John B. Sanfilippo & Son, Inc.

Welcome to the John B. Sanfilippo and Son Incorporated third quarter fiscal 2022 operating results conference call. My name is James and I will be your operator for today's call. At this time, all participants are in innocent only mode. Later, we will conduct a question and answer session. During the Q&A session, if you have a question, please press 01 on your phone. And I'd like to turn the call over to CFO Frank Pellegrino. Mr. Pellegrino, you may begin.

Thank you, James. Good morning, everyone, and welcome to our 2022 third 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. 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 third quarter of fiscal 2022 increased 5.1% to $218.6 million, compared to net sales of $207.9 million for the third quarter of fiscal 2021. The increase in net sales was attributable to an 8.1% increase in the weighted average sales price per pound and was offset in part by a 2.8% decrease in sales value, which is defined as pounds sold to customers. The increase in the weighted average selling price was attributable to price increases implemented during the third quarter in response to higher commodity acquisition costs for all major tree nuts and peanuts, and increases in freight, labor, and other input costs. Sales volume decreased 5.8% in the consumer distribution channel, primarily driven by a 57.1% decrease in peanut butter sales volume. due to the plant downtime associated with upgrading our peanut butter line that occurred and was completed in the third quarter, and the discontinuance of our in-shall peanut product line, which occurred in the fourth quarter of fiscal 2021. These two factors accounted for substantially all the sales volume decline in the consumer distribution channel. Sales volume in the consumer distribution channel accounted for 75.3% of total sales volume in the current third quarter. Looking at sales volume for our branded products and consumer channel, sales volume for fish and recipe nuts fell 24.5%, primarily due to the later Easter holiday this year, higher at-home cooking and baking nut consumption in our prior fiscal year due to COVID-19 restrictions, and reduced purchases due to the impact of higher selling prices at retail. The 12.5% increase in sales volume for Archer Value Harvest was attributable to increased promotional activity at a grocery customer and increased distribution at a major customer in the non-food sector as this retailer continues to recover from COVID-19 restrictions. Fisher's Snack Nut sales volume decreased 23.5% primarily due to the discontinuance of our in-shop peanut product line which was partially offset by distribution gains of our oven-roasted, never-fried product line at existing customers. Excluding the impact of this discontinued product line, Fisher's Snack Nuts sales volume increased 14.4% due to increased distribution and velocity of the oven-roasted, never-fried product line. Sales volume for Southern Style Nuts decreased 2% due to reduced purchases as a result of higher selling prices at a mass merchandising retail Sales volume increased 11.2% in the commercial ingredients channel, mainly due to a 19.9% increase in sales volume to food service customers, attributable to improved conditions in the restaurant industry from fewer COVID-19 restrictions. However, this increase was offset in part by the impact of Omicron surge that occurred during the beginning of the current third quarter. Sales volume increased 3.1% in the contract packaging distribution channel, due to business with a new customer that started to ship in the third quarter. Net sales for the first three quarters of the current year increased to $698.1 million from $651.7 million for the first three quarters of fiscal 2021. The increase in net sales was attributable primarily to a 5.6% increase in sales value and a 1.5% increase in the weighted average selling price per pound. mainly from an increase in commodity acquisition costs for peanuts and all major tree nuts except walnuts. For the first three quarters of fiscal 2022, sales volume increased in all three of our distribution channels. Sales volume increased 2.8% in the consumer distribution channel, primarily from an 8.6% increase in private brand sales volume, driven by increases for trail and snack mixes, and mixed nuts mainly from new distribution at existing customers. This increase was partially offset by decreases in sales volume for private brand peanuts and cashews, and a sales volume decline for peanut butter and our Fisher snack nuts for the same reasons I cited in the quarterly comparison. Sales volume increased 24.8% in the commercial ingredients distribution channel, mainly as a result of a 36.6% increase in sales volume in our food service business that occurred for the same reasons I discussed in the quarterly comparison. Sales volume increased 3.6% in the contract packaging distribution channel for the same reason referenced in the quarterly comparison, as well as increased distribution and new product offerings by a major customer in this channel. Third quarter gross profit decreased $6.6 million and gross profit margin as a percentage of net sales decreased to 18% for a third quarter fiscal 2022 from 22.1% for a third quarter fiscal 2021. The decreases in gross profit margin and gross profit was mainly attributable to higher commodity acquisition costs for pecans, almonds, and walnuts, and other inflationary cost increases including labor, freight, and manufacturing supplies. Gross profit for the first three quarters of the current year increased to $5.3 million, while gross profit margin as a percentage of net sales decreased to 20.5% from 21.2% for the same period last year. The increase in gross profit was due to increased sales volume, which was partially offset by the same reasons I cited in the quarterly comparison. The slight decrease in gross profit margin was attributable to higher commodity acquisition costs for pecans, cashews, and almonds, which was mainly offset by increased sales value. Total operating expenses for the current third quarter decreased $3 million in the quarterly comparison, and total operating expenses as a percentage of net sales decreased to 10.1% from 12% compared to last year's third quarter. The decrease in total operating expenses was mainly due to a decrease in incentive compensation, which was partially offset by increases in freight, compensation, advertising, consumer insight research and related consulting, and sales broker commission expenses. The increase in freight expense resulted from higher freight rates compared to the prior year. Total operating expenses for the current year to date period increased to 11.5% of net sales, from 10.8% for the first three quarters of fiscal 2021, and total operating expenses increased $10 million. The increase in total operating expenses was due to increases in advertising, consumer insights, research, and related consulting, freight, compensation, and sales broker commission expenses, which was partially offset by a decrease in incentive compensation. The increase in freight expense resulted mainly from higher freight rates and an increase in sales value made on a delivered basis. Interest expense for the current third quarter increased to $500,000 from $300,000 for the third quarter of fiscal 2021. Interest expense for the first three quarters of the current year increased to $1.3 million from $1.1 million for the first three quarters of fiscal 2021. The increase in interest expense in both comparisons primarily resulted from higher average short-term debt levels driven mainly by increased commodity acquisition costs. Net income was $11.9 million or $1.02 per share diluted for the third quarter of fiscal 2022 compared to $14.7 million or $1.27 per share diluted for the third quarter of fiscal 2021. Net income for the first three quarters of fiscal 2022 was $44.4 million or $3.83 per share diluted compared to net income of $47.4 million or $4.10 per share diluted for the first three quarters of fiscal 2021. Now taking a look at inventory. Total value of inventories on hand at the end of the current third quarter increased 59.4 million or 39.1% compared to total inventory value at the end of the third quarter of fiscal 2021. The increase in value of total inventories was primarily due to higher commodity acquisition costs for raw nut and dried fruit input stocks. Higher on-hand quantities of almonds and finished goods also contributed to the increase in total inventories. The weighted average cost per pound of raw nut and dried fruit input stock on hand at the end of the current quarter increased 52.1% due to higher commodity acquisition costs. I will now turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on our operating results for the third quarter of fiscal 2022.

Thank you, Frank. Good morning, everyone. Despite all the headwinds, this was our third-best Q3 in the company's history. As anticipated, the third quarter of fiscal 22 was challenging as we continue to navigate through this unprecedented operating environment. However, there were many successes, and we believe the actions taken during the quarter should improve future operating performance. Our pricing actions to help offset the inflationary input costs were fully implemented by the end of the third quarter. But we will not see a full quarter impact of these actions until the fourth quarter. The good news is our margins in period 10 have started to normalize again. The challenging news is we continue to observe a difficult cost environment, and the procurement and operations teams are monitoring additional inflationary cost pressures on pecans, fuel, aluminum-based living stock, and certain ingredients, including roasting oil. The company is working on mitigation steps to manage supply chain volatility. Lead times for several ingredients and packaging materials have doubled and even tripled for some products. Nevertheless, our teams across the organization have done an extraordinary job taking care of our customers and maintaining best-in-class quality and service levels. I'm so thankful and proud of our team's hard work and dedication. Frank mentioned the main reasons for the decline in volume in the quarter. Discontinuation of our in-shell peanut business, which occurred in the fourth quarter of fiscal 21. Easter holiday falling two weeks later this year on the calendar, which pushed some volume into Q4. And the volume declines in peanut butter due to the planned downtime of our production line in Georgia. It's important to note that on the operations side, the upgrade of our peanut butter line in our Georgia manufacturing facility is expected to improve our peanut butter quality and manufacturing capabilities and efficiencies. The investments made to this production line will allow us to pursue new customers and continue to grow our peanut butter business. The company is also investing heavily in automation and expanding capacity for other parts of our business. The challenging labor market across the country has required us to make critical CapEx decisions to optimize our production lines and reduce headcount of temporary employees in our plants. We're also making important investments in R&D and insights to build an innovation pipeline for our brands and private brand customers. Turning to priorities by JVSS Business Channel. The consumer channel, as Frank mentioned, net sales increased 2.5% in dollars and decreased 5.8% in sales volume in the third quarter of fiscal 22. The decline in our in-shell peanut business volume was partially offset by distribution gains of our oven-roasted, never-fried product line and existing customers. The sales team continues to focus on expanding distribution of this important product line. Our Fisher recipe program had a very successful holiday season in the second quarter. The strong success of bringing new consumers to the baking and cooking aisle and growing consumption is a catalyst to gain new and expanded distribution with customers and to grow our volume and our market share. The commercial ingredient channel distribution increased 21.2% in dollars and 11.2% in volume in the third quarter. We are seeing significant growth in our food service business due to improved conditions in the restaurant industry as the country opens up from fewer pandemic restrictions. Q3 started out with negative impact from the Omicron surge in P7 and P8. However, volume has since come back very strong. The food service business managers have done an exceptional job gaining new distribution of our branded products in front of house non-commercial locations around the country. As summer approaches, our products will be available for consumers to purchase in more locations than in any other time in the company's history. And the teams are continuing to pursue other alternative retail opportunities. The contract packaging channel increased 11.5% in dollars and 3.1% in sales volume in the third quarter. The contract packaging team has done a nice job establishing new business with a new customer and volume just started shipping in the third quarter. It is our investment in manufacturing and our supply chain expertise that provides value during these challenging times to a variety of snack food companies. Turning to category updates, I will share some category and brand results with you 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 March 20th, 2022. When I refer to Q3, I'm referring to the 13 weeks of the quarter ending March 20th. 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, masks, Walmart, military, and other outlets. Unless otherwise specified, when we discuss pricing, we are referring to average price per pound. Breakouts of the recipe, snack, and produce nut segments are based on our customer definitions developed in conjunction with IRI. And the term velocity refers to the sales per point of distribution. The total nut and trail mix category was down 1% in dollars and 3% in pound volume in Q3. This is slightly down versus the rate we saw last quarter. We continue to see strong growth in the trail mix segment, slightly offsetting declines in the recipe and snack nut segments. This produce segment was slightly up on dollars, but flat on volume. And overall, prices across categories were up in Q3 versus the prior year, 2.9%, with almost all nut types increasing. Now I will cover each segment in more depth, starting with recipe nuts. The recipe nuts segment declined 2% in dollar sales and 6% in pound sales. This is similar to the decline that we saw in Q2. As a reminder, the recipe nuts segment has seen significant growth throughout the pandemic, driven by more consumers cooking and baking at home. Additionally, Easter was earlier this year versus last year, April 4th of 21 versus April 17th of 22, causing timing shifts of promotions. Our Fisher brand performed on par with the recipe segment in Q3, declining 3% in dollars and 6% in pounds. Fisher's performance resulted in a dollar share decline of two-tenths of a point in Q3, although Fisher remains the branded leader. Fisher's performance was driven by slowing velocity in the grocery and mass channels, driven by higher pricing and lapping at home cooking and baking at home and a later Easter. Now let me turn to the snack nut segment. In Q3, the snack nut segment declined 4% in dollar sales and 7% in pound sales. This is greater than the decline we saw in Q2. All nut types except macadamias are declining in both dollars and pounds. Prices across all nut types except macadamias are up versus the prior year. Fisher Snack did not repeat a club rotation this year and declined 6% in dollars and 18% in pound sales at the total outlet level. However, without the club item, Fisher Snack continues to grow faster than the category and gross share. The oven roasted never fried line continued to grow 24% in dollars and pounds, driven by strong distribution growth. We are seeing strong results in the oven roasted never fried line across our large sizes as consumers continue to look for better-produced snacks at a good value. We are focused on continuing to build distribution and drive velocities against this line. The trail and snack mix segment grew dollars and pounds in Q3. up 8% and 4% respectively. This segment continues to accelerate growth as it lapsed out of modest performance during the pandemic. Pricing was up 3% in this segment. Our Southern Style Nuts brand declined 2% in dollars and 5% in pound sales due to velocity slowdown in our mass channel, given increasing competition from private brands. Private brands continue to drive the trail mix category growth. Our last segment, Produce Nuts, increased 2% in dollar sales and was flat in pound volume sales in Q3. This is slightly lower growth than we saw in Q2. The growth is still being driven by pistachios, which were up 24% in dollars versus last year. Our Produce Nut brand, Orchard Valley Harvest, was flat in dollar sales and up 10% in pound sales driven by strong performance in the grocery channel as we continue to activate new merchandising and trade strategies. In closing, I made a comment last year at this time about how extraordinary it was to see the world change since our third quarter of 2020. And yet here we are in 2022 with events changing our world in a significant way again. As we look ahead, there will be numerous challenges we will need to overcome, including the ongoing and potential new supply chain issues and inflationary cost pressures due to the conflict in Ukraine and the potential impact on consumption from higher retail selling prices. However, I am very confident in the strategic investments we have made in our people, our customers, and our capabilities to overcome these challenges and drive future earnings growth. Our company and our team of dedicated leaders and frontline associates throughout the organization remain steadfast and strong. We are adapting quickly to overcome supply chain disruptions and cost volatility. And our insights, innovation, R&D, marketing, and sales teams are laser focused on consumer behavior and consumption trends to develop new products and pursue new brand opportunities and pursue elevated demand with our private brand retail partners. We have the right strategies, talent, and 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 Frank.

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

Thank you. As we say, we can begin the Q&A session. If you have a question, please press 01 on your phone. If you wish to be removed from the question queue, you may press 02. And if you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. And once again, if you have a question, press 01 on your phone. Our first question comes from Chris McGinnis of Siddeley and Company.

Good morning. Thanks for taking my questions and all the commentary. I guess if we could just start on the inflationary environment and maybe even supply chain, just given the commentary around the Russia-Ukraine conflict, can you just talk about the issues that may bring about in terms of the inflationary environment and just supply? Is there anything specifically in that region that you work, you know, that you need in terms could pose a challenge?

Chris, I'll answer that. This is Jasper. I think the most pressing thing that we're seeing from Ukraine is regarding sunflower oil. Ukraine grows something like 60% of the world's sunflower oil. So as you can imagine, that's put pressure on a lot of other oils, including ourselves, because we do have some product lines that use sunflower oil. So we're currently reviewing that and trying to find substitute oils to replace that with sunflower oil. So that work is ongoing. The other inflationary items that we see, certainly all supplies, CapEx, equipment, I mean everything has gone at least twice to 3x on lead time and costs have gone up significantly on a lot of that. So try to balance our inventory levels of that and making sure that we have what we need to continue to service our customers It's been an ongoing challenge for, quite honestly, for two years, and I think certain things like Jeff talked about with respect to aluminum. We do use aluminum in our packaging as well as in other areas. So that is a challenge, and our procurement team is working pretty hard to find alternates for that. Then, of course, you have the inflationary aspects of wages and finding employees to come in. Jeff talked about a lot of automation that we've added into the manufacturing to help offset that and then quite honestly in a lot of cases needed to invest in automation because we could not find people to fill those jobs and so we'll continue to look at that throughout 23. We made quite a bit of progress in 22 automating where we could and getting equipment in but again equipment lead times in some cases have gone out to about a year and so Fortunately, I think we're pretty well set as we look towards our busy season for Q2. The one great thing about our vertical integration is we do control a lot of our own supply chain, and so all the major nuts that we handle are within our control. Freight has also been a challenge, particularly through Q1 and Q2. We finally had enough time to take a breath and do some RFPs, particularly as it relates to our rail. We do send a lot of rail from California to Chicago. We executed that RFP in Q3, and we're now onboarding those carriers, and you'll see some of that effect in Q4 and forward. But I'm sure every challenge that every other manufacturing is having, right, bringing labor in, dealing with supply chain issues, particularly the long lead time and the higher costs, forecasting accuracy has probably been more important now than ever. and we've been working diligently with our customers to make sure that those are as accurate as possible so we have enough material and supplies on hand to be able to service them at the levels of which we like to service, which is 99% or better.

Great. I appreciate all the insight there. Just thinking about the later Easter, will that positively impact Q4? I know there's one more week, so Can you just talk about the impact on that for, I know you don't give guidance, but just on what you expect for Q4?

Yes, that should have a positive impact on Q4. The year-over-year comparison should be impacted by Easter, Fall, and Q4.

Okay. And I guess just thinking about consumer, there was a lot of kind of moving parts within that. you know, the new distribution wins. Are you continuing to see, you know, new gains as, you know, you invest more around the marketing side and the, you know, the insights?

Yeah. Hey, Chris, this is Jeffrey. So definitely the team sales marketing operations, R&D, all of them are doing a great job building a current pipeline for customers and The dynamics in the industry today are, from a consumption perspective, you're starting to see price increases take effect that were initiated in Q3. So you're seeing higher retail prices. We're seeing a little bit of a shift from higher-priced nuts, the mixed nuts, cashews, to lower-priced trail mixes and peanuts. So we're monitoring that shift. But the opportunities are substantial. With the company's scale and our access to supply chain, and just as Jasper mentioned, just managing it better than a lot of other companies, we just feel this actually will create new opportunities for us with some other supply chain challenges. And just, you know, with our scale, we've got opportunities to continue to grow. The marketing team has invested a lot in repositioning our squirrel brand and our orchard line harvest brand. A lot of those efforts are taking place now, but won't have an impact until later Q4 and actually into fiscal 23. So we won't see a lot of that impact, but the investments are being made now for those brands for future growth. We're also seeing a shift from a lot of branded business to private brands. And so, of course, with our big private brand presence, we are working with our key retail partners to make sure that we can meet that new demand in private brands as consumers look to them.

I appreciate that. One of the things I think I remember was that the consumer changed to a larger package size during COVID. Are you seeing that shift back down to the smaller sizes, and how does that change? And then, I guess, thinking about the inflationary price environment and the customer switching there, can you just talk about those two components, if you're seeing that?

You're still seeing strong, not so much growth, but sustaining demand in the larger sizes because it's one of the best price points at retail. So there's still a great value in some of those bigger pack styles. But I would imagine if inflationary pressures continues and there's further price increases, you will see consumers that can hit a $10 price point look for a smaller item in the category. That's just... common sense will lead it that way. But this time we haven't seen that yet.

Yeah, and Chris, I'd like to add that as the convenience store business and food service business opens up and people are going back to work, you know, a lot of our on-the-go program and a lot of our on-the-go items do service those. So we have seen a shift from our average ounce per pound produced is going back down. So we're packing more units with similar pounds. The good thing was we were really well set up prior to COVID hitting to be able to efficiently handle that. And so we're just kind of seeing a little bit more of a return to normal pre-pandemic with respect to that ratio of on-the-go versus large format bags.

I get that. And then maybe just on the commercial business, obviously, you know, things are improving there. Sustained growth from here and how do you think about pre-COVID to where you're at now and then include market share gains in that? You know, what's the run rate of that business, you know, you think longer term?

So I would just say from a distribution standpoint, you know, all throughout COVID, the teams have been really focused on building distribution, even though places weren't open. We negotiated contracts, agreements to build that distribution. So once they did reopen and traffic increased, we had our products available in those outlets. So I will say we have more distribution points today than we did pre-COVID or ever in the company's history. And now that places are reopening and restrictions are limited and summer is approaching, we've got more distribution. So we should expect to see a lot further growth in the food service channel. It's not measured. It's not like a market share like you would see in consumer channel. They don't have that specific of metrics from a distribution standpoint.

Okay, great. I appreciate that. That's all I have for now. I'll jump back in the queue. Thank you.

Thanks, Chris. And once again, if you have a question, please press 01. And we have no more questions.

Again, thank you for your interest in JBSS. This concludes the call for our third quarter of fiscal 2022 operating results.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.