John B Sanfilippo & Son Inc (JBSS) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 John B. Sanfilippo & Son earnings conference call. My name is Katie and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference. (Operator Instructions). I would like to now hand the call over to your host for today, Mike Valentine, Chief Financial Officer. Please proceed.

Thank you, Katie. First we'd like to thank everybody for participating in our quarterly conference call for our first quarter of fiscal 2012.

Before we start we want to alert everyone to the fact that we may make some forward-looking statements today. These statements are based on our current expectations and they 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 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 6.8% to $156.8 million in comparison to net sales for the first quarter of fiscal 2011. The increase in net sales was mainly attributable to increased selling prices for most of the major tree nut products that we sell due to higher commodity acquisition costs. The sales increase incurred despite a 6.8% decline in sales volume. Sales volumes decreased in all distribution channels mainly because of the impact of higher selling prices and consumer demand.

The first quarter saw gross profit increase by $1.2 million and gross profit margin decrease nominally to 13.9% of net sales. The nominal decline in gross profit margin occurred as a result of a decline in gross profit margins on sales of cashews and products containing cashews such as mixed nuts and fruit/nut mixes due to a significant increase in cashew acquisition costs since the first quarter of fiscal 2011.

The decline in gross profit margins on sales of cashew products was offset by increases in gross profit margins on sales of walnuts, almonds, peanuts, pistachios and pine nuts. The increase in gross profit margins on sales of these products primarily led to the $1.2 million increase in gross profit.

First quarter total operating expenses decreased by $800,000 to 10.4% of net sales from 11.6% of net sales for the first quarter of 2011. The decrease in total operating expenses occurred mainly as a result of a fair value adjustment recorded within the administrative expense in the first quarter of fiscal 2011 which did not recur in the first quarter of fiscal 2012. The fair value adjustment recorded in the first quarter of last year related to the Orchard Valley Harvest earn-out liability.

Interest expense in the first quarter declined by $100,000 in comparison to interest expense for the first quarter of last year. The reduction was due to lower interest rates on our revolving credit facility and a decline in long-term debt.

The value of inventories on hand at the end of the current quarter decreased by $2.3 million or 2% compared to the value of inventories on hand at the end of last year.

Pounds of raw input stocks decreased by 22% as of the end of the first quarter of 2012 compared to pounds of raw nut input stocks on hand as of the end of the previous year's first quarter. Due to higher acquisition costs for most tree nuts that were purchased during the first quarter of 2012, the weighted average cost per pound of raw nut input stocks on hand at the end of the current quarter was 18.4% higher than the weighted average cost per pound at the end of the first quarter of fiscal 2011.

This increase in the weighted average cost follows a 59.7% increase in the weighted average cost per pound of raw nut input stocks that we reported in the quarterly comparison in our earnings release for the first quarter of fiscal 2011.

Net income for the current first quarter increased to $2.4 million from $1.1 million the first quarter of last year due to improved alignment of sales prices and acquisitions costs for most of the products that we sell.

Jeffrey Sanfilippo, our CEO, is currently traveling in Asia to meet with customers and distributors so I will sub for him and provide some additional comments in respect to our business. As we have noted over the last few quarters, commodity costs have risen considerably, especially in respect to tree nuts. It seems that we have spent most of the last 12 to 18 months taking multiple tree nut pricing actions to keep up with these risking markets. We anticipate that we should complete the implementation of our cash and pricing actions in the second quarter to achieve better alignment of acquisitions costs and sales prices for these key products.

As you can imagine, implementing these price increases over this period of time has been quite a challenge. To put this in perspective, over the last year or so we have witnessed the following in respect to tree nut market prices in relation to their historical averages. Pecan prices are up by about 55%, cashew prices are up by about 60%, walnut prices are up by about 35%. Even Brazil nuts have soared.

As a result of the impact of high food inflation in emerging markets such as China and India, and the absence of any major tree nut supply concerns, we believe that tree nut market prices should be relatively stable in the coming months. That said, we should emphasize that they will remain significantly higher than their historical averages except for almond market prices.

Unfortunately we cannot make the same prediction for peanut prices. In fact, like many in the industry we believe that peanut shortage is a real possibility. Consequently, peanut market prices have more than doubled over the last 12 months due to severe drought conditions, poor quality and reduced acreage. We anticipate that they will remain at these high levels over the next 12 months.

As you may recall we are a peanut sheller and at times being a peanut sheller can deliver meaningful advantages. As a peanut sheller we contract most of our needs directly with farmers prior to planting which this year occurred in February and March. We were able to work with our farmers and effectively encourage them to plant the peanuts we need and thereby avoided a significant shift to cotton in grower base.

The timing of contracting also allowed us to avoid a considerable portion of the remarkable run-up in peanut market prices. Consequently, our anticipated cost increase for peanuts should be advantageous compared to the increase that the majority of the industry will likely incur over the next 12 months. Because our acquisition costs for peanuts did increase, we will have to raise our prices for peanut products which will likely occur in phases. We believe the first phase in anticipated to be completed in our second quarter.

Assuming that peanut yields and quality levels do not fall below what we anticipate, we believe that our advantage as a peanut sheller should allow us to meet the majority of our customer's peanut needs with price increases that are not as severe as the market price increase I noted earlier.

With tree nut and peanut prices at these very high levels we should anticipate that a negative impact on consumption will occur for both tree nuts and peanuts. With the exception of almonds and trail mixes, we are already seeing some signs of an adverse impact on consumption from high prices in the category data that we monitor from AC Nielsen. So at this time I will turn the call over to Howard Brandeisky, Vice President of Marketing, who will provide further comments on recent category performance.

Thank you, Mike, and good morning everyone. By way of background, all of the market information that I am going to discuss is reported through AC Nielsen data ending September 17. We looked at the category on a four outlet basis which includes scanned data for food, drug and mass, and panel data for Walmart. When we discuss pricing we are referring to average price per pound.

Looking at the total category, the category experienced a softening in pound volume in the first quarter on a four outlet basis, though sales dollars increased due to higher prices. As you know the nut category, and as Mike just explained, it has been experiencing significant commodity increases to most nut types and that is working its way into the marketplace in the form of higher prices. For the first quarter total pound volume for the category was at almost 2% while sales revenue increased 8%.

Looking at the snack nuts segment, it experienced a growth in revenue of 8% driven by price increases. It was flat in pounds versus the prior year. Consumers are managing through this higher price environment by trading off in the more expensive nut types. So for example, cashews and mixed nuts have experienced double digit average price increases in the category with a corresponding impact on volume. However, almonds and trail mixes have experienced growth as prices have been more stable. It is worth noting that we are seeing smaller increases in average prices at retail than the raw material commodity prices that Mike described earlier. So it hasn't worked its way completely through the marketplace yet.

Fisher and private brands lost share in the snack segment as their average prices increased. Fisher faced a particularly challenging quarter as the brand's prices went up slightly more than the overall category on average.

Looking at the baking segment, the baking segment had positive results this past quarter. Revenue was up 9% and pound sales increased 4%. However, as in snack nuts, we are seeing consumers changing their nut consumption patterns in the face of these higher prices. In the quarter consumers reduced consumption versus prior year of walnuts and pecans which have experienced significant increases in average price per pound while increasing consumption of almonds and even peanuts.

Private brands in the segment posted double digit increases in both revenue and pounds driven by a decline in average price per pound versus prior year. The growth of private brands in the baking segment illustrates that consumers are price sensitive, especially given the overall economic landscape and they continue to view private brands as a viable alternative in the marketplace.

Fisher baking share performance softened in the first quarter. Fisher baking average price per pound increased more than the category average while as I mentioned private brand average prices declined, and that resulted in a share shift.

We continue to invest in consumer insights which we are translating into in-market initiatives on both snack and bake nuts. So, for example, late in the first quarter we began shipping a Fisher baking nut innovation, a resealable standup bag; we believe it is a value addition for consumers. We believe it will merchandise better on the shelf. And as a result it will have a positive impact on our business.

Finally, looking at the produce segment, the produce segment of the category saw the softest results in the overall nut category. Revenue increased 4% but pound sales declined 7%. And this was a continuation of the trends we started seeing last quarter. Produce nuts have seen the greatest increases in average price per pound at retail of the three category segments and that is impacting category growth.

Now let me hand over to Jasper Sanfilippo, our President and Chief Operating Officer, who will provide additional commentary on operations.

Thank you, Howard, and good morning everyone. I will be providing a brief report on the operational initiatives the company is focusing on. As Mike had mentioned before, the increase in raw material costs throughout our operations is a significant cost and is something that we need to manage.

Things that are company is focusing on are conversion costs of grow purchased raw material, reduced material waste throughout our value-added operations, increased line of efficiencies across all of our operations, and a reduction and control the manufacturing spending.

As we look deeper into our conversion cost, I will give you specific examples of what we are doing at our three shelling plants. In our Selma operation where we shell pecans we have improved product transfer points throughout the operation to reduce both in-shell spillage as well as [meat] spillage as we process and shell pecans. In addition we have also implemented some processing changes that allow us to reduce our labor inspection costs as well as giving us better of our [mill-off] or our [meat shrink] throughout our shelling plant.

In our walnut shelling operation we have also increased and improved the product transfer points to again reduce spillage of both in-shell walnuts and meats. We have also installed new laser sorting equipment that will give us better yields on our walnut pieces and lower our inspection costs.

We have also made initial improvements to increase our walnut shelling capacity which will also reduce our cost per pound.

In our Bainbridge peanut shelling operation we have also reduced our spillage points throughout the operation and we have increased our blanching capacity to accommodate the poor quality peanut crop that we expect as Mike had mentioned. This also allows us to covert in-shell peanuts to shelled peanuts faster which will help us service our customers.

As we look at reducing our material waste across all of our value operations we have implemented material waste programs in all of our facilities where we measure by week what our material wastes are. The main areas of focus here are on product spillage, overfills, amount of rework, and product returns from our customers. We have set up visual communication boards throughout our facilities where each department and each line knows exactly where they are at as it relates to the material waste.

We also have implemented a film scrap program where we are measuring and reducing the film scrap that we have as it relates to our production models.

As we talk about our increasing line efficiencies, we continue to focus on reducing our downtime and reducing the amount of changeover our lines of software. We continually advance our preventative maintenance program to allow fewer downtime and fewer unseen mechanical breakdowns as well as provide better operator and line training to our employees. And we continue to improve our operational metrics to make sure that our employees know where they stand at any given hour.

We have also worked with our scheduling department and our sales group to increase our forecasting accuracy which will allow us to schedule our lines in a more efficient manner and thus reducing our changeover.

As we look to control the manufacturing spending we are looking at reducing our overtime. We have put goals in place in terms of reducing our operating supplies and repair and maintenance and our utility costs. Again, as we look at the increase in raw material our main focus is material wastes throughout and our conversion costs throughout our operations, particularly in light of our expensive commodities.

At this time I will turn the presentation back over to Mike.

Thank you, Jasper. At this time we will open the call to questions from participants. Katie, will you please queue up the first question.

Thank you. (Operator Instructions). Your first question comes from the line of Jeff Geygan. Please proceed.

Good morning gentlemen. I thought it was a very nice quarter.

Thank you, Jeff.

Jasper, a question for you specifically and I appreciate the color that you provided here. With respect to the various cost reductions, how do you anticipate that will affect your cost of sales and I know dollar wise it might be hard to quantify. Could you put that in terms of a percent reduction in cost to sales?

Jeff, I really can't do that for many reasons. There are so many factors that go into effecting our conversion costs, the grades that we buy, the quality that comes in from the farmers, the time of year when we shell the product. So it is virtually impossible for us to actually compare what our improvements will be. But what we do know is we are trying to improve what we have done year over year. So it is more of what would it have cost us had we not had these improvements in place. And because each crop year varies wildly it is impossible for us to actually quantify what these improvements actually will deliver.

Are there specific items, i.e. less overtime or reduced utility costs, that you could ballpark in dollars how much you anticipate you would save?

Jeff, we don't really share that information so it is not something that I can give you.

Jeff, this is Mike. I think the thing to focus on the most is this war on waste that we currently have throughout our operations. With nut costs so high, even a percent of waste that was once tolerable at normal levels now can deliver some meaningful savings.

Good to know. And then Howard, it is good to hear your voice on this call as well. Can you speak to the progress you are making with OVH? And when you mentioned produce segment, my assumption is that is a reflection in part about OVH but can you add any color to that?

We are doing quite a bit of consumer work on the produce segment and there will be more to come, I think, in future quarters. We are not really prepared to speak to any great detail of that right now, but that is obviously an important segment in the category, an area where we have interest, and we are in the process of completing some consumer work which we will translate into in-market programs.

All right, I appreciate it. Thank you, gentlemen.

Okay, Jeff. Thank you.

Your next question comes from the line of Mark [Voen]. Please Proceed.

Hi gentlemen. I'm wondering if you can just give me some insight as you guys generate free cash flow this year what your plans are to spend it in terms of either, not specific acquisitions but areas of growth, China, or maybe some of your shelling operations or on another product.

Okay Mark. This is Mike. We have generated some significant free cash flow over the last couple of months as we typically do. And that is as our inventories decline. We believe that because all nuts are so expensive going forward, including peanuts unlike last year, that we will use the majority of our available line of credit on a revolver up through February and probably won't start generating significant positive cash flow until after February.

So, at least in this fiscal year, all of our borrowing capacity is really reserved for nut procurement.

Got it. Can you just elaborate a little more, Michael, on your efforts in China? Is that more of you just forming relationships with distributors out there? Would you plan on actually putting physical infrastructure there? Would that save costs versus United States? What is kind of an overhead view of your thoughts on that?

Well the first thing to think about is that we do have some significant customers in China that are US-based. And we essentially followed them there for private label. So that is kind of giving us a business base, if you will, for us to build on. And currently we are really in the learning and research phase as to whether it really makes sense to produce nuts there. We have made no decisions in that respect.

I think as a first step, maybe getting somebody local there in terms of just a sales representative might make sense. But I do want to stress right now that we made no decisions and we are still researching.

And then my last question is more on peanuts and the dynamic there. I know you guys actually lend money to peanut farmers before they actually put the crops in. Can you kind of elaborate on how that will help you keep prices lower and be more competitive versus your competitors?

Well, I think that, as I pointed out, there are really two key things to keep in mind. First of all, just from the timing of purchasing, as a sheller we had the ability to buy significant quantities of peanuts in February and March. And though we had to pay some higher prices just to make sure we didn't lose a lot of peanut acreage to cotton, it is nowhere near what we have seen in the market price increase. And a lot of that occurred after peanuts were planted and the industry realized what the acreage reduction truly was. So we were able to avoid all of that. And consequently we expect that we would have a cost that on average is quite a bit lower than just about everybody else in the industry.

And then in terms of quantity, as I mentioned, we have a group of peanut farmers that are very committed to planting peanuts. And they definitely work with us to ensure that the acreage that we needed to get planted actually got planted and didn't ship over to cotton. So, we are very fortunate in that respect and we don't really have a sizeable short position right now unlike what we think is occurring in the rest of the industry.

And with peanuts, you guys are probably not going to have the problem where you lock in lower distribution prices versus higher acquisition prices like you had last year.

That's correct.

Thanks very much.

Okay, thank you.

(Operator Instructions). At this time I am showing we have no further questions. I would like to hand the call back over to management for closing remarks.

Okay, Katie, thank you. Again, we would like to thank everybody for their interest in JBSS and this concludes the call for our first quarter of fiscal 2012 operating results. Again, thank you everyone.

Ladies and gentlemen, thank you very much for your participation in today's conference call. You may disconnect. Have a wonderful day.