John B Sanfilippo & Son Inc (JBSS) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Fourth Quarter Fiscal 2018 Year-End Operating Results Conference Call. (Operator Instructions)

I would now like to introduce your host for today's conference, Michael Valentine, Chief Financial Officer. Sir, you may begin.

Thank you, Ashley. Good morning, everyone, and welcome to our 2018 fourth quarter and fiscal year 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 would like to note 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 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.

I'll start the call by covering financial highlights for the 2018 fourth quarter and the fiscal year. The current fourth quarter net sales increased by 4.9% to $211.5 million compared to net sales of $201.6 million for the fourth quarter of fiscal 2017. The increase in net sales in the quarterly comparison was due to a 3.2% increase in the weighted average selling price per pound due to a shift in volume to the consumer channel, where prices typically are higher than in our other channels.

And sales volume increased by 1.7%. We define sales volume as pounds sold to customers. Sales volume increased in the consumer distribution channel by 14% primarily due to increased sales of private brand trail mixes, peanuts and almonds; increased sales of Orchard Valley Harvest produce products; and the inclusion of sales from Southern Style snack mix products in this distribution channel, which were reported in the contract packaging channel in last year's fourth quarter. Sales volume increased in the commercial ingredients distribution channel as a result of the inclusion of sales of Squirrel Brand products, which were reported in our contract packaging distribution channel last year. And just as a reminder, there's -- reclassification occurred as a result of our acquisition of the Squirrel Brand business in the second quarter of fiscal 2018.

Sales volume decreased in the contract packaging channel primarily due to these reclassifications that I mentioned and also the loss of some bulk business with an existing customer. Sales volume for our branded products in the consumer channel changed as follows: Fisher recipe nut volume increased by 2.5%, and Orchard Valley Harvest nut volume increased by 97.9%, mainly, in both cases, due to distribution gains with new and existing customers. Fisher snack nut volume decreased by 6.1% mainly due to reduced display activity at a major customer.

Turning to net sales for the year. Fiscal 2018 net sales increased by 5% to $888.6 million compared to $846.6 million in fiscal 2017. This increase was mainly due to a 3.4% increase in sales volume. Sales volume increased by 11.1% in the consumer distribution channel for the same reasons I noted in the quarterly comparison. And sales volume in the commercial ingredients distribution channel declined due to the loss of a bulk almond butter customer that occurred in the second quarter of fiscal 2017. Finally, sales volume decreased in the contract packaging channel, again, mainly for the same reasons I cited in the quarterly comparison.

The current fourth quarter gross profit margin decreased to 15.6% of net sales from 16.7% in last year's fourth quarter. And gross profit dollars declined to $32.9 million from $33.6 million or a decline of $700,000. The decreases in gross profit margin and gross profit were due primarily to temporarily higher commodity acquisition costs for walnuts in the fourth quarter.

Fiscal 2018 gross profit margin decreased to 15.6% of net sales from 16.8% of net sales for fiscal 2017. Gross profit declined to $138.8 million from $141.9 million for fiscal 2017. The decreases in gross profit and gross profit margin for the fiscal year comparison were primarily due to higher commodity acquisition costs for walnuts throughout the year and higher commodity acquisition costs for pecans during the first 2 quarters of the current fiscal year.

Total operating expenses for the quarter increased by $1 million, and total operating expenses as a percentage of net sales decreased slightly to 10.6% from 10.7% in last year's fourth quarter. The increase in total operating expenses was mainly attributable to increases in shipping costs, advertising and sales commission expenses. These were largely offset by a decrease in incentive compensation expense. Total operating expenses also included $800,000 in amortization expense associated with the acquisition of the Squirrel Brand business.

For the fiscal year, total operating expenses for fiscal 2018 increased by $1.3 million and total operating expenses as a percentage of net sales decreased to 9.3% from 9.6%. The increase in total operating expenses was mainly due to the same reasons I cited in the quarterly comparison. Also, total operating expenses included $2 million in amortization expense, again, associated with the acquisition of the Squirrel Brand business.

Interest expense increased to $900,000 for the current fourth quarter of fiscal '18 from $800,000 in last year's fourth quarter. And for the year, interest expense increased to $3.5 million from $2.9 million for fiscal 2017. The increases in interest expense for both comparisons were mainly due to higher debt levels and interest rates, both primarily attributable to the acquisition of the Squirrel Brand business. As a result of the above, net income decreased by 16.7% to $5.6 million in the quarterly comparison, and net income for fiscal 2018 decreased by 10.3% to $32.4 million.

Turning to inventory. The total value of inventories on hand at the end of the current fiscal year decreased by $7.8 million or 4.3% compared to the total value of inventories at the end of last year. The decline in the value of total inventories was primarily due to lower quantities on hand for walnuts and pecans. The weighted average cost per pound of our raw nut and dried fruit input stocks on hand at the end of the year decreased by only 0.7% as the decline in acquisition costs for pecans during the current quarter was almost fully offset by increases in acquisition costs for peanuts and walnuts.

And now I'll turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance for the current quarter and the fiscal year.

Thank you, Mike. Good morning, everyone. The company reported its second best year ever in earnings per share of $2.83 in volume shipped of 269 million pounds and in net sales of $888.6 million. I want to thank the management team and all our dedicated employees for their commitment and leadership. These strong results were achieved in the face of significant competitive activity, freight cost increases and market headwinds in the nut industry.

We were, again, successful in generating cash from our operations in fiscal 2018. Our strong financial position allowed us to pay a cash dividend of $28.4 million. We increased the annual regular dividend by 10% to $0.55 per share and supplemented that with a special dividend of $2 per share, both of which were paid last week on August 17, 2018. These most recent dividend payments marked the seventh consecutive year that we have paid dividends to our stockholders, and we are pleased to return cash to our stockholders early in the fiscal year through these dividends.

We are executing our growth strategies, implementing continuous improvement projects throughout the organization to optimize our cost structure, and we continue to invest in our people, our brands and our processes. Our sales continue to shift to the consumer distribution channel with another quarter of strong consumer channel volume growth. Sales in the consumer distribution channel amounted to 65% of our total net sales compared to 59% of total net sales for last year's fourth quarter.

As Mike mentioned, in the second quarter of fiscal 2018, we acquired the Squirrel Brand business and completed the integration in the third quarter with a successful transition of all significant customers. This transition accounts for approximately 16.6% of the annual sales volume increase in the consumer channel. In our fourth quarter, we set the direction for our growth priorities for the Squirrel business and started executing plans to expand distribution. While we will maintain a focus on current alternative channel customers for Squirrel, Southern Style and Hunter Mix, we believe there are significant opportunities in the [cold] channel. Our R&D, marketing and sales teams have created a pipeline of products that are being presented now, and we are encouraged by initial feedback from buyers.

Turning to sales review by JBS channel. Consumer net sales increased by 11.2% in dollars and 11.1% in sales volume in fiscal 2018. The sales volume increase was driven by increased sales of private brand products and Orchard Valley Harvest produce products. A 63.7% increase in sales volume of Orchard Valley Harvest was driven by new item introductions and distribution gains at new and existing customers. Sales volume for private label snack and trail mixes increased 11.3% due, again, to new item introductions and increased distribution with existing customers.

In the commercial ingredients channel, net sales decreased by 6.4% in dollars and 5.5% in sales volume compared to fiscal 2017. The sales volume decrease, as Mike mentioned, was primarily due to the loss of a bulk almond customer, which occurred in the second quarter of fiscal 2017. We have cycled against that major volume loss, and the commercial ingredients sales team has strong plans in place to regain that volume. Our key commercial ingredients sales priorities in fiscal 2019 are to grow industrial nut butters, expand our business with chain accounts and build our Fisher and Orchard Valley Harvest brands in foodservice.

Turning to category updates. I'm happy to share brand results with you both for the quarter and for the fiscal year. As always, all market information I'll refer to is IRi-reported data. And for today, this is the period ending June 24, 2018. When I refer to Q4, I'm referring to 13 weeks of the quarter ending June 24. References to changes in volume or price are versus the corresponding period 1 year ago. We look at the category on IRi's total U.S. definition, which includes food, drug, mass, Walmart, military and other outlets, or unless otherwise specified. And when we discuss pricing, we are referring to average price per pound. Breakouts of the recipe, snack and produce categories are based on our custom definitions developed in conjunction with IRi. And the term velocity refers to the sales per point of distribution.

First, let me review some category dynamics. We saw an increase in dollar sales and pound sales for both the quarter and the fiscal year. The total nut category increased in sales dollars by 2% and pound volume by 1% in Q4. Overall prices in Q4 increased 1% versus the prior year. For the quarter, prices decreased on pecans by 3% and pistachios and almonds decreased by 2% versus last year. And that resulted in a 22% pound sales increase for pistachios, a 7% pound increase for pecans and a 2% increase for almonds.

Looking at the entire 2018 fiscal year. The nut category increased 2% in dollar sales and 2% in volume sales. Category pricing versus the fiscal year increased 1% versus the prior year. Pricing on pistachios and almonds decreased 8% and 5%, respectively, and drove increases of 27% on pistachios and 4% on almonds. Cashews increased in price versus last year by 7%, which resulted in a 5% decrease in pound volume.

Now I'll talk about each category in a little more depth, starting with recipe nuts. In Q4, the recipe nut category struggled, declining 5% in dollar sales and 7% in pound volume sales. Prices increased on walnuts by 5% and almonds by 8%, which resulted in a 6% decrease in walnuts and a 32% decrease in almond volume. For the fiscal year, the recipe category decreased 1% in dollars and was flat in pound sales. Pricing on almonds decreased by 7%, resulting in a pound volume decline of 26%. Pricing on walnuts and pecans decreased 2% and 1%, respectively, versus a year ago, resulting in pound volume gains on walnuts of 2% and on pecans of 5%.

Our Fisher recipe nuts decreased 23% in dollar sales and 21% in pound sales for the quarter versus last year. As a result, Fisher's share in the category decreased 3.5 share points versus last year, and the decline was driven by a loss in distribution of some core items at a key retailer. For the entire fiscal year, Fisher recipe nut dollar sales decreased 7% and pound volume decreased 1%. Pound share for Fisher decreased 0.1 point versus last year. But despite this decrease, Fisher continues to be the #1 brand in the recipe aisle in all outlets.

Now let me turn to the snack category. In Q4, the snack category increased 3% in dollar sales and 1% in pound sales. Fisher snack increased 14% in sales dollars and 9% in pound volume in Q4. The increase was driven by an increase in ACV of almost 9 points. For the fiscal year, the snack category increased 2% in dollars and 1% in pounds versus the prior year. Fisher snack sales dollars decreased 1% and pound volume decreased 3% in fiscal '18. The decrease was driven by reduced merchandising at a key customer.

We continue to be very excited about the launch of our Oven Roasted Never Fried line extension. This is a differentiated offering, and Fisher is the first major snack nut brand to launch a line of oven-roasted products across such a broad range of snack nuts. The products taste great and have a clean ingredient line of just nuts and sea salt. Fisher Oven Roasted first shipped to lead accounts in the third quarter. And it's still early, but distribution is growing, and velocity and retail pricing metrics are in line with our expectations.

In Q4, the produce nut category increased 3% in dollar sales and increased 1% in pound volume. Orchard Valley Harvest brand increased 141% in dollars and 148% in pounds at IRi reporting customers. OVH's share of the category increased 2 points in dollars and 1.1 points in pound versus last year. Total points of distribution increased by 124% as more retailers are accepting an expanded assortment of OVH items into their sets.

For this fiscal year, the produce nut category increased 4% in dollars and increased 2% in pound volume sales. OVH increased 63% in dollars and 59% in pound sales at IRi reporting customers. And OVH's share of the category increased 0.9 in dollars and 5 points in -- 0.5 points in pounds versus last year. Total points of distribution increased by 79% as more retailers accept more OVH products into their sets as well.

We have continued to build the core business success by launching new products such as our Antioxidant Mix and our Heart Healthy Blend, both in multipacks, along with a line of salad toppers that has gained strong early distribution.

In closing, fiscal 2018 was a good year in spite of several difficult market factors. I'm proud that JBSS outperformed many competitors in our space. But I am confident we can do even better, and I'm very optimistic about this coming year. We've gained new customers with our Fisher recipe program. Our Fisher Oven Roasted Never Fried line is being launched on a national level. Our Orchard Valley Harvest brand continues to grow with new customers and expanded distribution. We've already gained several new private brand customers that will begin shipping in our second quarter. And now that Squirrel, Southern Roasted (sic) [Southern Style] and Hunter Mix brands are part of the JBSS portfolio, we have a whole new set of customers to pursue and innovative products to sell. The management team and our dedicated employees have a steadfast commitment to develop business opportunities that create shareholder value and provide relevant, profitable, innovative products and services to our customers and consumers.

We appreciate your participation in the call, and thank you for your interest in our company. I'll now turn the call back over to Mike.

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

(Operator Instructions) And your first question comes from the line of Craig Bibb with CJS Securities. (Operator Instructions) And our question comes from the line of Craig Bibb with CJS Securities.

And so I was trying to ask about walnuts. You took a hit in the quarter, but prices have pulled back since then. Are margins likely to improve going forward?

Craig, this is Jasper. This really started about Q2 of '16, when we found that our grower base was larger than the demand that we had. So we cut our grower base back between '16 and '17. And as we said, last year's crop was smaller, and I think our proportional handle of that was even smaller, coupled with increased brand performance and movement of walnuts. So going forward, really, in April and May, we had much better visibility of what we'd be shipping this fall. So subsequently, we did have to go out in the open market and cover product. As you said, that market has come down. And as we look to July through, really, December, I would say that our acquisition costs are very much in line with what our selling prices are.

Okay. And then maybe this would be a good time to transition to talking about the impact of Chinese tariffs on U.S. nuts and what that might do to supply and pricing in the months ahead.

Well, unfortunately, I don't have a crystal ball. But what I can say is we saw a little bit last year. Walnuts are really a global commodity. There's a lot of large suppliers in China, India, California and, to a lesser extent, Chile. So I think those global customers do have options. Obviously, the tariffs into China, India and Turkey directly impact the California market. But it really is too early to tell how much of an impact that will have and whether or not global customers really see a value in the California walnuts versus some of the alternate options they have.

And this is Jeffrey, Craig. Looking at pecans, so the tariffs went into effect -- it went from 7% to 47%. We did see some loads that were aimed for China canceled, and most stayed in the U.S. But really, China will start looking at the pecan crop coming up in the next month to 2 months. They are early buyers of the inshell crop out of Georgia originally. So we'll get better visibility on what that tariff will -- how it will impact consumption or demand in China within the next 2 months.

And Craig, this is Mike. I just want to follow up. On all the nuts, as we noted in our 10-K, we're expecting some significant commodity deflation for the 2018 crop year. And that's driven not only by tariffs in the case of walnuts and pecans and almonds, but also much larger crops [that] we expect. And that would be the case for all 3 of those nuts. So that's our expectation in respect to commodity costs at this time.

We're in a changing world here, but has there been a situation with huge increases in tariffs in the past? And did nuts get routed through other countries to get around that when that happened?

Well, there are -- we've seen this with cashews in the past, where quite a bit of that goes through Vietnam and then, ultimately, into China. But it's our understanding that China is going to be much more aggressive in their enforcement efforts to prevent that. So we do expect to see follow-ups in export pounds for, really, almost all the major tree nuts that are grown in the United States.

Okay. Maybe you can shift to the lost contract packaging volume. What was the actual percentage and decrease in volume? And explain the reason for the shift there.

Okay. We have a customer, it's still an existing customer, that we were essentially providing a purchasing service for cranberries and raisins as they started up a new product line. Their product line is very successful, and as a consequence of that, the amount of pounds of raisins and cranberries that they were using it made a lot more sense for them to buy those themselves. They were a low-margin business for us. We didn't actually get any processing benefits from it. But we continue to supply them roasted nuts, and that part of the business is still growing.

Okay. So this [is bulk] business that's obviously not coming back. And how much volume does that represent?

I think it represents something like about 3 million pounds per year.

Okay. And that's low-margin?

Yes.

Okay. There's a lot of puts and takes going on with recipe net volume. It looks like you're regaining some of the lost shelf space and you added new customers. Maybe walk us through that a little bit.

Sure. So one of our largest Fisher customers just created a private brand program last year, right before the holiday season. And they eliminated a lot of the Fisher SKUs, specifically the smaller-size 2-ounce bags. And as a result, we saw pretty significant volume declines with our branded business at this retailer. Since then, they realized maybe they went too far on the private brand side and eliminated items that were really valuable for their consumers' shopping especially outside of the holiday season those that wanted the smaller sizes. So since that time -- since last year, we reinstated some of those smaller bag sizes. We've expanded some other distribution on other pack sizes at that retailer. And we have just started -- and they just did the reset in Q4 -- at the end of Q4. And so we'll start to see some of that value come back in volume going into Q1 and Q2 of this fiscal year.

Okay. So it sounds like you're going to see growth in recipe nut volume starting next quarter and potentially for the whole year. Is that...

Correct, yes. And we've done a really good job expanding beyond this major retailer. Fisher, as I mentioned earlier, is the #1 brand in recipe nuts. We've got a great success story. We've invested a lot in the consumer in that category, providing new ideas on how they can use recipe nuts for cooking. And so we've really built a lot of brand equity in the Fisher brand. And that's been successful as well in growing the category.

Okay. If there's someone else in queue, I'll get off. Otherwise, I can keep going. What would you guys prefer?

You can keep going.

Yes, keep going, Craig.

Okay. You added 2 new customers for snack nuts. How material is the volume from -- are we likely to see? And how is it going?

Yes. So our Fisher -- really, we've been focused on our Fisher brand in the Midwest, the core markets, core geography for the brand since its inception. But now with the launch of our Fisher Oven Roasted Never Fried, we've seen such good feedback from consumers and from retailers that we decided to launch it nationally. The initial retailers that we gained were in the Midwest. But now we've got such great success in the velocity of those items in the Midwest that we're starting to expand it nationally. So we're very excited. It's early to tell because we just launched it in beginning of Q4 of fiscal '18. So not a lot of volume at this point, but we believe with the success we're having and the velocity, we've got a lot of good opportunities to gain new distribution beyond what we currently have in fiscal '19.

Okay. And actually, while you're talking about retailers, can you detail the -- or maybe just give us a little insight on the changes at Whole Foods since Amazon purchased them?

We haven't seen tons of changes. Obviously, Amazon is using Whole Foods. We started to see some changes in distribution with some of the products that they're carrying. But I think they're really leveraging the facilities, the brick-and-mortar facilities that Whole Foods has. They're taking a lot of the expertise that Whole Foods provided from a procurement, marketing, product standpoint and starting to apply that in e-commerce. And then I think Amazon is using their expertise in distribution and their global presence to expand Whole Foods consumption as well. So it's -- they're still getting their arms around the whole retail business, I believe, but I think they're starting to make some things work for themselves.

The 148% increase in OVH volume at retail, outstanding. It looks like -- is that 3 quarters distribution and 1 quarter from increased sales per door? Or how should we look at that?

It's really a combination of new distribution and velocity. We've done a great job expanding the product portfolio, especially with the Heart Healthy and the Omega-3 and Antioxidant additions. They've just been very well received. So I don't have the exact estimate on what is new distribution versus velocity, but it's -- they're both very positive, and that's what's driving such strong results. And because we have such great velocity and a success story, we're able to gain new distribution at retailers that currently don't carry Orchard Valley Harvest.

What percentage of ACV is Orchard Valley Harvest now or at least at the end of the quarter?

We don't have that number here. I'm sorry about that.

I don't have it, either.

None of us have it here. Sorry about that, Craig.

Okay. It's up versus a year ago, obviously.

Up significantly, I think, would be a good way to put it.

How did salad toppers do? Or is it too early?

We've gotten good initial response from buyers and from consumers. We launched it originally in the club channel, and now we're expanding that into grocery. So it's a brand-new launch for us, so it's a little bit early to tell. But we're optimistic about gaining new distribution with that product portfolio.

You've owned the Squirrel Brand for a couple of quarters now. What changes have you made on expansion of distribution, et cetera?

So a couple of things we're looking at the product portfolio. As I mentioned on the call, we're really focused -- we think there are great opportunities in the club channel. And so we've actually created some club channel pack sizes and some new products to offer to that channel specifically. And so that's one area of focus. Secondarily, Squirrel was not strong in grocery before we bought them, and we've got such a great distribution, sales and marketing arm for the grocery channel. So we're starting to develop some items under the Squirrel portfolio to start selling into grocery. And then the alternative channel that Squirrel was very strong in, we continue to grow that business as well with some of the new products that we put in the pipeline to launch. So we're optimistic about the growth opportunities for Squirrel in the coming year.

Okay. It looks like you're doing a good job of managing the increase in freight expenses. What are you doing to offset higher trucking costs?

This is Jasper. One of the things that we've done is we brought more of our freight in-house. We've invested in our own transportation system, whereby we have the flexibility of contracting with 3PLs, like we've done in the past, coupled with allowing ourselves to contract directly with carriers for high-velocity lanes, with the plan that, ultimately, we do want to take more of our freight in-house. The new setup that we have provides us that flexibility to continue to service our customers and then evaluate lane by lane with different carriers to contract internally and take those contracts away from our 3PL, so in essence, save on [their] margin as well as have better control of our deliveries. Obviously, a lot of retailers have OTIF fines in place. And between our TMS, being able to control our carriers directly and partnering with a really strong 3PL, I think it positions ourselves very well to try to mitigate our freight expense going forward as well as service our customers.

(Operator Instructions) And I am not showing any further questions at this time. I would now like to turn the call back over to Michael Valentine, Chief Financial Officer, for any closing remarks.

Okay, Ashley. Thank you. Before we end the call, please note that we will be presenting at the Sidoti & Company Fall 2018 Conference in New York on September 27, and we will be posting an updated investor presentation on our site that day. Again, thank you, everyone, for your interest in JBSS. This concludes the call for our fourth quarter and fiscal year 2018 operating results.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.