John B. Sanfilippo & Son, Inc.

Ladies and gentlemen, thank you for standing by. And welcome to the John B. Sanfilippo & Son, Inc. Third Quarter Fiscal 2020 Operating Results Conference Call. At this time, all participants 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'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mike Valentino, Valentin, sorry, Chief Financial Officer. Sir, please begin.

Thank you, Norma. Good morning, everyone, and welcome to our 2020 Third Quarter Earnings Conference Call. We 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 Forms 10-K and 10-Q. 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 third quarter of fiscal 2020 increased by 4.9%. to $211.6 million compared to net sales of $201.8 million for the third quarter of fiscal 2019. The increase in net sales was attributable to a 13.7% increase in sales volume, which we define as pounds sold to customers. The increase in net sales from the sales volume increase was offset in part by a lower weighted average selling price per pound, as the majority of the sales volume increase was driven by growth and lower price trail, snack mixes, and peanuts. Lower selling prices for pecans and cashews, which resulted from lower acquisition costs, also contributed to the decline in the weighted average selling price per pound. Sales volume increased in the consumer channel by 19.3%, which came primarily from increased sales of trail and snack mixes and peanuts, and to a lesser extent, increased sales of cashews, almonds and mixed nuts to existing private brand customers. Sales volume increases for Fisher Snack Nuts, Orchard Valley Harvest Produce products and Southern Style Nut Snack Mix products also contributed to the sales volume increase in the consumer distribution channel. Now looking at sales volume for our brands in the consumer channel, sales volume for Fisher Recipe Nuts fell by 21.7% primarily from lost distribution at a major customer in favor of private brand recipe nuts. The 5.8% increase in sales volume for Orchard Valley Harvest produce products resulted from distribution gains with a new customer and the introduction of new items with an existing customer. Additionally, it also was attributable to increased promotional activity. Fisher's Snack Nuts sales volume increased by 14.2% and that was primarily due to increased promotional activity. Sales volume for southern style nuts increased by 41.4% and that was due to distribution gains with new customers and increased promotional activity. Sales volume increased by 9% in the commercial ingredients channel primarily from the sale of lower quality farmer stock peanuts to peanut oil processors in China. And sales volume decreased by 6.4% in the contract packaging channel primarily due to some lost business with one customer that increased its internal nut processing capacity. Looking at the impact of COVID-19 on our total sales volume for the third quarter, the 13.7% sales volume growth in the current quarter was attributable in part to pantry loading by consumers in anticipation of the shelter-in-place directives that ultimately occurred. For January and February, sales volume increased by a total of 9.1%. We believe the increase in sales volume in January and February was primarily related to the factors I cited in our sales volume discussion earlier. In March 2020, sales volume increased by 23.6% compared to March 2019. After considering our sales volume growth rate for the first two months of the current quarter, we estimate that approximately one-third of the sales volume increase for the current third quarter was attributable to pantry loading. Within the commercial ingredients channel, food service sales volume was relatively unchanged from fiscal 2019 third quarter. Sales volume increases in January and February were fully offset by a significant amount of order cancellations in March by food service distributors, and that was due to restaurant closures primarily. Net sales for the first three quarters of the current fiscal year increased to $675.9 million from $659.4 million The increase in net sales was attributable to a 9% increase in sales volume. This increase in net sales from the sales volume was offset in part by lower selling prices, primarily due to the factors I discussed in the quarterly comparison. Sales volume increased by 12.9% in the consumer distribution channel, primarily for the same reasons I cited in the quarterly comparison as well. Sales volume increased by 7.2% in the commercial ingredients distribution channel, primarily from increased sales of peanuts to peanut oil processors, including the ones I mentioned in the quarterly comparison. Sales volume declined in the contract packaging distribution channel by 7.4%, primarily for the reasons I cited in the quarterly comparison, and also a reduction in promotional and merchandising activity by some other customers in this channel. Third quarter gross profit increased by $4 million and gross profit margin as percentage of net sales increased to 20.2% for the third quarter of fiscal 2020 from 19.2% for the third quarter of last year. Increases in gross profit and gross profit margin were primarily attributable to increased sales volume, manufacturing efficiencies, and reduced manufacturing spending per produced pound. Gross profit for the first three quarters of the current year increased by $20.4 million and gross profit margin as a percentage of net sales increased to 20% from 17.4% for the same period last year. The increases in both gross profit and gross profit margin were mainly due to the reasons I cited in the quarterly comparison, as well as lower acquisition costs for cashews and pecans. Total operating expenses for the current third quarter decreased to 11.1% of net sales from 11.6% for last year's third quarter, primarily due to a higher net sales base. Total operating expenses were unchanged as increases for incentive compensation, product donations to food banks, and broker commissions were fully offset by decreases in legal expenses, consulting, freight, and advertising expenses. We recognize a $700,000 gain from an insurance recovery, and that recovery was related to a fire we had in our Garysburg, North Carolina facility, which occurred in the second quarter of fiscal 2020. Total operating expenses for the current year-to-date period decreased to 10.7% of net sales from 11% for the first three quarters of last year, and again, that was due to a higher net sales base. Total operating expenses decreased by $400,000 as increases in expenses for incentive compensation, product donation to food banks, broker commissions were more than offset by decreases in legal consulting, freight, and advertising expenses, as well as the gain I mentioned from the insurance recovery earlier. Interest expense for the current third quarter decreased to $600,000 from $800,000 in last year's third quarter. An interest expense for the first three quarters of the current year decreased to $1.5 million from $2.5 million for the first three quarters of last year. The decrease in interest expense in the quarterly comparison resulted from lower interest rates. The decrease in interest expense in the year-to-date comparison came from lower average debt levels and also lower interest rates. Net income for the quarter was $13.5 million, or $1.17 per share diluted. for the third quarter of fiscal 20 compared to $10.3 million or $0.90 per share diluted for last year's third quarter. And net income for the first three quarters of 2020 was $43.9 million or $3.80 per share diluted compared to net income of $28.2 million or $2.45 per share diluted for the first three quarters of last year. Now taking a quick look at inventory, The total value of our inventories on hand at the end of the current third quarter increased by $9.6 million, or 5.4%, compared to the total value of inventory in last year's third quarter. The increase in the value of total inventories was primarily due to increased quantities of peanuts, cashews, almonds, pistachios, and work and process inventory. The weighted average cost per pound of our raw nut and dried fruit input stocks increased by 3.4%, and that was due primarily to increased acquisition costs for walnuts and higher quantities of tree nuts compared to quantities of lower cost peanuts on hand. And now I will certainly call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on our operating results for the third quarter of fiscal 2020. Jeffrey.

Thank you, Mike. Good morning, everyone. The third quarter of fiscal 2020 marks the fifth consecutive quarter in which we reported record net income and diluted earnings per share. This quarter's results were the second highest for any quarter in the company's history. This solid performance was driven by strong volume growth in our consumer distribution channel. We've talked a lot in the past about our strategies to make our consumer sales channel a larger portion of our overall business. and I'm happy to report that sales volume in the consumer distribution channel accounted for approximately 70% of our total sales volume in the current third quarter. The increase in sales volume, as Mike mentioned, was driven mainly by increased sales of private brand products complemented by increased sales for our Fisher Snack Nuts, Orchard Valley Harvest Produce products and Southern Style Nuts snack mixes. Prior to the COVID-19 impact on sales volume, we had strong volume with its 6.8% growth in the first half of the current fiscal year and 9.1% growth for January and February. Our employees were already working very hard to deliver these results when the March sales volume surge occurred. During March, our business required even more effort, and our employees delivered with the majority of our orders shipping on time and complete. This truly demonstrates how committed our team members are in fulfilling our obligation to provide food to American consumers during these difficult times. While we were meeting these unprecedented challenges, we took many measures to improve the safety of our employees. The company established a COVID-19 crisis management team that meets daily to discuss risks faced by the company and mitigation strategies. We quickly began implementing work from home requirements for the majority of our office employees, staggering shifts and breaks for our production employees, installing partitions on lines where social distancing could not be affected, performing daily temperature screening for all employees upon arrival, and providing face masks for all employees and requiring their use throughout our facilities. We also recognized the need to take a different approach to our employee compensation during this period. Consequently, we temporarily increased manufacturing employee compensation by 10% based on hours worked, extended personal time off weeks for those who are in self-quarantine or ill, and provided weekly allowances to cover costs incurred by those employees working from home. We also committed to supporting our communities and donated products valued at over a half million dollars to provide peanut butter and snacks to food banks located near our major customers are facilities in the current third quarter, and we continue to donate food in these areas to help families in need. Going forward, we expect sales volume in our consumer distribution channel to normalize as consumers adjust to the current circumstances. Food service sales, which are within our commercial ingredient channel, have been growing this fiscal year, and such sales represented 10% of our total sales volume in the current year-to-date period. However, we expect our food service sales to decline significantly in the coming months until travel restrictions and restaurant closings are lifted. Our procurement team is working closely with our domestic and global suppliers to source and maintain consistent inventories of raw materials, ingredients, and packaging to provide a steady supply of our products to our customers and consumers. Turning to a sales review by JBS Channel, in the consumer channel, as Mike mentioned, it increased by 11.9% in dollars and 19.3% in volume in the third quarter. Sales on was driven mainly by increased sales of trail and snack mixes and peanuts, and to a lesser extent from increased sales of cashews, almonds, and mixed nuts with existing private brand customers. We did see a spike as a result of pantry loading in March, and we anticipate our consumer volume will remain steady going forward as consumers will eat more at home and order online with the stay at home and travel restrictions in place. Net sales and commercial ingredient distribution channel decreased by 6.6% in dollars and increased by 9% in sales volume. As I previously mentioned, we anticipate food service sales volume to decline in the coming quarter as a result of COVID-19, but our teams are working hard to manage our inventories and look for growth opportunities and they will be ready for business when travel restrictions and stay-at-home orders are lifted. Net sales in the contract packaging distribution channel decreased by 17.8% in dollars and 6.4% in sales volume. One of our major customers in this channel provides a lot of products for convenience stores and with COVID-19 restrictions in place, we believe this business will continue to be flat to declining in the coming months until travel restrictions are lifted. Turning to category updates 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 is for the period ending March 22, 2020. When I refer to Q3, I'm referring to 13 weeks of the quarter ending March 22. References to changes in volume or price are versus the corresponding period one year ago. We look at the category and IRI's total U.S. definition, which includes food, drug, mass, Walmart, military, and other outlets. 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's review some category dynamics. The total nut category increased in sales dollars and pound volume by 5% and 6% respectively in the third quarter. Overall prices for the quarter decreased 1% versus the prior year. The volume growth in the current third quarter was attributed in part to pantry loading by consumers in anticipation of the shelter-in-place directives that ultimately occurred. The last two weeks of the quarter, sales for the overall category increased 36% in dollar sales and 41% in pound volume versus last year. The previous 11 weeks saw the category flat in sales versus a year ago. Now I'll talk about each category in a little more in depth, starting with recipe nuts. In Q3, the recipe nut category increased 8% in dollars and 13% in pound volume. Prices for the category decreased 4% versus last year. Walnut and pecan pricing decreased by 4% and 7%, respectively. Our Fisher recipe nuts decreased 24% in dollar sales and 23% in pound sales for the quarter. As a result, Fisher's share in the category decreased 7 pounds share points versus last year. The decrease in sales volume for Fisher resulted from loss distribution at a major customer that we've talked about in the past. In traditional grocery, which IRI calls the U.S. food channel, Fisher Recipe increased 29% in pound volume behind an increase of total points of distribution of 22%. Fisher continues to be the brand share leader in the recipe category when using the broader multi-outlet definition and within the U.S. food channel. Now let's turn to the snack category. In Q3, the snack category increased 7% in dollar sales, 10% in pound sales. Pricing declined 2% versus last year in the snack category. Fisher snack increased 25% in sales dollars and 18% in pound volume in Q3. Promotional sales for the brand increased by 17% and total distribution increased by 19%, driving sales. Fisher oven roast, never fried, continues to expand beyond the core of Fisher geography and increased in pound sales by 85%. Pound velocity and total points of distribution increased by 5% and 6%, respectively, versus last year. Oven roast never fried contributed 64% of the growth of the fish or snack business. In addition to the successful quarter, trial and repeat continued to be solid. Consumers are purchasing the product, enjoying their experience, and repeat purchasing the item, which is a good sign for long-term success. In Q3, the produce category, was flat in dollars and decreased 5% in pound volume sales and prices increased 5%. Orchard Valley Harvest decreased 17% in dollars and 15% pounds and OVH pound share decreased two-tenths of a point versus last year. The volume decline was due to lost distribution related to the reduction in shelf space in the produce section at a major customer. OVH shipments are up which is attributable to distribution of new items with a current customer that does not report data to IRI and new brand distribution within traditional grocery. Two recent Orchard Valley Harvest line extensions, our spread and dip peanut butter and our chickpea chips are available at a limited number of retailers. The spread and dip peanut butter taps into the popular consumer behavior of dipping fruits and vegetables in nut butters for healthy snacking. OVH Spread & Dip makes that easy with a wide mouth hummus-like tub. And our OVH chickpea chip offering taps into the consumer desire for more plant-based snacks. Both line extensions are being supported with in-store merchandising and social and digital consumer support. It's still too early to report on their specific performances, but we are excited about the potential to expand the brand into the nut butter and the chip categories. In closing, it is extraordinary how the world has changed since our last earnings call just three months ago at the end of January. We will face challenges in the remaining periods of fiscal 2020, and there will be headwinds going into fiscal 2021 as a result of the COVID-19 pandemic. But our company and our team of dedicated leaders and frontline associates throughout our organization are steadfast and strong. We will adapt quickly to the dramatic changes in consumer behavior and seize opportunities where they arise. The company has strong brands in our portfolio with enormous opportunities for growth. And we have a manufacturing footprint that can meet new consumer demand for retailer private brands and our branded business in e-commerce. We will continue to prioritize the health and productivity of our associates and follow the most up-to-date guidance from health authorities to ensure we are doing all that we can in our manufacturing facilities and offices to keep everyone safe. Lastly, we have the right strategies and business model to continue to grow and provide exceptional value and innovation for our customers and consumers and our shareholders. I was proud that we announced last night that the company will be paying a $1 per share dividend, which will be paid out in June. 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.