John B Sanfilippo & Son Inc (JBSS) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the John B. Sanfilippo & Son Incorporated fist-quarter 2017 operating results conference call. My name is Derek and I will be your operator for today. At this time, all participants are on a listen-only mode. (Operator Instructions). At this time I would like to turn the conference over to Mr. Mike Valentine, Chief Financial Officer. Please proceed.

Thank you, Derek. Good morning, everyone and welcome to our 2017 first-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.

Before we start, we want to remind you 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 the risks and uncertainties that are inherent in our business.

Starting with operating results, net sales for the first quarter of fiscal 2017 decreased by 1.5% to $222.3 million in comparison to net sales last year of $225.8 million. The decrease in net sales came from lower selling prices for products containing walnuts and almonds. The decline in selling prices for these products was due to lower commodity acquisition costs.

Sales volume, which we define as pounds sold to customers, rose by 9.7% in the quarterly comparison. Sales volume increase was driven primarily by increases in sales of peanuts, walnuts, pecans and almonds in the consumer channel. Sales volume increased in all distribution channels. The majority of the total sales volume increase, as I mentioned, occurred in the consumer distribution channel, which was primarily driven by increased sales of our branded products.

Fisher recipe nut sales volume increased by 44.6% mainly due to distribution gains with new customers, increased promotional activity and the introduction of a larger package size for walnuts. Fisher snack nut and peanut butter volume increased by 13.2%, primarily due to distribution gains with new customers and increased product display activity.

Orchard Valley Harvest and Sunshine Country produce products increased by 192.5% due to increased promotional activity and the introduction of new items for our Orchard Valley Harvest brand. Slightly offsetting these sales volume increases for our brands was a sales volume decreased from Fisher Nut Exactly snack bites, which was largely due to lost distribution in club stores. The sales volume increase in the consumer channel was also due in part to an 8.2% increase in sales volume with existing private brand customers and that was primarily with peanut products.

The sales volume increase in the contract packaging channel came from increased sales of trail mix, almond and cashew products to existing customers, and the sales volume increase in the commercial ingredients channel mainly came from increased sales of peanuts to peanut oil stock crushers.

Gross profit for the first quarter of fiscal 2017 increased by 9.8% or $3.3 million to $36.5 million in the quarterly comparison. Gross profit margin increased to 16.4% of net sales in the current quarter from 14.7% of net sales for last year's first quarter. The increase in gross profit was mainly attributable to increased sales volume, and the increase in gross profit margin primarily resulted from lower acquisition costs for walnuts and almonds.

The increase in gross profit margin also is attributable to improved alignment of selling prices and acquisition costs for pecans. Total operating expenses increased to $19.9 million in comparison to $19.5 million for the first quarter of fiscal 2016. As a percentage of net sales, the first-quarter 2017 total operating expenses increased to 9% from 8.6% for last year's first quarter. The increase in total operating expenses in the quarterly comparison was mainly attributable to increases in shipping expense, which resulted primarily from the higher sales volume. The increase in operating expenses as a percentage of net sales was largely the result of a lower net sales base.

Interest expense in the current first quarter declined by $300,000. The reduction in interest expense was due primarily to lower debt levels. The total value of our inventories on hand at the end of the current first quarter decreased by $40.7 million or 21.7% compared to the total value of our inventories on hand at the end of the first quarter of fiscal 2016. The decrease in the total inventory value was attributable primarily to lower acquisition costs for walnuts and almonds.

For that reason, the weighted average cost per pound of our raw nut and dried fruit input stocks on hand at the end of the first quarter decreased by 29.9% compared to the weighted average cost for those input stocks at the end of the first quarter of last year. Net income was $10.2 million or $0.89 per diluted share for the current first quarter compared to $8 million or $0.71 per diluted share last year. Both the aforementioned 2017 net income and per-share results represent record results for a first quarter. I will now turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our operating results for the first quarter of fiscal 2017. Jeff.

Thank you, Mike. Good morning, everyone. As you can see from our earnings release, the Company started fiscal 2017 with strong momentum. This is the fourth consecutive year the Company had reported record first-quarter operating results for net income and diluted earnings per share. This year, the strong results are due to a significant increase in sales volume and improved gross profit margin. Approximately 50% of the total sales volume increase came from increased sales of our branded products, which has been a strategic focus for the management team. As was the case in fiscal 2016, sales volume growth for our brands continues to outpace sales volume growth for our private brand products. Sales volume, measured as pounds sold to customers, increased 5.9 million pounds or 9.7% compared to the first quarter of 2016.

As I mentioned on the last quarter call, our management team is keenly aware of the importance of margin expansion so we continue to build our brands and transform our business and that of our customers with product, packaging and processing innovation. We are also focused on operational efficiencies to reduce costs throughout our manufacturing and supply chain and, lastly, we are assessing our SG&A expenses and corporate structure to optimize our investments and talent across our Company.

I want to thank our management team and all of our dedicated employees for their leadership and congratulate them for a great start to our fiscal 2017 year. We ended fiscal 2016 with strong momentum and now we continue to execute our plans to grow JBSS brands, expand consumer reach and provide best-in-class integrated net solutions to key partners.

In our first quarter, our Board of Directors, after considering the financial position of our Company and other factors, declared a special cash dividend of $2.50 per share on all issued and outstanding shares of Common Stock and Class A common stock of the Company. The 2016 special dividend of approximately $28.2 million was paid on August 4, 2016 to stockholders of record as of the close of business on July 21, 2016. These results demonstrate a focused commitment to create shareholder value and provide relevant, profitable, value-added products and services to our customers and consumers.

A significant change to our strategy was briefly discussed on our last earnings call and I will elaborate on it in more detail now. As I mentioned, we have reallocated resources from our global expansion efforts and shifted focus to expanding consumer reach. The goal here is to gain distribution of our branded products in alternative channels and develop business with customers and consumers we currently do not reach, for example, the dollar store channel. We currently have little to no distribution of our branded products here, so we are realigning our sales and marketing efforts to pursue business development with dollar store-type accounts.

Another area is our club store business. While we do have some distribution in this channel, the opportunities for further growth are substantial. An additional area is our food service division where we are aligning our resources to pursue front-of-house distribution for Fisher and Orchard Valley Harvest in the noncommercial segment. We define the noncommercial customer as a location that sells food where food is not their primary business. This would include organizations such as colleges and universities, healthcare institutions and corporate industry. I will keep you updated on our progress in future earnings calls.

Turning to our sales channels, in the consumer channel, net sales increased by 2.2% in dollars and 14.2% in sales volume in the first quarter of fiscal 2017 compared to the first quarter of 2016. The sales volume increase was driven primarily by increased sales of our branded products, as I mentioned. And Mike mentioned sales volume for Fisher recipe nuts increased 44.6% due to distribution gains with new customers, the introduction of larger pack sizes of walnuts and increased promotional activity.

Sales volume for Fisher snack nuts and peanut butter increased a combined 13.2%, primarily as a result of distribution gains with new customers and increased product display activity. 192.5% increase in combined sales volume of Orchard Valley Harvest and Sunshine Country produce products due to increased promotional activity and new item introductions also contributed to the sales volume increase. These results demonstrate the speed in which the Company is able to react to changing market conditions and consumption trends and this performance validates the strength of the Fisher and Orchard Valley Harvest brands in the marketplace.

The one brand segment where we are not happy with the results is our Fisher Nut Exactly program. Sales volume has declined due to lost distribution in some club stores. With the goal of regaining that lost distribution, we will be introducing newly-formulated snack bites to retailers in the club channel in the coming second quarter.

I also want to mention the Company's private brand business and strong Q1 results with an 8.2% increase in sales volume as we continue to provide valuable innovation with existing private brand customers. In our commercial ingredient channel, net sales decreased by 16.8% in dollars and sales volume increased 1.8% in the first quarter. The decrease in net sales was largely due to lower selling prices on products containing almonds. In the second quarter, we expect net sales to continue to decline in the commercial ingredient channel due to an existing customer changing vendors to a vertically integrated almond butter supplier.

The contract packaging channel net sales increased by 11.8% in dollars and 6.7% in sales volume in the first quarter of 2017. The sales volume increase was primarily due to increased sales of trail mixes, almonds and cashews to existing customers. We again saw meaningful sales volume growth in our contract packaging channel due to the efforts we made in assisting our customers as they launch new products and gain new distribution.

Now turning to category updates in the snack, recipe and produce segment. Let me share a review of our brand performance and consumption trends. Starting with recipe nuts, in Q1, the recipe nut category declined 13% in dollars and 10% in pound sales. Price increases on almonds of 17% and pecans of 10% drove negative pound sales trends of 39% for almonds and 13% for pecans. These declines could not be offset by a 20% decline in walnut pricing, which led to an 8% increase in pound sales.

Our Fisher brand had a very strong quarter and continues to gain momentum behind our integrated marketing efforts. Fisher recipe nuts increased 7% in dollar sales and 13% in pound sales in the quarter versus last year. As a result, Fisher pound share in the category increased 5.2 points versus last year. The growth was driven by an increase in distribution of 11 percentage points of ACV as our sales team has been able to translate our retail success into greater retail penetration. Distribution for Fisher recipe nuts is now at 56% ACV.

In addition to the distribution gains, pound velocity was up 7%. The velocity growth was driven by strong merchandising performance and the effectiveness of our brand, no preservatives and non-GMO messaging. Our brand equity efforts on Fisher coupled with our distribution gains helped the brand overcome category weakness and deliver growth in our first quarter.

Now let me turn to the snack category. In Q1, the snack category decreased 2% in dollars and pound sales versus last year and average prices were flat as increases in cashews of 3% were offset by declines in almonds and peanuts of 3% and 2% respectively. Fisher snack decreased 15% in sales dollars and 5% in pound sales in Q1. The decline was driven by a decrease in pound velocity at a key customer, which was driven by merchandising declines. However, Fisher snack nuts performed well at retailers that do not report to IRI.

Fisher Nut Exactly declined 35% versus last year due to the loss of distribution at one major customer. At retailers where the brand has been supported with merchandising, Fisher Nut Exactly seems to have carved a niche role in the category as a differentiated nut-based offering. Our Orchard Valley Harvest business had a strong Q1 quarter, increasing over 100% in dollar and pound sales. Building on key market trends of non-GMO and clean ingredient lines, the business has found acceptance among our retail partners. Our ACV distribution has increased to 35% nationally and our velocity increased 4% behind strong merchandising efforts.

We have continued to build on this success by launching new products such as our omega-3 mix and dark chocolate covered fruits both in multipacks. Sunshine Country, our other brand in the produce section of the store, also had a great quarter. The brand posted very strong consumption gains, but it is off of a small base as we are lapping the launch of the brand, which occurred last year. Our total produce business, Orchard Valley Harvest and Sunshine Country, grew 149% in pounds in the first quarter compared to a year ago.

In closing, while we face competitive challenges every year that impact our Company, we've proven our ability to manage through high-price markets and now declining markets. In addition, we are investing in established infrastructure to comply with new regulatory changes in the food industry and we will continue to work closely with customers to provide value and leadership to build their nut and snack programs.

Leading into the first half of 2017, our results demonstrate our ability to grow our brands and provide competitive snack, recipe and produce programs for our private brand partners and commercial ingredient and contract packaging customers. As a result, in Q1, sales volume rose by 9.7% in the quarter and we experienced growth in all distribution channels. And gross profit, as Mike mentioned, increased by 9.8% and net income increased by 27.4%. We do have volume challenges and headwinds going into the remaining quarters of fiscal 2017 with the loss of a major industrial customer, but the management team remains focused on consistent execution of our corporate goals to create customer and shareholder value.

For fiscal 2017, our resources will be devoted to three specific areas -- expansion of national distribution of our Fisher and Orchard Valley Harvest-branded products; expansion of our customer reach by entering into new distribution channels, launching differentiated products and investing in new businesses; and three, continue value-added growth of non-branded business with our key existing customers. 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.

Thank you, Jeff. At this time, we will open the call to questions. Derek, can you please queue up the first question?

(Operator Instructions) Francesco Pellegrino, Sidoti.

Good morning, guys. So, just quickly, I know this quarter was a first-quarter record. Are we lapping a record in first quarter last year as well?

Yes, correct. We are. Actually, this is the fourth consecutive first quarter where we have record earnings.

Okay. So this might be a good lead-in because I think it's an interesting time for the Company. I take a lot of calls about the cycle turning over and when I speak with you guys about one of the slides in your presentation that shows all the spot market pricing for various nuts, in the past, you guys haven't been able to manage a cycle turn as well as you are doing it now. When we go back to 2002, when we go back to 2007, you are just never able to maintain that gross profit per pound that we are seeing now. Can you just give us a little bit of color on maybe what you guys are doing differently now than what you were doing then? Is it the product mix? Is it better inventory management? Is it better price initiatives? Is it brand growth? There's a lot of things you guys are doing well and I would just be interested to hear what's the one thing that you attribute it to?

Well, I wouldn't say there's just one thing, Francesco. Obviously, one of the biggest factors is building our branded business. We have much more control over our pricing. We have better control over what our volume expectations are with our brands and there's higher margin in our branded business and so I would say if there was one significant thing, it would be shifting our focus on building our brands, but at the same time working with key private brand customers to help build their program, but do it in a profitable way where we can mitigate these huge fluctuations in margin compression by creating value and equity in their own brands through product innovation and packaging.

So I would say top line that would be the two key things. But additional we are really focused on our operational efficiencies across every facility and organization. We've improved the talent in our organization. It's little things that you can't pick at individually, but overall it's just done a great job in helping shift our focus on managing these volatile markets. So the talent, the brand-building, operational efficiencies and then the volume increases -- as we've increased our volume over the last couple years, we've got excess capacity in our facilities, which we've talked about and we are starting to fill that capacity now with profitable business.

But you guys buy commodities and it's just a little bit puzzling because when nut prices are high, you steal share. When nut prices are low, you gain volume and there just seems to be this smoothing effect that, regardless of the operating environment, it's just record EPS year over year over year. And maybe I'm not giving you enough credit for your brand performance, which I noted that 50% of the total volume growth during the quarter was attributable to your brands, but I'm just hearing a lot of commentary with some of these other not nut manufacturers, but some of these guys selling nut clusters, just giving cautionary commentary in regards to almond pricing. You guys aren't vertically integrated for almond pricing. What are you doing so much better as compared to your peers when it comes to something that you are not vertically integrated for almonds that a lot of your peers aren't vertically integrated for as well?

I think part of it is our expertise in procurement. I think people take for granted the importance of having great procurement people in your organization. We've talked about how 80% of cost of goods is in the raw material itself and so we've got to be experts at procurement, understanding what's happening with commodities. Even though we are not primary shellers of almonds, we do have very good insights into what's happening with the almond crop, both from a supply standpoint, but also from a demand and consumption standpoint. And so I think we've got good visibility on what we should be doing with our inventory management a little bit better than maybe some of our competitors in the industry.

Okay. One thing -- and maybe this might be a question for Mike -- when I look at your volume growth and then I look at the change in your selling expenses, volume was up 10%; selling expenses were relatively flat year-over-year. I would have thought there would have been some sort of correlation, some direct correlation between the two. Could you give us a little bit of insight into that?

Well, on the selling expense line, we did have an offset in compensation and a lot of that is just due to the fact that we've eliminated our sales office in China, which had quite a bit of selling expense related to it. So that helped offset some of the freight expense increase.

Okay. Quickly moving to Fisher Nut Exactly, it's something you guys have identified as a problem, but I would think you guys are maybe making it a bigger deal than it actually is because are the problems you are encountering off of a small base?

Correct. It's a very small base at this point. Remember, we launched the brand two years ago. Although we have distribution in the club channel, that's been the majority of the distribution. Now we are getting additional distribution in grocery, but it is off of a very small base, that is correct.

So it seems as if you might have hit the ceiling sooner than later with the Fisher Nut Exactly, but Orchard Valley Harvest, this just seems like it's a brand with legs. What should we be thinking about with the ceiling because the base isn't small anymore? It's growing to the fact that you have just started to break it out in regards to your branded sales as a percentage of the consumer business. It's really running. Is it just new distribution, growing out the produce category? What is going to start this brand to maybe slow down a little bit?

Well, there are so many opportunities for Orchard Valley Harvest. It is the right brand, the right time, health and wellness, the non-GMO, clean ingredient deck. The packaging the marketing team and creative services have put together have done a great job, so we've got the right brand at the right time and there's going to be continued growth. We focused initially on the produce category. We felt because it was a produce brand originally it was the right place to start, which is what we've done, but there's still opportunities not only in produce because we don't have national distribution in some areas, but also in other alternative market channels where we see opportunities for OVH and we have gained some distribution now. So we see beyond actually the produce category more opportunities with OVH.

All right. I've got a couple more questions, but I'm going to jump into queue and let someone else take over.

(Operator Instructions). Francesco Pellegrino, Sidoti.

All right, guys. Just talking about your balance sheet. Look, it's significantly underlevered. You've already done a $2.50 special dividend in the first quarter. When does the Board meet next to discuss maybe an additional special dividend throughout the year because I know you traditionally pay one over years past in the second quarter?

So, for the last four years, our Board has met at our Q1 meeting to assess whether we are in a position to pay a special dividend. And as I mentioned before, typically, what we do as management is we update our Board in respect to what quantities of nuts we are going to buy and what price we are going to pay and what that impact is on our borrowing capacity. And then typically if the Board believes there's enough excess borrowing capacity after we buy, especially the nuts that we shell, then the Board will consider a special dividend.

When is this meeting taking place?

We are actually meeting -- we have Board and Committee meetings starting this afternoon and then, of course, tomorrow is our annual meeting.

Okay. So we could be finding out about another special dividend, if it were to occur, relatively soon?

That's correct.

Okay. And a question that I have asked you guys in the past -- and I don't know if it makes sense anymore -- is I've always asked you about the M&A space and if there's anything out there that you would consider, and you guys have always said we are always looking for something, but until we find the right thing, we are not going to go out and do it. Given how well your brands have performed, does it even make sense to maybe go outside of what you guys do so well? We've seen you guys do this a little bit with the Fisher Nut Exactly, with the nut clusters. You guys do mixed nuts and just pure nuts well, but once you start venturing off course, it just seems as if -- I don't want to say you guys don't have the level of expertise, but there is so much growth potential with what you currently have, I would just wonder if maybe shifting your focus to something else might actually not be the best way to allocate resources right now. Just a little bit of commentary on that.

So we still continue to look at M&A opportunities. Our M&A strategy is always looking at diversifying our product portfolio. If there are companies that have strong brands that would be a nice alignment with our current brand portfolio, we look at them. If there's talent, or expertise, or manufacturing capabilities that would be nice additions to our operations, we look at companies that might have those. So it's still on our radar. We've looked at a couple companies recently. Obviously, as you know, the M&A activity, there's a lot of money in the marketplace with private equity and other strategics. Valuations just have not made sense for us on some of the companies we did look at, but still definitely part of our strategy if the right opportunity comes along.

Okay. Last question for me is I notice in the press release -- and I know we get a little bit more of this when you file your 10-Q -- you said peanuts, walnuts, pecans and almonds all had volume increases, and when I just look at where walnut prices are coming in year-over-year and pecan prices are still being relatively high, I'm a little bit -- I would have thought that going into baking season we would have seen consumers transitioning down from expensive pecans towards less-expensive walnuts, but you were able to grow your pecan volume business as well. And I would just think there's different dynamics to what it contributes on a gross profit basis. Can you maybe just give us a little bit of an overview between the differences between the two when we have one nut cost decreasing and one nut staying relatively high?

Good question. We fully expected walnut volume to increase significantly and indeed it did. We were pretty surprised by pecans -- by the volume increase for pecans. It was still pretty significant. We rank it third in the release and I think that speaks a lot about the display activity that we have for Fisher recipe nuts and also our promotional programs to help drive that.

And I would add, Francesco, if we look at pound volume going forward, you are starting to see declines in volume on pecans at retail, so it's just starting to get reflected now whereas -- so, for example, I think walnuts, if I look at these numbers right, the recipe nuts, pecans were down 13% in volume and walnuts were up 8%. So you are starting to see that shift a little bit now reflected at retail consumption.

And that's total category.

Correct.

But when walnut prices are low, you are able to offset maybe a contraction in gross profit per pound for walnuts with greater volume, but then when I look at something like pecans, you are able to maintain a really healthy gross profit per pound even with maybe volume that's maybe less attractive than what the volume is that you are doing in walnuts and it just seems it's a little bit of a microcosm from where you guys have been over the past couple of years regardless of the operating environment and it's just -- is the majority of these sales branded?

Well, they are for walnuts, pecans and almonds. In the first quarter, the peanuts were primarily private brand.

Okay. Okay. All right. That's it for me. Thanks again, guys and congrats on a great quarter.

At this time, I am showing no further questions in queue. I would like to turn the call back over to Mr. Mike Valentine for any closing remarks.

Okay, Derek. Thank you. Again, we want to thank everyone for your interest in JBSS and this concludes the call for our first quarter of fiscal 2017. Thank you.

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