John B. Sanfilippo & Son, Inc.

Good day and welcome to the John B. Sanfilippo & Sons Third Quarter Fiscal 2024 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, please press star 1-1. As a reminder, this call is being recorded. I would like to turn the call over to Jeffrey Sanfilippo, CEO. Please go ahead.

Thank you, Michelle. Good morning, everyone, and welcome to our 2024 Third Quarter earnings conference calls. Thank you for joining us. On the call with me today is Jasper Sanfilippo, our COO, and Frank Pellegrino, our CFO. We may make some forward-looking statements today. These statements are based on our current expectations, and they involve certain risks and uncertainties. The factors that could negatively impact results are explained in the various SEC filings that we have made, including forms 10-K and 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties that are inherent in our business. Looking at results, I'm happy to report the Lakeville acquisition increased quarterly sales volume by 18.1 million pounds, or .1% over third quarter of fiscal 2023, and increased our quarterly net sales by approximately $46.9 million, or .7% over the third quarter of fiscal 23. Our integration team has made great progress in optimizing the operations in Lakeville, and we currently expect it to become a creative to our operating income during the upcoming fourth quarter, which is significantly ahead of our initial schedule. We also sold in the third quarter approximately $3.2 million of our own internally developed nutrition bars from our Elgin, Illinois manufacturing facility. This complements the snack bars produced in Lakeville. I'd like to personally thank all our employees who have worked with passion, dedication, and a sense of urgency to optimize the operations in Lakeville and continue to drive improvements. The company just held our board of directors meeting in Lakeville, where the officers had a chance to tour the plant. I am so proud of the management team in that facility, who are now part of the JDSS family. Their commitment to quality, safety, and customer service is remarkable. Even though we continue to operate in an environment of elevated retail selling prices and cautious consumers, our consumer distribution channel delivered strong results. Our private brand business reversed two consecutive quarters of decreasing sales volume. While our branded business sales volume decreased in the quarter, it represented a significant improvement over the decreases we experienced over the last three quarters as we continue to see strong momentum at a major e-commerce customer for our branded products. This time last year, we started seeing signs of a challenging operating and inflationary environment. Despite these headwinds, our company executed our strategies, optimized our cost structure and supply chain, and created capabilities to expand our product offerings. In Q3 of fiscal 23, we started shipping our first private brand bars to a major retailer. Since that time, we have gained new private brand business at many other retailers across the country. We continue to receive favorable feedback from our partners and expect to gain additional new customers in subsequent quarters. And we are working on numerous innovative sales opportunities utilizing our new bar capabilities. Our board of directors met yesterday and approved a dollar per share special cash dividend, reinforcing our goal of creating long-term shareholder value by returning capital to our shareholders. The dividend will be paid on June 20, 2024 to stockholders of record as of May 31, 2024. Looking ahead to the fourth quarter and fiscal 25, we are optimistic about the contributions of the Lakeville acquisition to our operating results based on the current performance and ongoing and expected future operational improvements. We initially estimated the current fiscal year dilution due to the Lakeville acquisition to range from $0.80 to $1 per diluted share, which we have now updated to $0.25 to $0.50 per diluted share as a direct result of our team's excellence in optimizing the operations in Lakeville during the third quarter. Our strong operating results would not be possible without the dedication of our talented team members who continue to exceed expectations and create value for our customers and shareholders. Consumers have reacted to higher retail prices at the shelf and there have been demand destruction because of increased prices. Our insights team has done an extraordinary job understanding price elasticities in the nut and trail and snack bar categories. We are testing price changes based on these insights and achieved significant initial success at a major retailer. We are monitoring this positive trend and are initiating plans to execute this price strategy with other retail partners. In addition to entering new product categories such as the snack and nutrition bars, our long-term growth plan also includes transforming our branded portfolio. Last year, the company relaunched and rebranded our orchard valley harvest product line. The new products and packaging have had mixed results in the market and we are assessing next steps for the brand. It is a difficult environment for most brands across the snack category as consumers have tightened their wallets due to current inflationary pressures. But we continue to focus on expanding distribution, building brand awareness and trial with innovative marketing programs and allocating a portion of the sales of OVH to support our partnership with Conscious Alliance to help end child hunger. I'll now turn the call over to Frank to discuss our financial performance.

Thank you, Jeffrey. Starting with the income statement, net sales for the third quarter of fiscal 2024 increased 33.3 million, or 14%, 271.9 million, and for net sales of 238.5 million for the third quarter of fiscal 2023. Net sales for the current third quarter include approximately 46.9 million of net sales in the Lakeville acquisition. Excluding Lakeville acquisition, net sales decreased 13.6 million or 5.7%. The decline was due to a .3% decrease in the weighted average sales price per pound combined with a .4% decrease in sales volume, which is defined as pound sales to customers. Decrease in weighted average sales price primarily resulted from lower commodity acquisition costs for all major tree nuts, except walnuts, which was partially offset by higher commodity acquisition costs for peanuts. Sales volume declined for all major nut types in the third quarter. Sales volume increased .1% in the consumer distribution channel, primarily due to Lakeville acquisition, whose sales volume is almost exclusively private brand bars. Excluding the impact of the Lakeville acquisition, sales volume increased .3% in the consumer distribution channel, primarily due to a .5% increase in private brand sales volume. The .5% increase in sales volume for our private brand and consumer distribution channel was driven by increased peanut butter and nutrition bar distribution, which was partially offset by a decrease in snack and trail mix volume at a mass merchandising retailer. Additionally, new sales distribution of snack and trail mix at a grocery store retailer was partially offset by lost distribution at a drug channel customer. The .8% decrease in sales volume for our branded products, which includes Fisher Recipe Nuts, Fisher Snack Nuts, Orphan Valley Harvests, and Seller Style Nuts in the consumer distribution channel was primarily attributable to a .8% decrease in sales volume for Fisher Snack Nuts due to lost distribution at a mass merchandising retailer and decreased sales volume at several grocery store retailers. These decreases were partially offset by increased e-commerce sales volume for our branded products. Sales volume decreased .4% in the commercial ingredients channel due to competitive pricing pressures and not recurrent peanut butter sales at a food service distributor that occurred in the third quarter of fiscal 2023. This decrease was partially offset by new peanut butter business at two other food service distributors and sales volume of loose granola associated with the Lakeville acquisition. Excluding the impact of the Lakeville acquisition, sales volume decreased 3% in the commercial ingredients channel. Sales volume decreased .3% in the Top Track packaging distribution channel due to decreased cashew and mixed nut distribution by a major customer due to soft consumer demand. Third quarter gross profit margin as a percentage of net sales decreased to .1% compared to 20.9%. For third quarter fiscal 2023, mainly related to higher net sales base from the Lakeville acquisition. Excluding the impact of the Lakeville acquisition, gross profit margin decreased slightly by 30 basis points due to higher commodity acquisition costs for peanuts and walnuts, reduced production volume, and increased expenditures related to facility repairs and maintenance, not compliant inventory, and incentive compensation. Gross profit, which was positively impacted by approximately $3 million due to Lakeville acquisition, all towards approximately 1.7 million, was related to a partial release of an inventory evaluation reserve, initially recorded at the acquisition date, decreased slightly by approximately $600,000, or 1.2%, due to the same reasons contributing to the decrease in gross profit margin. Excluding the impact of the Lakeville acquisition, gross profit decreased by 3.6 million, or 7.2%. Total operating expenses for the third quarter increased 2.9 million in the quarterly comparison, all towards approximately 1.8 million directly relates to operating expenses associated with the Lakeville acquisition. Excluding the Lakeville acquisition, total operating expenses increased 1.1 million, mainly due to increased incentive compensation, which was partially offset by decreases in freight and advertising expenses. Total operating expenses for the current third quarter decreased to .3% on net sales, from .7% for last year's third quarter, due to the reasons cited before, and a higher net sales base due to the Lakeville acquisition. Excluding the impact of Lakeville acquisition, total operating expenses as percentage of net sales increased to .9% from .7% due to the reasons cited before and a lower net sales base. Interest expense for the current third quarter increased from 600,000 for the third quarter, physical 2023, primarily due to higher average debt levels due to the Lakeville acquisition. Net income for the third quarter of fiscal 2024 was 13.5 million, or $1.15 per diluted share compared to 15.7 million, or $1.35 per diluted share for the third quarter of fiscal 2023. Now taking a look at inventory. The total value of inventory on hand at the end of the current third quarter increased 20.3 million, or 10.7%, mainly due to the additional 24.9 million of inventory associated with the Lakeville acquisition. Excluding the Lakeville acquisition, the value of total inventory on hand decreased 4.5 million, or .4% year over year. The decrease in the value of total inventories was primarily due to lower quantities of finished goods and lower quantity and commodity acquisition costs for work in process, raw materials, cashews, and almonds. This was offset by higher quantities of pecans and walnuts and higher commodity acquisition costs for walnuts. The weighted average cost per pound of raw nut and dried fruit input stock on hand, excluding the impact of the Lakeville acquisition, decreased .7% year over year, mainly due to higher quantities of peanuts and in-shell walnuts and peacocks. Moving on to year date results. Net sales for the first three quarters of the current year increased .1% to 797.2 million, compared to the first three quarters of fiscal 2023, primarily due to the Lakeville acquisition. Excluding the impact of the Lakeville acquisition, net sales decreased .7% to 721.6 million, primarily attributable to a .8% decline in sales volume and a 2% decrease in the weighted average selling price per pound. Sales volume increased 8.8%, primarily due to Lakeville acquisition. Excluding the impact of the Lakeville acquisition, sales volume decreased 3.8%, primarily due to sales volume decreases in the consumer and contract packaging channels. Growth profit margin increased slightly from .5% to .6% net sales. Total operating expenses for the current year to date period increased 5.4 million to 93.6 million. The increase in total operating expenses was mainly due to increases in incentive compensation, incremental operating expenses associated with the Lakeville acquisition, advertising expense, and charitable food donations. These increases were partially offset by the one-time bargain purchase gains in the Lakeville acquisition and the decrease in freight expense. Net income for the first three quarters of fiscal 2024 was 50.2 million, or $4.30 per diluted share, compared to net income of 48.2 million, or $4.14 per diluted share, for the first three quarters of fiscal 2023. Please refer to our tech queue, which was filed yesterday for additional details regarding our financial performance for our third quarter of fiscal 2024. Now I'll turn the call back over to Jeffrey to provide additional comments on our upper results for the third quarter of fiscal 2024 and discuss category trends.

Thanks, Frank, for the financial updates. Now let's turn to retail consumption. I will share some category and brand results with you for the quarter. As always, market information I'll be referring to is in CIRCANA reported data, and for today is the period ending March 24th, 2024. When I refer to Q3, I'm referring to 13 weeks of the quarter ending March 24th, 2024. References to changes in volume or price are versus the corresponding period one year ago. We look at the category on CIRCANA's total U.S. definition, which includes food, drug, mass, Walmart, military, and other outlets, unless otherwise specified, and when we discuss pricing, we are referring to average price per pound. Breakouts of the recipe, snack, and produce nut segments are based on our custom definitions developed in conjunction with CIRCANA. Snack bar category is the syndicated view as defined by CIRCANA, and the term velocity refers to the sales per point of distribution. In the last quarter, we continue to see a shift in consumer behavior in the broader snack aisle as defined by CIRCANA. We continue to see volume declines no longer offset by price across the entire snack aisle as consumers continue to tighten their budgets. The snack aisle declined .7% in volume and was down .1% in dollars in Q3. This is similar to the declines we experienced in Q2. The total nut and trail mix category was down .1% in dollars and down .4% in pound volume in Q3. This is actually slightly better performance than we saw last quarter, as nut and trail mix prices have moderated with price per pound flat versus the prior year. While prices have stabilized, the price per pound is still close to a five-year high. Now I will cover each segment in more depth, starting with recipe nuts. The recipe nut segment was down .1% in dollar sales and was flat in pound sales. This is an improvement in performance versus what we saw in Q2 as we continue to see pricing declines in this category across walnuts and pecans. Our Fisher recipe brand declined in Q3, driven mainly by lower distribution. Fisher declined 9% in dollars and 10% in pounds, a slight improvement versus the performance we saw in Q2. Fisher is still the branded recipe nut leader, and we are actively working on ways to engage consumers with the right price pack architecture and promotions as we plan for this year's holiday season. Now let me turn to the snack nut segment. In Q3, the snack nut segment was down .3% in dollars and down .1% in pound sales. This is consistent with the performance we saw in Q2. Some good news is that pricing continues to stabilize in the snack nut category, with prices flat versus a year ago. Fisher snack performed worse than the category, down 26% in dollars and 18% in pounds. This continues to be driven by significant distribution loss in the mass channel. We are continuing to find a balance between the right pricing and promotional strategy margin in this competitive category. Private label snack nuts are performing consistent with the category, down 5% in dollars and down .6% in pounds. The trail and snack mix category is down 3% in dollars and down 3% in pounds in Q3, consistent with the performance we saw in Q2. The prices of trail mix were flat versus a year ago. Our southern style nut brand declined 13% in dollars and 13% in pounds. The clients were almost entirely driven by the club channel distribution loss we mentioned previously. Private brands, the sheer leader in trail mix, performed slightly worse than the category, down 4% in dollars and 4% in pounds, driven by poor performance in the mass channel. Our last segment, produce nuts, declined 5% in dollars and 3% in pound volume in Q3, slightly better than the performance we saw in Q2. Our produce nut brand, Orchard Valley Harvest, declined 17% in dollar sales and 10% in pound sales, driven by distribution declines in the mass channel. The brand is continuing to see growth in the food channel, growing 4% in pounds in Q3. And we continue to drive awareness and trial of our new products and packaging at retail. Now we'll switch to the snack bar category, which we will now start reporting in our earnings calls. In Q3, the snack bar category declined .5% in dollars and .8% in pounds. This is primarily driven by a total recall of a major branded snack bar player earlier this year. Snack bar pricing increased by .8% in Q3. Private label bars continued to grow .6% in dollars and .8% in pounds. Private label bars continued to expand in stores, picking up 3% more in TDP distribution, while prices rose 3.6%. We continue to see positive momentum in private label in the snack and energy bar category. In closing, we face several challenges in the future, which include the impacts of ongoing inflation in food and other input prices, sustain higher interest rates, and the potential for an economic downturn in the markets in which we operate. However, I am confident in the strategic investments we have made in our people, our customers, and capabilities to overcome these challenges and continue to deliver strong operating results and create long-term value for our shareholders. We're also cautiously optimistic that consumer demand will stabilize and slowly begin to recover in the core nut and trail mix categories. We will continue to optimize our cost structure, product portfolio, and flexibility as we respond to ongoing macroeconomic volatility. Our company and our team of dedicated leaders and frontline associates throughout the organization remain steadfast and strong. We've always adapted quickly to overcome headwinds. Our insights, innovation, R&D, marketing, sales, and operations teams are laser-focused on consumer behavior and consumption trends to develop new products, pursue new branded opportunities, and support increased demand from 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'll now turn the call back over to Michelle to open the line for questions. Michelle?

Thank you. If you'd like to ask a question, please press star 11. If your question hasn't answered and you'd like to remove yourself in the queue, please press star 11 again. One moment for questions. Again, that's star 11 to ask a question. I'm not showing any questions. I'd like to turn the call back over to Jeffrey B. Sanfilippo for closing remarks.

We appreciate your participation in the call today and thank you for your interest in our company. Thank you and have a great day.

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone, have a great day.