John B Sanfilippo & Son Inc (JBSS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. third-quarter fiscal 2014 operating results conference call. My name is Kim 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 conference over to your host for today, Mr. Michael Valentine, Chief Financial Officer. Please proceed.

Thank you, Kim. Good morning, everyone, and welcome to the JBSS 2014 third-quarter earnings conference call. Thank you for joining us today. On the call with me today are Jeffrey Sanfilippo, our CEO, and Jasper Sanfilippo, our COO, and both are traveling today and are participating by phone.

Before we start we want to alert you to the fact that we may make some forward-looking statements today. These statements are based on our current expectations and 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 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, net sales for the third quarter of fiscal 2014 increased to $174.3 million in comparison to net sales for the third quarter of last year of $163.8 million. The increase in net sales was attributable primarily to an 8% increase in selling prices. The increase in selling prices arose as a result of higher acquisition costs for almonds and walnuts primarily.

Sales volume, which we measure in terms of pounds sold, declined by less than 2%. The volume decline was driven primarily by lower availability of certain grades of walnuts that are only suitable for in shell, which impacted our volume and our export channel, and a smaller 2013 peanut crop, which contributed to the overall decline in volume. And it also led to lower sales of raw bought peanuts to other peanut processors in our commercial ingredients channel.

Those volume declines were offset in part by a 4% volume increase in our consumer channel. A 50% volume increase in sales of Fischer recipe nuts and volume increases for private brand snack nuts primarily drove the volume increase in the consumer channel in the quarterly comparison. A significant increase in Fisher recipe nut volume was generated by increased in-store merchandising activity and a product line expansion to higher ounce weight packages.

Net sales for the first three quarters of the current fiscal year increased to $576.1 million from $556.9 million for the first three quarters of last year. The increase in net sales in the year-to-date comparison came mainly from an 8% increase in sales volume.

Sales volume increased significantly in the consumer, commercial ingredients and contract packaging channels. Sizable volume increases for Fisher recipe nuts and private brand snack nut and trail mixes for the main drivers of the volume increase in the consumer channel. The volume increase in the commercial ingredients channel primarily came from increased sales of almonds to a major customer.

The commercial ingredients volume increase was also bolstered by increased sales of pecans to a major customer in that channel that implemented a product line expansion into pecans. New product launches involving almonds, trail mixes, chocolate and yogurt coated products that were executed by several key customers led to the volume increase in the contract packaging channel in the year-to-date comparison.

The third-quarter gross profit margin declined to 13.1% of net sales from 14% of net sales in last year's third quarter, while gross profit dollars remained relatively unchanged. The decline in gross margin occurred because selling price increases for almonds, mixed nuts, which contain almonds, and walnuts were not fully implemented until the end of January while higher acquisition costs for almonds and walnuts impacted the entire month.

Gross profit margin for the first three quarters of the current fiscal year decreased to 15.5% from 16.2% for the first three quarters of fiscal 2013. The decline in gross margin in the year-to-date comparison occurred largely as a result of competitive pricing pressures that existed in the first two quarters of the current fiscal year.

The delay in implementing price increases for almonds, mixed nuts and walnuts that unfavorably impacted the current third quarter also contributed to the gross margin decline in the year-to-date comparison. The decrease in gross margin was offset in part by manufacturing efficiency improvements achieved during the current fiscal year.

Total operating expenses for the current third-quarter decreased to (technical difficulty) sales from 11.9% of net sales for the third quarter of last year. The decline in total operating expenses as a percentage of net sales was driven by lower incentive compensation and advertising expenses. Advertising expense fell primarily because of the later Easter holiday which falls in the fourth quarter this year.

Total operating expenses for the current year-to-date period decreased to 9.4% of net sales from 10.5% for the first three quarters of last year. As was the case in the quarterly comparison, total operating expenses as a percentage of net sales declined to reductions in incentive compensation and advertising and expenses.

The decrease in total operating expenses in the year-to-date comparison also was attributable to a $1.6 million gain on the sale of our original Elgin site that occurred in this year's second quarter. The original Elgin site was originally purchased in 2006 for our facility consolidation project. The lower total operating expenses was offset in part by increased shipping costs chiefly from increased sales volume in the year-to-date comparison.

Interest expense declined slightly to $1.1 million from $1.2 million in the quarterly comparison and interest expense declined to $3.2 million from $3.5 million in the year-to-date comparison. The interest expense declines in both comparisons were attributable to lower average borrowing levels during those respective periods.

As a result of the factors that we have discussed so far, net income and earnings per share for the current third quarter were the highest ever reported by the Company for any quarter that ended in March.

Taking a look at inventory, value of total inventories at the end of the current third quarter increased significantly by $31.3 million or almost 19% compared to total inventory value on hand at the end of the third quarter last year. The increase in the value of total inventories was driven primarily by increased acquisition costs for pecans, walnuts and almonds while quantities of raw input stocks were lower.

The higher acquisition cost for pecans, walnuts and almonds led to an approximate 23% increase in the weighted average cost per pound for our raw nut input stocks in the quarterly comparison. And now I will turn the call over to Jeffrey Sanfilippo who will provide additional comments on our performance in the current quarter. Jeff?

Thank you, Mike. Good morning, everyone. We had a strong fiscal 2014 third quarter for the Company, achieving record net sales, net income and record earnings per share. We are especially pleased with the performance of our Fisher recipe brand during the current quarter as pounds sold increased by 50% over pounds sold in the third quarter of fiscal 2013. And pound and dollar market share also increased significantly in the quarterly comparison.

I want to thank our Fischer sales and marketing teams for this remarkable accomplishment, especially when we consider the late Easter holiday this year.

As I have mentioned on previous earnings calls, in addition to building JBSS brands, our Company is focused on creating value through differentiated products, packaging and consumer insights. And our strategy at leveraging our innovation and manufacturing capabilities to grow our business with key non-branded customers also allowed us to realize significant volume gains with many of our major private brand, contract manufacturing and commercial ingredient customers.

I'd like to touch on a few highlights of our strategic growth plans. First, grow JBSS brands. This is our Company's third year owning the Orchard Valley Harvest brand. Since JBSS purchased the brand our sales and marketing teams overhauled the product and packaging portfolio to meet the growing demand from consumers in the produce section looking for healthy snacks.

Our [omni-gross] sizes of almonds, cashews and trail mixes have been very successful. We are in the process of launching a variety of multipacks soon. We believe our brand position of no artificial ingredients and non-GMO products is resonating with consumers.

The Fisher recipe brand outperformed the category, with strong volume increases in pecans, walnuts and almonds. We expanded the product portfolio this year and added larger club pack sizes. In addition, we expanded our in-store merchandising efforts which were very successful in gaining incremental business.

Key performance measures such as distribution, velocity and volume are all growing. When looking at category brand share, excluding the club channel, Fischer is the number one recipe nut brand in the country today.

Fisher snack nuts, we believe there is a great deal of brand equity in our Fisher snack nut program, and our Company just launched an innovative new product that just hit retail shelves within the past four weeks. The product is called Fisher Nut Exactly and contains almonds, popcorn with a splash of dark chocolate. We are optimistic about the initial sales and feedback that we have received from consumers.

Turning to expand globally, we continue to develop our Fisher brand business in China by improving our distributor network and leveraging our presence in China through Sanfilippo Shanghai Trading Company, Ltd. to support our long-term business strategy.

Sales of our Fischer specialty pack for Chinese New Year was very successful with substantial growth versus prior-year sales in spite of the overall CNY holiday in China where sales result in the country were lower due to changes in government policies on gifting as a result of austerity measures.

Turning to the sales review by business channel. Consumer, net sales in the consumer distribution channel increased by 10.7% in dollars and 4.2% in sales volume in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The increase in volume in the consumer distribution channel, as Mike mentioned, was driven by a 50.2% increase in Fisher recipe volume and a 3.6% increase in sales of private brand snack nuts.

In our commercial ingredient channel net sales increased by 3.9% in dollars but decreased 6.8% in volume in the third quarter of fiscal 2014. The sales volume decrease in the quarterly comparison is primarily attributed to decreased bulk peanut volume due to a smaller crop compared to the same quarter of the prior year.

In the international channel, net sales in the export distribution channel decreased by 13.8% in dollars and 26.1% in sales volume in the third quarter. The decrease in the quarterly comparison is due primarily to decreased amounts of bulk in-shell walnuts, as Mike mentioned, available for export and decreased sales of peanut products.

In the contract packaging channel, net sales increased by 3% in dollars and decreased 0.4% in sales volume in the quarter. The contract packaging sale volume increase primarily resulted from increased sales of almonds, trail mixes and chocolate and yogurt coated products due to new product launches executed by key customers in this channel.

Now let's look at consumption trends in the snack, recipe and produce categories. All market information is reported through IRI dated March 23, 2013. And when I refer to Q3 I am referring to 12 weeks of the quarter ending March 23. References to changes in volume or price are versus the corresponding period one year ago.

We look at the category and IRI's total US definition, which includes food, drug, mass, Walmart, military and other outlets. And when we discuss pricing we are referring to average price per pound.

The total nut category increased 3% in pound volume and 5% in sales dollars in Q3. We saw growth in snack nut pound sales, but recipe and produce nut pound volume decreased due to higher prices. The snack nut category had a successful Q3 increasing 7% in pound volume sales and dollar sales.

Pound growth came from virtually all major nut types due to declines in average selling prices on peanuts, cashews and mixed nuts. Almonds also grew 5% despite a 10% increase in average prices. However, we did see offsets to consumer demand in other parts of the store for almonds.

The Fisher snack nut business increased in volume and dollars sales versus Q3 of last year, up 13% and 12% respectively. The growth was fueled by an 18% increase in non-promoted sales. This growth was driven by a 16% increase in total points of distribution and a 19% increase in pound sales for point of distribution.

Private brand increased 14%. The private brand increases were driven by a 23% increase in merchandise sales. The recipe category decreased 5% in pound volume and increased 7% in dollar sales versus last year. The pound volume declines were driven by higher prices of 12% on average.

The greatest decline was seen on almonds sold in the recipe nut section as prices jumped 24%. It looks like consumers responded to the almond price increase in recipe nuts by switching their purchases to the snack aisle.

Fisher recipe continues to gain momentum behind the strategy of growing distribution, increasing merchandising activity and building equity. Both Fisher recipe nut pound volume and sales dollars as measured by IRI increased by 23% in Q3 versus last year. Factors driving this growth included an increase of 21% in merchandise volume and a 12% increase in total points of distribution.

The Fisher brand continued its sponsorship of the Food Network and celebrity chef, Alex Guarnaschelli, which was launched last year. The produce category declined in both pound volume and dollar sales, 6% and 1% respectively. The decline was driven by pistachios which decreased 22% in pounds versus last year.

Orchard Valley Harvest brand was flat in dollar sales and increased 4% in pound sales. Total points of distribution for OVH increased 40% and merchandising increased 6% leading into a 120% increase in unit sales per [planned] distribution.

Turning to a quick overview of nut markets. We have seen acquisition costs for domestic tree nuts increase in the 2013 crop year which falls into our current 2014 fiscal year.

On the positive side, although there was significantly reduced acreage planted for the 2013 crop year, we have recently observed a decline in peanut prices back to normal levels this year due to the lingering impact of the large carryover from the record 2012 crop which fell into our fiscal 2013 year.

In spite of fluctuating nut markets, our Company continues to pursue opportunities to mitigate the margin impact of volatile material costs. We are focused on expanding our product portfolio with other snacking ingredients to complement our snack nut items. We continue to focus on better aligning costs of our inventory positions with selling prices and we continue to work on continuous improvement projects that generate manufacturing efficiencies and operating cost reductions.

In closing, I am pleased with our record top-line results, net income and EPS in the third quarter of fiscal 2014. Overall, our strategies are working well and we intend to stay the course. I'm optimistic about our ability to grow our brands, expand in emerging international markets, and create value for key global food retailers, manufacturers and distributors. And I am excited about the pipeline of projects and new product introductions we will launch in the near future.

The management team remains focused on consistent execution of our corporate plans to create shareholder value. And each of our employees is focused on improving quality and service, enhancing operational efficiencies and reducing costs throughout the supply chain to create value for our customers. We appreciate your participation in the call and thank you for your interest in our Company. I will now pass the call back over to Mike.

Great, thank you, Jeffrey. We will now open the call to questions. As I mentioned earlier, both Jeffrey and Jasper are calling in separately. So if you have a question for either one of them, if you would be kind enough to name them in your question that would be very helpful. Kim, can you please queue up the first question?

(Operator Instructions). [Francesco Pegrino], [John B. Samfolin].

Hi, guys. It is Francesco Pellegrino over at Sidoti. It looks like it was a rather good quarter. I wanted to touch on one thing that I noticed in the release that referred to the larger package sizes by total weight that seem to be a new staple for the product line.

Going forward do you think you will start to see larger package sizes come into the production cycle? And is this more of demand by the consumer to sort of have larger purchasing power in terms of buying in larger quantities for cost's sake?

Jeffrey, can you take that question?

Sure. Thanks [for the] good question. So what we have seen is switching from grocery we are competing heavily with the club stores and club size packages. And so there has been an interest in offering larger sizes in grocery -- in typical grocery retailers. And that is where we have seen the growth recently.

That is a defensive move to compete with club packs. But at the same time, because the nut category is growing and consumption is growing, there is a value proposition as well for consumers in the grocery aisle to purchase larger sizes of packages.

When -- if the consumer is asking for larger packages but they're also making a transition over from nuts to different types of snack products, the downward pressure that this would have on your gross margin I would think would be considerable to a point that the consumer is willing to make less frequent purchases but the purchases that they do make are going to be larger.

So is there going to be issue of turnover going forward in terms of inventory possibly staying on store shelves longer than anticipated?

You'll see the shelf space because obviously the larger packs take up more room, so the retailer will carry less units of the larger packs than they do currently of their smaller pack sizes. So I don't anticipate bigger inventories being held by the retailer, it is just going to be less units but a similar amount of pounds.

All right, and --.

So what you should anticipate is a lower unit volume but either maintain or increase the amount of pounds.

And do you think the consumer is able to understand the increase in price that is going to be passed on to them just based upon they're going to be getting a larger quantity product that they are going to have pay for, but on a unit basis it is going to be less?

Correct. So you will be amazed at how smart consumers are. They look at that per ounce cost when they are looking at the shelf tags. And so, they are very, very understanding of what that dynamic looks like from a price standpoint for them. They may not calculate what paying up a little bit higher price for the total package because it will sit in their cabinet maybe longer. But they are very aware of what the per ounce unit cost is.

So the transition over to larger packages should not necessarily be flawless but the consumer understands the thinking behind such a strategic move --

Correct.

-- and plus smaller snack sizes in terms of the 100 calorie bags that we have been seeing coming onto the market, it seems as if this is a different approach. But the consumer has to sort of control their own consumption patterns.

Correct.

(Multiple speakers) the larger bags. All right, interesting.

Yes, so they will still have both options, they will still have opportunities for the smaller packs, but really the new larger size club packs are relatively new for the grocery category.

All right. And just one last thing. I noticed Fisher Nut Exactly; I know that the product is in its early infancy stages, it has been on the market for four weeks. Any feedback that you are getting from retail chains in terms of the type of penetration it has been able to see by the consumer?

It is so new right now we are just getting initial consumer feedback, so it is too early to answer that question at this point. We are just optimistic from the feedback we have heard from consumers as we have done some test markets and in-store monitoring of the sales.

Can you go into any thresholds that you are looking for this line to establish over the next quarter, next half year and next year for the Company to significantly start investing into growing out this product line?

Well, again, it's really new. We are just getting a feel for how it is doing in markets. We will have more on that in future calls but at this point it is still too early to talk about it.

All right, thank you, guys.

(Operator Instructions). [Bruce Winter].

How is your plan of increasing your international business particularly in Asia coming along?

We are still in the process of building the infrastructure in China. We had, like I mentioned on the call, a strong Chinese New Year with our new gift pack that we created for the market. And so, it is really initial stages of building the distribution.

We are happy with the current distribution we have, we have got good strong distributors in a couple key markets in China. But again, it is just initial phases of building that from there.

We've also done some focus groups in market and looked at some new pack styles and different products for the Chinese consumer. So taking some time to build the distribution but we think we are on the right course and have a good infrastructure now to start adding to that volume.

Sounds good. About six month ago I asked you what are the factors out of your control that are going to affect your results this year, and if they were competitive conditions in nut supply. I guess nut supply you have covered. What about competitive conditions?

Yes, this is an extremely competitive market, like most industries are. We've got the big branded players that are investing in the category. We've got private brand competitors as well that are investing. But I think we've done a great job managing our pricing, managing our prices and margins in the category. That is still something we have no complete control over what our competitors do.

Okay, thank you.

Ron Strauss, Pekin Singer.

Gentlemen, I take my hat off to you. As you know, I've been following your Company for a long time. All the headwinds are vanished and you have got nothing but tailwinds it seems except for your raw material costs and I take my hat off to you. You have managed this business quite well. Let me ask a question if I could. Did I hear you say that you are number one in recipe nuts now?

We are. If you exclude the club channel we are the number one brand of recipe nuts now.

Is that for a four-week period, or a 16-week period or --?

That is hard, Ron. I believe it is a 16-week period, Ron. I think it's been within the last couple of months we have achieved that.

Wow, that is great. I wonder if you could elaborate on the incentive compensation reduction that occurred in the quarter.

Mike, do you want to cover that?

Can we disclose the amount?

No -- well, I -- not so much the amount but why. If you want to disclose the amount that is fine.

Well, actually I think it is in the Q. This is Mike, Ron. As you know we are and EBA Company and the way EBA-based incentive plans are designed it is based on improvement and we have to achieve a certain minimum amount of improvement which goes to stockholders and then anything we do over that then goes to the participants in the plan.

This year we have accrued a smaller amount of the bonus expense, pretty significantly smaller amount than we did last year. But also keep in mind that in the last two years we have far exceeded 1x targets in respect to improvement. So just want to be clear, we still believe we are going to pay a bonus to our employees this year. But it won't be where it was over the last two years.

Good, that is all I had. Thank you very much.

(Operator Instructions). Okay, ladies and gentlemen, this concludes our question-and-answer session. I will now turn the call back to Mr. Michael Valentine.

Okay, thanks, Kim. Again, thank you, everyone, for your interest in JBSS and this concludes the call for our third-quarter 2014 operating results.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.