John B. Sanfilippo & Son, Inc.

Gentlemen, thank you for standing by, and welcome to the John B. Sanfilippo & Son Second Quarter Fiscal 2020 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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 telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Mr. Michael Valentine. Chief Financial Officer. Please go ahead, sir.

Thank you, Cherie. Good morning, everyone, and welcome to our 2020 Second Quarter Earnings Conference call. Thank you for joining us today. On the call with me are 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. We encourage you to refer to these filings to learn more about these risks and uncertainties that are inherent in our business. Starting with the income statement, net sales for the second quarter of fiscal 2020 decreased by 2.7%. The decline in net sales was primarily due to lower selling prices, which resulted from a shift in sales volume from higher priced pecans and walnuts to lower priced trail and snack mixes, peanuts, and cashews. Lower selling prices for pecans and cashews which resulted from lower commodity acquisition costs for these nut types also contributed to the overall reduction in selling prices. The decline in net sales for lower selling prices was largely offset by a 4.8% increase in sales volume which we define as pounds sold to customers. Sales volume increased by 4.2% in our consumer distribution channel mainly from increased sales of snack nuts and trail and snack mixes from distribution gains with new and existing private brand customers. Increased sales for our Orchard Valley Harvest and Southern Style nut brands also contributed to the sales volume increase in the consumer channel. Sales volume increased in the commercial ingredients channel by 14.5% and that was mainly due to distribution gains with new food service customers and increased sales of peanut crushing stock to peanut oil processors. Sales volume declined in the contract packaging channel by 2.5%, primarily from a reduction in promotional and merchandising activity by some of our customers in this channel. Looking at sales volume for our brands in our consumer channel, Fisher recipe nut volume decreased by 29.8% as a result of lost holiday display distribution at a major customer in favor of their private brand recipe nuts. The 6.5% increase in sales volume for Orchard Valley Harvest was primarily driven by distribution gains at new and existing customers as well as the introduction of new products. The 6.4% decrease in sales volume for Fisher Snack Nuts resulted mainly from reduced promotional activity for in-shelf peanuts at a customer who does not report to IRI. The 42.9% increase in sales volume for Southern Style Nuts came from increased promotional activity Net sales for the first two quarters of the current fiscal year increased to $464.3 million from $457.6 million for the first two quarters of last year. The increase in net sales was attributable to a 6.8% increase in sales volume in the year-to-date comparison. The increase in net sales from sales volume increase was largely offset by lower selling prices. And the reduction in lower selling prices resulted primarily from those factors that led to lower selling prices in the quarterly comparison. Sales volume increased by 10% in the consumer distribution channel, primarily from increased sales of snack nuts and trail and snack mixes from distribution gains with new and existing private brand customers. The increased sales for Orchard Valley Harvest and Southern Style Nut brands also contributed to the sales volume increase in the consumer channel. Sales volume increased by 6.3% in the commercial ingredients channel for the same reasons I noted in the quarterly comparison. And sales volume declined in the contract packaging channel by 7.9%. And that was primarily from a reduction in unit outsweights implemented by a major customer roughly a year ago for its entire product line and a reduction in promotional and merchandising activity by some customers in this channel. Second quarter gross profit increased by $7.1 million and gross profit margin as percentage of net sales increased to 20.3% for the second quarter of fiscal 2020 from 16.9% for the second quarter of fiscal 2019. The increases in gross profit and gross profit margin were mainly due to increased sales volume, manufacturing efficiencies, reduced manufacturing spending, and lower acquisition costs for pecans and cashews. Gross profit for the first two quarters of the current year increased by $16.4 million, and gross profit margin, again, as a percentage of net sales, increased to 19.9% from 16.6% for the same period last year. The increases in gross profit and gross profit margin in the year-to-date comparison occurred primarily for the same reasons I cited in the quarterly comparison. Total operating expenses for the current second quarter decreased by $700,000 in the quarterly comparison, and as a percentage of net sales, total operating expenses was unchanged at 10.4% compared to last year. The decrease in operating expenses was due to decreases in advertising and freight expenses, which were partially offset by increases in incentive compensation and commissions expenses. Total operating expenses for the current year-to-date period decreased to 10.5% of net sales from 10.7% for the first two quarters of last year. And total operating expenses decreased by $400,000 in the year-to-date comparison. The decrease in total operating expenses for the current year-to-date comparison primarily was attributable to the same factors I cited in the quarterly comparison. Interest expense was $400,000. For the second quarter of fiscal 2020, compared to $800,000 last year, an interest expense for the first two quarters of the current year decreased to $1 million from $1.7 million for the same period last year. In both cases, the decreases in interest expense were attributable primarily to lower total average debt levels. Net income was $17.5 million, or $1.52 per share. for the second quarter of fiscal 2020 compared to $11.3 million, or $0.98 per share, for the second quarter of last year. And both net income and EPS were record amounts for second quarter. Net income for the first two quarters of 2020 was $30.4 million, or $2.64 per share diluted, compared to net income of $17.9 million, or or $1.56 per share diluted for the first two quarters of fiscal 19. Now taking a quick look at our inventory numbers, the total value of our inventories on hand at the end of the current second quarter increased slightly compared to the total value of inventories at the end of last year's second quarter. And the weighted average cost per pound of our raw nut and dried fruit input stocks on hand at the end of the second quarter increased by 7.1%. Jeffrey Sanfilippo,

Thank you, Mike. Good morning, everyone. I would like to start my comments by acknowledging the passing this week of our former chairman and CEO, Jasper Sanfilippo Sr. He led the company from 1963 to 2006 and was a strong mentor to many of us at GADSS. And Jasper Sr. was an amazing father to me and my brother Jasper. Our dad loved this company and worked hard to build the foundation for a successful business along with family members and a team of talented associates. After he retired, like clockwork, he would call and ask me or Jasper almost every day, how is business, how is the company doing? Tuesday, before he passed away, he asked that question again. The answer was, Dad, the second quarter of fiscal 2020 marks the fourth consecutive quarter in which we reported record net income and earnings per share. He had a big smile and was so proud of everyone in the company for achieving such strong, consistent results. I will miss those conversations, but we will always remember Jasper Sanfilippo Sr.'s contributions to JBSS. It has been a very strong first half of fiscal 2020. We paid a second special dividend during the second quarter of $2 per share, providing value to our stockholders. As has been the case in recent quarters, we saw strong sales volume growth in our consumer distribution channel from increased sales of private brand snack nuts and trail mixes. We also had significant sales volume growth in the food service sector of our commercial ingredients channel as new relationships with group buying organizations enabled us to expand our product lines into alternative channels. The entire organization is working hard to drive continuous improvement projects Optimize supply chain efficiencies and enhance JVSS margins. I would like to thank our operations team for generating meaningful savings from the various efficiency initiatives they completed during the current second quarter, which helped drive our increase in gross profit. Turning to a sales review by JVS Channel. Net sales in the consumer distribution channel increased $7.4 million, or 3.8%, and sales volume increased 4.2% in the second quarter of fiscal 2020. The company had strong success working with key partners to drive volume growth within their private brand programs, especially in the snack and trail mix categories. Sales volume for Fisher's Snack Nuts decreased 6.4%, primarily as a result of reduced promotional activity for in-shelf peanuts. Sales volume of Fisher's recipe nuts decreased 29.8% from last holiday distribution at a major customer, as Mike mentioned earlier. But our teams mitigated this volume decline with significant volume growth at other retailers, and sales volume of Orchard Valley Harvest products increased 6.5% due to distribution gains at new and existing customers and the introduction of new products. Sales volume of Southern Style nuts increased 42.9% due to increased promotional activity. In the commercial ingredient channel, nut sales increased by 8.9% in dollars and 14.5% in sales volume. The sales volume increase for the quarterly period was primarily due to distribution gains with new food service customers. The sales and marketing teams have done a great job expanding distribution with non-commercial accounts and winning business with new distributors. And there was also an increased sales volume of peanut crushing stock to peanut oil processors in the second quarter. The sales in the contract packaging distribution channel decreased by 8.7% in dollars and 2.5% in volume in the second quarter. The decline in sales volume primarily came from reduction in promotional and merchandising activities, again, as Mike mentioned. But the company was awarded new business in this channel from a major customer, which will start shipping in our third quarter. We anticipate the new business will have a positive impact Overcoming the negative volume trends the company has experienced in this channel the past few years. Turning to category updates, I'm happy to share category and brand results with you this morning, both for the quarter and for the fiscal year to date. As always, all market information I'll be referring to is IRI-recorded data, and for today is for the period ending December 29, 2019. When I refer to Q2, I'm referring to 13 weeks of the quarter and December 29th. 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. The term velocity refers to the sales per point of distribution. First, let me review some category dynamics. The total nut category decreased in sales dollars and pound volume by 1% in Q2. Overall prices in Q2 increased 1% versus the prior year. Now I'll talk about each category in a little more depth. starting with recipe nuts. In Q2, the recipe nut category decreased 5% in dollar sales driven by a drop in average price per pound as pound volume sales were flat. Prices decreased on walnuts and pecans by 5% and 7% respectively. Official recipe nuts decreased 32% in dollar sales and pound sales for the quarter versus last year. As a result, Fisher's share in the category decreased 9.5 pound share points versus last year. The decrease in sales line for Fisher recipe nuts resulted from lost display distribution at a major customer in favor of private brand recipe nuts. In traditional grocery, which IRI calls the U.S. Food Channel, Fisher recipe increased 21% in pound volume behind an increase of total points of distribution of 21%. Fisher continues to be the branded share leader in the recipe category when using the broader multi-outlet definition or within the U.S. food channel. Now let me turn to the snack category. In Q2, the snack category increased 2% in dollars and was flat in pound sales, driven by a 2% increase in average cost per pound. Fisher's snack increased 17% in sales dollars and 8% in pound buying sales in Q2. The brand increased in total distribution points by 24% as Fisher Oven Roast Never Fried expanded beyond the core Fisher geography and increased in pound sales by 122% versus last year. The Oven Roasted Never Fried subline also increased pound velocity by 12%. In addition to the successful quarter, early reads on trial and repeat are solid. Consumers are purchasing the product, enjoying their experience, and repeat purchasing the item, which is a good sign for long-term success. As we have discussed on previous calls, Fisher Oven Roast Never Fried offers consumers a full line of nuts that are dry roasted, not roasted in oil. These include whole cashews, deluxe mixed nuts, mixed nuts with peanuts, almonds, pecans, and a unique almond cashew blend, as well as straight peanuts. As we expand into new markets, 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, as well as FSIs. In Q2, the produce nut category decreased 5% in dollar sales and 9% in pound volume sales. OVH, our produce nut brand, decreased 22% in dollar sales and pounds at OVH share pounds The volume decline was due to lost distribution related to the reduction of shelf space in the produce nut section at a major customer. In Q2, we continued to build distribution of our spread and dip line of nut butters by getting shippers out in the market to gain awareness and trial of this new product. Likewise, we gained distribution of our chickpea chip line as well as in the second quarter. It's still early, but initial feedback from retailers on our new products is encouraging. In closing, we face a number of challenges in the future, which include, among others, potential acquisition cost volatility for almonds and increasing commodity costs for walnuts, as well as intensified competition on pricing and for market share from both private brand and main brand nut products. Official recipe nut sales have been negatively impacted recently due to this increased competition for market share. But we have strong brands in our portfolio with enormous opportunities for growth. We have a dedicated team of leaders throughout the company that are doing what matters most to deliver strong financial results. And we have the right strategies to continue to build our business and provide exceptional value and innovation for 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.