John B Sanfilippo & Son Inc (JBSS) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2013 John B. Sanfilippo & Son earnings conference call. My name is Shantalay and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference, at which time (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Mike Valentine, Chief Financial Officer. Please proceed, sir.

Okay. Thank you, Shantalay. First, we would like to thank everyone for participating in our quarterly conference call for the second quarter of fiscal 2013. Before we start, we want to alert 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 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 second quarter was $215.6 million compared to $223.3 million for the second quarter of fiscal 2012. Sales volume, which we measure in pounds, sold to customer declined by 9.2% in the quarterly comparison. The decline in sales volume for peanut products in the Consumer, Commercial Ingredients, and Export Distribution channels primarily led to the sales volume decline in the comparison. High selling prices for peanut products was the primary factor leading to the sales volume decline in these distribution channels.

Sales volume also declined for fruit and nut mixes in the Consumer channel, primarily as a result of unit weight downsizing and lower sales to a significant private-label customer. Partially offsetting the sales volume decline was an increase in sales volumes to a major customer in our Contract Packaging Distribution channel, which was gained through additional distribution and new product offerings. The sales volume decline was also offset partially by a 14.5% increase in sales volume for Fisher Baking Nuts in the Consumer Distribution channel.

Net sales for the first two quarters of the current fiscal year increased to $393.1 million from $380.1 million for the first two quarters of fiscal 2012. The increase in net sales in the year-to-date comparison was primarily attributable to higher selling prices. Sales volume declined by 5.4%, which was driven by volume decreases in the Consumer, Commercial Ingredients, and Export Distribution channels. Sales volume decreases for peanut products and fruit and nut mixes were the primary cause of the sales volume decline in these distribution channels.

As was the case in the quarterly comparison, the decline in sales volume for these channels was partially offset by an increase in sales volume in the Contract Packaging Distribution channel. The sales volume decline was also partially offset by a 20.8% increase in Fisher Baking Nuts sales volume in the Consumer Distribution channel.

Second-quarter gross profit margin rose to 17% from 15.9% for last year's second quarter as a percentage of net sales. Gross profit margin for the first two quarters of the current fiscal year increased to 17.1% from 15.1% for the first two quarters of last year. The increase of gross profit margins for both the quarterly and year-to-date comparisons are attributable to a shift in sales volume to higher-margin Fisher brand products, and continued improvement in the alignment of selling prices and acquisition costs.

Total operating expenses for the current second quarter increased to 10.3% of net sales from 8.8% of net sales for the second quarter of 2012. Total operating expenses for the current year-to-date period increased to 9.9% of net sales from 9.5% for the first two quarters of fiscal 2012. The increases in total operating expenses as a percentage of net sales in both the quarterly and year-to-date comparisons are mainly attributable to a significant increase in promotional spending and advertising spending, as part of the Company's strategic initiative to grow the Fisher brand.

Primarily because of lower average short-term borrowing levels in both comparisons, interest expense declined by $200,000 in both the quarterly and year-to-date comparisons. Average short-term borrowings were lower in both comparisons, primarily because of significantly lower acquisition costs for pecans during the current second quarter, compared to acquisition costs for pecans during last year's second quarter.

Taking a look at inventory. The value of total inventories at the end of the current second quarter increased by $12.1 million or 7.8%, compared to total inventories on-hand at the end of the second quarter of fiscal 2012. Quantities of raw input stocks increased by 30.4%, while the weighted average cost per pound for input stocks decreased by 11.1%. The cost per pound of input stocks decreased because of lower per-pound acquisition costs for pecans.

At this time, I will turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance during the current second quarter. Jeff?

Thank you, Mike. Good morning, everyone. We are pleased with our results for the first two quarters of fiscal 2013, especially in the continued growth of our Fisher brand baking nut business.

Our significant increase in promotional spending and advertising, while negatively impacting our current net income, is intended to achieve growth for our higher-margin branded business, both now and in the future. In addition, the Company continues to invest in product innovation, marketing programs, and consumer insights, to support our Orchard Valley Harvest brand and the private brands of several key retail partners.

I am proud that for the first time since 1995, our Board of Directors, after considering the financial position of our Company, declared a dividend. The special cash dividend of $1 per share on all issued and outstanding shares of common stock and Class A common stock of the Company, was declared on December 10, 2012, and paid the first day of our third fiscal quarter, December 28, 2012.

We paid a total of $10.9 million to our stockholders. For those of you that received dividend distributions 17 years ago, and then last month, I thank you for your long-term support of JBSS, and for your long-term view of our business.

We entered the back-half of fiscal 2013 with both headwinds and tailwinds, a bit volatile like the weather here in Chicago at the moment. While we are building strong successes in portions of our business, such as our Fisher baking and contract manufacturing, the declines in net sales and in sales volume in our second quarter of fiscal 2013 demonstrate that the Company faces challenges, and we must continue to execute our core strategies with a sense of urgency. And they are to grow our brands, to expand globally, and to provide value-added integrated nut solutions.

We believe that our efforts to continue to execute our growth strategies will be aided by anticipated lower market prices for peanuts, pecans, and cashews in the remainder of fiscal 2013. In general, while tree nut market prices are expected to remain higher than historical averages, we do anticipate a modest overall price decrease for nut commodities in fiscal 2013.

Turning to category updates, volume is still being impacted by higher commodity prices. All the market information that I will share is reported through ACNielsen data ending December 22. When I refer to Q2, I'm referring to the first 12 weeks of the quarter ending December 22. We look at the category on Nielsen's new total US definition, which includes food, drug, mass, Wal-Mart, military, and other outlets. And when we discuss pricing, we are referring to average price per pound.

The total nut category experienced a softening in pound volume in Q2, though sales dollars increased due to higher prices versus a year ago. Average pound prices were up 8% versus a year ago. As a result, for the second quarter, total pound volume for the category -- nut category was down 5%, while sales revenue increased 2%.

Looking at it by subcategories, the baking or recipe nut subcategory decreased 5% in pounds and 1% in dollars for the quarter. Average prices in the baking category increased 4% versus last year. Our Fisher brand had a very strong quarter, winning the holidays in comparison to our prior-year performance and our competition. Behind our freshness bag innovation, Fisher gained 3.9 pounds share points this past quarter, and is up 4.4 share points versus prior-year for the last six months, our fiscal year-to-date. In fact, Fisher has increased share versus prior-year for 13 straight Nielsen quad periods.

Gross revenue for fish or recipe nuts is up 19% versus prior-year for the quarter, and 25% up for the fiscal year-to-date. For the second quarter, Fisher had 29% pound share of the category, and narrowed the gap versus the category leader to under 5 points. This growth is being driven by strong non-promoted volume as well as incremental volume on promotion.

Non-promoted volume, as measured by Nielsen, was up 6%, driven by increased distribution and, also, strong equity support for the brand. We increased marketing support significantly versus year-ago behind the sponsorship of the Food Network and celebrity chef, Alex Guarnaschelli. The program included Cooking with Nuts vignettes, featuring Chef Alex, and airing on the Food Network and the Cooking Channel.

The effort was supplemented with print ads in the Food Network Magazine, online digital ads, and an entire section on the Fisher website dedicated to Chef Alex, her recipes, and simple twists using nuts. The Food Network effort was supplemented with additional targeted Fisher recipe nut print executions.

Fisher recipe nuts also increased volume on promotion. Promoted volume was up 21%, driven by displays. Displays increased 44% behind strong execution of a Fisher tie-in program with Karo Syrup. Corn syrup and pecans are two ingredients for pecan pie, so Karo was the perfect tie-in partner. The program delivered a compelling "Buy two Fisher, get Karo free" offer via tear pad, which helped drive a significant increase in display activity during the critical holiday timeframe.

For snack nuts, the category declined 9% in pound sales for the quarter versus last year, while revenue increased 3%. Average prices were up 12% for the quarter versus last year. Cashews, peanuts, almonds and mixed nuts, the nut types that have experienced the greatest increases in prices, experienced the biggest declines in pound volume. Shell mixes growth has continued, increasing 5% in revenue and 1% in pound sales.

The Fisher brand increased 2/10 of a share point in the Snack subcategory versus last year. Fisher Snack has some real momentum, showing share growth for eight quad-week periods in a row. The share gain has been due to increased distribution and better merchandising around our Freshness You Can See integrated marketing campaign. Base volume for Fisher has increased 50%, driven by strong gains in distribution. Incremental volume has increased 6% behind strong display activity at retail.

The Produce subcategory decreased 3% in pounds and increased 2% in revenue. Almonds and pistachios are growing in this subsegment, but pistachio growth is slowing. Retail almond prices decreased 9% versus last year, while pistachio prices increased 4%. Our Orchard Valley Harvest brand was down in the second quarter, due to distribution losses. We are in the process of relaunching the brand behind an updated brand positioning and product bundle.

Now turning to a sales review by business channel. Although, as we mentioned, sales were strong for Fisher baking nuts, overall nut sales in the Consumer channel decreased by 6.7% in dollars, and decreased 14.1% in volume in the second quarter of fiscal 2013.

Private brand consumer sales decreased by 18.2% in the quarter of fiscal 2013, due primarily, as Mike mentioned, to the transition of a baking nut customer, which occurred in the first quarter of the fiscal year, and lower sales volume at a major customer. Finally, sales volume declined for fruit and nut mixes at the same major customer, primarily as a result of unit weight downsizing.

Net sales in the Commercial Ingredient Distribution channel were consistent in dollars, but decreased 5.3% in sales volume in the second quarter of fiscal 2013, compared to the second quarter of fiscal 2012. The sales volume decrease for the second quarter was primarily due to the impact of high peanut and walnut prices on customer demand.

Net sales in the Contract Packaging Distribution channel, as Mike mentioned, increased 19.6% in dollars and increased 12.6% in sales volume. The sales volume increase for the second quarter was driven by new distribution gain and new products launched by a major contract packaging customer.

And last channel, Export Distribution, decreased by 13.5% in dollars and decreased 17% in sales volume in the second quarter. The decrease for the second quarter was primarily driven by high peanut prices on customer demand and the timing of export shipments of in-shell walnuts. We do anticipate making up some of the volume of in-shell walnut shipments in the next quarter.

In closing, our financial performance for the first six months of fiscal 2013 showed a general improvement over the first six months of fiscal 2012. And we have executed portions of our strategic plan during the first half of fiscal 2013. Efforts to grow our Fisher brand showed strong results through expanded distribution and increased velocity, and existing customers and acquisition (technical difficulty).

Looking forward, we believe there is light at the end of the rising nut commodity tunnel. We currently expect that most commodity costs, other than almonds, while higher than historical averages, will remain consistent during the remainder of fiscal 2013. This should allow our sales and marketing teams to build promotional growth programs across all of our channels.

While we've accomplished many things in the first half of fiscal 2013, there are market dynamics and competitive challenges ahead, and there's a great deal more we must do with a sense of urgency. Management priorities include profitable volume growth and operational cost reductions. The Company will stay focused on our key strategic pillars to grow JBSS brands with continued investments in Fisher and in building our Orchard Valley Harvest brand.

To expand globally, a team of executives just returned from China after meeting with distributors, suppliers and marketing agencies, to build an infrastructure for us to expand into Asia. And, lastly, to provide integrated nut solutions to key retailers and commercial ingredient customers through continued investment in consumer insights, and product and packaging innovation.

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. Thanks, Jeff. Shantalay, we will now open the call to questions. Can you please queue up the first question?

(Operator Instructions). Patrick McNulty, Milwaukee Private Management.

Thanks for taking my questions. First of all, I'd like to congratulate you on the continued success with the Fisher brand and baking nuts. It's fantastic to see. And the question, the first question I have is, can you talk a little bit about the dynamics of the accounts payable on revolver relationship? In terms of how and why they evolve over the course of the purchasing cycle?

Okay, as you know, we're a sheller of walnuts, peanuts and pecans. In many cases, we pay growers and farmers at the time of delivery. So, typically, we see our revolver balance and our payables rise during our second quarter, and continue to rise throughout most of our third quarter, and then fall the remainder of the year.

A lot of those -- well, the revolver balance is driven primarily by pecan purchase quantities and prices, and the accounts payable balances typically driven by walnut quantity purchases and prices.

Okay, okay. Thanks for that. And then why is the inventory volume on-hand increased so significantly? Is that indicative of expectations of stronger second-half fiscal 2013 year-over-year sales?

No, it's primarily driven by walnut harvest that was earlier than it was last year.

Okay. Okay, that makes sense. And then a final question, guys, is in relation to the decision to pay the dividend. And I recognize that you're making progress with a long-term debt position, but since you've talked in the past about Sanfilippo struggling in a volatile nut price environment at the gross margin level, because of your cost structure vis-a-vis your purchasing methodology, why did you decide it was more sensible to pay the dividend rather than to allocate the capital to reducing net debt, and with the riskiness of the equity?

The long-term -- the prepayments on the two long-term debt mortgages were very high and it did not make sense to prepay that debt.

Okay, and when you say very high, can you give me some color about how disadvantageous that would have been to do that?

Oh, it was millions of dollars. And as a percentage of the outstanding balances, was pretty significant.

Okay, fair enough, fair enough. Thank you very much guys.

Okay.

Gregg Hillman, First Wilshire Securities.

Yes, could you talk about -- I don't know if it's too long for this call -- the inventory that's on your balance sheet right now, what -- in terms of, let's say, the top five nuts, I guess, what does it represent, in terms of the top five nuts? And what would be the average price, you know, the balance sheet of that inventory? And then what is the price coming in you've recently purchased or in the process of purchasing, if you get my drift?

Okay. Well, the -- basically, the bulk of our inventories, in terms of pounds, are made up of peanuts, pecans, and walnuts at this time of year. And I would guess in pound terms, that's probably at least half of the total pounds in the inventory.

I don't have the average -- weighted average cost of -- run and put stocks in front of me; but because pecans make up such a large part of our inventory at this time of year, and those prices are down, what percentage are pecan acquisition costs down -- like, 25%, something like that, meaningful number? That's why our weighted average cost run with stocks is down so significantly versus last year.

Okay. And do you have any idea -- Mike, you mentioned that it's going to help gross margins in the next quarter. Does that mean that the gross margins should trend up a percentage point or two over the next couple quarters?

Not necessarily, Gregg. We're -- as you know, especially with peanuts, and the supplies of the whole industry, high prices really took its toll on snack peanut consumption in the United States. So it's our view that -- and I'm sure many in the other industries share our view -- that it's important to get prices back to normal levels and start driving consumption, especially on that key nut.

So just getting back to my question, do you have any idea -- can you quantify the impact?

Impact on what? Just price (multiple speakers) --?

No, just gross margins -- of all that, what you were just talking about.

Well, just as when we increased prices over the last two years, our goal was to maintain gross profit dollars. Similarly, as we reduce prices, our goal is to maintain gross profit dollars.

Okay. Okay. And that's roughly inconsistent with the average over many years, not just last year, which was atypical. Is that correct?

That's correct, yes.

Okay, thanks very much.

Okay. Thank you, Gregg.

Chip Saye, AWH Capital.

It's Austin Hopper. Thanks for taking my questions. Congrats on the marketshare gains you're seeing with Fisher. I was hoping -- can you -- I think you mentioned it, but can you talk about the share that you've got currently on the Fisher baking side, versus your largest competitor? And maybe kind of what that was a year ago, comparatively speaking?

Sure. This is Jeffery. It's really new distribution gains at two major US retailers. So, as -- taking our packaging innovation, our marketing support, and just gaining new distribution at two key retailers, was where the distribution came from. Plus increasing the velocity at the current retailers that we had for Fisher in the prior year, was a combination of both new distribution and increased velocity, due to the marketing support behind the brand.

Okay, but the share you've got now versus a year ago, and versus your largest competitor?

Oh, as a percent of the market?

Yes.

Yes. So, I think I mentioned on the call, we're -- if you look at total Fisher, we're -- where's that number?

Yes, I thought it was in the high 20s.

Yes. Yes, I would say anywhere from 24% to 27% market share.

It was low 20s last year, I think it was.

Yes.

Okay. And then you've talked about the bag innovation and the Karo promotion, and some other things that have contributed to this. Can you just talk about access to nut supply and maybe walnut supply in particular, what has happened there and how that's impacted your share?

Sure. So, if you look at walnuts specifically, we've really focused on building our grower base of walnuts to support our growth in our Fisher brand. So it was a combination of going after additional growers for walnuts. But at the same time, we also shifted a lot of the volume that we already had in walnuts to -- from our Commercial Ingredient division, and even our Export division, to support the growth in our Consumer channel for Fisher.

It was a combination of both increasing our supply from growers as well as shifting some of the volume from other channels to support the brands. Same for pecans and even almonds as well.

Yes. And this is Mike. I would also remind everyone, too, that in the third quarter of last fiscal year, we elected to discontinue doing private-label business with a significant retailer, in order to provide for enough supply of walnuts and pecans to fund our Fisher growth initiatives.

Great, thank you.

(Operator Instructions). At this time, there are no additional audio questions in queue. I would like to turn the call back over to Mike Valentine for closing remarks.

Okay, thank you, Shantalay. We again want to thank everyone for their interest in JBSS. And this concludes the call for our second quarter of fiscal 2013. And we wish everyone a good day. Thank you.

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