John B. Sanfilippo & Son, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the John B. Filippo & Son, Inc. First Quarter Fiscal 2021 Operating Results Conference Call. At this time, all participants' lines are in the 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 telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Mike Valentine, CFO of John B. Sanfilippo & Son, Inc. Please go ahead, sir.

Thank you, Buena. Good morning, everyone, and welcome to our 2021 First Quarter Earnings Conference Call. Thank you for joining us today on the call with me today 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 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 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 first quarter of fiscal 2021 declined by 3.5% to $210.3 million in comparison to $217.8 million for last year's first quarter. The decline in net sales resulted from a 3.5% decline in sales volume which we define as pounds sold to customers. Sales volume increased in the consumer distribution channel by 3.8%, primarily from a 6.9% increase in private brand sales volume for trail and snack mixes, mixed nuts, cashews, and peanuts primarily at existing customers. The increase in sales volume for these products was partially offset by a decline in peanut butter sales volume due to a temporary peanut supply shortage that occurred during the current quarter. Increased sales of fish or snack nuts also contributed to the sales volume increase in the consumer distribution channel. Sales volume declined 27.7% in the commercial ingredients distribution channel due to a 40.9% decline in sales volume for almond, peanut, walnut, sunflower, and pecan products in our food service business. The decline in the food service sales volume was due to a decline in air travel and nationwide restrictions on occupancy rates in enclosures of restaurants, both of which were attributable to COVID-19. Sales volume in the contract packaging distribution channel declined 12.2%, and that was due to the unfavorable impact of lower convenience store foot traffic on one customer's business, again as a result of COVID-19. and the loss of peanut butter business with another customer due to the temporary peanut supply shortage I mentioned earlier. Looking at sales volume for brands in our consumer channel, sales volume for Fisher Recipe Nuts fell by 14.1% as a result of loss of distribution at some customers, which was offset in part by increased sales with internet retailers and increased sales with other existing customers in the grocery sector. Sales volume for Orchard Valley Harvest declined by 16.1%, mainly from some lost distribution at one customer and reduced foot traffic at a major customer in the non-food sector as a result of COVID-19. Fisher's Snack Nuts sales volume increased by 12.6% due to increased promotional activity and distribution gains at new and existing customers for our oven-roasted, never-fried product lines. Southern Style Nuts sales volume declined by 8.4% due to lower promotional activity at several customers, which was offset in part by distribution gains with new grocery customers and increased sales with internet retailers. Gross profit declined by 6.9% to $39.3 million in the first quarter of fiscal 21 compared to $42.2 million in last year's first quarter. Gross profit margin as percentage of sales declined to 18.7% in the current quarter from 19.4% in the first quarter of fiscal 2020. The decline in gross profit dollars and gross profit margins were primarily due to the decline in sales volume that we talked about earlier. Total operating expenses declined to 9.7% of net sales for the first quarter of fiscal 2021 from 10.6% for last year's first quarter. and total operating expenses declined by $2.7 million. The decline in total operating expenses resulted mainly from reductions in advertising, compensation and consulting expenses. Interest expense in the current first quarter declined by $70,000 in the quarterly comparison due to a reduction in our weighted average interest rates. As a result of the above, net income was $12.8 million or $1.11 per share diluted for the first quarter of fiscal 21 compared to $12.9 million or $1.12 per share diluted for the first quarter of fiscal 2020. Take a look at our inventory. Total value of inventories on hand at the end of the current first quarter declined $6.1 million or 3.9% compared to the total value of inventories on hand at the end of the first quarter of fiscal 2020. The decline in total inventory value was primarily attributable to lower quantities of farmer stock peanuts and shelled pecans and shelled walnuts on hand. Lower acquisition costs for almonds and cashews also contributed to the decline in total inventory value. The weighted average cost per pound of raw nut and dried fruit and put stocks on hand at the end of the first quarter fiscal 2021 increased by 7.8% compared to the weighted average cost at the end of the first quarter of fiscal 2020. This increase was mainly attributable to a shift in product mix from lower priced farmer stock peanuts to higher priced in-shell pecans. I will now turn the call over to Jeff Sanfilippo, our CEO, who will provide additional comments on our operating results for the first quarter of fiscal 2021. Jeffrey.

Thank you, Mike. Good morning, everyone. The first quarter fiscal 2021 net income and diluted earnings per share nearly equaled the record results we reported in last year's first quarter, despite COVID-19 related challenges in our food service business. We also continued our goal of returning profits to our stockholders by increasing our regular annual dividend by 8.3% to $0.65 per share. and we supplemented that with a special dividend of $1.85 per share, both of which were paid in the first quarter of fiscal 2021. It takes a talented group of dedicated individuals across an entire organization to deliver consistent, strong results as we have done here at JBSS, especially during these unprecedented times we face as a business, as a country, and as a world in the midst of a pandemic. I am proud of every person in our company whose leadership and commitment to providing outstanding quality, service, and value to our customers and consumers is unwavering. There are significant changes to industry trends as consumer preferences shift to shopping in smaller store formats like grocery and shifting to e-commerce purchasing. With restaurant closures and other limitations due to the impact of COVID-19, consumers are also doing more cooking and baking at home, which has had a positive impact on certain aspects of our consumer business, but a negative impact on our food service business. The JBSS business model puts us in a strong position to follow shifts in consumption and demand wherever they go between our consumer, commercial ingredient, and contract manufacturing channels. We expect to redirect our promotional and advertising activity with respect to our brands to focus on more digital and e-commerce platforms to match consumer behavior. We continue to see strong e-commerce and grocery performance across our Orchard Valley Harvest and Fisher Recipe brands and expect that there will be additional opportunities to connect these brands to consumers' desires for more functional snacking and baking and cooking ideas, respectively. Sales volume continues to grow in our consumer distribution channel, primarily from distribution gains for private brand products and Fisher's snack nuts. The consumer channel accounted for approximately 75.8% of total sales volume in the current fiscal quarter, which demonstrates a significant change in our total business channel performance. The company continues to face distribution challenges with our Fisher Recipe brand and several retailers due to branded and private brand competition for shelf space. The sales and marketing teams are focused on enhancing retail programs for this holiday season with key customers where we have strong distribution to offset volume declines due to the areas we lost distribution. We believe our holiday promotional and merchandising programs are very competitive and will allow Fisher to compete effectively in the coming months. As mentioned, our food service business has been impacted negatively as a result of COVID-19, particularly with respect to the air travel and restaurant industries, as Mike referenced. However, we have observed some improvement in this business as a sales volume decline in this channel has slowed since the fourth quarter of fiscal 2020. It is an unpredictable demand scenario with states handling restaurant capacity guidelines depending on positivity rates from the virus in different ways across the country. Nevertheless, Our food service and operation teams are adjusting rapidly to market conditions as they pursue and build new business opportunities across the country. And along with our major food service customers, we believe that when consumers are ready and allowed to reengage with restaurants, consumer demand for food prepared away from home should increase. Good news on the supply side of nuts. As we enter the harvest season, our procurement teams have seen acquisition costs for walnuts and almonds decrease for the 2020 crop year, which falls into the current 2021 fiscal year. Peanut prices are relatively flat versus last year. The pecan harvest has just begun, so we do not have visibility yet on how prices will compare to last year. But we expect acquisition costs to decline or remain stable for all other major tree nuts. and we believe our inventory positions are well aligned with our commitments and selling prices going into this busy holiday season. The purchasing teams have worked closely with our domestic and global suppliers to source and maintain a consistent supply of raw materials, ingredients and packaging. Now let's turn to category updates in the snack, recipe and produce segments. I will share some of the category and brand results with you for the quarter. As always, all the market information I will be referring to is IRI-reported data, and for today, it is for the period ending September 20, 2020. When I refer to Q1, I am referring to 13 weeks of the quarter ending September 20. 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 nut categories are based on our custom definitions developed in conjunction with IRI. 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 first quarter of fiscal 2021. We saw strong evidence of a shift in consumer preferences to shop in smaller store formats like grocery and online. Growth in private label and moves to larger value sizes continue to drive category volume increases. The total nut category grew in both sales dollars and pounds, Thank you. Thank you. Based on IRI total U.S. multi-outlet market data, consumers continue to do much more cooking and baking at home, with the entire baking aisle category sales increasing by 22%. This is down from the previous quarter high of 49%, but still significantly above last year. This change in consumer behavior is driving strong recipe nut category growth, In Q1, the category increased 16% in dollar sales and 13% in pound volume sales. Despite strong category growth, our overall Fisher brand continues to be challenged by a decline in on-shelf placement with two key retailers. Our Fisher recipe nuts decreased 13% in dollar sales and 16% in pound sales for the quarter versus last year. As a result, Fisher's share in the category decreased 4 tenths of a pound share points versus last year. The decline in pound volume at a major customer in the mass merchandiser sector was offset in large part by pound volume gains in grocery. In traditional grocery, which IRI calls the U.S. Food Channel, Fisher's recipe actually increased 10% in pound volume. 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 Q1, the snack category increased 6% in dollar sales and 9% in pound sales. Fisher's snack outperformed the category, increasing 15% in sales dollars and 18% in pound sales volume in Q1. driven by an increase in total points of distribution and velocity. This growth was primarily driven by the Fisher Oven Roast Never Fried line which continued to expand beyond the core Fisher geography and increased pound sales by 106%. Pound velocity and total points of distribution increased by 43% and 33% respectively versus last year. Pound volume for our southern-style nuts brand at retail decreased by 2% in the quarter due to losing distribution on some flavors at a key customer. This was partially offset by growth in the club channel. Pound volume for the total trail and snack mix category decreased by 3% in the quarterly comparison. In Q1, the produce nut category increased 7% in dollar sales and was flat in pound volume sales. Orchard Valley Harvest Our produce brand decreased 27% in pound sales, resulting in a pound share decline of 6 tenths of a point versus last year. The volume decline was due to lost distribution at a major customer in the mass merchandiser sector. Within traditional grocery, OVH was down 5% in dollars and declined 5.9% in pound sales. In closing, we will continue to face volatility in our fiscal 2021 as a result of COVID-19 and the uncertainty of future local, state, and federal restrictions aimed to mitigate and control the pandemic. However, I am confident we have the people, the processes, the brands, the expertise, and the financial strength in place to be flexible and successfully navigate our company through these volatile times and to continue to grow our business. Success requires smart strategies and the right business model for sustainable growth and we have them here at JBSS. We will continue to maintain a competitive advantage, to be differentiated and to be an innovative and valuable partner. 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.