John B. Sanfilippo & Son, Inc.

Good day, and thank you for standing by. Welcome to the John B. Sanfilippo & Son Incorporated Fourth Quarter and Fiscal 2022 Year-End 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 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Frank Pellegrino, Chief Financial Officer, please go ahead.

Thank you. Good morning, everyone, and welcome to our 2022 fourth quarter and fiscal year earnings conference call. Thank you for joining us today. On the call with me today are Jeffrey Santolipo, our CEO, Jasper Santolipo, Jr., our COO, and Mike Valentine, our group president. We may make some forward-looking statements today. These statements are based on 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 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. I will start the call by covering financial highlights for the 2022 fourth quarter and fiscal year. Both the current fourth quarter and fiscal year contain an additional week compared to same periods in fiscal 2021. The current four-quarter net sales increased 24.7% to $257.7 million compared to net sales of $206.7 million for the four-quarter fiscal of 2021. The increase in net sales was due to a 12.5% increase in the weighted average selling price per pound and a 10.9% increase in sales volume, which we define as pounds sold to customers. The increase in weighted average selling price per pound resulted from an increase in commodity acquisition costs for peanuts, all major tree nuts, dried fruits, and other input costs due to inflationary conditions. Excluding the estimated impact of the extra week in the current four-quarter, net sales increased approximately 16%, and sales volume increased approximately 3%. Sales volume increased in all three distribution channels in the current four-quarter. sales volume in the consumer distribution channel increased 7.5%. The volume increase in the consumer channel was primarily driven by a 9.9% increase in private brand sales volume from increases in trail and snack mixes resulting from new distribution at an existing customer and increased consumer demand for lower-priced products such as peanuts in response to the current economic environment. These gains were partially offset by lost private brand distribution at a grocery customer and sales volume decreased in fish or snack nuts due to the discontinuance of our in-shop unit product line. Sales volume in the consumer distribution channel accounted for 71% of total sales volume in the current fourth quarter. Looking at sales volume for our branded products in the consumer channel, fish or recipe nut volume increased 17.3% in large part due to the later Easter holiday this year, an increase in e-commerce volume due to improved online content and enhanced promotional support. The 42.9% increase in sales volume for our Orchard Valley Harvest brand primarily came from regained distribution at a customer in the Club Channel and increased distribution at a major customer in the non-food sector who continues to recover from COVID-19 restrictions. Increased promotional activity at this customer during the current quarter also contributed to the sales volume increase for Orchard Value Harvest. Fisher's Snack Nut Volume decreased 28%, primarily due to the discontinuance of our in-shop peanut product line, which was partially offset by distribution gains at existing customers, timing of promotional and merchandising activities, and an increase in e-commerce volume due to improved online content and enhanced promotional support. Excluding the impact of the discontinued product line, Fisher's Snack Nuts sales volume increased 19.2%. Sales volume for Southern Style Nuts increased 11.3%, predominantly due to increased promotional activity at a current club, store, or customer. Sales volume increased 20.5% in the commercial ingredients distribution channel, primarily due to a 30.4% increase in sales volume to food service customers related to the continued recovery in the restaurant industry from the impacts of COVID-19 restrictions and new distributions at existing customers. Sales volume increased 19.4% in the contract packaging distribution channel due to increased peanut distribution by a major customer in this channel and business with a new customer. Fiscal 2022 net sales increased 11.3% to $955.9 million compared to fiscal 2021 net sales of $858.5 million. The increase in net sales is primarily attributable to a 6.9% increase in sales volume and a 4.2% increase in the weighted average selling price per pound. The increase in the weighted average selling price per pound resulted from an increase in commodity acquisition costs for peanuts, all major tree nuts except walnuts, dried fruits, and other input costs due to inflationary conditions. Excluding the estimated impact of the extra week in the current fourth quarter, net sales increased approximately 9% and sales volume increased approximately 5%. For fiscal 2022, sales volume increased in all three distribution channels. Sales volume increased 3.9% in the consumer distribution channel. The volume increase came primarily from an 8.9% increase in private brand sales volume, driven by increases for trail and snack mixes and mixed nuts resulting from new distribution and existing customers. This increase was partially offset by the discontinuance of our in-shop peanut product line which occurred in the fourth quarter of fiscal 2021, and a decrease in peanut butter sales volume due to the planned downtime associated with the upgrade of our peanut butter line that occurred and was completed in the third quarter of the 2022 fiscal year. Sales volume increased 23.5% in the commercial ingredients distribution channel due to a 34.6% increase in sales volume in our food service business, which occurred for the same reasons discussed in the quarterly comparisons. Sales volume increased 7.7% in the contract packaging channel for the same reasons I cited in the quarterly comparison and also due to increased distribution and new product offerings by a major customer in this channel. Gross profit for the fourth quarter of the current year increased $9.4 million, where our gross profit margin decreased to 21.8% of net sales for the current fourth quarter compared to 22.6% in the fourth quarter of fiscal 2021. The decrease in gross profit margin was mainly attributable to higher acquisition costs for peanuts, all major tree nuts, dried fruit, and other input costs, which was partially offset by the impact of increased sales volume. The increase in gross profit was mainly due to increased sales volume and manufacturing efficiencies that resulted from increased sales volume. Gross profit for the current fiscal year increased $14.6 million, where our gross profit margin decreased 60 basis points to 20.9% of net sales. The decrease in gross profit margin was attributable to higher acquisition costs for pecan, cashews, and almonds, and other inflationary cost increases for labor, freight, and manufacturing supplies. These cost increases were mainly offset by manufacturing efficiencies that resulted from increased sales volumes. The increase in gross profit was due to the same reasons I cited in the quarterly comparison. Total operating expenses in the quarterly comparison increased $2.4 million, while total operating expenses as a percentage of net sales decreased 190 basis points to 12.3%. The increase in total operating expenses in the quarterly comparison was mainly attributable to increases in base compensation, freight, and sales broker commission expenses. The increase in freight expense resulted largely from higher fuel prices compared to prior year and an increase in sales made on a delivered basis. The decrease in total operating expenses as percentage of net sales was due to higher net sales base. Total operating expenses for fiscal 2022 increased $12.4 million and total operating expenses as a percentage of net sales increased slightly to 11.7% from 11.6% in fiscal 2021. The increase in total output expenses mainly came from increases in freight expense, base compensation, advertising, consumer insight research and related consulting, and sales broker commission expenses, which was partially offset by a decrease in incentive compensation expense. The increase in freight expense resulted largely from higher freight rates higher fuel prices, and increase in sales made on a delivered basis. The increase in total operating expenses as percentage of net sales was due to the same reasons which were offset by a higher net sales base. Interest expense increased to $600,000 for the fourth quarter of fiscal 2022 from $300,000 in last year's fourth quarter. Interest expense for the current fiscal year increased to $1.9 million for $1.4 million for fiscal 2021. The increases in both comparisons came from higher average short-term debt levels driven mainly by increased commodity acquisition costs. Net income was $17.4 million or $1.50 per share diluted for the fourth quarter of fiscal 2022 compared to $12.3 million or $1.07 per share diluted. Net income for fiscal 2022 was $61.8 million or $5.33 per share diluted, compared to $59.7 million, or $5.17 per share diluted. Now taking a look at inventory. Total value of inventories on-hand at the end of the current fiscal year increased by $56.9 million, or 38.4%, compared to total value of inventories at the end of fiscal 2021. The increase in the value of total inventory was primarily due to higher commodity acquisition costs for substantially all raw nuts and dried fruit input stocks, and higher quantities of finished goods on hand at year end. This increase was partially offset by lower quantities of pecans and walnuts on hand at year end. As a result of higher commodity acquisition costs, the weighted average cost per pound of raw nuts and dried fruit input stocks on hand at the end of the current four quarter increase 39.7%. I will now turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on our performance for the current quarter and fiscal year.

Thank you, Frank. Good morning, everyone. I'm pleased to report a very successful end to fiscal 22 as Frank just talked about. This is the fourth consecutive year JVSS has delivered record net income and record earnings per share. driven by strong sales volume growth in all our distribution channels and brands. These results validate the actions taken during the last 12 months to respond to the numerous challenges we faced in an unprecedented year. In addition to our strong financial performance, we shipped over 314 million pounds to customers in fiscal 22, which is another record for the company. This is a 20 million pound increase over last year's record of 294 million pounds in fiscal 21. And despite all the supply chain headwinds the company faced with labor, raw materials, freight and shipping, we still succeeded in maintaining best in class quality and service levels for our customers and consumers. These significant results demonstrate the underlying strength and resilience of our organization. These achievements are also a testament to the fortitude of our business model, the commitment of our people, and the mutual trust and depth of our customer and supplier relationships. I cannot be prouder of our management team and all of our 1300 team members for their hard work and dedication over the past year. Mainly as a result of our financial performance in the first three quarters of fiscal 22 and a record fourth quarter, Our Board of Directors raised our annual regular dividend by 7.1% to $0.75 per share and supplemented our annual dividend with a special dividend of $1.50 per share, both of which will be paid out to our stockholders of record as of August 12, 2022. Next week, it'll be paid on August 31, 2022. These most recent cash dividend payments, totaling $34.5 million during fiscal 22, mark the 11th consecutive year that we have paid dividends, and we are pleased to return cash to our stockholders. And we are paying bonuses to each and every one of our exceptional JBSS associates who worked together with us this past year. In addition to achieving record results and maintaining superior quality and service, We also invested in people, infrastructure, innovation, and new manufacturing capabilities. And we invested in our brands to reposition and reinvigorate them. Our investment in people and capabilities put JBSS in a competitive position to unlock insights that address changing consumer needs and behaviors. We share these insights with our key partners to help build their snack and recipe businesses. and drive growth by winning the hearts and minds of new and existing customers. Human resources are a critical component to our success, and we recognize that our business is stronger and more successful if supported by a diverse workforce. The company established goals last year to be more intentional in hiring, maintaining, and promoting diversity among our employees and fostering an inclusive environment where differences are celebrated. In fiscal 22, our Diversity, Equity, and Inclusion Council developed several employee resource groups, provided training and oversight, and enhanced our DEI initiatives. We begin the new fiscal year with great momentum and optimism about our business. However, we will again face various challenges in light of uncertain economic and operating conditions. We are starting to see volume contraction in response to higher retail and selling prices, which may impact our results in fiscal 23. However, we will continue to focus on and execute our long-term strategic plan, and we are confident we can overcome these challenges and deliver another year of strong operating results. Our long-range plan focuses on growing our non-branded business across key customers, transforming Fisher, Orchard Valley Harvest, and Squirrel brands into leading brands, while increasing distribution and diversifying our portfolio into high-growth snacking segments to accelerate growth with innovation and targeted opportunistic acquisitions. We plan to execute our long-range plan with those three clear goals, provide non-branded customer value-added solutions, based on our extensive industry and consumer expertise. We will grow our brand's business by reaching new consumers and expanding distribution across current and alternative channels. And we will focus on product expansion and packaging innovation, diversifying our product offerings and focusing on new ways for consumers to buy our products, including sales via e-commerce platforms. The management team looked at our mission, vision, and core values that have been in place for the past 12 years. We realized it was time to refresh key elements of our corporate mission as we execute our long-range plan to become a $2 billion business. We are expanding beyond nuts into other snacking platforms. Our Orchard Valley Harvest Chickpea Chips snacks is just one of many new products to come. And our new mission is simple. We are nuts about creating real food that brings joy, nourishes people, and protects the planet. Brings joy. JDSS strives for diversity, equity, and inclusion in everything we do. As we recruit, train, promote, and develop our employees, and interact with our shareholders, customers, and suppliers, all differences are celebrated. Nourishes people. JBSS is committed to building healthy minds and bodies for our communities, associates, and partners. We will work to end food insecurity, educate the next generation of farmers, and support the growth and betterment of our associates. And protect the planet. JBSS is committed to being stewards of the planet and its resources. We'll measure our efforts by offsetting, reducing, or minimizing our waste and carbon footprints throughout partnerships with our farmers, customers, communities, and our employees. This new mission will guide our company for years to come as we execute our long range plans. Now we'll shift the topic to consumption activity in the category with updates. I will share category and brand results with you 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 June 26, 2022. When I refer to Q4, I'm referring to 14 weeks of the quarter ending June 26, 2022. 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. When we discuss pricing, we are referring to average price per pound. Breakouts of the snack, recipe, and produce segments are based on our custom 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 4% in pound volume in Q4. This is slightly down versus the rate we saw last year. All categories declined in pound volume in Q4, while trail mix was the only category to grow in dollars. Overall, prices across the category were up in Q4 versus the prior year, up 2.5%, with almost all nut types increasing. Now I'll cover each segment in a little bit more depth, starting with recipe nuts. The recipe nut segment was flat in dollar sales and down 8% in pound sales. This is worse performance than we saw in Q3. As a reminder, the recipe segment had seen significant growth throughout the pandemic, driven by more consumers cooking and baking at home. Prices of recipe nuts were up 9% versus last year. Our Fisher brand declined 8% in dollars and 9% in pounds. Fisher's performance resulted in a dollar share decline of 1.2 points in Q4, although Fisher remains the branded leader. Fisher's performance was driven by slowing velocity in the grocery channel and distribution declines in mass. Velocity declines were driven by higher pricing and lapping at-home cooking and baking at home. Now let me turn to the snack segment. In Q4, the snack nut segment declined 3% in dollar sales and 5% in pound sales. This is slightly better than the decline we saw in Q3. Most nut types, except peanuts, macadamias and pecans increased in price. Peanuts, the lowest priced nut type, saw the greatest absolute pound and dollar gain in the category. Fisher snack continues to grow faster than the category and gross share, increasing 9% in dollars and 6% in pounds. The oven roast never fried line continued to grow 20% in dollars and pounds, driven by strong distribution growth. We are seeing strong results in the oven roast never fried line across our large size as consumers continue to look for better for you 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 was up 5% in dollars in Q4 and down 2% in pounds. Prices of trail mixes were up 6.5%. Our southern style nuts brand declined 5% in dollars and 10% in pounds due to velocity slowdown in our mass channel, given increasing competition from private brands. Private brands continue to drive the trail mix category growth, up 12% in dollars and 2% in pounds. Our last segment, produce nuts, declined 3% in dollar sales and 2% in pound volume sales in Q4. This is a change in trajectory versus the growth we saw in Q3. The decline was driven by higher priced nuts, including pistachios, pecans, and cashews. Our produce nut brand, Orchard Valley Harvest, declined 9% in dollar sales and 11% in pound sales, driven by distribution declines in mass, offsetting strong performance in the grocery channel. In closing, We face a number of challenges in the future, which include recent widespread inflation potential for economic downturn, supply chain challenges, and the lingering impacts of COVID. We have also experienced a tightening in the labor market for those employed at our production facilities, which has led to increased labor costs. Fiscal 22 was a strong year, especially considering the dramatic changes in the marketplace. This success is possible because we have talented people across our organization and we invest in them to do what matters most to drive results. We are executing our growth strategies, implementing continuous improvement projects throughout the company to optimize our cost structure, and we continue to invest in our people, brands, and processes to better serve our customers and consumers and create value for our shareholders. 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.

Thank you, Jeffrey. At this time, we will open the call for questions. Latonia, please give up our first question.

Certainly. As a reminder, to ask a question, you will need to press star 11 on your telephone. Again, to ask a question, you will need to press star 1-1 on your touchtone telephone. I would now like to turn the conference back to Frank Pellegrino.

Again, thank you all for your interest in JBSS. This concludes the call for our fourth quarter and fiscal year 2022 operating results.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.