John B Sanfilippo & Son Inc (JBSS) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son Incorporated third-quarter fiscal 2015 operating results conference call. My name is Denise and I'll be the operator for today. (Operator Instructions) I will now turn the conference over to Mr. Mike Valentine, Chief Financial Officer. Please proceed, Sir.

Thank you, Denise. Good morning, everyone, and welcome to our 2015 third-quarter earnings conference call. On the call with me today is Jeffrey Sanfilippo, our Chief Executive Officer, and Jasper Sanfilippo, Jr., our Chief Operating Officer.

Before we start, 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 2015 increased by approximately 20% to $209.4 million compared to net sales for the third quarter of fiscal 2014 of $174.3 million. The increase in net sales was attributable to a 10.1% increase in selling prices and a 9.1% increase in sales volume which we measure as pounds sold. Volume increased for all major product types except pecans and volume increased in the consumer, contract packaging and export distribution channels in the quarterly comparison.

Volume increase in the consumer channel came from increased sales of private brand snack, nut, and trail mix products to existing customers. Increased sales of Orchard Valley Harvest brand products also contributed to the net sales increase.

Volume declined for Fisher Recipe nuts and snack nuts by 4.8% and 10%, respectively. The decline in Fisher Recipe nut volume was due to reduced merchandising activity at a major customer. The decline in Fisher Snack Nut volume was due to a change in the timing of merchandising activity at a major customer where their promotional activity occurred in the second quarter of this year as opposed to the third quarter of last year.

The increase in volume in the contract packaging channel was attributable to increased sales with existing customers, which rose in large part from new product introductions made by those customers. The volume increase in the export channel resulted from increased sales of Fisher Snack nuts and bulk peanuts in addition to new item introductions made by an existing customer.

The volumes decline in the customer ingredients channel was primarily due to lower sales of bulk pecans resulting from a smaller pecan crop and also lower sales in Macadamia nuts due to lost business with customers that use Macadamia nuts as an ingredient in their products.

Net sales for the first three quarters of the current year increased to $665.8 million from $576.1 million for the first three quarters of last year. The increase in net sales in the year-to-date comparison was attributable to an 8% increase in selling prices and a 7% increase in sales volume. Sales volume increased in the consumer and contract packaging channels. The volume increase in the consumer channel was driven by increased sales of private brand snack nut and trail mix products, and by increased sales of Fisher Recipe and snack nuts. Again, increased sales of Orchard Valley Harvest brand products also contributed to the volume increase in the consumer channel in the year-to-date comparison.

The volume increase in the contract packaging channel primarily came from increased sales of peanut, cashew, and mixed nut products to existing customers. The commercial ingredients volume decrease came mainly from lower sales of both pecans and Macadamia nuts for the same reasons noted in the quarterly comparison.

The volume decrease in the exports channel was attributable to a significantly lower supply of the Hartley variety of walnuts that are typically sold into the export market as in-shell. The third-quarter gross profit margin increased to 14.2% of net sales from 13.1% for last year's third quarter while gross profit increased by 30.6%.

The gross profit margin and gross profit increases were mainly attributable to faster implementation of selling price increases, resulting from increased commodity acquisition costs, compared to the timing of selling price increases implemented in last year's third quarter.

The volume increase coupled with lower acquisition costs for walnuts also contributed to the increase in gross profit margin and gross profit in the quarterly comparison.

Gross profit margin for the first three quarters of the current year decreased to 14.7% of net sales from 15.5% for the first three quarters of last year. The decline in gross profit in the year-to-ate comparison was primarily due to higher acquisition costs for pecans and almonds in the first quarter of fiscal 2015 and to the unfavorable impact on selling prices that resulted from increased trade spending in the second quarter of fiscal 2015.

The decline in gross profit margin in the year-to-date comparison was offset in part by improved gross profit margins in the current third quarter. The increase in gross profit was mainly due to increased sales volume in the year-to-date comparison.

Total operating expenses for the current third quarter decreased to 8.7% of net sales from 9.6% for the third quarter of last year. The decline in total operating expenses as a percentage of net sales was mainly due to higher net sales base for the current quarter. The increase in total operating expenses in dollar terms was primarily attributable to increases in compensation and advertising expenses.

Advertising expense increased in the quarterly comparison because of the earlier Easter and Passover holidays this year compared to last year. Total operating expenses for the current year-to-date period decreased to 8.9% of net sales from 9.4% 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, due to a higher net sales base.

The increase in total operating expenses in dollar terms mainly occurred for the same reasons cited in the quarterly comparison. The increase in total operating expenses in the year-to-date comparison was also attributable in part to the $1.6 million gain in the sale of an old Elgin, Illinois site that reduced total operating expenses in last year's year-to-date period. The original Elgin site was purchased in 2006 for our facility consolidation project.

Interest expense declined to $1 million from $1.1 million in the quarterly comparison and interest expense declined to $2.9 million from $3.2 million in the year-to-date comparison. The interest expense declines of both comparisons were attributable to lower interest rates for our short-term credit facility. As a result of the factors we have discussed net income and earnings per share for the current third quarter were the highest ever reported by the Company for a quarter ending in March.

Taking a quick look at inventory, the value of total inventories at the end of the current third quarter increased by $30.3 million or 15.3% compared to the total inventory value at the end of last year's third quarter. The increase in the value of inventories was driven primarily by a higher commodity acquisition cost for pecans and almonds and increased quantities of walnuts, work in process, and finished goods inventories in quantity terms.

As a result of the higher acquisition cost for pecans and almonds the weighted average cost for product raw nut and dried fruit input stocks on hand at the end of the current third quarter increased by 3.7%.

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

Thank you, Mike. Good morning, everyone.

We exceeded last year's record third-quarter net income with another record third quarter, realizing double-digit percentage growth in net sales, gross profit and net income.

EPS increased by an incredible 76% to a record $0.58 per share diluted. Sales volume also grew a respectable 9.1% or 5 million pounds in Q3, in spite of higher commodity prices in raw material costs.

I am very proud of our management team and all our employees for their leadership in executing our strategic growth plans to create value for our customers and our shareholders. We are on track for another record year and performance as we head into the last quarter of fiscal 2015.

Everyone at JBSS continues to be laser-focused on the Company's long-term objective to drive profitable growth. Our strategic goals remain consistent -- growing Fisher and Orchard Valley Harvest into leading nut brands by focusing on consumers demanding quality nuts in the snacking recipe and produce categories, expanding globally and building our Company into a leading international branded and private brand snack nut company and providing integrated nut solutions to grow nonbranded business at existing key customers in each distribution channel.

Looking at a snapshot of our brand performance, we continued to execute these goals. In the third quarter we experienced distribution gains for our Orchard Valley Harvest brand, the improved distribution drove a 56% increase in volume compared to the third quarter of fiscal 2014. According to market data from IRI Orchard Valley Harvest produce brand also performed well at retail in the quarterly comparison with the 52% increase in pound volume compared to a 9% decline in pound volume for the entire produce nut category.

Although we experienced declines in sales volume for Fisher Recipe and snack nuts, both brands outperformed their respective categories at retail in the quarterly comparison. According to IRI, Fisher Recipe nut pound volume increased by 5% compared to a 5% decline for the entire recipe nut category. And Fisher's snack nut palm pound volume increased by 7% compared to a 2% increase for the entire snack nut category.

During the current third quarter, after months of testing our Fisher nut Exactly brand we introduced this new snack bite product line into distribution with eight retailers in approximately 700 stores. In the fourth quarter of fiscal 2015, we expect to ship Fisher Not Exactly to nine additional retailers in over 4,000 stores. The introduction of Fisher Nut Exactly has been well received by retailers and consumers.

Turning to a sales review by business channel, the consumer channel net sales increased by 24.9% in dollars and 10.2% in sales volume in the third quarter, as Mike had mentioned earlier. And we saw strong volume from private brand and our Orchard Valley Harvest brand [there].

In the commercial ingredient channel, net sales increased by 6% in dollars, though sales volume decreased 3% in the third quarter. In Q3, the Company started shipping a new Fisher Recipe nut program into the food service channel in stand up bags and we are pleased with the initial placement to date.

In the international channel, distribution increased by -- sales increased by 25.4% in dollars and 13.1% in sales volume. The sales volume increase for the quarterly period comparison was primarily due to increased sales of Fisher Snack nut and bulk peanuts, in addition to new item introductions made by an existing customer. Our Fisher gift program for Chinese New Year was well received and sold out at the beginning of the holiday season.

The international sales and marketing teams are focused now on a transition to a new portfolio of Fisher products and packaging in mainland China and around the world. The contract packaging channel net sales increased by 25.8% in dollars and 22.8% in sales volume. The sales volume increase for the quarterly period was due to new product introductions executed by several key existing customers.

Now let's look at consumption trends in the snack, recipe and produce categories. All the market information is reported through IRI data, dated March 22, 2015. When I refer to Q3 I am referring to 13 weeks of the quarter ending March 22. References to changes in volume or price are versus the corresponding period one year ago. We look at the category on IRI's total US definition which includes food, drug, mass, Walmart, military, and other outlets unless otherwise specified.

And when we discuss pricing, we are referring to average price per pound. The total nut category increased 3% in sales dollars and decreased 2% in pound volume in Q3. Overall, prices in Q3 increased 3% versus the prior year. Almonds, walnuts, and pistachios experienced the largest price increases versus last year. Almonds and pistachios increased 9% versus Q3 last year, while walnuts increased 8%.

These increases resulted in 11% pound sales decline for pistachios, a 5% decline for walnuts, and a 4% pound sales decline for almonds.

JBSS brands posted strong results, however. Overall Fisher brand gained 2/10 of a point of pound share of the total category. This follows full-year share growth in each of the last two fiscal years. The snack nut category had a successful Q3, increasing 6% in dollar sales and 2% pound volume. Pound growth came from peanuts, mixed nuts, and cashews.

And, as I mentioned previously, our Fisher's snack nut business, as reported by IRI, increased in volume by 7% and by 4% in dollar sales versus Q3 last year. The growth was fueled by a 10% increase in non-promoted sales.

The Fisher brand extension of Nut Exactly products is a lineup of nut and popcorn snack bite clusters that have been dipped in a touch of indulgence. Varieties include almond popcorn dipped in dark chocolate, almond popcorn dipped in milk chocolate, pecan popcorn dipped in salted caramel, and peanut popcorn dipped in peanut butter.

The Fisher Nut Exactly retail launch began in Q3. The sell in has gone well and we have received positive feedback. While I don't have market-specific data to share at this time, I look forward to sharing updates on future earnings calls.

The recipe category decreased 3% in pound volume and grew 6% in dollar sales versus last year. The results were driven by higher prices of 9% on average. The three major nut types increased in price versus last year. Almonds were up 16%, walnuts up 9%, and pecans were up 5%. The price increases resulted in pound volume declines of almonds at 7% and walnuts were down 5%. Pecans showed some resilience against the higher prices with pound volume actually increasing 3%.

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 grew as measured by IRI, increasing by 9% and 18%, respectively, in Q3 versus last year. Factors driving this growth include an increase of 9% in non-promoted volume, a 1% increase in total points of distribution, and an 8% increase in velocity, which is pound sales per point of distribution.

An increase in non-promoted volume suggests that the Fisher equity-based messaging is working. Our Fisher brand has grown consumption for 40 straight quad weeks and pound volume sales as measured by IRI, a period covering three years. The produce category declined in pound volume 8% and 3% in dollar sales. The volume decline was driven by higher prices on almonds, up 15%, and pistachios, up 8%.

Our Orchard Valley Harvest brand is picking up momentum with increased distribution and velocity. This momentum is driven by the brand's successful grab and go minis and the expansion of the line to include multi-packs of grab and go items. These items are providing shoppers and the health-conscious consumers in the produce section of the store a differentiated choice. Total points of distribution for OVH increased 65% and non-promoted volume increased 63% versus last year.

Turning a moment to raw materials, we continue to improve the alignment of selling prices with commodity acquisition costs, especially in respect to timing. In the third quarter, our sales and marketing teams implemented nearly all of our post harvest price adjustments in the first half of January and their efforts largely accounted for the improvement in gross profit margin in the quarterly comparison.

With the exception of walnuts, we have seen acquisition costs for domestic tree nuts increase in the 2014 crop year, which falls into our current 2015 fiscal year. Our nut commodity purchases were $70.8 million higher during the first three quarters of fiscal 2015 than the same period of fiscal 2014 primarily due to the procurement of larger quantities of cashews and pecans, combined with increasing pecan and almond acquisition costs.

In closing, the management team remains focused on consistent execution of our corporate goals to create customer and shareholder value. In the first three quarters of fiscal 2015, performance results demonstrate our ability to grow our brands and create value for key customers. While we continue to face supply and demand challenges that impact commodity pricing and volume growth, we have proven our ability to manage through volatile markets to mitigate the impact on our financial performance. And we will continue to work closely with our customers to provide value and help them continue to build their snack nut programs.

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. Denise, we will now open the call to questions.

(Operator Instructions) Francisco Pellegrino, Sidoti.

Congrats on a really great quarter. First off, it looks as if everything really went well for you guys during the quarter. I am seeing higher volume sales, higher prices being passed along to customers, gross margin expansion in a difficult commodity cost environment.

Looking forward as the Company looks to keep this momentum going, any color that you guys can maybe give us in regards to where trade spending could be for maybe the remainder of the year and for fiscal 2016 going forward?

We increased our trade spending in Q2, as we talked about previously. We did pull back on the trade spending in Q3. We anticipate Q4 will be pretty consistent with typical trade spend amounts. We still, if you looked at our total trade spend as a percent of branded sales, we are still on average a little bit lower than our competitors. But, again, we are going to be consistent with our typical averages of trade spend going into the fourth quarter.

We have done a lot of investment in new distribution, which we are comfortable with now, but we anticipate trade spending to level off as far as a percent of sales.

Obviously, when you start talking about this space and stealing market share, it comes down to being able to supply the market with greater volume sales. Obviously, being vertically integrated, is the Company looking to align themselves with more growers and looking to maintain these relationships over the long term? What can you tell us right now about the environment in regards to long-term relationships with growers that eventually, down the supply chain, helps you to substantiate higher volume sales [growth] (technical difficulty)?

We have had decades-long relationships with walnut, pecan, and growers and peanut farmers. We expect that to continue.

We do believe there is an environment out there for increased peanut acreage, especially given lower corn and cotton cost. And we do expect to expand the amount of peanuts we shell as a result of that. There are new -- continue to be new plantings on walnuts. Even buyer existing grower base. And just as we witnessed this year, we will probably see, weather permitting, increased quantities there.

I know this was a business you guys got out of in regards to being vertically integrated for it in the past. I know it caused some problems historically. Is there any thinking about maybe jumping back in to the almond business becoming vertically integrated within almonds, and sort of aligning yourself with growers? Or do you just really feel as if this is a type of nut product to sort of be further removed from earlier on in the supply chain?

Well, for the most part, almond handlers or showers are now pretty much controlled or owned by growers. They are virtually one and the same. So unless you are a grower, it just does not make sense to be a handler of almonds.

And, Francesco, this is Jeff. I would also add, there is such a diverse amount of grower processors and processors, specifically in the almond industry. It is still a extremely fragmented industry from a supply chain standpoint. We have enough access to current processors and grower processors that it wouldn't make sense at this point to pursue that.

All right. I guess, switching topics for a bit. The Fisher Nut Exactly line looks as if you guys are getting really strong distribution. It looks as if distribution points right now are really strong. It looks as if they are going to explode within the next couple of weeks.

Currently, how many SKUs are in the Fisher Nut Exactly line? And is this something that you think you could add a lot more SKUs to going forward? Or is it just going to be a couple of SKUs with the cluster product?

This is Jeff, again, Francesco. Good questions. So the Fisher Nut Exactly just launched in Q3. We did some testing last year. We are currently in the Club Channel with one package -- one SKU. We are looking to develop a second SKU for the Club Channel and then the Grocery Channel, which just launched in Q3, it is five items that exist today.

Our R&D teams and marketing are in the process of looking at some other flavor profiles. Currently, the majority of the products are confectionery with chocolate or peanut butter or caramel. Now we are starting to do some testing now on some savory products to expand that line.

All right. I am only going to ask this question because the last time I asked about a new product line, it turned out to be the Fisher Nut Exactly line. What is happening with Sunshine Country? Is this sort of just taking a backseat right now to the Fisher and Fisher Nut Exactly and Orchard Valley Harvest brands? Is there anything out there that you could really see maybe jumpstarting the growth? It is not really a brand you guys have been talking a lot about over the past couple of quarters.

Yes. So Sunshine Country, Francesco, is really a -- we consider it a control brand now. It used to be a much bigger brand for us before we started really developing Fisher and then our Orchard Valley Harvest produce brand. So it is really a third tier brand for JBSS, and we would use it for some produce categories where it might be a lower quality product that they are just looking for a price point to hit.

But it is more of a control brand at this point. So you shouldn't expect to see much from the Sunshine Country brand. Our big focus is on Fisher, Fisher Nut and then our Orchard Valley Harvest brands.

And, looking at those brands, looking at the IRI data, looking at where your sales are, it looks as if Company shipments are lagging IRI data, which leads me to believe that retailers are sitting on rather depleted inventory, which would speak well to your fourth-quarter shipments. I know where Easter falls during a quarter can really impact what happens with your shipment rates.

Can you give us a little bit of color in regards to just where the IRI data sort of stacks up against the Company shipment rates? It seems as if there is going to be a lot of volume that could be sold back to these retailers as they look to replenish their stock.

Francesco, this is Mike. You are right. The math would suggest that their inventories are depleted. We don't really have visibility on our retailers' inventories. We do get some anecdotal information and there is, at least with a couple of retailers, some indication that their inventories are low.

But, again, that does get a little murky when you consider the timing of the spring religious holidays. Last year, they were two weeks later than they were this year. So that may end up explaining it, but we will know here shortly.

All right. And, just to touch on the financial condition of the Company, if we continue with the theory that shipments to retailers are going to be rather attractive during the fourth quarter, look, I know in the past some investors sort of get caught up in your inventory number. Right now it looks as if you are sitting on a record inventory. Obviously, it is part of being vertically integrated.

I know investors look at that number and they are concerned that it might be a little bit too high. When I look at the IRI data, I look at where your shipments are for the past quarter, where your shipments could be this quarter. I almost think that your inventory might not be enough to match fourth quarter. And I know this is a problem you guys incurred in the first quarter. Sort of being caught shorthanded with where your inventory numbers were.

I know it is not an account that you give too much transparency with, for competitive reasons. Can you make me a little bit more comfortable in regards to the comments you made earlier about just for your inventory sits right now and whether I should be concerned that you might not be sitting on end of inventory going forward?

Well, first of all, in terms of dollars, more than 50% of the increase in dollars really sits in our finished goods and work in process which are built up in anticipation of this volume increased trend continuing. So in that respect, we have plenty of finished goods to deal with that.

In terms of raw input stocks, the only increasing quantity that is noteworthy is with walnuts. We had a smaller pecan crop, as we noted. As we mentioned in previous calls, nuts like almonds and cashews, which are at historical high prices, where our coverage is, we are playing it kind of close right now. There doesn't appear to be a lot of upside risk in those markets. We certainly don't want to get too long on those.

But there is plenty of almonds and cashews out there for us to buy. And we don't anticipate any shortages there.

You mentioned that a lot of your finished -- a lot of your inventory is finished goods volume. Does that mean that you already have buyers for this product?

Yes. Our ongoing customer relationships assure us that this finished good inventory is going to shift. And just to kind of frame that up, it is not probably much more than a month on hand. So there is no risk issues there.

So, if it is not more than a month on hand, you are sitting on a high level of finished goods volume, we could almost jump to a conclusion that retailers are sitting on depleted inventory levels at the store level and that they are committed to replenishing right now into the fourth quarter, despite some of the holiday things that you had mentioned a couple of questions earlier. Can I make that inference based upon where your finished good inventory is?

Well, that -- obviously, we wouldn't have that higher inventory amount -- or finished goods inventory amount if we didn't believe that. But, I do want to caution you that, believe it or not, we don't get a lot of visibility on what our customers are forecasting. And, in some cases, our customers have difficulty with that.

So we can't say for sure, but certainly with the kind of volume increase we experienced in the third quarter of 9%, it makes sense for us to have a lot more finished goods and work in process on hand for the fourth-quarter needs.

That is it for me. Thanks again, guys.

Tom [Cox, Trammell] Partners.

Great numbers. I just had a question regarding Orchard Valley. Can you guys give us any more color? I mean, that seems to be growing very, very strongly in the last several quarters and just as that comes more into the forefront, can you give us a little bit more -- I don't know, whatever you can provide as far as detail; as far as how you see that progressing and how big of a component that can become and whatnot?

Hey, Tom. This is Jeffrey. So we bought the Orchard Valley Harvest brand back in 2010 and at that point we started to see growth in the produce section of the grocery aisle. And we believe that there was an opportunity to build a health and wellness type of snack nut brand so when we brought bought the brand we relaunched it, cleaned up the packaging, it is our non-preservative, clean ingredient, non-GMO brand. And we just continue to see further strength in that category for consumption of that product line.

So we are in produce now. We are launched with -- the minis is the big product line right now. So the goal and the opportunity is to expand the size of the packaging that we currently do in Orchard Valley Harvest to a bigger bag and get more distribution with that bigger bag. Right now, it is a 2 ounce bag on average size, both individual and multi-packs.

We are also seeing interest outside of the produce category for that product line because it is a clean ingredient deck, and there is not a lot of snacking nut programs that have the call outs that we can put on our packaging. And so we are seeing interest in other areas of both grocery and alternative markets for that brand. So we are very excited about the opportunities for growth there.

Okay. And so, is this tremendous 50% growth that you have seen quarter over quarter for the last several quarters, is that attributable to just greater distributions, greater number of stores, or is it just more of these packages in your existing store base?

So it is a combination of velocity. So the current distribution we have, we are getting more turns per week for that specific pack, but also a lot of it is new distribution as well. So it is a combination of both.

And do you see room to continue to grow the distribution the way you have grown it the last year?

We do. Yes. We have got great success stories now and a lot of retailers and, again, it is trying to get bigger sizes into the categories where we currently have distribution and then continue to expand distribution. Also looking at adding to the portfolio, it is a pretty simple product line right now. So our R&D teams are working on looking at some new items for that brand as well.

Okay. Great. One last question. Can you remind me on private label, what is the impact, if any, positive or negative, from the Safeway and Albertsons merger?

They are still going through the process of looking at all their categories. So, it is hard to say exactly what that impact will be at this point. I couldn't give guidance on that right now, because we just don't know.

We have no further questions. I will now turn the call back over to Mr. Mike Valentine, Chief Financial Officer, for any closing remarks. Please proceed, Sir.

Thank you, everyone, again, for your interest in JBSS. This concludes our call for our third-quarter operating results for fiscal 2015.

This concludes today's conference. You may now disconnect. Have a great day, everyone.