John B. Sanfilippo & Son, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the John B. Sanfilippo & Son, Inc. First Quarter Fiscal 2020 Operating Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your cell phone. If you require any assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Mike Valentine, Chief Financial Officer. Thank you. Please go ahead, sir.

Thank you, Marjolaine. Good morning, everyone, and welcome to our fiscal 2020 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, we want to alert you to the fact that we may make some forward-looking statements today. These statements are based on our current expectations, and they involve certain risks and uncertainties. The factors that could negatively impact results are explained in the various SEC filings that we have made, including Form 10-K and, on occasion, Form 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 the income statement, net sales for the first quarter of fiscal 2020 increased by 6.6% to $217.8 million in comparison to $204.3 million for last year's first quarter. The increase in net sales resulted from a 9.1% increase in sales volume, which we define as pounds sold to customers. The increase in net sales from volume was offset in part by lower selling prices primarily for cashews, pecans, and walnuts, which in turn resulted from lower commodity acquisition costs. The increase in sales volume came from a 17.4% increase in sales volume in the consumer distribution channel. This was offset in part by a 13% decline in sales volume in the contract packaging distribution channel, and that was due to a reduction in unit ounce weights implemented by a customer for its entire product line in this channel and reduced promotional activity by another customer in this channel. Sales volume was relatively unchanged in the commercial ingredients channel. The sales volume increase in the consumer distribution channel was mainly due to increased sales of private brand snack nuts and trail mixes from distribution gains with existing and new customers. Now looking at sales volume for our brands in the consumer channel, sales volume for fish and recipe nuts fell by 30.3% as a result of lost distribution for some items due to the continued expansion of private brand recipe nut offerings at a major customer. Sales volume for Orchard Valley Harvest brand increased by 12.4%, and that was mainly from increased sales with existing customers. Fisher Snack Nuts sales volume declined by 8% due to lost airline business and club business. Southern Style Nuts brand sales volume increased by 40.3%, Due to distribution gains with new grocery customers primarily. Gross profit increased by 28.2% to $42.2 million in the first quarter of fiscal 2020 compared to $33 million in last year's first quarter. Gross profit margin as a percentage of net sales increased to 19.4% in the current quarter from 16.1% for the first quarter of fiscal 2019. The increases in both gross profit and gross profit margin were primarily due to the increase in sales volume and also the lower commodity costs for cashews, pecans, and walnuts. Total operating expenses declined to 10.6% of net sales for the current first quarter from 11.2% of net sales for last year's first quarter, and total operating expenses increased by $300,000. The increase in total operating expenses resulted mainly from an increase in compensation expense, which was largely offset by declines in shipping, advertising and amortization expenses. Interest expense in the quarterly comparison declined by $400,000, and that was due to lower average debt levels during the current first quarter. As a result of the above, net income was $12.9 million, or $1.12 per share diluted, compared to $6.6 million or 57 cents per share diluted for last year's first quarter. Now taking a quick look at inventory, the total value of inventories on hand at the end of the current first quarter declined by $24.6 million or 13.6% compared to the total value of inventories on hand at last year's first quarter. The decline in total inventory value was primarily attributable to lower acquisition costs for pecans, cashews, and walnuts as well as lower quantities on hand for finished goods. The weighted average cost per pound of our raw nut and dried fruit input stocks on hand at the end of the current first quarter decreased by 25.9% compared to the weighted average cost at the end of the first quarter of last year. This decline was due to lower acquisitions costs for pecans, cashews, and walnuts and a shift in product makes in our inventory to lower cost peanuts. At this time, I will now turn the call over to Jeff Sanfilippo, our CEO, who will provide further additional comments on our operating results for the current first quarter. Jeff?

Thank you, Mike. Good morning, everyone. The first quarter of fiscal 2020 marks the third consecutive quarter in which we reported record net income and record earnings per share. First quarter diluted EPS nearly doubled to a record $1.12 per share. We also continued our goal of returning profits to our stockholders by increasing our regular annual dividend by 9% to $0.60 per share and supplemented that with a special dividend of $2.40 per share, both of which were paid in the fiscal 2020 first quarter. I'm very proud of the entire JBSS team for delivering such strong results to kick off the year. The 9.1% sales volume growth was driven by success in our consumer distribution channel which accounted for approximately 70% of total sales volume in the current first quarter. A significant portion of this increase was attributed primarily from distribution gains for private brand products as Mike mentioned. The company has been successful in not only expanding items with existing customers but also gaining additional retail accounts. We continue to enhance our innovation pipeline across our big business segments and brands to support this growth. Sales volume growth for our Southern Style Nuts and Orchard Valley Harvest brands also contributed to the sales volume growth in the consumer distribution channel. Sales volume growth for our Orchard Valley Harvest brand has been especially impressive, with a compounded annual growth rate of approximately 27% since we started reporting on sales volume performance for the brand in fiscal 2015. We continue to face headwinds with our Fisher Recipe brand and a major customer due to a competitive private brand program as I've discussed in past earnings calls. However, the sales and marketing teams have done an incredible job gaining expanded distribution at other retailers to offset potential volume declines going forward. We believe our holiday promotional and merchandising programs are very competitive and are intended to allow Fisher to compete against private brands more effectively. As we enter the harvest season, we have seen acquisition costs for walnuts and almonds begin to increase in the 2019 crop year, which falls into our current 2020 fiscal year. We also continue to see declining acquisition costs for cashews. Peanut prices are relatively flat versus last year, and the pecan harvest has just begun, so we don't have visibility yet on how prices will compare to last year. but we believe in our inventory positions are well aligned with our commitments and selling prices going into this busy holiday season. Turning to sales by our business channels, net sales in the consumer distribution channel increased $11.7 million or 12.7% and sales volume increased 17.4% in the first quarter of fiscal 2020 compared to fiscal 2019. The sales volume growth, as I mentioned earlier, was driven by increased sales of private brand snack nuts and trail mixes. The consumer teams have been successful in building valuable retailer partnerships to pursue private brand opportunities. But we also continue to invest in our brands. The consumer sales and marketing teams were busy launching and selling in several new branded product lines this past quarter. I will discuss this when I cover category updates. As Mike mentioned, net sales and sales volume in the commercial ingredients distribution channel was relatively unchanged in the first quarter of fiscal 2020. The commercial ingredient teams are focused on developing stronger customer relationships with key distributors and executing the placement and sell-in of our branded products at a major noncommercial business customer. Net sales in the contract packaging distribution channel decreased by 13.9% in dollars and 13% in sales volume in the first quarter of fiscal 2020. We've reported declines in this channel for the past several quarters as a result of a key customer downsizing weights and other factors. But we believe the volume going forward should level off with a few new pieces of business that will begin shipping in the remaining quarters of this fiscal year. Turning to category updates in the snack, recipe, and produce segment, let me share a review of our branded performance and consumption trends, both for the quarter and for the fiscal year. As always, the market information I'll be referring to is IRI-reported data, and for today it is for the period ending September 22, 2019. When I refer to Q1, I'm referring to 13 weeks of the quarter ending September 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 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 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. The total nut category increased in sales dollars and pound volume by 1% in Q1. Overall prices in Q1 were flat versus the prior year. Now I'll talk about each category more in depth starting with recipe nuts. In first quarter the recipe nut category decreased 4% in dollars and increased 4% in pound volume sales. Prices decreased on walnuts and pecans by 11% and 6% respectively, resulting in a 2% pound volume increase on walnuts and a 5% increase on pecans. Our Fisherville recipe nuts decreased 22% in dollars and 25% in pound sales for the quarter versus last year. As a result, Fisher's share in the category decreased 5.8 pound share points versus last year. The sales line decline for Fisher Recipe nuts resulted from lost distribution, as I mentioned, on items in a retailer that continued to expand their private brand program. In the food grocery channel, Fisher Recipe increased 9% in pound volume, driven by an increase of total points of distribution of 18%. Now let me turn to the snack category. In Q1, the snack category increased 2% in dollar sales and 1% in pound sales. Fisher Snack increased 8% in sales dollars and declined 3% in pound volume sales in Q1. The increase in dollar sales is a result in shifting product mix from peanuts to cashews and mixed nuts. The brand increased in total distribution points by 21% as Fisher Oven Roasted Never Fried expanded beyond the core Fisher geography. As we have discussed on previous calls, Fisher Oven Roast Never Fried offers consumers a full line of Full lineup of nuts that are dry roasted, not roasted in oil, including whole cashews, deluxe mixed nuts, mixed nuts with peanuts, almonds, pecans, and a unique almond cashew blend, as well as peanuts. We continue to support the brand with an integrated marketing plan of in-store merchandising and customer programming, radio-targeted digital and social media marketing, and FSIs. The brand is performing well where we have achieved our shelf price objectives and we hope to expand to new markets in the future. In Q1, the produce nut category decreased 4% in dollar sales and 3% in pound volume sales. OVH, our produce nut brand, decreased 4% in dollars and increased 7% in pounds at IRI reporting customers. OVH share pound increased two-tenths of a point versus last year. and we're flat dollar sales year versus year ago. Total points of distribution increased by 2% versus last year. Orchard Valley Harvest launched two exciting new products in the first quarter bringing pure and simple goodness to the specialty nut butter and chips categories. The brand spread and dip peanut butter offers consumers a natural non-GMO peanut butter package in a tub for easy dipping as well as the more traditional use of spreading on bread. The butters are being sold into the produce section of stores to tap into the consumer behavior trends of snacking on fruits and vegetables with peanut butter. We also launched Orchard Valley Harvest Chickpea Chips, which are light, crispy chips made from chickpeas. Consumers are increasingly looking for interesting, salty snack alternatives to potato chips, and Orchard Valley Harvest Chickpea Chips taste great while offering consumers three grams of protein per serving. It is too early to tell how the new products are doing, but initial feedback from retailers is encouraging. In closing, it takes a talented group of dedicated employees across an entire organization to deliver consistent, strong results as we have done here at JBSS. I am very proud of every person in our company. Their leadership and commitment to providing outstanding service and value to our customers and consumers is best in class, and I believe the best in our industry. Success also requires smart strategies for sustainable growth, to maintain a competitive advantage, to be differentiated, to be a valuable partner, and to remain relevant. The leadership team has spent the past few months reviewing our current strategies. We assessed what we are doing well and what we can improve upon. We've evaluated competitors, markets, our supply chain, and consumer consumption trends. We are in the process of defining what our strategic plans will be for the next three years to continue to deliver consistent, strong results. 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.