John B. Sanfilippo & Son, Inc.

to our fiscal 2023 second quarter earnings conference call. Thank you for joining us. On the call with me today is Frank Pellegrino, our CFO, Jasper Sanfilippo, our COO. We 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 the filings to learn more about these risks and uncertainties that are inherent in our business. First, let me start off by performance. During the second quarter, net sales increased over $21 million, or 8.3%, compared to last year's second quarter. And we delivered strong bottom line growth as our diluted EPS increased 26.5% to $1.45 per share. Our strong quarterly performance resulted from numerous continuous improvement initiatives, a focus on reducing our operating costs, reduced discretionary spending, and selling price alignment efforts initiated last fiscal year as a response to inflationary cost increases. We continue to see strong demand for our products, especially from our private brand customers and our consumer channel. Our sales volume grew over 3% in the consumer channel, including the one-time loss of a private brand grocery customer compared to the overall decline in the snack-nut category. During the quarter, we continued to execute against our long-range plan. First, we paid a dollar-per-share special dividend, reinforcing our goal of creating long-term shareholder value by returning capital to our shareholders. Second, we completed the acquisition of the Just the Cheese brand, which is part of our strategic initiative to further diversify our product offerings. We are excited to add Just the Cheese to our branded portfolio as it complements our current brand offerings in the snack category. And the acquired production capabilities will help accelerate growth with our private brand and food service customers. Just the Cheese was invented in 1991 and relaunched in 2017. It is manufactured at Specialty Cheese in Reeseville, Wisconsin. Just the Cheese is one of the nation's leading baked cheese snacking brands and offers 100% real cheese snack bars and cheese crisps. The acquisition will provide us with a product that expands our portfolio into new snacking categories. And third, I am proud to announce that we began to ship our new product line of private brand nutrition bars. which our team members across the organization have worked tirelessly over the last several years to develop and bring to market. JBSS is excited to enter into the snack bar category. The snack bar category is around 8 billion in size across omni-channel and 6.6 billion in IRI multi-outlet and consistently grew for over a decade until the pandemic started. Post-COVID, it has bounced back with 10% growth in dollar sales over the last 52 weeks. One of the white spaces in the category is high-quality retailer brand offerings. We believe JBSS can become the partner of choice in the nutrition bar segment for retailer brands, given our strong track record of quality, service, and innovation. I will share additional details of our new product line in future earnings calls. The management team is focused on executing the company's long-term strategic plan for growth. We continue to invest the time and resources to look at macro trends, consumer insights, competitive activity, supply chain, retailer strategies, e-commerce, and innovation and manufacturing capabilities. There is more work to be done, but there is alignment on the direction and path for JBSS to become a $2 billion business in the future. A few highlights I will mention. We are executing our growth strategies by continuing to invest in our brands and customers. A great example is our Orchard Valley Harvest, or OV brand as we call it. Over the past year, our marketing, R&D, and consumer insights teams have transformed the Orchard Valley Harvest brand. It is now a purpose-led brand, which supports our larger social good goal to fight food insecurity. OVH has been completely relaunched with new graphics, new price pack architecture, new innovative products, and a new marketing campaign to make it more accessible, appetizing, and approachable. We've established a partnership with an organization called Conscious Alliance whose mission is to stop child hunger. And 1% of OVH sales goes towards tackling child hunger across America. Our sales teams are working hard and have been actively pursuing new distribution across the country. And I look forward to sharing more details in the future. We are executing our growth strategies by continuing to invest in new capabilities and food safety to provide more value to our private brand retail partners and food service partners. Both these business segments are important to the company's success. The significant expansion of our capabilities into the snack bar core category is a great example of JBSS executing its long range growth plan. In addition, as I mentioned, We have now entered the cheese snack category as well, which provides a new capability in a new snacking segment. And strategically, there are significant opportunities to use cheese snack ingredients in new mixes across our customer base and product portfolio. And one last comment. We are executing our growth strategies by investing in our people and our culture. We are being intentional in diversifying our workforce and creating a robust and inclusive leadership team across the organization. We are being intentional in improving our impact on the environment and being good stewards in the communities where we live and work. I am proud of the hard work and progress our ESG committee has made in establishing a framework for our goals and plans. We are living our mission to create real food that brings joy, nourishes people, and protects the planet. At this time, I'd like to turn the call over to Frank to cover our financial performance.

Thank you, Jeffrey. Starting with the income statement, net sales for second quarter of fiscal 2023 increased 8.3% to $274.3 million compared to net sales of $253.2 million for the second quarter of fiscal 2022. The increase in net sales was due to a 12.7% increase in the weighted average sales price per pound, partially offset by a 3.8% decrease in sales volume, which is defined as pounds sold to customers. Sales volume for peanuts and all major tree nuts, except pecans, declined in the current second quarter. The increase in weighted average selling price partially resulted from higher commodity acquisition costs for pecans, cashews, peanuts, and dried fruit. Sales volume decreased 2% in the consumer distribution channel, primarily due to a 5% decrease in sales volume for our branded products, which include Fisher Recipe Nuts, Fisher Snack Nuts, Orchard Valley Harvest, and Southern Style Nuts. The sales volume decrease for our branded products was mainly attributable to a 24.1% decrease in the sales volume of Fisher Snack Nuts due to competitive pricing pressures at two grocery store retailers in lost distribution at another grocery store retailer. The overall sales volume decrease in the consumer distribution channel was partially offset by a 0.7% increase in sales volume for private brand sales. New private brand peanut butter business at a mass merchandising retailer and increased seasonal distribution at another mass merchandiser retailer were substantially offset by lost distribution with a private brand grocery customer that occurred in the fourth quarter of fiscal 2022. Sales volume decreased 7.7% in the commercial ingredients channel due to a 38.9% decrease in sales volume of bulk products to other food manufacturers as a result of reduced consumption from softened consumer spending. This decrease was partially offset by a 2.9% increase in sales volume to food service customers due to new distribution at existing customers. Sales volume decreased 11.4% in the contract packaging distribution channel, primarily due to earlier timing of holiday shipments at a major customer in this channel. Second quarter gross profit margin at a percentage of net sales remained consistent at 20.6% compared to the second quarter of fiscal 2022. The consistency in gross profit margin was due to lower acquisition costs for almonds and walnuts, which were offset by inflationary cost increases, including labor and manufacturing supplies, increased depreciation expense, and a decrease in sales value. Gross profit increased $4.3 million, or 8.2%, mainly due to higher net sales base. Total operating expenses for the current second quarter decreased $1.9 million in the quarterly comparison, due to decreases in advertising spend, incentive compensation, loss on asset disposals, and freight expense, which were partially offset by an increase in base and equity compensation. Total operating expenses for the current second quarter decreased 11.7% of net sales from 13.4% for last year's second quarter due to the reasons noted above and a higher net sales base. Interest expense for the current second quarter increased to $600,000 from $400,000 for the second quarter of fiscal 2022 primarily due to higher weighted average interest rates. Net income for the second quarter of fiscal 2023 was $16.9 million or $1.45 per diluted share compared to $13.2 million or $1.14 per diluted share for the second quarter of fiscal 2022. Now taking a look at inventory. The total value of inventories on hand at the end of this current second quarter decreased 5.7 million or 3.2% compared to total values of inventory on hand at the end of the second quarter of fiscal 2022. The decrease in the value of inventories was primarily due to lower commodity acquisition costs for all major tree nuts and lower quantities of finished goods and pecans. partially offset by higher quantities of cashews, raw materials, work in process, and farmer stock peanuts. The weighted average cost per pound of raw nut and dried fruit input stock on hand at the end of the current quarter decreased 24.2% compared to weighted average cost per pound at the end of the second quarter of fiscal 2022 and was mainly due to lower acquisition costs for all major tree nuts. Moving on to year-to-date results. Net sales for the first two quarters of the current year increased 9.9% to $526.9 million compared to the first two quarters of fiscal 2022. The increase in net sales was primarily attributable to the 11.1% increase in the weighted average selling price per pound, partially offset by a 1.1% decline in sales volume. The sales volume increase in the contract packaging channel was offset by sales volume declines in the consumer and commercial ingredients channels. Gross profit margin decreased 1.4% to 20.3% of net sales. The decrease in gross profit margin was mainly attributable to higher commodity acquisition costs for all major tree nuts, except walnuts and peanuts. Other inflationary cost increases cited in the quarterly comparison and increased depreciation expense. Total operating expenses for the current year-to-date period increased $1.8 million to $60.3 million. The increase in total operating expenses was mainly due to a non-recurring gain of approximately $2.3 million from the sale of the Garysburg, North Carolina facility, which occurred in the first quarter of fiscal 2022. In addition, increases in base and equity compensation expense and sales broker expenses contributed to the overall increase, but were partially offset by decreases in advertising spend and freight expense. Net income for the first two quarters of fiscal 2023 was $32.5 million, or $2.79 per diluted share, compared to a net income of $32.5 million, or $2.81 per diluted share, for the first two quarters of fiscal 2022. Please refer to our 10-Q, which was filed yesterday, for additional details regarding financial performance for the second quarter of fiscal 2023. Now I'll turn the call over to Jeffrey to provide additional comments on our operating results for the second quarter of fiscal 2023 and discuss category trends.

Great. Thanks, Frank. So I'll share some category and brand results with you for the quarter. As always, the market information I'll be referring to is IRI reported data. And for today, it is the period ending January 1st, 2023. When I refer to Q2, I'm referring to 13 weeks of the quarter ending January 1st. 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 the average price per pound. Breakouts of the recipe, snack, 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. First, the total nut and trail mix category was up 1% in dollars and down 4% in pound volume in Q2. This is the same pound rate we saw last quarter, while retail dollars showed slight improvement. All segments continued to decline in pound volume in Q2, while trail mix, recipe, and snack nuts grew in dollar sales. Overall, prices across the category were up in Q2 versus the prior year. by 5.3%, with almost all nut types increasing. Now I will cover each segment in more depth, starting with recipe nuts. The recipe nut segment was up 4% in dollar sales and down 7% in pound sales. This is slightly better dollar performance than we saw in Q1. Prices of recipe nuts were up 11.3% versus last year, the largest pricing increase of any segment. Our Fisher brand had a successful holiday season and grew 19% in dollars and 9% in pounds. Fisher's performance resulted in growing dollar share by 2.7 points and remaining the branded leader. Fisher's performance was driven by increased distribution and velocity in the mass and grocery channels. Velocity growth was driven by focused holiday promotional strategies, including off-shelf displays, features, and pricing. We are excited to carry this momentum as we head into the new year. Now let's turn to the snack nut segment. In Q2, the snack nut segment was flat 0.4% in dollar sales and down 4% in pound sales. This is slightly better than the decline we saw in Q1. Most nut types, except macadamia and pecan nuts, increased in price. Fisher's snack slightly declined in this quarter, down 0.2%, and was down 11% in pounds. On peanuts, the largest nut type within the brand, we are seeing significant competitive pricing and promotional pressure. We continue to see 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 good value. and 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 Q2 and down 5% in pounds. Prices of retail mixes were up 10%, slightly greater than the last quarter. Our southern style nut brand delivered 6% dollar growth and declined 1% in pounds, beating the category. Dollar growth was driven by increased distribution and velocity in the food channel. Private brands continue to drive trail mix category growth up 11% in dollars in Q2. Our last segment, produce nuts, declined 2% in dollars and 3% in pound volume in Q2. This is slightly worse than the performance we saw in Q1. Our produce nut brand, Orchard Valley Harvest, declined 8% in dollars and 8% in pound sales, driven by distribution declines in mass, offsetting strong performance in the grocery channel. We have started the repositioning and relaunch of this brand at mass and should start seeing new products flow into the market over the next several months. In closing, we start the second half of fiscal 2023 with excitement and optimism. as we begin to see stabilization in the supply chain, modest downward pressure in acquisition costs of tree nuts, and the continuation of our journey to diversify our product offerings. As always, we will continue to respond to challenges including the current economic and operating environment and the recent category contraction. I believe we have the right team, initiatives, and strategies to continuously overcome these challenges and deliver long-term shareholder value. Our management team and all our associates continue to work hard to expand our business, to build stronger brands, to build more innovative product platforms, and to provide higher levels of quality and service. JBSS is positioned well for stronger results in the future. We appreciate your participation in the call and thank you for your interest in our company. I will now open up the call for questions.

Thank you. And ladies and gentlemen, if you have a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. And that is star 1-1 if you have a question. One moment while we compile the Q&A roster.

For our first question, please.

It comes from the line of Daniel Ambresse with a UBS. Please proceed.

Yes, hi, good morning, Jeffrey and Frank, and good job in a challenging couple of years here. You've done a great job. I know you haven't had a question in the past couple quarters, so I just wanted to kind of throw my hat in the ring here and talk a little bit about capital allocation and how you view it. I know you guys have been very consistent with paying special dividends. In the context of the Hormel project, Yeah, acquisition of planters at about 3.4 times sales. And I know your branded products are only about a quarter of your sales. It just seems like the market isn't giving you enough credit maybe for that part of the portfolio or for your private label portfolio. And I want to know what you've thought about that in the context of capital allocation, potentially share repurchases.

So thanks for the question. Over the last quite a few years, we've really been investing in building our brand portfolio. We realize that we've got much stronger margins in our brands. We have much more control over what we do with the brands, where we launch, what we launch. And so your capital allocation is extremely important as far as continuing to invest in our brands. I touched on the relaunch and transformation of our Orchard Valley Harvest brand, which is just hitting the market literally this week. And so we see the branded portfolio is extremely important. We've talked about how private brands is the biggest piece of our business today. It is still like very critical component of our success. And we believe we are really strong value partners with our key retail partners that we work with. But definitely brands is a part of our investment in the future. And we see a lot of opportunities. We see a lot of white space within our brand portfolio to continue to grow them. and really build stronger equity in our brands, which in turn, as we can build a stronger brand portfolio as a percent of our total sales, I think we'll get the improvement in some of our returns and investments.

As far as your question about short buybacks, we prefer special dividends as a way to return capital to our shareholders. Mainly due to our daily trading volume is pretty low, So we think the more shares out there, it's probably better for our trading volume and for our share price. And we believe declaring dividends and paying special dividends is a beneficial way to return capital.

Great. That makes sense. And good luck in the future. Thank you.

Thank you. Thank you. Again, ladies and gentlemen, simply press star 1-1 if you have a question. All right, I don't see any further questions in the queue. I will turn the conference back to our CEO, Jeffrey Sanfilippo, for his closing remarks.

Great. I want to thank everyone for their interest in JBSS. This concludes our fiscal 23 Q2 call. Thank you for your interest in the company, and have a great day.

And with that, we conclude today's conference call. Thank you for participating, and you may now disconnect.