John B. Sanfilippo & Son, Inc.

Thank you for standing by, and welcome to the John B. Sanfilippo & Son, Inc., Third Quarter Fiscal 2021 Operating Results Conference Call. At this time, all participants are on 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 will need to press star 1 on your telephone. I would now like to hand the conference over to your speaker today, Mike Valentine, CFO. Thank you. Please go ahead, sir.

Thank you, Dee. Good morning, everyone, and welcome to our 2021 Third Quarter Earnings Conference Call. We thank you all for joining us today. On the call with me 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 21 decreased 1.8% to $207.9 million from net sales of $211.6 million for the third quarter of fiscal 20. The decrease in net sales was mainly attributable to a 1.2% decrease in sales volume which we define as pounds sold to customers. Sales volume declined primarily due to a reduction in sales volume for almonds and peanuts. This was offset in part by increased sales volume for trail and snack mixes. Sales volume increased in our consumer distribution channel by 9.1%. And that was due to an 11.8% increase in sales volume for private brand snack nuts and trail and snack mixes. The increase in sales volume for these private brand products came from new distribution at existing customers, a shift in consumer preferences to lower-priced private brand products, and growth in snacking as many consumers continue to purchase food for consumption at home while they work at home. Sales volume in the consumer distribution channel accounted for 77.7% of our total sales volume in the current third quarter. Now looking at sales volume for our brands in our consumer channel, sales volume for Fisher Recipe Nuts fell 6.4%, and that was primarily due to lost distribution at two grocery customers. The 21.4% decrease in sales volume for our Orchard Valley Harvest brand was attributable to lower foot traffic at a major customer in the non-food sector due to COVID-19. Fisher Snack Nuts sales volume decreased 3.1%, primarily due to reduced merchandising activity for Fisher and Shell peanuts as we are in the process of discontinuing that product line. And we expect to have that completed by the end of the upcoming fourth quarter. Sales volume for Southern Style nuts decreased 14.2% due to the discontinuance of an item at a major customer. Sales volume decreased in the commercial ingredients channel by 29.8% due to a 25.7% decline in sales volume in our food service business and a decline in sales of peanut crushing stock to peanut oil processors. The decline in food service sales volume was mainly due to a decline in air travel and continued nationwide restrictions on indoor restaurant dining as a result of COVID-19. Sales volume declined in the contract packaging distribution channel by 19.2%, and that was primarily due to the unfavorable impact of lower convenience store foot traffic on one customer's business, again as a result of COVID-19. Net sales for the first three quarters of the current fiscal year decreased to $651.7 million from $675.9 million for the first three quarters of fiscal 20. The decrease in net sales was attributable primarily to a 2.7% decrease and our weighted average selling price for our products, which in turn was due to a decline in commodity acquisition costs for all major tree nuts. Sales volume decreased 0.9%, primarily due to a reduction in sales volume for almonds and peanuts, and that was partially offset by increased sales for trail and snack mixes. The decline in sales volume, especially for almonds, also contributed to the decline in net sales. Sales volume increased 7.7% in the consumer distribution channel, primarily for the same reason I discussed in the quarterly comparison. Sales volume decreased 27.1% in the commercial ingredients distribution channel, mainly as a result of a 32.5% decline in sales volume in our food service business. And again, the decline in food service sales volume occurred for the same reasons I discussed in the quarterly comparison. Sales volume declined in the contract packaging distribution channel by 15.1%, primarily for the reason I cited in the quarterly comparison, as well as the loss of peanut butter business with another customer, which was attributable to a temporary peanut supply shortage that existed in the first quarter of fiscal 2021. Third quarter gross profit increased $3.2 million, and gross profit margin as percentage of net sales increased to 22.1% for the third quarter of fiscal 2021 from 20.2% for the third quarter of fiscal 2020. The increases in gross profit and gross profit margin were attributable primarily to lower commodity acquisition costs for all major tree nuts. Gross profit for the first three quarters of the current year increased $3.1 million in gross profit margin as percentage of net sales increased to 21.2% from 20% for the same period last year. Again, the increases in both gross profit and gross profit margin were due to the lower commodity acquisition costs for all major tree nuts. Total operating expenses for the current third quarter increased to 12% net sales from 11.1% for last year's third quarter. and total operating expenses for the current third quarter increased to $24.9 million from $23.4 million in the quarterly comparison. The increase in total operating expenses was due to a $1.5 million increase in freight expense. And that resulted from significantly higher freight rates compared to freight rates in last year's third quarter, and to a lesser extent, an increase in sales volume for sales made on a delivered basis to our customers. Total operating expenses for the current year-to-date period increased slightly to 10.8% from 10.7% of net sales for the first three quarters of fiscal 20, and total operating expenses decreased $1.7 million. The decline in total operating expenses was due to a $2.3 million gain from the final insurance recovery that was recognized in the second quarter of fiscal 2021. This insurance recovery relates to the Garysburg, North Carolina, facility fire that occurred in the second quarter of fiscal 2020. The impact of that insurance recovery gain was offset in part by increases in freight, insurance, and consulting expenses, net of decreases in advertising, incentive compensation, and travel expenses. Interest expense for the current third quarter decreased to $300,000 from $600,000 In last year's third quarter, an interest expense for the first three quarters of the current year decreased to $1.1 million from $1.5 million for the first three quarters of fiscal 2020. The decrease in interest expense in both comparisons primarily resulted from lower average debt levels. Net income was $14.7 million or $1.27 per diluted share for the third quarter of fiscal 2021 compared to $13.5 million or $1.17 per share diluted for the third quarter of fiscal 20. Both net income and EPS were records for a third quarter. Net income for the first three quarters of fiscal 21 was $47.4 million or $4.10 per share diluted compared to net income of $43.9 million or $3.80 per share diluted for the first three quarters of fiscal 2020. Now taking a quick look at our inventory, the total value of our inventories on hand at the end of the current third quarter decreased $36.8 million or 19.5% compared to the total inventory value at the end of the third quarter of fiscal 2020. The decrease in the value of total inventories was primarily due to lower commodity acquisition costs for all major tree nuts. Also, lower quantities of peanuts, almonds, and pecans contributed to the decline in the total value of inventories on hand. The weighted average cost per pound of our raw nut and dried fruit input stocks on hand decreased 17.8% again due to lower acquisition costs for all major tree nuts. And now I will turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on our operating results for the third quarter of fiscal 2021. Jeffrey?

Thank you, Mike. Good morning, everyone. As was the case in the second quarter of fiscal 2021, we reported record net income and diluted earnings per share. Despite the continuing challenges we faced in our food service business, and our contract packaging distribution channel and with our Orchard Valley Harvest brand due to the impact of COVID-19. These record results were again driven in large part by lower commodity acquisition costs, as Mike mentioned, for all major tree nuts and strong sales volume growth for private brand products in our consumer distribution channel. And we continue to see improvement in our food service business as we did in the first two quarters of fiscal 2021. with dining out and air travel having increased. Our record performance over the last two quarters put us in a strong position to pay a $2.50 per share special dividend during the current third quarter. Team members from every department across our organization worked hard and led with dedication and commitment to deliver these strong results and service our customers and consumers. At this time last year, Our company established a COVID-19 crisis management team that met daily to discuss risks faced by the company and mitigation strategies. Here we are, one year later, continuing to follow recommendations made by state and federal regulators and health agencies to ensure the safety and health of our employees as those recommendations change and evolve. But I'm happy to share that the crisis team has now pivoted to being a recovery team with a focus on getting our team members vaccinated. A few weeks ago, we organized a free voluntary COVID-19 immunization clinic, which was held on site at our Elgin, Illinois facility. The company, in partnership with Jules Osco, administered 1,064 Pfizer vaccinations to employees and their families. The second dose will be administered next week. JBSS is in the process now of facilitating clinics at each of our manufacturing locations. In addition to this important initiative, the recovery team is coordinating our reimagined workforce, which will provide for flexibility on when and where people work in our organization to support our business and take care of our customers and consumers. One key learning from the pandemic is that many of our associates proved they could work remotely and still meet goals and objectives while continuing to nurture collaboration and connection. At the same time, being apart from each other has also made us realize how much we value being together in person. And there is often no substitute for live collaboration, connection, and celebration to maintain a strong JBSS culture. In our operations, there are short-term external headwinds to manage, driving up costs as we navigate and transition into a post-pandemic environment. For example, the wooden pallet industry has been impacted for several months now with low inventory levels, due in part to labor and lumber shortages. The pallet shortage has impacted our operations primarily at our Elgin facility and led to some cost increases. We anticipate the industry to see some relief in the coming quarters. In the interim, we are working with our vendors, customers, and JBSS facilities in other regions of the country to source additional supply. Also, during fiscal 2021, there is a shortage in capacity in the transportation industry. Compounding this driver shortage is an increase in demand driven by additional spending on consumer goods. This tightening in transportation capacity, including rail and ocean freight, is expected to continue in fiscal 22, has led to increased transportation costs. Despite these headwinds, there are bright signs of demand recovery in specific business segments. I've shared the negative impact on our food service and contract manufacturing business and volume demand declines in convenience stores and nonessential retail customers due to reduced foot traffic. while people continue to work from home. The good news is that 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 vaccine becomes more widely distributed and accepted by the public and restrictions are again loosened, sales volume with our food service, restaurant, convenience store, and non-essential retail customers will continue to improve. And we've already started seeing significant growth in our backlog these past few weeks. Turning to sales review by channel, net sales in the consumer distribution channel increased 6.8% in the third quarter of fiscal 21. As Mike mentioned, the increase was driven by growth in private brands from several of our key retail partners. They continue to benefit from elevated at-home food demand driven by the pandemic. For our branded business, there is much work to be done. The marketing, innovation, R&D, and insights teams have been working extremely hard on brand positioning, product differentiation, and consumer engagement. A lot of heavy lifting is taking place right now to build stronger brands and sales distribution plans for the coming year. The teams are prioritizing core brand initiatives and enhancing product portfolios. For example, the fish or nut flour program is gaining momentum with new distribution gains as we capitalize on the ongoing increased demand for food at home as well as the rise in cooking and baking. Net sales in the commercial ingredient distribution channel decreased 30.5% in dollars. As we have shared previously, reduced away-from-home demand is a significant drive of these declines. But throughout this past year, our food service and industrial teams have set us up for a strong recovery by developing strategic partnerships and getting product placement in locations where it matters. And we are seeing positive leading indicators in our order backlog that business demand is coming back in this channel. Net sales in the contract packaging distribution channel decreased 23.2% in dollars. Again, one of the negative impacts of COVID-19 is the decline in people visiting convenience stores throughout the country, where our largest customer in this channel has significant sales concentration. But this too is beginning to recover as we see growing demand in this channel. Turning to category updates, I will share some of the brand results with you and category updates for the quarter. As always, all the market information I'll be referring to is IRI-reported data And for today, it is for the period ending March 21st, 2021. When I refer to Q3, I'm referring to 13 weeks of the quarter ending March 21st. 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. And the term velocity refers to the sales per point of distribution. As we've mentioned for the past year, COVID-19 had positive and negative impacts upon our results for fiscal 21. In the last four weeks of Q3, however, We started to lap the beginning of the pandemic and the large pantry build that happened in March of 2020. The total nut category and JBSS volume both declined in the last four weeks versus prior year, while results for the quarter are mixed. The total nut category was flat in both sales dollars and pounds in Q3. This is down versus the dollars and pound growth we saw in the first half of the year. This is primarily driven by the lack of the March pantry build from last year, as mentioned previously. Overall prices for the quarter were flat versus the prior year. Now we'll cover each category in much more depth, starting with recipe nuts. The recipe category grew 5% in dollar sales and 7% in pound sales. This is consistent with the growth that we saw in Q2. The category saw significant growth throughout the pandemic, driven by more consumers cooking and baking at home. Despite category growth, our overall Fisher brand continues to be challenged by a decline in distribution with two key retailers. Our Fisher recipe notes decreased 15% in dollar sales and 10% in pound sales for the quarter versus last year. We did see gains in velocity, but this was not enough to offset distribution declines. As a result, Fisher's share in the category decreased 2.4 pound share points versus last year. Fisher continues to be the branded share leader in the recipe category when using a broader multi-outlet definition or within the U.S. food channel. Now let me turn to the snack category. In Q3, the snack category declined dollar sales 2% or remained flat in pound sales. Fisher snack grew faster than the category, up 1% in dollar sales and up 9% in pound sales in Q3, driven by strong pound velocity on core Fisher snack nuts, up 19.5% driven by increased promotional activity. The trail and snack mix category declined dollars and pounds in Q3 by 6% and 8% respectively. Our southern-style nut brand performed better than the category, though still declined 4% in pounds and dollars due to lost distribution on a flavor variant at a major retailer. In Q3, the produce nut category increased 6% in dollars and 5% in pound volume. Orchard Valley Harvest, our produce nut brand, decreased 16% in dollar sales and 18% in pound sales, driven by lost distribution and aggressive competitive action. In closing, it is extraordinary how the world has changed since our third quarter last year. But our company and our team of dedicated leaders and frontline associates throughout our organization remain steadfast and strong. We adapted quickly to the dramatic changes in consumer behavior and seized opportunities to follow consumption growth in e-commerce and elevated demand with our private brand retail partners. We've made good progress on our fiscal 2021 priorities. Building a stronger commercial team and fueling investment in our brands and manufacturing capabilities. Looking ahead, we remain focused on strengthening our momentum and emerging from the pandemic a stronger company, even better positioned to drive long-term shareholder value. 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 we can in our manufacturing facilities and offices to keep everyone safe. Lastly, we have the right strategies, the right talent and the right business model to continue to grow 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.