John B. Sanfilippo & Son, Inc.

Good day and thank you for standing by. Welcome to the John B. Sanfilippo & Son Incorporated First Quarter Fiscal 2022 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 will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, CFO Frank Pellegrino. Please go ahead, sir.

Thank you, Charlotte. Good morning, everyone, and welcome to our fiscal 2022 first quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO, Jasper Sanfilippo, our COO, and Mike Valentine, our group president. Before we start, I would like to remind everyone 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 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 2022 increased 7.6% to $226.3 million, compared to net sales of $210.3 million for the first quarter of fiscal 2021. The increase in net sales was mainly attributable to a 14% increase in sales volume, which is defined as pounds sold to customers. Increased sales volume was partially offset by a 5.6% decrease and the weighted average selling price per pound, which is caused by decline in commodity prices for all major tree nuts except cashews. Sales volume increased in consumer distribution channel by 13% due to a 20.4% increase in private brand sales volume for trail and snack mixes. The increase in sales volume for these private brand products came from new distribution at existing customers. The increase in private brand sales volume was partially offset by sales volume decline in our branded products. Sales volume in the consumer distribution channel accounted for 75.1% of total sales volume in the first quarter. Sales volume increased in the commercial ingredients channel by 37.2% due to a 47.8% increase in sales volume to our food service customers. The increase in food service sales volume was attributable to improved conditions in the restaurant industry from the COVID-19 restrictions. Sales volume declined in the contract packaging distribution channel by 3.9%, primarily due to promotional activity by a customer in the first quarter of fiscal 2021 that did not repeat in the current first quarter. Looking at sales volume for our brand and our consumer channel, Fish and recipe nuts decreased 9.7%, primarily as a result of merchandising timing shifts, lost distribution at a customer, and lapping of increased at-home cooking and baking nut consumption compared to last year's first quarter due to COVID-19. The 6.3% decrease in sales volume for Orchard Valley Harvest was primarily due to a temporary distribution loss at a customer in the club channel. This was partially offset by a 29.1% increase and a major customer in the non-food sector, as this retailer continues to recover from COVID-19 restrictions. Fish or snack nut sales volume, excluding the impact of our discontinued in-shell product line, which occurred in the fourth quarter of fiscal 2021, increased 7% due to new distribution and increased merchandising in existing customers. Including the impact of the discontinued product line, fish or snack nut volume decreased by 30.3%. Sales volume for selling-style nuts decreased 1% due to reduced merchandising and promotional activity. Gross profit increased by 31.7% to $51.8 million in the first quarter of fiscal 2022 compared to $39.3 million in last year's first quarter. Gross profit margin increased to 22.9% in net sales in the current quarter of fiscal 2022 from 18.7% for the first quarter of fiscal 2021. The increase in gross profit and gross profit margin was attributable primarily to lower commodity acquisition costs for all major tree nuts except cashews and increased sales volume. Total operating expenses for the current first quarter increased to 10.8% of net sales from 9.7% for last year's first quarter. Total operating expenses for the current first quarter increased $4 million in the quarterly comparison. This increase included a gain of approximately $2.3 million from the sale of our Garysburg, North Carolina facility. The increase in total operating expenses was due to increased freight expense, an increase in consumer insight research and related consulting, increased advertising, and increased compensation expenses. The increase in freight accounted for 60% of the total increase in operating expense. The freight expense increase resulted mainly from higher freight rates and increase in sales volume made on a delivered basis. Interest expense for the current first quarter decreased at $371,000 from $450,000 for the first quarter of fiscal 2021 due to lower average debt levels. As a result of what we previously mentioned, net income was $19.2 million or $1.66 per share diluted for the first quarter fiscal 2022, compared to $12.8 million or $1.11 per share diluted for the first quarter fiscal 2021. Now taking a look at inventory. The total value of inventories on hand at the end of the current first quarter increased $2.2 million or 1.5%, compared to total inventory value at the end of the first quarter of fiscal 2021. The increase in value of total inventories were primarily due to higher quantities of almonds, ingredients, and packaging. This was partially offset by lower quantities of farmer stock peanuts, pecans, and cashews on hand. The weighted average cost per pound of raw nut and dry fruit input stocks on hand at the end of the quarter increased 11.1%, compared to the first quarter of fiscal 2021. This increase in weighted average cost is attributed to the quantity of lower-priced peanuts decreasing much more significantly than the decrease in total quantity of higher-priced tree nut and dried fruit input stocks in the quarterly comparison. The decrease in the quantity of peanuts on hand was due to the closure of our Garysburg facility. I will now turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on our operating results for the first quarter of fiscal 2022.

Thank you, Frank. Good morning, everyone. A great start to the current first quarter of fiscal 2022. We reported record net income and diluted earnings per share for the fourth consecutive quarter. The record results were driven by strong double-digit volume growth in our consumer distribution channel. the continued recovery of our food service business and our commercial ingredients channel, and lower commodity acquisition costs for most major tree nuts. The strong sales volume growth in our consumer distribution channel was mainly attributable to the efforts of our entire team to maintain superior service and quality levels as we navigated through the numerous global supply chain challenges that existed during this quarter. The consumer channel accounted for approximately 79.4% of total sales dollars in the current first quarter. Our relentless commitment to providing best in class service, quality, and value to our customers and consumers is a significant factor in our company's success. 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 with the pandemic and the impact it has had on economic and social behavior. I am proud of every person in our company whose leadership and commitment to our customers and consumers is unwavering. especially our manufacturing, shipping, and procurement teams. As we enter the harvest season, we anticipate higher acquisition costs for many of our raw nut and dried fruit input stock, notably in respect to cashews, almonds, and walnuts, where we expect to see significant increases in acquisition costs as they return to average historical market prices. In addition, we are experiencing cost increases in freight and labor, and we expect that trend to continue. We have begun implementing pricing actions across our entire business to help mitigate these increasing costs. Our team is also working diligently to identify and implement cost savings initiatives to offset some of these rising expenses. This current unprecedented inflationary environment and global supply chain constraints are presenting numerous challenges but I'm confident our management team and dedicated employees will respond to these challenges and deliver exceptional performance for our customers and consumers. In the current first quarter, we continue to invest in our people, production capabilities, and brands to lay the foundation for future growth. I mentioned in our last call the increased investments the company is making in consumer insights. This is important to help fuel our growth and embed insights across the organization. We're investing in people and capabilities to unlock insights that address changing consumer needs and behaviors that will drive growth by enabling our marketing efforts to win the hearts and minds of new and existing consumers. We have witnessed extraordinary shifts in consumption these past 19 months. The investments we are making will establish a stronger foundation to identify opportunities faster, develop more relevant innovative products, build stronger brands, and expand consumption, particularly with Gen Z and millennial generations. In addition, we continue 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. And we believe there are additional opportunities to connect these brands to consumers' desires for more functional snacking, baking, and cooking products. Turning to channel distribution updates, net sales in the consumer channel increased $13 million, or 7.8% in the first quarter of fiscal 22. The increase was driven by increased sales of private brand trail and snack mixes, which was partially offset by a decline in branded product sales during the current quarter. Frank mentioned that the company discontinued its in-shell peanut product line, which will negatively impact our sales volume for Fisher snacks. However, the sales and marketing teams have done a great job building new distribution with our Fisher oven roast product portfolio to offset some of this volume decline. A similar story goes with our Fisher Recipe sales. While we have faced challenges from private brand and branded competition, our sales and marketing teams have made progress building new distribution, and we are planning for a strong holiday season in November and December. Net sales in the commercial ingredient channel increased 23.4% in dollars for the first quarter of fiscal 22. The food service and industrial teams have done an extraordinary job throughout the past 19 months positioning JBSS for a strong recovery once restaurants started opening and expanding capacity and people started traveling and going out again. We are in a strong position now for the growth in this channel as a result of their efforts. Net dollar sales in the contract packaging distribution channel decreased 11.1% in dollars. The decline in sales volume was primarily attributed to lower promotional activity, as Frank mentioned, at a key customer. We anticipated stronger performance in this channel, but have not seen an increase in convenience store volume yet, which makes up a significant portion of a major customer's sales in this channel. Turning to category updates, I'll share some of the brand results and category results 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 September 19th, 2021. When I refer to Q1, I'm referring to 13 weeks of the quarter ending September 19th, 2021. 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 speak of pricing, we are referring to the average price per pound. Breakouts of the recipe, snack, and produce categories are based on our custom definitions developed in conjunction with IRI. The term velocity refers to the sales per point of distribution. The total nut category was up 1% in both sales dollars and pound volume in Q1. This is consistent with the growth rate we saw last year. We saw strong growth in the produce and trail mix categories, offsetting declines in the recipe and snack nut categories. Overall, prices across the category were flat in Q1 versus the price prior year with some nuts increasing while others declined. Now I will cover each category in more depth, starting with recipe nuts. The recipe nut category declined 11% in dollars and 7% in pound sales. This is a slight improvement versus the decline that we saw in Q4 of 2021. The declines were consistent across all major recipe nut types. The category had seen significant growth throughout the pandemic, driven by more consumers cooking and baking at home. The latest data suggests that while some consumers have reduced at-home consumption, levels are still above 2019. Our Fisher brand continues to be challenged by decline in distribution with two key retailers in Q1. Our Fisher recipe nuts decreased 70% in dollars and 13% in pounds for the first quarter versus last year. We did see gains in velocity across food and mass channels, but this was not enough to offset distribution declines. As a result, Fisher dollar sales decreased one point versus last year. This 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. We are actively working to return Fisher recipe to growth and have invested in consumer research, innovation, and marketing, which you will see hit in the market this holiday season. Now let's turn to the snack category. In Q1, the snack category declined 2% in dollars and 1% in pound sales. This is consistent with the decline that we saw in Q4 of last year. The snack category has held on to most category gains that it experienced during the pandemic. We are seeing switching among nut types with declines in almonds and peanuts being mostly offset with growth in cashews and pistachios. Fisher's snack continued to grow dollar share in Q1 and was up 7% in dollar sales, driven by strong distribution and velocity growth. And as I mentioned, we are seeing strong results in the oven roasted never fried line across our large sizes as consumers continue to look for better for you snacks at a better value. And we are focused on continuing to build distribution and drive velocities against this line. The trail and snack mix category grew dollar sales and pounds in Q1 7% and 6% respectively. This segment continues to grow as it laps out of modest performance during the pandemic. Our southern-style nut brands declined 2% in dollars and was flat on pounds due to slower velocities versus last year in mass and club. In grocery, southern-style nuts grew 69% behind increases in distribution and velocity. Our last category, produce nuts, increased 8% in dollar sales and 5% in pound volume. This was primarily driven by pistachios, which were up 43%, almost $30 million versus last year. Our produce nut brand, Orchard Valley Harvest, was down 11% in dollar sales and 6% in pound sales, driven by lost distribution and aggressive competitive action. We are actively working on plans to turn this brand around, inclusive of new product, pack, and communication news coming towards the end of the fiscal year. In closing, success requires smart strategies and the right business model for sustainable growth. It also requires a talented and committed team of associates. We have all those elements of success here, and the record results over the past four quarters demonstrate the success of our business. No doubt, we will face strong headwinds in the coming quarters with commodity, labor, and freight cost increases and supply chain challenges. And there's still some uncertainty regarding COVID-19 and future local, state, and federal restrictions aimed to mitigate and control the pandemic. In spite of these challenges, I'm 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. Our teams are working on exciting new products that will be launched in the back half of fiscal 22, and we are building a robust pipeline of innovation for fiscal 23 and beyond. JBSS will continue to maintain a competitive advantage, to be differentiated, and to be an innovative and valuable partner to our customers and consumers. 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'll now turn the call back over to Frank.

Thanks, Jeffrey. We will now open the call to questions. Charlotte, please queue up the first question.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Chris McGuinness from Sidorian Company. Your line is now open.

Good morning. Thanks for taking my questions and a nice quarter. I just wonder if maybe we could start off with just, you know, obviously, a lot of talk around just the inflationary environment, but also some of the other kind of external factors that are that should pressure sounds like profitability in the near term, you just walk through some of the magnitude that you expect that it's been a while since you've been in a inflationary environment. And, you know, if you just walk us through how that could impact the model. Thanks.

Well, I'll start it off, Chris. Thanks for the question. Obviously, we are in a challenging situation with inflationary pricing, not just commodities this time, but it's labor, it's freight. And so we are having those difficult conversations with customers. We've actually started that a few weeks ago. Not easy, but at the same time, it's the right thing for the business. And we need to make sure that we keep these customers in supply, both being able to procure product for them, package it, and ship it. And so difficult conversations, but they're necessary. You know, we are getting back to actually normalized levels with some commodities, so it's not like we are increasing commodity costs way beyond where they've ever been. So retail prices should still be very competitive with what consumers have paid for in the past.

Okay. And is there any issue around getting supply at this point?

So, Chris, this is Mike Valentine. Hey, Mike. Hey, Mike. So we see shortages periodically on various different things. For example, in packaging, we're seeing lead times that can be as much as three months, where they used to be weeks. Occasionally, we'll see some materials that'll get very tight. Like, for example, recently it's been litting stock for our clear cans. We talked about pallets before. And then, of course, anything imported, you know, can be a little bit dicey, you know, just due to the situation on West Coast ports. Sure.

And I would add, Chris, that because of our procurement expertise and our visibility at the supply chain, we anticipated some challenges. We watched how they've extended lead times on deliveries, and our procurement team has done an extraordinary job making sure that we have been kept in stock as best as possible.

Great. I guess I could just turn it on the demand side. Within consumer, just around that snack mix, can you just talk about what's happening? You've obviously done a great job around that kind of end that product line. Is this a new program, an expansion with the existing customer? Because it sounded like it was a pretty robust pickup in the quarter.

Yes, you're referring to the Fisher Oven Roast Never Fried program?

I thought it was a branded product or expansion with a customer around the snack nuts or the trail mix.

Yeah, so we've seen, obviously, snack and trail mixes. There's competitive pricing for mixes like that, so we've seen consumers shift to snack mixes. But it's been a growing category for a long time. We've really expanded our manufacturing of some private brand items with key customers in that trail mix category and snack mix category. So part of it is new products that we're supplying that we didn't in previous years. Part of it is growth in that segment within the category.

Hey, Chris, this is Frank. A big factor in that is also we began to ship some new product to our private brand customers in Q2 of last year, so the Q1 over Q1 impact is much more significant.

Okay. Oh, okay. The comp plays into it. Okay. All right. That makes sense. It sounds like Fisher Recipe, you have some holiday, you're coming up on the holiday. Can you just talk about it? It sounds like you may approach it differently. Is that correct in terms of how you're looking at the holiday season for Fisher Recipe? Okay.

You know, Chris, our sales and marketing teams have done a great job building more relevant messaging for the holiday season. We've gained some new distribution. We focus on velocity. The holiday season is the most important time period for recipe nuts, and our team has just positioned us really well, both from consumer messaging, product placement, pricing. We're very competitive in the market from a pricing perspective, and so we just anticipate a really strong holiday season this year.

Great. And anything you can share from the, you know, I know it's still early, but just on the consumer sites and some of the talent addition, you know, what have they seen about the brands? What are they looking to introduce? Can you just talk a little bit? I know you can't share too much probably on the new product introductions, but, you know, whatever you could share would be helpful.

Yeah, we're hopeful at least for the new product. We've made some investments in new technology that we'll discuss probably in the back half of the fiscal year. You know, the Consumer Insights team has been focusing on, Just really understanding Gen Z and millennial generation consumers. They don't typically put nuts on their shopping list a lot of times when they go to the store. So we've got to understand that dynamic. They're looking at category trends and the changing consumer behavior as a result of the pandemic. e-commerce is critical, and just the social messaging and how you engage consumers has changed dramatically. So those investments we're making, Consumer Insights, are helping us to understand the consumer, where they're shopping, the type of messaging that impacts them, and we'll still have a much better level of intelligence to then look at our brands, position them better, message them better, and engage consumers in the future.

Okay, great. And any update on the PETA chips or some of the new product introductions and how they're contributing at this point?

Sure. So the chickpea chips in Orchard Valley Harvest, we launch in e-commerce. We've got distribution on Amazon. It's really a test market at this point, but our goal is to have a full launch in spring of 22. So Q3 of 22, we'll have a full launch of Orchard Valley Harvest chickpea chips.

Great.

It's a great product.

Great. Thanks. And then just looking at on the commercial side, is that the growth that we're seeing is as we reopen, the economy's reopened. Are you at, do you think you're taking market share? Is there ability to go out and take market share as the economy starts to open back up? And how far below are you from where I guess pre-COVID levels are you at this point?

Yeah, so we're still trying to get back to 2019 levels. Obviously, not all restaurants have full capacity. Not all restaurants are open. There's been some impact on restaurant closures as a result of the pandemic the past 19 months. So it will take time, I believe, for the entire food service channel to get back and very robust. What I will tell you is our food service team has worked so hard to build distribution. We've got better distribution today than we did in 2019 pre-pandemic. We have better products in the marketplace. We have better relationships with some of the key food service players in the market. And so I'm very confident our team is well positioned to take advantage and optimize this return to going out to dinners and lunches and breakfast and the return of food service and also traveling as well.

Hey, Chris, this is Frank again. As far as your second part of that question, at Q1, we're approximately 87% pre-COVID levels on volume in food service.

Great.

And we expect to get back to pre-COVID levels sometime during the year, fiscal year.

Fiscal year throughout the remainder of this year. Okay. Great. And then just last question, you know, M&A, it sounded like, you know, the last time we talked on the, you know, last quarter, you were maybe looking into some M&A, but it just didn't make sense. Can you maybe just update us on the M&A market?

Thanks. Sure, Chris. It's a very competitive market out there. We are actively looking for potential targets. We have an M&A committee that's actively looking and analyzing any potential targets. Again, it's hard to predict when those may materialize, but we are looking pretty consistently.

Great. Well, thanks again for taking my questions. Good luck in Q2, and I'll jump back in the queue.

Thanks, Chris.

As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that's star and then the number 1 on your telephone keypad. There are no further questions at this time. Presenters, please continue.

Again, thank you for your interest in JBSS. Now, I'd like to remind everyone that we will be presenting at the Southwest Ideas Conference in Dallas on November 18, 2021. This concludes the call for our first quarter of fiscal 2022 operating results.

This concludes today's conference call. Thank you, everyone, for participating. You may now