John B Sanfilippo & Son Inc (JBSS) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 John B. Sanfilippo & Son, Incorporated, earnings conference call. My name is Francine, and I am 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)

We would now like to turn the presentation over to your host for today's call, Mr. Michael Valentine. Sir, you may proceed.

Okay, thank you, Francine. First, we'd like to thank everyone for participating in our quarterly earnings call for the third quarter of fiscal 2011. Before we start, we want to let everyone know 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 our results are explained in the various SEC filings that we have made including forms 10-K and forms 10-Q. We encourage you 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 to $137.4 million from $113.2 million for the third quarter of fiscal 2010. The increase in net sales was almost completely attributable to price increases implemented during the first three quarters of the current fiscal year. Sales volume or total pounds shipped to customers increased by 1.1% which was driven by a significant increase in volume in the consumer channel and was offset by declines in the industrial and food service channels.

The increase in sales volume in the consumer channel came mainly from sales of products that are associated with the acquisition of Orchard Valley Harvest, or OVH, which was completed in May of 2010. Excluding sales of OVH products, net sales would have increased by 10.8%, and sales volume would have decreased by 5.9% in the quarterly comparison.

Current year-to-date net sales increased by 20.9% to $507.8 million from $420.1 million for the same period in fiscal 2010. The increase in net sales was in large part attributable to price increases implemented again during the first three quarters of our current fiscal year.

Sales volume increased by 4.8%, which was driven by a significant increase in volume again in the consumer channel and offset in part by volume declines in the industrial and export channels. The increase of sales volume in the consumer channel came mainly from sales of OVH products and all other key products except peanut products. Excluding sales of OVH products, net sales would have increased by 11.4%, and sales volume would have decreased by 1.6% in the year-to-date comparison.

The current third quarter gross profit margin decreased to 7.3% of net sales from 12% for the third quarter of fiscal 2010. The decline in gross profit margin occurred primarily because the process of implementing price increases in all distribution channels was not completed until the latter part of February, while acquisition costs for tree nuts were significantly higher in the current quarter than they were in last year's third quarter. The increase in acquisition costs for tree nuts is being driven primarily by increased global demand, especially in emerging markets, such as India and China.

The current quarter's gross profit margin was also negatively impacted by $700,000 in expenses associated with the relocation of the OVH Modesto, California facility into our Gustine, California, and Elgin, Illinois, facilities. The gross profit for last year's third quarter was negatively impacted by $400,000 for a supplier's black pepper recall.

The current year-to-date gross profit margin as percentage of net sales decreased to 11.4% from 16.7% for the same period of fiscal 2010. The gross profit margin decline and the year-to-date comparison arose almost entirely because of higher acquisition costs for tree nuts to the extent that they were not offset by price increases.

Total operating expenses in the current quarter as a percentage of net sales decreased to 12.8% from 13.2% for the third quarter of fiscal 2010. And total operating expenses as a percentage of net sales for the current year-to-date period decreased to 10.2% from 11.1% of net sales for the same period last year.

The decrease in total operating expenses as a percentage of net sales for both the current quarter and year-to-date period comparisons arose primarily because of a higher sales base. Total operating expenses increased by $2.6 million and $5.5 million in the quarterly and year-to-date comparisons, respectively.

The increases in total operating expenses in the quarter and year-to-date comparisons were driven in part by increases in freight, base compensation, brand support, and broker commission expenses. The increases in total operating expenses were offset to a large extent by the reduction in incentive compensation expense under the Company's economic value-added incentive plan.

The reduction in incentive compensation expense includes the estimated forfeiture of previously accrued-for incentive compensation due to the decline in operating results during the last three quarters.

Total operating expenses for the current quarter include certain expenses that were not incurred in the third quarter of fiscal 2010 as follows. A $1.5 million increase in an accrual for the anticipated settlement of a pending legal matter, $500,000 of amortization expense for OVH intangible assets, and a $300,000 write down of OVH equipment that resulted from the relocation.

These expenses were offset in part by a $300,000 reduction in the liability related to a pistachio recall that occurred in the third quarter of fiscal 2009.

Total operating expenses in the current year-to-date period included certain expenses that were not included in the same period of fiscal 2010. They are as follows. $2.6 million for the anticipated settlement of a pending legal matter, $1.5 million increase in the OVH earn-out liability, $1.5 million of amortization expense for OVH intangible assets, and the $700,000 write-down of OVH equipment resulting from the relocation.

These expenses were offset in part by a $1.4 million reduction in the liability related to the pistachio recall and the receipt of compensation from the pistachio supplier for the costs associated with that recall.

Interest expense in the current quarter rose to $1.7 million from $1.4 million for last year's third quarter. Interest expense in the current year-to-date period increased to $4.7 million from $4.2 million for the same period in fiscal 2010. The increase in interest expense in both comparisons resulted from higher average short-term debt levels which were driven primarily by higher acquisition cost for most tree nuts.

Turning to inventory, inventory at the end of the current third quarter increased by $33.5 million or 26.9% compared to inventories on hand at the end of the third quarter of fiscal 2010. The weighted average cost per pound of raw nut input stocks on hand at the end of the current quarter increased by 46.3% over the weighted average cost per pound for this inventory at the end of third quarter of last year.

The increases in total inventory value and the weighted average cost per pound of raw nut input stocks were driven primarily by the increase in tree nut acquisition costs.

Pounds of raw nuts on hand decreased by about 7.9 million pounds or 12.3% in the quarterly comparison.

And now I will turn the call over to Jeffrey Sanfilippo, our Chief Executive Officer, who will provide additional comments on our performance in the current quarter. Jeff?

Thank you, Mike. Good morning, everyone. The main theme of our third quarter earnings release centered around rising acquisition costs for tree nuts and the impact higher commodity prices had on our net sales, gross margins, inventory values, and interest expense. It seems everywhere you turn there is an article or a news headline about rising commodity prices.

The Wall Street Journal on April 18 ran a story with the headline, Shell Shock, Chinese Demand Reshapes US Pecan Business. The article highlighted how the expanding consumption of pecans in China has outpaced supply and driven prices to record highs. This is just one example, but it's not just nuts. There are rising prices for oils, grains, soy, corn, fuel, and other commodities that continue to impact our cost structure and gross margins. Fuel increases impacted our operating expenses this past quarter with an increase in freight costs of $1.7 million.

In addition, there is increasing competition within our industry, and the overall consumer confidence index took an unexpected drop in March and slightly edged up in April.

So how do we navigate our customers, our brands, and our company through this challenging environment? First, let me comment on what we have done within our organization.

As I mentioned on the last call, we implemented meaningful cost savings and cost containment initiatives throughout our entire company. This included products, such as optimizing packaging materials used in production to reduce weights and lower cost.

Our purchasing department focused on sourcing alternative ingredients to mitigate cost increases. Our sales team worked with our broker partners to reduce commissions. Our marketing team reviewed all promotions and optimized trade marketing and advertising spend. Our operations team completed the move and consolidation of our Modesto facility into the Gustine and Elgin plants. They also continue to work on improving material waste and manufacturing efficiencies.

In our procurement department, we centralized our purchasing of major nut commodities to better manage inventory levels and positions. Our human resources department converted a substantial portion of our temporary labor force to full-time employees to increase productivity, and we executed headcount reductions across several departments.

These were all important steps to remain competitive while still maintaining superior levels of quality and service for our customers and consumers. Cost reductions are critical during these volatile times. But, we cannot just save our way to long-term success.

The Company did execute price increases across all channels and completed the changes in February. Although we did experience a decline in gross profit margin in the quarterly comparison, March marked the first month since acquisition costs began to rise earlier in the current fiscal year where our sales prices and acquisition costs were better aligned. As a result, March was a profitable month.

Our customers must also navigate through higher commodity prices, growing competition among their peers and trending changes in consumer confidence and behavior.

To assist our key partners, we implemented several projects. Our priority is to work with key private-brand partners to downsize packages in their portfolio. The snack nut category leader recently reduced weights on several nut items. Our sales and marketing teams are working closely with our private-brand partners to downsize like items to maintain a competitive retail price gap.

Another key priority is to closely monitor consumer trends during such volatile times and respond as quickly as possible to maximize sales opportunities and optimize demand planning.

On the last call, I mentioned our company created and filled a new position, Director of Consumer Insights, to assist our sales leaders and customers with information and recommendations to optimize product placement, pricing, and promotions. This is a critical role as we manage the potential impact higher retail prices will have on nut consumption.

Turning to sales performance, we anticipate the Company will have record net sales this fiscal year in spite of the extraordinary challenges our industry faces with rising commodity prices, intense competition, and a volatile economic environment.

Here's a brief overview of the sales by channel results for the quarter. Starting with the export channel, net sales for the third quarter increased from $8.9 million in fiscal 2010 to $9.8 million in fiscal 2011. The increase was primarily attributable to price increases and the shift in sales volume from commercial ingredient bulk products to value-added retail package products. Some of the countries we have been successful in building retail distribution for both Fisher and private brands are Japan, China, Korea, Mexico, and Norway.

Our international sales teams have aligned with several of the Company's key domestic partners to expand their nut programs overseas.

In the commercial ingredient channel, net sales for the third quarter increased from $31 million in fiscal 2010 to $32.6 million in fiscal 2011.

As I mentioned on the last call, the Company 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, R&D, and procurement to support our strategic plan and focus on innovative products and customers.

The net sales increase is mainly due to price increases implemented in January and February. Trends in the commercial ingredient channel continue to center around healthy offerings, local sourcing, sustainable packaging, and smaller menu portions. We are currently working with key commercial ingredient partners and transitioning both private brand items and Fisher products to sustainable packaging materials.

And in our consumer sales channel, net sales for the third quarter increased from $62 million in fiscal 2010 to $82.8 million in fiscal 2011. The main drivers were increased volume from OVH products and price increases across the majority of our product portfolio. We experienced strong top line growth of our key retail partners in the consumer channel, and we are working closely with them to develop innovative products and realign pack sizes of core products to drive future growth and maintain competitive price points.

Turning to domestic consumption and the retail category, the total nut category experienced a softening in pound volume in Q3. Those sales dollars increased due to higher prices. The significant commodity increases on virtually all nut types are beginning to work their way into the market place in the form of higher prices.

For the third quarter, total pound volume was down 2% while sales revenue increased 3%. Looking at it by major segment, the snack segment experienced growth in both revenue of 5% and pound sales of 3%. Value-added snack nuts, such a trail mixes and flavored nuts drove this growth, while [core] nuts were flat versus a year ago.

Branded players drove the growth of the segment while private brands were flat versus last year. The Fisher brand was down a half a share point nationally; however, the brand is starting to achieve positive results around our clear can initiative. JBS launched a new clear can for our Fisher snack nuts last quarter. Strong integrated marketing support started in mid February in a targeted set of customers within our high franchise. The message of the campaign, Freshness You Can See, aims to remind consumers about the high-quality products manufactured by Fisher.

Radio executions and other shopper marketing activities have been coordinated with our key retail partners in selected geographies to drive shoppers to the shelf. Early results have been positive, and we plan to support the brand through the fiscal year and look forward to sharing more results on future calls.

The baking and culinary segment saw soft results this past quarter. Revenue was up 1%, but pound sales declined 5%. Pricing has significantly affected this segment. Pricing has increased 9% versus the prior quarter after a 6% increase last quarter. Increases were particularly evident within walnuts and pecans which increased by 10% and 16.5% respectively.

Private brands posted double-digit increases in both revenue and pounds while branded players posted a double-digit decline in pounds and a 4% decline in revenue. The growth of private brands within this segment illustrates that consumers are still anxious about the economy and continue to view private brands as a viable alternative in the marketplace.

Fisher baking grew at the same pace as the baking segment this quarter in revenue, and produced better than segment results in pound sales, growing pound share by 0.6 points for the quarter.

Fisher baking share performance for the fiscal year so far has been positive. Fisher has increased 0.7 share points in revenue and 11 share points in volume on a four-outlet basis.

The produce segment saw the softest results within the nut category. Revenue declined 3%, and pound sales declined 13%. This is a reversal of the trends we've seen over the past few quarters during which the produce segment has grown. This segment has taken the largest pricing increase of the three segments.

Aggressive pricing has been reflected in pistachios, pecans, walnuts, and cashews. Each one of these nut types increased in price by at least 19% versus last year. And these four nut types generate over 50% of revenue in this segment.

In closing, we will continue to face challenges with potentially higher raw material cost for pecans and cashews. And there is uncertainty about the impact higher commodity cost and higher retail prices will have on consumption.

As a company, we will continue to do what is necessary to control costs while maintaining the high quality, the consistent supply, and the service levels our customers expect and deserve. 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. Francine, would you please queue up the first question?

(Operator instructions) And there are no questions in the queue. Actually one just popped in. Our first question is from the line of Jeff Geygan from Milwaukee Private Wealth Management.

Morning, guys.

Morning, Jeff.

With rising input costs and your response being raising prices naturally, what happens somewhere during this cycle when your input costs decline?

Jeff, do you want to take that one?

Yes. Well, first of all we don't anticipate prices to come down dramatically in the short term. But obviously as they do, we look at our cost structure and work with our retail partners. Some partners we've got contracts with, so pricing is locked in at current levels. But, we'd obviously want to maintain competitive price points as we look at prices coming down hopefully not in the too distant future. Obviously we will react to that correspondingly.

So, if you are getting squeezed when your costs are going up, do you enjoy a corresponding period of benefit when your input costs go down is really the question.

Jeffrey Sanfilippo. Sure. Well obviously it is always difficult to take price increases. Customers are much more willing to accept immediate price decreases. So we'll say there's a lag time in getting price increases implemented as we've seen in our results.

Jeff, this is Mike, too. I would also like to add that, as Jeff Sanfilippo mentioned, we probably will see some volume decline from these very high prices. And it's certainly in everyone's best interest, both our customers and ours, to adjust our prices for those cost decreases so we can restore that volume.

Jeff, you indicated that in March the Company operated profitably as a result of increasing cost to customers. Is operating profitably at a net level or a gross level, and can you comment on the type of margin that you enjoyed there? And, likewise, how are you performing in April?

Jeff, we haven't disclosed any guidance. So we can't answer that question. I will say that, as we noted in our press release, it's also a little bit difficult to predict because we have seen further increases in pecans and cashews. And, you know, also we're going to begin to see some increases in peanut prices during the latter part of the summer.

At your annual meeting you talked about your increase in global sales, particularly in Asia. Are you seeing those trends continue particularly in light of a weaker dollar?

We are. We've actually done a lot of new distribution with our Fisher brand. We set up a new distributor, a distributor in China quite a few months ago. And we've had great success in initially getting Fisher distribution. We've expanded our Fisher product line for the international market. Actually perfect timing to go in with smaller pack sizes which are not only are ideal because of the economy, but also consumption, especially in China, prefers smaller pack sizes. And, so we definitely anticipate higher growth in international markets, especially Asia.

All right. I know it's a challenging time. I appreciate it. Thank you.

Thanks, Jeff.

We have a question from the line of Bruce Baughman of Franklin.

Good morning. Obviously the mechanics of putting through price increases in response to input cost is complex. Can you give us a little more color on anything you can do in the future to limit the lag time or make it smoother?

Do you want to handle that, Mike or --?

Okay. We'll both probably end up handling this. One of the problems we ran into, Bruce, was the timing. It's very difficult to get price increases in before the busy season. And for the most part, that caused the lag time. Had it been at some other point in time of the year, we probably wouldn't have experienced that.

Okay.

Yes, one of the challenges -- the crops come in right before the holiday season, or the majority of crops do. So in a lot of situations, you've already got prices locked in. Retailers have promotions already scheduled for the fall. So, it's a difficult time to mitigate any kind of price volatility, especially at that time of year.

Okay. And the volatility across these different products, is it mainly reflecting an auction market at the time the crops come in to market? Just how does it work on that end?

I'll take that one, Jeff. Actually it varies for each nut. So, for example on pecans, we buy our pecans when the grower delivers them, and we price it at that time. Walnuts, we actually do not price our walnuts with our growers until early March. And then peanuts, we'll fix those prices somewhere around planting time.

So for example, with peanuts, we're actually agreeing on prices with our peanut farmers for the next crop that they are going to deliver in the fall of 2011.

It sounds like the mechanics leave you exposed to every cycle to lock in in sales when you don't know what your costs are going to be. Is that accurate?

Well, one of the reasons why we've de emphasized industrial sales is because they tend to be 12-month fixed-priced contracts that are typically entered into before harvest and before costs are known. So, we've eliminated a lot of that risk out of our business. In our other channels, we have the ability to change prices anywhere from two to four times a year. And, you know, that has also eliminated quite a bit of risk out of our business, but there still can be some short periods of time where we may not be aligned with our costs.

Okay, and then my other question was, can you give us some color on the legal matter that -- the pending legal matter that's being accrued for?

We don't -- it's still in litigation mode. But we are nearing settlement. And, as noted in the release and also in the Q that we filed yesterday, it relates to unpaid wage matters.

Okay. Thank you.

And there are no further questions.

Okay, Francine, it appears there are no other questions. So at this point, we will end today's call. And we would like to thank everyone for their interest in JBSS and participating in this earnings call. Thank you, everyone.

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