scott Bruce, Sundeck.]

Thanks for taking the question. I just wanted to follow up on that last point about private label versus national brands. Can you just repeat your comments and how that what seems to be a shift from branded to private label might impact your ability to restore margins through higher branded sales?

As most people know, our private brand business is larger than our Fisher brand business across the US. And so with the price increases that we've implemented in the second and third quarters, we anticipate the margin pressure to be relieved. Although, as Mike mentioned, if commodities continue to rise, we could face some of that margin pressure going forward.

But we are seeing a shift in consumption trends towards private brands. Consumers are looking for a lower price point. A lot of the key partners we work with have done a great job building equity in their own private brands, not only from a price point, but just from innovation and product availability and just different things that consumers are looking for in the marketplace.

As far as our Fisher brand, we obviously have some challenges. We've lost market share over the last year or so, and we need to look at ways to rebuild that. We are rebranding it. We are launching it in new, innovative packaging, and we are putting some dollars behind that relaunch that will begin at the end of February -- or early February, sorry. So we anticipate trying to regain some of the market share that we've lost.

This concludes the question-and-answer section of the call. I would now like to turn the call over to Mr. Mike Valentine for closing remarks.

Thank you, Caitlin. We would like to thank everyone for their interest in JBSS and joining us on today's call. This concludes our call for our second-quarter fiscal 2011 operating results. We wish everyone a good day. 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.