John B. Sanfilippo & Son, Inc.

Welcome to the John B. Sanfilippo & Son, Inc. Fourth Quarter and Fiscal 2020 Year-End 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 then 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star then 0. And I'd like to hand the conference over to your speaker today, Mr. Michael Valentine, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Jimmy. Good morning everyone and welcome to our 2020 fourth quarter and fiscal year earnings conference call. Thank you for joining us today. On the call with me is Jeffrey Sanfilippo, our CEO, and Jasper Sanfilippo, our COO. Before we start, we may make some forward-looking statements today. These statements are based on our current expectations. and they 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 on occasion Forms 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties that are inherent in our business. I'll start the call today by covering financial highlights for the 2024 quarter and fiscal year. The current fourth quarter net sales decreased by 5.8% to $204.2 million compared to net sales of $216.8 million for the fourth quarter fiscal 2019. The decrease in net sales in the quarterly comparison was primarily due to a 3.3% decrease in our weighted average selling price per pound. The decline in the weighted average selling price came from a shift in product mix from higher-priced almonds, pecans, and walnuts to lower-priced trail and snack mixes and peanuts. Lower selling prices for cashews, which resulted from lower acquisition costs, also contributed to the decline in the weighted average selling price. A 2.6% decline in sales volume, which is defined as pounds sold to customers, also contributed to the decline in net sales. Sales volume increased in the consumer distribution channel by 16.1%. The volume increase in the consumer channel was primarily driven by a 25.2% increase in private brand snack nut and trail mix sales with existing customers. Approximately 59% of the total sales volume increase in the consumer distribution channel occurred in April, most of which we attribute to continued pantry loading in response to COVID-19. Sales volume declined by 43% in the commercial ingredients distribution channel, primarily due to a 63.3% decline in sales volume to food service customers. The decline in food service sales volume was due to stay-at-home orders, restaurant closures, and a decline in air travel, again as a result of COVID-19. The decline in food service sales volume was offset in part by increased sales of peanut crushing stock to peanut oil processors. Sales volume declined by 32.4% in the contract packaging distribution channel, primarily due to some lost business with one customer that increased its internal nut processing capacity and the unfavorable impact of lower convenience store foot traffic on another customer's business in this channel, again, as a result of COVID-19. Looking at sales volume for brands in our consumer channel, Fisher Recipe nut volume increased by 3.4%, and that was primarily due to higher online sales as consumers are cooking and baking more frequently and reducing their trips to physical stores. The 43.3% decrease in sales volume for our Orchard Valley Harvest brand primarily came from temporary store closures at a major customer in the non-food space and some lost distribution at another customer. Fish or snack nut volume increased by 1.6% and that was mainly due The sales volume for Southern Style Nuts decreased by 3.8% as a result of some lost distribution at a major customer and lower promotional activity at other customers. These were offset in large part by increased sales in club stores and online sales. We attribute the cancellation and lower promotional activity for fish or snack nuts and southern style nuts to a general unwillingness on the part of retailers to execute promotional activity as a result of COVID-19. Fiscal 2020 net sales increased by .4% to $880.1 million compared to fiscal 19 net sales of $876.2 million, while sales volume increased by 6.1%. A 5.3% decline in the weighted average selling price per pound offset nearly all of the positive impact on net sales from the sales volume increase in the year comparison. The majority of the sales volume increase was driven by growth in lower priced trail and snack mixes and peanuts, which drove the decline in the weighted average selling price per pound. Lower selling prices for products containing caches and pecans driven by lower commodity acquisition costs also contributed to the decrease in the weighted average selling price per pound. Sales volume increased by 13.7% in the consumer distribution channel and that volume increase was primarily driven by increased sales of trail mixes and snack nuts Due to distribution gains with new and existing private brand customers, as well as increased sales of southern-style nuts products. Sales volume declined by 6.9% in the consumer ingredients distribution channel and by 13.8% in the contract packaging distribution channel, for the same reasons I cited previously in the quarterly comparison. Gross profit decreased to $40.7 million in the fourth quarter of fiscal 20 compared to $43.6 million in last year's fourth quarter. Gross profit margin was 20% of net sales compared to 20.1% of net sales in the prior fourth quarter. The decline in gross profit was due primarily to the declines in food service and contract packaging sales volume, which were offset in part by Gross profit generated from the increase in sales volume in the consumer distribution channel, lower commodity acquisition costs for cashews, and reduced manufacturing spending per produced pound due to manufacturing efficiency gains. The current quarter also included $1 million in COVID-19-related bonus expenses paid to our essential manufacturing employees, and that ceased in the latter part of the current fourth quarter. Total operating expenses for fiscal 2020, gross profit for fiscal 2020 increased to $175.8 million compared to $158.3 million in fiscal 2019. Gross profit margin increased to 20% of net sales from 18.1% of net sales for fiscal 2019. The increases in gross profit and gross profit margin were primarily due to increased sales volume in the consumer distribution channel, lower commodity acquisition costs for cashews, and reduced spending per produced pound due to manufacturing efficiency gains. Total operating expenses decreased by $2.1 million, and total operating expenses as a percentage of net sales decreased to 12.3% from 12.5% in the quarterly comparison. The decrease in total operating expenses in the quarterly comparison was mainly attributable to declines in incentive compensation, consulting, and travel expenses. These decreases were offset in part by increases in product donations to food banks and higher recruiting expenses. Total operating expenses for fiscal 20 decreased by $2.5 million, and total operating expenses as a percentage of net sales decreased to 11% from 11.4% in fiscal 19. The decrease in total operating expenses came from declines in advertising, freight, legal, and consulting expenses. A gain of $900,000 from an insurance recovery related to a fire in our Garysburg, North Carolina facility, and that fire occurred in the second quarter of fiscal 20, also contributed to the reduction in operating expenses. These reductions were offset in part by increases in expenses for payroll-related and incentive compensation, product donations to food banks, and broker commissions. Interest expense decreased to $500,000 for the fourth quarter of fiscal 20 from $600,000 in last year's fourth quarter, and interest expense for the current fiscal year decreased to $2 million from $3.1 million for fiscal 19. The decrease in the quarterly comparison resulted primarily from lower interest rates and the decrease in interest expense in the yearly comparison came from lower average debt levels and lower interest rates. Net income was $10.3 million or $0.89 per share diluted for the fourth quarter of fiscal 20 compared to $11.3 million or $0.98 per share diluted for the fourth quarter of fiscal 19. Net income for fiscal 2020 was a record $54.1 million or $4.69 per share diluted compared to net income of $39.5 million or $3.43 per share diluted for fiscal 19. Now taking a quick look at inventory, the total value of our inventories on hand at the end of the current fiscal year increased by $15 million or 9.6% compared to the total value of inventories at the end of fiscal 19. The increase in the total value of inventories was primarily due to higher quantities on hand for peanuts, cashews, and almonds, as well as higher acquisition costs for peanuts and walnuts. These increases were partially upset by lower acquisition costs for pecans. The weighted average cost per pound of our raw nut and dried fruit input stocks on hand at the end of the current fourth quarter fell by 7% compared to last year. This decline was due to an increase in the quantities of lower-priced peanuts on hand compared to higher-priced tree nuts. Lower acquisition costs for caches and beacons also led to the decline in the weighted average cost per pound of our raw nut and dried fruit input stocks. And now I will turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our performance for the current quarter and fiscal year. Jeffrey?

Thank you, Mike. Good morning, everyone. After reporting record results for our third quarter of fiscal 2020, the company finished the year strong, despite significant headwinds from the impact of COVID-19 and the dramatic shifts in consumer behavior and consumption trends at the start of our fourth quarter. Navigating through a challenging landscape in the fourth quarter of fiscal 2020, the company still ended the year by breaking records. in gross profit, which increased by $17.5 million or 11.1% to $175.8 million. That income reached a record $54.1 million, as Mike mentioned, and earnings per share reached a record $4.69. Our five production facilities are essential businesses and have stayed open through the pandemic to sustain the food supply chain. I am so proud of the hard work Dedication and leadership of our team members throughout the company. They showed up to provide essential goods for our customers. They showed up to service our consumers. And they showed up to support their families and to support each other. A special thank you to our manufacturing teams who come to work every day and continue to stay focused on operational efficiencies in production to reduce spending per produce pound at the same time providing best-in-class service levels for our customers and consumers. Our strong financial position allowed us to pay cash dividends for the ninth year in a row. We paid $68.7 million during fiscal 2020 to our stockholders, and we are paying bonuses to each of our exceptional associates throughout the organization who worked together this past year. These are truly extraordinary times for all of us. The pandemic had positive and negative impacts upon our results for the fourth quarter of fiscal 2020. We saw strong evidence of a shift in consumer preferences to shop in smaller store formats like grocery stores and via the internet. Based on IRI Total US multi-outlet market data, consumers are also doing much more cooking and baking at home. with the entire baking aisle category sales increasing by 49%. Internet-based sales for our brands increased by 365%, led by strong increases in our market-leading Fisher recipe nut line. On the other hand, closures for restaurants and other food service establishments throughout the country negatively impacted our food service business. However, we were encouraged by significant improvement in food service business as some re-openings occurred in the fourth quarter. In April, our food service sales volume declined by 90% compared to April of 2019. While in June, our food service sales volume declined by 34% compared to June of 2019. In snack nuts and snack and trail mixes, we saw a significant shift to lower-priced private label products from National Branded Products. Based on changes in our item mix, we also saw consumer preferences shift from single-serve grab-and-go items to large pack sizes such as 32-ounce jars and stand-up bags. The shift to larger pack sizes allowed us to capture significant efficiencies in manufacturing and distribution. We believe we are well positioned to take advantage of these dramatic changes in consumer preferences in respect to product line diversity and manufacturing capabilities. In recognition of these changes, we also bolstered our marketing and innovation leadership by adding individuals from major consumer product companies who have significant experience in managing brands in a changing environment. The company's long-term objective to drive profitable growth includes three pillars. To continue to grow Fisher, Orchard Valley Harvest, Squirrel Brand, and Southern Style Nuts into leading nut brands by focusing on consumer insights in the snack, recipe, trail snack mix, and produce categories. Two, provide integrated nut solutions to grow private brand businesses in each distribution channel. And three, expand our offerings into alternative distribution channels. With new resources added to sales, marketing, innovation, and research and development, JBSS will execute on our strategic plan to grow our branded business by reaching new consumers via product and packaging innovation, expanding distribution across current and alternative channels, and focusing on new ways consumers are purchasing food, with an emphasis on e-commerce. Turning to year-end sales review by business channel. In the consumer channel, net sales increased by 7.9% in dollars and 13.7% in sales volume in fiscal 2020 compared to fiscal 2019. Sales volume increase, as Mike mentioned, was driven by increases in trail mixes and snack nuts with new and existing private brand customers. There are significant opportunities in fiscal 2021 to grow our consumer sales with both private brands and with our strong branded portfolio. especially in e-commerce, grocery, and club where we expect those segments to continue to benefit from shifts in consumer buying. Net sales in the commercial ingredient distribution channel decreased by 16% in dollars and 6.9% in sales volume compared to fiscal 2019. Mike talked about the decrease in sales volume due to decreases in food service from restaurant closures, a decline in air travel, and the various nationwide stay-at-home orders as a result of COVID-19. But prior to the start of statewide lockdowns and travel restrictions, our food service business was on track for strong growth. Our commercial ingredients, sales and marketing teams have done a great job building customer relationships and expanding distribution. We have since reallocated and repositioned some resources to pursue alternative channels to follow changing demands for our products. In the contract packaging channel, net sales decreased by 20.7% in dollars and 13.8% in sales volume. This channel for JBSS has seen declines in sales volume in the past few years, and we have reallocated some resources from contract packaging to focus on other priorities. This channel was particularly impacted in a negative way by COVID-19 as trips to convenience stores declined significantly for a key customer in this channel. Turning to category updates, I'll share some brand results and category results for the quarter. As always, market information I'll be referring to is IRI-reported data, and for today it is for the period ending June 21, 2020. When I refer to Q4, I'm referring to 13 weeks of the quarter ending June 21st. References to changes in volume on 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. As has been mentioned, COVID-19 had positive and negative impacts upon our results for the fourth quarter. We saw strong evidence of a shift in consumer preferences to shop in smaller store formats like grocery and online. First, let's review some category dynamics. The total nut category increased in both sales dollars and pound volume by 5% in the fourth quarter. This was in line with the growth rate we saw in Q3 and ahead of the category growth rate in the first half of our fiscal year. Overall prices for the quarter were flat versus the prior year. Now I will cover each category in a little more depth, starting with recipe nuts. Based on RRI total U.S. multi-outlet market data, consumers are doing much more cooking and baking at home with the entire baking aisle category sales increasing by 49%. The impact of the pandemic is significant when it comes to people preparing more meals at home. This change in consumer behavior is driving strong recipe nut category growth. In Q4, the category increased 28% in dollars and 24% in pound volume. Despite strong category growth, our overall Fisher brand continues to be challenged by a decline in on-shelf placement with the key retailer. Our Fisher recipe nuts decreased 6% in dollar sales and 10% in pound sales for the quarter versus last year. As a result, Fisher's share in the category decreased 5.6% The decline in pound volume at retail was due to lost distribution at a major customer in the mass merchandising sector, which was offset in a large part by pound volume growth in grocery. In traditional grocery, which IRI calls the U.S. food channel, Fisher Recipe increased 44% in pound volume, behind the COVID-based trend referenced above where consumers shifted their spend to grocery. 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 Q4, the snack category increased 6% in dollar sales and 9% in pound sales. Fisher's snack increased 27% in dollar sales and 21% in pound volume in Q4, driven by a 19% increase in total points of distribution. This growth was primarily driven by the Fisher Oven Roast Never Fried line as we continued to expand beyond the core Fisher geography and increased pound sales by 109%. Pound velocity and total points of distribution increased by 31% and 60% respectively versus last year. Pound volume for our Southern Style Nut brand at retail increased by 7% in the quarter due to a distribution gain with a new customer. while pound volume for the total trail and snack mix category decreased by 3% in the quarterly comparison. In Q4, the produce nut category increased 3% in dollar sales and decreased 3% in pound volume sales. Orchard Valley Harvest, our produce nut brand, decreased 30% in pound sales resulting in a pound share decline of 0.5 points versus last year. The volume decline was due to some lost distribution at one key customer. Within traditional grocery, OVH was flat in dollars and declined 1% in pound sales. In closing, fiscal 2020 was a strong year, especially considering the dynamic changes we've all experienced since March. This success is possible because we have talented people across our organization and we invest in them to do what matters most to drive results. 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, brands, and processes to better serve our customers and consumers and create value for our shareholders. We will continue to face challenges in our fiscal 21 as a result of the COVID-19 pandemic continues. Our company continues to follow recommendations made by state and federal regulators and health agencies to ensure the safety and health of our employees. We know there is uncertainty about future local and federal restrictions aimed to mitigate and control the pandemic. As these restrictions were loosened during the fourth quarter of fiscal 2020, We saw a gradual increase in demand from our food service, restaurant, convenience store, and non-essential retail customers. While we realize this is a fluid situation, we believe the company is in a very strong position to respond to changes quickly and continue to grow our business. The management team and all 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 across all our channels. 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.