John B. Sanfilippo & Son, Inc.

Good morning. My name is Dexter, and I'll be your conference operator today. At this time, I would like to welcome everyone to the John B. Sanfilippo & Son, Inc., Second Partner Fiscal 2021 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Mr. Mark Barentine, Chief Financial Officer, will begin your conference. Please go ahead, sir.

Thank you, Dexter. Good morning, everyone. Welcome to our 2021 Second 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 remind you 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 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 top line, net sales for the second quarter of fiscal 21 decreased 5.2% to $233.6 million. In comparison, the net sales for the second quarter of fiscal 2020 of $246.4 million. The decline in net sales was primarily due to lower selling prices for tree nuts which in turn resulted from lower commodity acquisition costs. The decline in net sales from lower selling prices was offset in part by a 1.8% increase in sales volume which we define as pound sold to customers. Sales volume increased 9.9% in our consumer distribution channel and that was mainly due to a 13.3% increase in sales volume for private brand peanuts, trail mixes, and snack mixes. Current economic conditions have resulted in a shift in consumer preferences to lower-priced private label products and lower-priced products that we make. Increased sales for fish or snack nuts also contributed to the sales volume increase in the consumer distribution channel. Sales volume decreased in our commercial ingredients channel by 23.6%, and that was due to a 29.4% decline in sales volume in our food service business. The decline in food service sales volume was due to a decline in air travel, nationwide restrictions on indoor restaurant dining, and restaurant closures, all of which were attributable to COVID-19. Sales volume declined in the contract packaging distribution channel by 14.1%, primarily due to the unfavorable impact of lower convenience store foot traffic in one customer's business, again from COVID-19. Turning to sales volume for our branded products. In the current second quarter, branded sales volume accounted for 25.5% of total consumer channel sales volume. Sales volume for our Fisher recipe nuts declined 18.4%, As a result of lost distribution at some grocery customers, which was offset in part by increased sales with our internet retailer customers. The 13% decrease in sales volume for Orchard Valley Harvest was primarily driven by lower foot traffic at a major customer in the non-food sector due to COVID-19, reduced promotional activity, and lost distribution at some other customers. The 30.2% increase in sales volume for fish or snack nuts resulted mainly from increased promotional activity. In southern style nuts, sales volume declined by 4.2%, and that was due to reduced merchandising and promotional activity compared to last year's second quarter, and that was offset in part by distribution gains with new customers. Net sales for the first two quarters of the current fiscal year decreased significantly. to $443.8 million from $464.3 million for the first two quarters of fiscal 20. This decrease in net sales was primarily attributable to lower selling prices for the same reason I discussed in the quarterly comparison. The decrease in net sales was also attributable to a 0.7% decline in sales volume. Sales volume increased 7% in the consumer distribution channel primarily for the same reasons I cited in the quarterly comparison. Sales volume decreased 25.6% in the commercial ingredients distribution channel, mainly as a result of a 35.5% decline in sales volume in our food service business for the first two quarters. The decline in food service sales volume occurred for the same reasons I cited in the quarterly comparison. Sales volume declined in the contract packaging distribution channel by 13.2%, for the same reason I also cited in the quarterly comparison, as well as the loss of some peanut butter business with another customer, and that was attributable to a temporary peanut supply shortage that existed in the first quarter of fiscal 2021. Second quarter gross profit increased $2.8 million, or 5.6%, and gross profit margin as a percentage of net sales increased to 22.6%, for the second quarter of fiscal 2021 from 20.3% for the second quarter of fiscal 2020. The increases in gross profit and gross profit margin were mainly due to lower commodity acquisition costs for tree nuts and increased sales volume. Gross profit for the first two quarters of the current fiscal year declined by $100,000 in gross profit margin as a percentage of net sales Thank you very much. was due to the recognition of a $2.3 million gain on the estimated final insurance settlement related to the fire that occurred in our Garysburg, North Carolina facility that occurred in the second quarter of fiscal 2020. The gain from the insurance settlement was largely offset by increases in freight, compensation, and advertising expenses. Total operating expenses as a percentage of net sales increased to 10.7% from 10.4% Thank you. Thank you. Thank you. I cited in the quarterly comparison. Declines in compensation and travel expenses also contributed to the decline in total operating expenses in the year-to-date comparison. Interest expense for the second quarter and year-to-date period of fiscal 21 declined slightly compared to interest expense for both periods in fiscal 2020. The decreases in interest expense in both comparisons were due to a lower weighted average interest rate from the reduction of long-term debt. The benefit from a lower weighted average interest rate was largely offset by higher average short-term debt levels in both periods. Net income was $19.9 million or $1.72 per share diluted for the second quarter of fiscal 2021 compared to $17.5 million or $1.52 per share diluted for the second quarter of fiscal 2020. Net income for the first two quarters of fiscal 2021 was $32.7 million or $2.83 per share diluted compared to net income of $30.4 million or $2.64 per share diluted for the first two quarters of fiscal 2020. Now taking a quick look at inventory. Thank you for joining us. decreased 4.6% compared to the weighted average cost per pound of these input stocks at the end of the second quarter of last year. The decrease in the weighted average cost per pound of our input stocks was attributable to lower commodity acquisition costs for all major tree nuts. This was offset in part by a shift in product mix from lower priced peanuts to higher priced walnuts and pecans. I will now turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on operating results for the second quarter of fiscal 21. Jeffrey?

Thank you, Mike. Good morning, everyone. JVSS reported record net income and diluted earnings per share in our second quarter, coming off of a record second quarter last year. I am so proud of our management team and all of our associates for overcoming enormous headwinds to achieve record results for our second quarter of fiscal 2021. This is a considerable accomplishment given the trio of challenges we faced in our food service business, in our contract packaging distribution channel, and with our Orchard Valley Harvest brand from the impact of COVID-19. 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, trail mixes, snack mixes, and Fisher's snack nuts. Sales volume in the consumer distribution channel accounted for 78.2% of total sales volume in the current second quarter. The pandemic has had an unfavorable impact on our food service business, as Mike alluded to. However, food service results have continued to improve in fiscal 21 as a decline in food service sales volume in the current second quarter was 29.4% compared to 63.3% in the fourth quarter of fiscal 2020. It has been a very strong first half of fiscal 2021. As you may have seen from our press release last night, our board of directors approved the payment of a special dividend of $2.50 per share. This special dividend will be paid on March 16, 2021 to stockholders of record at the close of business on February 26, 2021. These dividends reinforce our goal of creating long-term stockholder value through the responsible use of cash. These dividends would not be possible without the hard work and dedication of all of our employees. We demonstrated exceptional results despite having to overcome many challenges, including a shortage of capacity in the transportation industry, which our service providers believe is due to driver concerns related to the impact of COVID-19 and an increase in demand driven by additional spending on consumer goods. From the start of the pandemic, our entire organization came together to keep each other safe while still focusing on building our business. Our teams have not stopped working to drive continuous improvement projects, optimize supply chain efficiencies, and maintain best-in-class quality and service levels for our customers and consumers. Turning to a sales review by JBSS Business Channel. In the consumer channel, distribution increased $3.9 million, or 2.1%, and sales volume increased 9.9% in the second quarter of fiscal 21. Our sales, marketing, innovation, and R&D teams have been working hard on new product development and distribution. We recently launched Fisher Recipe nut flowers in the marketplace at the end of our second quarter. Preliminary customer and consumer feedback has been positive, and we are finalizing plans to gain retail distribution. You can already purchase our Fisher nut flowers at Amazon.com. In addition, our company will be gate-crashing this Valentine's Day with our new Rubly Royale Premium Gift Nut launch. Social media and marketing plans have already been executed, and the product was recently launched on Amazon.com as well, so look for it. In the commercial ingredient channel, distribution decreased by 40% in dollars and 23.6% in sales volume in the second quarter of fiscal 2021. The decline in sales volume was due to a 29.4% decrease in volume in our food service business. The sales volume decline in our food service business resulted in a decline in air travel and nationwide restrictions on indoor restaurant dining and closures of restaurants, all of which were attributable to the pandemic. In our first quarter of fiscal 21, volume declines were 40%. In this quarter, volume declines were only 30%. Although demand has been suppressed from our food service customers, the rate of decline is recovering from its low point in our fourth quarter of fiscal 2020. And we believe that as the COVID-19 vaccines become more widely distributed and accepted by the public and restrictions are again loosened, sales volume with our food service restaurant and non-commercial customers will continue to improve, and we expect to eventually return to pre-pandemic levels. I know the food service sales team has been laser focused on getting expanded distribution in place for our products in preparation for reopenings and re-engagement with their customers. In the contract packaging channel, distribution decreased by 12.8% in dollars and 14.1% in sales volume in the second quarter of fiscal 21 compared to the second quarter of fiscal 20. As Mike mentioned, the decline in volume was primarily attributable to the unfavorable impact of lower convenience store foot traffic on our customers' business as a result of the pandemic. Here, too, in the contract packaging channel, we anticipate a slow but eventual return to pre-pandemic levels of volume as vaccines become more widely distributed and accepted by the public and restrictions are again loosened. Turning to category updates, I will share some of the insights from this past quarter. As always, all the market information I'll be referring to is the IRI reported data, and for today, it is the period ending December 27th, 2020. When I refer to Q2, I'm referring to 13 weeks of this quarter ending December 27th. 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. As has been mentioned, COVID-19 had positive and negative impacts upon our results for the second quarter of fiscal 2021. We continue to see 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 growth. The total nut category increased in both sales dollars and pound volume by 4% and 5% respectively in Q2. This was slightly behind pound growth we saw in Q1, but ahead in dollar growth. Both pound and dollar growth rates are ahead of the category growth rate last year at this time. Overall prices for the quarter were down 1% versus the prior year. Now I will cover each category in more depth, starting with recipe nuts. Based on IRI's total U.S. multi-outlet market data, consumers continue to do much more cooking and baking at home. However, consumers also changed holiday behavior with smaller gatherings for Thanksgiving and Christmas, given travel bans and lockdowns. The recipe nut category grew 4% in dollar sales and 6% in pound sales. This is down from the previous quarter of 16% in dollar growth and 13% in pound growth. Despite category growth, our overall Fisher brand continues to be challenged by a decline in distribution with two key retailers. Our Fisher recipe nuts decreased 20% in dollar sales and 19% in pound sales for the quarter versus last year. We did show gains in velocity where we have distribution. This was not enough to offset distribution declines. As a result, Fisher's share in the category decreased 4.9 share points. versus last year. Fisher continues to be the branded share leader in the recipe category when using the broader multi-outlet definition or within the US food channel. Now let me turn to the snack category. In Q4, the snack category increased 4% in dollar sales and 6% in pound sales. Fisher's Snack also grew 4% in dollars and 10% in pound volume sales in Q2, with a 17% increase in pound velocity on core Fisher's Snack Nuts driven by increased promotional activity and an 8% pound growth rate on our oven-roasted, never-fried line. The pound volume for our southern-style nut brand at retail decreased by 19% in the quarter due to decreases in merchandising and promotional activity, while pound volume for the total trail and snack mix category decreased by 2% in the quarter. In Q4, the produce nut category increased 6% dollar sales and 4% in pound volume. Orchard Valley Harvest, our produce nut brand, decreased 14% in pound sales, resulting in a pound share decline of 0.2 points versus last year. The volume decline was due to reduced promotional activity and lost distribution at some customers. In closing, we face a number of future challenges with the uncertainty of the pandemic and its continued impact on our business. But we also see significant opportunities for growth Our management team and all our associates are not wasting any time waiting to expand our business. The teams are working incredibly hard to build stronger brands, to build more innovative product platforms, and to provide higher levels of quality and service. We have a stronger foundation today than we did at the start of the pandemic, and JVSS is positioned well for a bigger and brighter future. We have a dedicated team of leaders throughout the company who are doing what matters most to deliver strong financial results. We are investing in new talent, we are investing in new capabilities, and we are investing in our brands. Fisher Recipe, Fisher Snack, Orchard Valley Harvest, Squirrel, and Southern Style Nuts are all relevant brands in our portfolio with enormous opportunities for growth. We have the right strategies and human capital to continue to build our business and provide exceptional value and innovation for our customers, our consumers, and our stockholders. We appreciate your participation in the call and thank you for your interest in our company. I'll now turn the call back over to Mike.