John B Sanfilippo & Son Inc (JBSS) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the John B. Sanfilippo & Son, Inc. Quarter -- First Quarter Fiscal 2019 Operating Results Conference Call. (Operator Instructions) I would now like to introduce your host for today's presentation, Mr. Mike Valentine, Chief Financial Officer. Sir, please begin.

Thank you, Howard. Good morning, everyone, and welcome to our 2019 first quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO.

Before we start, please note that we may make some forward-looking statements today. These statements are based on our current expectations and may 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.

Additionally, I would like to take a moment to alert participants that in the current quarter, we adapted ASC Topic 606, Revenue From Contracts with Customers using the full retrospective method. The adoption of this new standard resulted in our recasting certain amounts in our financial statements for last year's first quarter. We will continue to recast prior year statements for the remainder of this fiscal year.

All right, starting with the income statement. Net sales for the first quarter of fiscal 2019 decreased by 5.3% to $204.3 million, in comparison to $215.7 million for last year's first quarter. The decrease in net sales came primarily from a 3.4% decline in sales volume, which we define as pounds sold to customers. The decline in sales volume mainly occurred in our contract packaging channel from the loss of some bulk dried fruit business with an existing customer and a reduction in unit ounce weights implemented by another contract packaging customer for nearly its entire product line.

Sales volume also declined in the commercial ingredients distribution channel due to lower sales of bulk cashews, peanut butter and walnuts, primarily from lost business. Sales volume increased in the consumer distribution channel by 6.9%, which was driven by increased sales of Orchard Valley Harvest produce products, private brand trail mixes and peanuts. And the volume increase was attributable to the inclusion of sales of Southern Style Nuts snack mix in this channel in the current quarter.

These sales were reported in the contract packaging distribution channel in last year's first quarter prior to the acquisition of the Squirrel Brand business that we did in the second quarter of fiscal 2018.

Sales volume for Fisher recipe nuts fell by 15.7%. This decline in volume primarily resulted from lost distribution for some items at a major customer due to the introduction of private brand recipe nuts, which occurred in the second quarter of fiscal 2018. Sales volume for Orchard Valley Harvest increased by 32.2% due to new distribution gains for multipack items and also new item introductions, such as our salad topper line. Fisher snack nut sales volume increased by 8% from increased promotional and merchandising activity at a major existing customer.

Gross profit for the first quarter of fiscal 2019 decreased by 6.2% to $33 million, and gross profit margin declined to 16.1% of net sales in the current quarter from 16.3% of net sales for last year's first quarter. The decrease in gross profit dollars and gross profit margin were primarily due to the sales volume decline we discussed earlier.

Total operating expenses increased to 11.2% of net sales for the first quarter of fiscal '19 from 8.1% of net sales for last year's first quarter, and total operating expenses increased by $5.4 million. The increase in total operating expenses as a percentage of sales and in dollars primarily resulted from increases in incentive and base compensation expenses, shipping costs, advertising expense, mainly to support distribution gains for our Fisher Oven Roasted Never Fried product line that we recently launched, and a lower net sales base.

Total operating expenses in the first quarter of fiscal 2019 also included $800,000 in amortization expense related to the acquisition of the Squirrel Brand business.

Interest expense in the current first quarter increased by $100,000 in the quarterly comparison, primarily due to higher debt levels and also higher interest rates. As a result of the above, net income was $6.6 million or $0.57 per share diluted for the first quarter of fiscal '19 compared to $10.7 million or $0.94 per share diluted for the first quarter of fiscal 2018.

Now taking a quick look at inventory. The total value of inventories on hand at the end of our current first quarter increased by $15.7 million or 9.5% compared to the total value of inventories on hand at the end of the first quarter of fiscal 2018. The increase in total inventory value was mainly attributable to higher quantities of finished goods.

The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of the first quarter declined by 23.3% compared to the weighted average cost of those stocks on hand at the end of the first quarter of fiscal 2018. This decline was primarily due to lower acquisition costs for pecans and cashews and a shift in pounds to lower-cost peanuts from higher-cost tree nuts.

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 2019. Jeffrey?

Thank you, Mike. Good morning, everyone.

While we did not achieve a sixth consecutive year of record first quarter operating results, the first quarter of fiscal 2019 contained some successes. We continued our goal of returning profits to our stockholders by increasing our annual dividend by 10% to $0.55 per share and supplemented that with a special dividend of $2 per share. Additionally, sales volume for Orchard Valley Harvest brand continues to grow significantly, which contributed to the growth in sales volume in our consumer distribution channel.

Orchard Valley Harvest pound volume increased by 78%, mainly from new item introductions and distribution gains, while pound volume for the produce category actually fell by 3%. Fisher snack pound volume increased by 15%, while pound volume for the snack category increased only 3%. The increase in pound volume for Fisher snack nuts, as Mike mentioned, was attributable in part to our launch of our Oven Roast Never Fried product line.

This was accomplished in spite of strong volume headwinds we faced, which had a negative impact on our first quarter results. We experienced significant volume challenges in our contract packaging and commercial ingredient channels, as Michael mentioned. And at this time last year, we learned that one of our major Fisher recipe nut customers was launching a private brand program that we would -- where we would lose significant shelf space and distribution, and we continued to cycle against that volume loss in this quarter. Lastly, we faced higher shipping costs, as has the rest of the industry, which negatively impacted our margins.

To mitigate the impact of these challenges going forward, we implemented our Fisher recipe nut holiday promotional and merchandising programs in October, which is intended to allow Fisher to compete against private brand recipe nuts more effectively. As we enter the harvest season, we anticipate significantly lower acquisition costs for pecans and walnuts, which is expected to put us in a strong position to drive volume growth for Fisher recipe nuts to increase promotional pricing and merchandising activity.

Finally, in the first quarter, we invested in a transportation management system and increased the size of our logistics department to make us less reliant on third-party logistic providers. We believe these investments should allow us to manage shipping costs more effectively in future quarters.

Our available credit under our credit facility has allowed us to devote more funds to promote our products, especially our Fisher and Orchard Valley Harvest brands. We're consummating strategic business acquisitions, such as the 2018 acquisition of the Squirrel Brand business. We are reinvesting in the company through capital expenditures. We're developing new products. We've paid cash dividends the past 7 years, and we are continuing to explore other growth strategies outlined in our strategic plan.

Turning to a sales review by JBS channel. Net sales in the consumer distribution channel increased $3.7 million or 2.7%, and sales volume increased 6.9% in the first quarter of fiscal 2019. The sales volume increase was driven by a 4.7% increase in the sales volume of private brand products through the sales growth of trail mixes and peanuts with existing customers.

Accounting for approximately 36.9% of the sales volume increase was the additional sales volume related to Southern Style snack mix products resulting from the acquisition, which occurred late in our fiscal 2018 second quarter. Sales volume for Fisher snacks increased as well, primarily as a result of increased promotional and merchandising activity at a major existing customer.

We are investing in our brands and at the same time, focused on valuable retailer partnerships for private brand opportunities. And we have positive volume momentum going into the remaining fiscal year as JBSS was awarded several new private brand contracts. One began shipping at the start of Q2, and 2 others will begin shipping in Q3 and Q4.

Net sales in the commercial ingredient distribution channel increased by 1.5% in dollars, yet sales volume decreased 7.7% in the first quarter of fiscal 2019. Some of the volume loss was a result of inventory optimization efforts for in-shell walnuts and peanut by-products, which occurred in the first quarter of fiscal '18 and were not necessary this year.

Net sales in the contract packaging distribution channel decreased by 36.1% in dollars and 27.7% in volume in the first quarter of fiscal '19. And as Mike mentioned, sales volume decrease was in part due to our acquisition of the Squirrel Brand business at the end of November 2017, where volume shifted to the consumer and commercial ingredients channels.

Turning now to category updates in the snack, recipe and produce segment. Let me share a review of our brand performance and consumption trends. As always, all the market information I'll be referring to is IRi-reported data. And for today, it is for the period ending September 23, 2018. When I refer to Q1, I'm referring to 13 weeks of the quarter ending September 23. 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, unless otherwise specified. And when we discuss pricing, we are referring to average price per pound. Breakouts of the recipe, snack and produce snack categories are based on our custom definitions developed in conjunction with IRi. And the term velocity refers to the sales per point of distribution, with each point of distribution being equal to 1% ACV as measured by IRi.

First, let me review some category dynamics. The total nut category increased in sales dollars by 1%, and pound volume was flat in Q1. Overall prices in Q1 increased 2% versus the prior year. For the quarter, prices decreased on pecans by 2% versus last year, and that resulted in an 8% pound sales increase for pecans. Walnut prices increased by 5%, resulting in a decrease in volume of 4%.

Now I'll talk about each category in a little more depth, starting with recipe nuts. In Q1, the recipe nut category struggled, declining 3% in dollar sales; and 4% in pound volume; price increases on walnuts and almonds by 4%, which resulted in a 6% decrease in walnuts and a 24% decrease in almond volume.

Our Fisher recipe nuts decreased 19% in dollar sales and 21% in pound sales, as we mentioned in the first quarter versus last year. As a result, Fisher's share in the category decreased 4.5 share points versus last year. And again, the decline was driven by the introduction, since last year, of private-label recipe nuts at a major retailer.

Now let me turn to the snack category. In Q1, the snack category increased 4% in dollars and 3% in pounds. Fisher snack increased 26% in sales dollars and 15% in pound volume sales in Q1. The increase was driven, as I mentioned before, by our launch of our new Oven Roasted Never Fried line extension, which drove an increase in total points of distribution of 17%.

Fisher Oven Roast first shipped to lead accounts in our third quarter of fiscal 2018. It is still very early, but distribution is growing. Velocity and retail pricing metrics are in line with our expectations. The launch has been supported by an integrated marketing plan of radio advertising, FSIs, customer programming and retail merchandising.

In Q1, the produce nut category increased 1% in dollars and decreased 3% in pound sales. OVH, our produce nut brand, increased 87% in dollars and 78% in pounds at IRi-reporting customers. OVH's share of the category increased 1.7% in dollars and 0.9 points in pound versus last year. ACV distribution for OVH has increased by 11 points versus last year as more retailers are accepting OVH into their sets.

Orchard Valley Harvest continues to grow due to increased distribution as well as new product introductions. Recent new products include our honey roast mixed nuts, glazed walnuts and berry salad toppers and honey roast sliced almonds and berry salad toppers, each in our convention -- convenient portion-controlled multipacks. Lastly, our Southern Style brand increased 1% in dollars but decreased 1% in pound sales.

In closing, while Q1 volume results were disappointing, our company is in a strong position to mitigate this weakness by driving volume performance through our multiple sales channels and enhancing our product portfolio. This is exactly what the teams across our organization are doing.

We've proven our ability to manage through volatile markets, and we are focused on margin enhancement and continued improvement in operational and supply chain efficiencies. We will continue to work closely with customers and consumers to provide value and leadership to build nut and snack programs and expand consumption.

I am optimistic about the growth opportunities we are pursuing across our channels and product portfolios. The management team and all our dedicated employees have a steadfast commitment to develop business plans that create shareholder value and provide relevant, profitable, value-added 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 will now turn the call back over to Mike.

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

(Operator Instructions) Our first question or comment comes from the line of Craig Bibb from CJS Securities.

So it was kind of a tough quarter, but your incentive comp was up. So could you talk about your outlook for the remainder of the year?

Go ahead, Jeff.

Yes. So obviously, our compensation plan is based on a full year, not just the quarter. Obviously, we had a difficult quarter, which we've just shared. But at the same time, we see a lot of opportunities for growth in the back half of the year.

And so we accrue our bonus compensation plan based on our expectations of year-end results. And so that's why you're seeing the numbers that you are because we're optimistic about our full year-end results.

Okay. So I mean, maybe a little bit more detail. I know you expect nut prices to come in. You have an easy comparison in the current quarter on gross margin, and you highlighted that you picked up some new private brand business. Could you -- am I missing anything?

So we're continuing to focus on building our brands. Fisher Oven Roast, we've had great success in the markets where we've gained distribution. Our ACV in our snack program is only 12% nationally, and so we've got a lot of opportunity to expand our Fisher snack program across the U.S. So we see upside there.

Our Orchard Valley Harvest brand continues to grow, and we're gaining new distribution. So we're very bullish on the growth opportunities for our brands. The Squirrel Brand, the -- Hunter Mix, some of the new brands that we acquired back in 2018, really just starting to get our arms around gaining new distribution there, so we've got a lot of growth opportunities in the plan.

And then, I mentioned the private brand customers that we recently picked up, that will just start shipping -- one just started shipping this quarter, and we've got 2 others that will start shipping in the back half of the year. So very optimistic and bullish on the growth in the back half of the year.

Okay. So I mean, given the volumes you just reported with Fisher snack nuts, obviously, the Never Fried promotion went well. As you add new accounts, could your percentage of ACV move from 12% to 15%? Or what kind of magnitude are we looking at?

Yes, so there's definitely opportunities. A lot of the -- we're working on gaining that new distribution now. The challenge is getting into some of those key retailers that the teams, the sales teams are presenting to now. But definitely, the opportunity is there to grow that market share.

It's still a very fragmented segment, the snack nut category at retail, and so we feel there's opportunity. We've got a great brand story, great success where we have distribution in just -- it's a health and wellness, marketing and advertising promotional niche in a category that doesn't exist today. So we think there's a great opportunity for further distribution.

Okay. And then with Orchard Valley, you said ACV was up 11% year-over-year. So what -- at the end of the quarter, you guys are 45% of ACV. Or...

Yes, we're currently at 46% with this quarter's results. So again, you've got another 54% of potential ACV. Difficult to get to 100%, but definitely a lot of upside on OVH as well at only 46% ACV today.

Okay. The volume decline in contract packaging, obviously, very material. Is there any likelihood that, that would reverse later in the year? Or just flow that through the rest of the year?

Well, in respect to the wait out we mentioned at one of our major customers, that's definitely going to flow through for the remainder of the year. Hopefully, that customer will take some measures to offset that volume decline because, of course, they're suffering that, too. And that may come in the form of additional shipper events or additional promotions. We're currently discussing those with them. So hopefully, that will help offset that.

As far as the loss of the dried fruit business goes, I believe we lost that in the third quarter of last year, so we still have a couple quarters yet to lap against that. In the meantime, the rest of their business that we do with that particular customer, primarily roasted nuts, is actually increasing. So -- and we expect that to continue.

And with the decline you expect in nut prices in calendar 2019, would that change the way they're approaching the business?

In the contract packaging channel or retailers in general.

Contract packaging, the per package ounces.

Go.

Yes. I don't see them increase in unit weight at least for 12 months, maybe even for 2 years. Typically, when you make a change like that, it's pretty costly in terms of changing packaging, and it's not something that typically reverses very quickly.

Okay. Your competition with -- in recipe nuts at the very large customer, looks like they took share above and beyond the lost shelf space. Could you give us a little more detail around that?

Sure. So they launched a private brand program this time last year. It was really end of October when we started to see it show up on shelves, and that's when they started to transition some of the shelf space from Fisher and other branded recipe nut companies to their private brand.

Since then, back in January, February, they actually felt like they went too far over with private brands, so we've actually gained back some of our Fisher recipe nut SKUs on their shelves at retail. And then in addition, there was a lot of -- there was a bigger price gap going into the holiday season.

And so as I mentioned on the call, we were just -- initiated our holiday pricing in October as we feel that, that price gap will lessen between Fisher and private brand for this holiday season.

Our next question or comment comes from the line of [Bruce Winter].

This is about the contribution of the Squirrel nuts acquisition to 2 metrics that you have in your press release. One is the gross profit margin as a percent of sales. What is -- how has Squirrel Brand affected that?

And secondly, total operating expenses as a percentage of sales, which includes incentive compensation, which you've discussed, base compensation, shipping and advertising expenses. So the question is, what has Squirrel Brand contributed to those numbers?

Okay. First of all, let me remind participants that we have been a contract packer for Squirrel Brand for some 20 years. So in this particular acquisition, the incremental impact on sales and gross profit dollars is not as large as you would expect, because we've already had our contract packaging sales baked in from the prior year. So now of course, we did pick up Squirrel Brand's markup in our numbers this year on top of the markup we've always had as a co-packer.

And then in the SG&A side, the Squirrel Brand impact primarily was just the amortization expense that we mentioned of $800,000. We also have about 4 people that we added, primarily into the selling expense line, that also had an impact on both base compensation, and to a lesser extent, incentive compensation.

Okay. This is a few miscellaneous things about Squirrel Brand. You don't have an earnout with them, do you?

No, we don't.

When do you intend to test the intangible assets?

We test them at the end of every fiscal year, and we did test those for our year ended June 2018.

And you're not the ones behind the Savanna Orchards and A. L. Schutzman, whatever, selling nuts that look like Squirrel Brands in Costco, are you?

No, we are not. That is not our company.

Okay. And then just my one last question is, I would expect that your success on Orchard Valley Harvest would influence your gross profit margin. Are you seeing that effect?

Yes. Typically, brands, especially a successful brand like that, will tend to outpace, say, for example, our bulk business in contract manufacturing.

But I do want everyone to keep in mind that we really just launched the OVH brand about 5 years ago. So we're working off of a relatively small base compared to other parts of our business. So even though we've had great success, it isn't going to move the needle as much as you would have expected.

Yes, exactly. Can you put some numbers around that?

Yes. I think we mentioned it last -- in our fourth quarter, that we expect the brand to reach about $50 million this year in sales.

And what margin increment falls in that?

We don't discuss margins for brands, but -- or really, for any components of our business, other than for nut types.

Yes, approximately. I mean, is it twice as profitable? Or...

Well, generally, there's a spread between some of our larger brands and some of the other parts of our business that can be -- range anywhere from 500 to 1,000 basis point spread. But a lot of times, it depends on what acquisition cost per nuts are.

(Operator Instructions) We have a follow-up from Mr. Craig Bibb from CJS Securities.

Okay. Can you -- when are you likely to get a good read on where nut prices are going to settle out for next year?

So pecans, we're actually just buying the market harvest now, so we really won't have a good idea on our average pecan prices until probably February, March, when the bulk of the harvest has been completed and we purchased our needs. Walnut market is...

Yes. We'll have a better idea on walnut prices by the end of December. We're currently monitoring the market now to see what approximate sales are happening, and what those market prices are. And then we'll figure out what our acquisition cost needs to be relative to what walnuts are selling for.

Okay. And then as you guys are, I guess, on -- obviously, prices are going to be down materially because of the tariffs in China. I mean, is the order of magnitude, like 30%, 25%?

Yes. For pecans, it's a little bit early. China has been very slow in getting into the market to buy pecans. Usually, they're some of the first buyers for the large-sized pecans that are harvested at the beginning of the crop. They have not been very active in the marketplace, but it's still fairly early to see the impact of what that will be to prices.

The hurricane in Florida that -- or Georgia that came through impacted, we estimate, about 20% of the crop in Georgia. So we're still trying to understand the dynamic there. And then Mexico had some challenges as well. But overall, we believe this crop will be larger than last year, but still too early to see what -- how the prices will shake out with the tariffs.

Okay. And do you guys have like a ballpark on what [lowering out] prices -- how big a benefit that could be to gross margin?

It's too soon to say, Craig, because we haven't actually put together our new crop pricing that we typically implement with customers starting in January. But I do want to add that, when we talk about pecans, walnuts and even cashews, we expect acquisition costs to be meaningfully lower than they were in the prior year. We just can't put a quantity on that yet.

Okay. Finished goods inventory was up. Why was that?

Yes. There's really 3 reasons that that inventory was up. The first reason is we needed to build inventory of recipe nuts on certain nut types so that we could start producing some of the other nut types as those crops came in, so we can get the benefit of those lower acquisition costs there.

We did react a little slowly to the softening in sales, so naturally, those inventories were a little higher because we build a lot of inventories, particularly at this time of year, against forecast. The team has since dialed that down, so they're watching our open orders a lot more closely and building inventory plans against that.

And then finally, we did have some new distribution that we mentioned before, that we needed to build some finished good inventories up to start servicing a new customer.

Okay. And then my last one is actually related to that. How large are these new private brand contracts? Are they -- how material?

So they're 3 different retailers, significant. If you added all 3 of them together, they will make the top 6 customers in our portfolio.

I'm showing no additional audio questions at this time. I'd like to turn the conference back over to Mr. Mike Valentine for any closing remarks.

All right. Thank you, Howard. Before we end the call, please note that we will be presenting at the Southwest IDEAS Conference in Dallas on November 15. Our presentation is scheduled to begin at 3:50 p.m. Central Standard Time, and the presentation will be webcast live and may be accessed at the conference website, www.IDEASconference.com. Again, thank you for your interest in JBSS, and this concludes the call for our first quarter of fiscal 2019 operating results.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.