John B. Sanfilippo & Son, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the John B. Sanfilippo and Son Incorporated Second Quarter Fiscal Year 2025 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. you will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. Please be advised that today's conference is being recorded. I would now like to turn the call over to Jeffrey Sanfilippo, CEO. Please go ahead.

Thank you, Lisa. Good morning, everyone, and welcome to our 2025 Second Quarter Earnings Conference Call. 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 may involve certain risks and uncertainties. The factors that could negatively impact results are explained in the various SEC filings that we have made, including our 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. We are pleased to report our largest quarterly sales volume and highest net sales in our company's history in the second quarter. This achievement was driven by the second consecutive quarter of sales volume increases across all three of our distribution channels as we execute our long-range plan. Additionally, our bar sales volume increased by approximately 28% over the prior year quarter. We remain encouraged by the sales line growth across our company and are focused on enhancing profitability through operational efficiencies and optimized pricing strategies. Our Fisher recipe brand had a very successful holiday season in Q2 and performed better than the category. We have a great branded program that complements a retailer's private brand recipe program to enhance the baking category. Our sales and marketing team are sharing the success story with our retail partners to demonstrate how Fisher can build their business. And we're excited about the opportunities to expand our distribution. To support our growth, the company has successfully moved our warehouse distribution in Elgin to the new facility we are leasing in Huntley, Illinois. It was an enormous task to complete the relocation of our customer shipping activities. And I want to thank the leaders in our administration, customer solutions, demand planning, engineering, logistics, IT, operations, and warehouse teams for their hard work and dedication to complete this important initiative. Now that the warehouse distribution move is complete, work has started to expand our production capabilities in Elgin, utilizing the 300,000 square feet of space we freed up. Over the next 18 months, The company will add additional manufacturing capacity to support our growth plans and to provide new innovative product platforms for our customers and consumers. We expect some of this new equipment to be in production by the end of this fiscal year. As we shared in our earnings release, gross profit and margins have been negatively impacted by several factors. Competitive pricing pressure, and strategic pricing decisions to maintain and grow our volume brought down average selling prices. Despite stabilized civilization and inflation rates, there are input costs in our industry that remain elevated and in some cases continue to increase, such as chocolate and now walnuts. This created significant margin compression before price increases could be executed. but we have initiated selling price adjustments for all our brands and private brand customers which take effect in Q3, the majority of which will occur in January and February. In addition to pricing, the company is also laser focused on cost optimization and organizing our structure and processes for growth. Key areas of opportunity include efficiencies and operations, supply chain, plate, SG&A, commissions, trade spend, and business and formula creation. There are key leaders across the nation reimagining how we do business and go to market. I'm excited about the margin enhancement initiatives this team will look at and execute. There are common things among other CPG companies in the food space that are navigating this current environment. Consumer behavior shifts where people are increasingly seeking value influenced by economic uncertainties and inflation. This continues to create a shift to discount retailers and smaller pack sizes or bulk purchases during promotions. We continue to assess our price pack architecture and focus on retailers, such as those in the Club Channel, to grow our business and provide consumers with innovative products. I'll now turn the call over to Frank Pellegrino, our CFO, to provide additional information on our financial performance for our second fiscal quarter.

Thank you, Jeffrey. Starting with the income statement, net sales for the second quarter of fiscal 2025 increased 3.4%, $301.1 million, compared to net sales of $291.2 million for the second quarter of fiscal 2024. The increase in net sales was due to a 7.1% increase in sales volume, which is defined as pounds sold to customers, which was partially offset by a 3.4% decrease in the weighted average sales price per pound. Decrease in the weighted average selling price primarily resulted from higher sales volume of lower-priced bars, granola, and private brand recipe nuts. Additionally, strategic pricing decisions and competitive pricing pressures contributed to the overall decrease in the weighted average selling prices and contributed to increased sales volume. Sales volume increased to 2.9% in the consumer distribution channel, primarily due to a 4% increase in private brand sales volume. The private brand volume increase was due to a 27.6% growth in bars volume, from a mass merchandising retailer returning to normalized inventory levels. Sales volume increased 3.4% for our branded products, which includes Fisher Recipe Nuts, Fisher Snack Nuts, Orchard Valley Harvest, and Southern Style Nuts. The increase in branded sales volume was mainly attributable to a 3.8% increase in sales volume of Fisher Recipe Nuts due to increased merchandising activity at several customers. Additionally, sales volume of selling-style nuts increased 11.8%, driven by a return to normalized inventory levels and increased sales velocity at a club store customer. Sales volume increased 1.4% in the commercial ingredients distribution channel due to higher sales of peanut crushing stock to peanut oil processors and distribution to a new food service customer, which was partially offset by lost business to another customer. Sales volume increased 55.6% on the contract manufacturing distribution channel, primarily due to increased granola volume processed in our Lakeville facility. This increase was partially offset by reduced peanut and cashew sales volume to major customers due to soft consumer demand. Gross profit decreased 5.7 million, or 9.8%, compared to the second quarter of last year, driven by competitive pricing pressures and strategic pricing decisions, as well as higher commodity acquisition costs for most tree nodes. The decrease was partially offset by improved profitability of borrowers. Second quarter gross profit margin as a percentage of net sales decreased to 17.4% compared to 19.9% for the second quarter of fiscal 2024 due to the reasons previously mentioned. Total operating expenses for the second quarter increased 2.5 million as compared to the prior year quarter, due to a one-time $2.2 million bargain purchase gain associated with the late-through acquisition, which did not recur in the current quarter. The increase was also driven by higher freight, rent, and compensation expenses, which were significantly offset by decreases in incentive compensation, consulting, and market expense. Total upward expenses for the second quarter of 2025 increased to 10.9% net sales from 10.4% for last year's second quarter due to the reasons previously mentioned and partially offset by a higher net sales base. Interest expense was $800,000 for the second quarter of fiscal 2025 compared to $1.1 million for the second quarter of fiscal 2024, primarily due to lower average debt levels. Net income for the second quarter of fiscal 2025 was $13.6 million, or $1.16 per diluted share, compared to $19.2 million, or $1.64 per diluted share for the second quarter of fiscal 2024. Now let's take a look at inventory. The total value of inventories on hand at the end of the current second quarter increased $8.5 million, or 4.3%, compared to the total value of inventories on hand at the end of the prior year, The increase was mainly due to higher commodity acquisition costs for almost all major tree nuts and chocolate, as well as higher on-hand quantities of almonds and cashews. The weight average cost per pound of raw nut and dried fruit increased 33.7% year-over-year, mainly due to higher commodity acquisition costs for almost all major tree nuts. Moving on to year-to-date results. Net sales for the first two quarters of current year increased 9.9% to $577.3 million compared to the first two quarters of fiscal 2024. Excluding the 2025 first quarter impact related to requisition, net sales increased 2.2% to $536.8 million. The increase in net sales was primarily attributed to a 4.1% increase in sales volume, which was partially offset by a 1.9% decrease and the weighted average selling price per pound. Sales volume increased by 14.9% due to increased sales volume in all channels, mainly driven by the impact of the LACO acquisition. Gross profit margin decreased 4.8% to 17.1% of net sales. The decrease was mainly attributable to lower selling prices due to competitive pricing pressures and strategic pricing decisions, along with increased commodity acquisition costs for almost all major non-commodity. This was partially offset by improved profitability of borrowers. Total operating expenses for the current year to date remain relatively unchanged at $62.4 million compared to $62.8 million for the first two quarters of fiscal 2024. Interest expense was $1.3 million for both the first two quarters of fiscal 2025 and fiscal 2024. Net income for the first two quarters of fiscal 2025 was $25.3 million $2.16 per diluted share, with an net income of $36.8 million, or $3.15 per diluted share, for the first two quarters of fiscal 2024. Please refer to our thank you, which was followed yesterday, for additional details regarding financial performance for the second quarter of fiscal 2025. Now I would turn the call over back to Jeffrey to provide additional comments on our operating results for the second quarter of the industry category term.

Thanks, Frank, for the financial updates. When we continue to navigate a challenging operating environment, I am proud of the efforts and results from each of our businesses to grow our volume and develop long-term business partnerships. I am confident that we have the right strategy, agility, and team to continue to deliver strong results. Now let's turn to category updates. I will share some category and brand results with you for the quarter. All the market information I'll be referring to is CERCANA panel data, and for today, it is the period ending December 29th, 2024. When I refer to Q2, I'm referring to 13 weeks of the quarter ending December 29th, 2024. References to changes in volume are versus the corresponding period one year ago. For pricing commentary, we are using scan data from CERCANA, which includes food, drug, masks, Walmart, military, and other outlets. We are referring to average price per pound. We're using the nut, trail mix, and bar syndicated views of the category as defined by CERCONA. In the latest quarter, we continue to see modest growth in the broader snack aisle as defined by CERCONA. Volume and dollars were up 1.5% and 3.4% respectively. This is consistent with the performance we saw in Q1 as pricing and inflation continue to stabilize. In Q2, the snack and trail mix category performed similar to the broader snack aisle, up 1% in pounds and 2% in dollars. This is also consistent with the performance we saw in Q1. We saw prices fall 1% in snack nuts with slightly lower retail prices across all major nut types except for almonds. Trail mixes prices were flat. Fisher Snack and Trail Mix performed on par with the category, with pound shipments up 2%. This was driven primarily by growth at a major specialty retailer and e-commerce. Our Southern Style Nuts brand pound shipments increased 12%, driven primarily by velocity growth in club, mass, and e-commerce. Our Orchard Valley Harvest brand, which primarily plays in trail mix, was relatively flat in pound shipments, down 1%, driven by strong growth in club and e-commerce, mostly offsetting declines in mass and specialty. Commodity increases, including cocoa and some tree nuts, are resulting in high prices for Orchard Valley Harvest. We are actively working on innovation and cost savings opportunities to help mitigate this commodity pressure. Private label consumer and trail shipments performed in line with the category, with pound shipments relatively flat to last year. Now let me turn to the recipe category. In 2, the recipe nut category was down 2% in pounds and up 4% in dollars as prices for both walnuts and pecans increased during the prime holiday baking season. This is an improvement in dollar performance. but it declined in volume performance in Q1. Our Fisher recipe pound shipments performed better than the category and were up 4% in Q2, with continued strength in e-commerce, grocery, and mass. Fisher continued to be the brand recipe leader and had a successful holiday season, as I mentioned. Now we will switch to the bar category. In Q2, the bar category grew 3% in pounds and 6% in dollars, and the major player continued to reenter the market after a recall last winter. Private label continues to grow within bars, up 10% in pounds and up 13% in dollars. Private label bar shipments are up significantly versus a year ago, 28% driven primarily by velocity growth. We continue to see positive momentum in private label in this category. In closing, As we look ahead to the second half of fiscal 2025, we begin with cautious optimism as we see continued strong consumption in the bar category and improving volume consumption in the nut and trail mix categories. This is an exciting time for our company as we execute on our future growth strategies and organize the company to improve margins. We're committed to creating long-term shareholder value through these strategic initiatives and continued operational excellence. I want to extend my thanks to all our employees for their hard work and dedication, which has been instrumental in achieving our record volume growth in Q2. R&D, insights, and tech services teams are designing a pipeline of differentiated and innovative products to bring to market. Their operations, procurement, administration, and continuous improvement teams continue to look at ways to optimize our manufacturing and supply chain to reduce costs. As always, we will continue to respond to challenges, including the current economic and operating environment. I believe we have the right team, initiatives, and strategies to overcome these challenges to provide differentiated value to our customers and consumers and deliver long-term shareholder values. 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 to our customers and consumers. We appreciate your participation in the call, and thank you for your interest in our company. We'll now open the call to questions. Lisa, please queue up the first question.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. You will then hear an automated message advising your hand is raised. We also ask that you please wait for your company and name to be announced before you proceed with your question. One moment, please. And our first question will come from the line of Nick Alton of CWB. Your line is open.

Hi, guys. I just wanted to start on the pricing environment and what's going on there. You were talking about it's becoming really competitive and seem to need to maintain share there. So just some further detail would be great.

Sure. So obviously, we've talked about increased commodity costs, especially in almonds, chocolate, cashews in the last couple of quarters. And now we're seeing increased costs in walnuts. And we have a typically a six-month pricing review with our retail partners. So it takes time to get those price increases initiated before actually raw material costs flow through our system. So that's put margin pressure on the company. But in addition to that, because of the volume declines in some areas, such as almonds, for example, we're seeing competitive price pressure from some of the brands not raising pricing in order to kind of maintain and try to rebuild some of that volume growth. So that puts even more pressure on private brand retailers because they expect a gap between the brand leader and their private brand. So it's a combination of things that have impacted pricing. As I mentioned, we have taken pricing now on all our brands and our private brand customers. So most of that goes into effect in January and February of this quarter. So a lot of it's being initiated as we speak.

And then will that take you back to like a gross margin per pound closer to over 60 cents from the current 50% the last couple of quarters?

Hey, this is Frank. That's our long-term goal. And we have a process in place that gets back to those historical averages and they will occur over the next several quarters.

And then just on the brand, like, I guess they have been losing share. Like, is it sustainable on their level? Like, I understand you guys are one of the lowest costs in the industry, but can the branded keep up with not increasing price with the commodity environment?

Yeah, it's tough to say. Obviously, brands, you know, they have a mind of their own, and I expect them to continue to invest in the category to either build their brand equity market share or just move some of the inventories of raw materials that they have in their system. And so it's hard to say when they would take price adjustments. I can't imagine it's going to be too far out there, but it's hard to say. And also add that the focus we have on, I'm sorry, yeah, and the other focus, obviously pricing is a big lever that we have, but also reducing our operating costs, our supply efficiencies is critical to making sure that we streamline our efforts. So we expect a lot of some of that margin enhancement to come from just cost reduction initiatives internally.

And then starting up the new lines, like you said, by the end of the fiscal year, will there be any costs associated with that that could create additional margin pressure in the next two quarters to come?

Yeah, Nick, this is Jasper. Most of the costs that will incur with the installation of these new lines will be capitalized. So I wouldn't imagine, other than some moving equipment around and things of that nature, I wouldn't imagine that it would have any impact on margins.

And then just some more comments around Lakeville, like how this quarter was and everything. Obviously, great quarter, 28% growth there, just after last quarter's back-to-school issues and everything.

Yeah, Lakeville, you know, we had a bunch of one-off expenses in Lakeville as we were moving inventory out of a third-party warehouse up there into our Hanley facility. We're still carrying a bit of a lease payment on that. That has expired at the end of Q2. also had to temporarily install some equipment we bought in summer into that lakeville facility to help build inventories for this year's back to school so there was quite a bit of noise up there i think from a overall operating impact we are really running that business for service and to build inventory so we make sure that we hit the back to school numbers so uh you know we are incurring quite a bit of overtime in that facility but we do anticipate with the installation of the line that we put up there temporarily, coupled with running more production in Elgin, that we'll see that facility become even more profitable than it is.

And then any disclosure on just like what the dollar value, you talked about the volume and growth and everything, like how, what was Lakeville's dollar value in the quarterly?

I think it's in the 10Q on Nick, but I think it's around $40 million with the late-goal related sales for the quarter.

All right. And then I just – final one just on tariffs because it's talked about in your report just how you get some of your pecan business from Mexico. So just any thoughts on how it's going to affect the industry, how it will affect you if these tariffs do come in?

Well, we're almost at the tail end of buying this crop, so I don't think even if the tariffs do occur – shortly. We would be still buying a lot of product from Mexico.

We are working with our procurement teams really across all the supply chain to make sure that we are aware and ready of tariffs to go into place either in Mexico or Canada or any country in the world. Just make sure we have the right supply chain in place to overcome any issues that might occur. It is on our radar for sure.

All right. Thanks, guys. That's it for questions for me. Thanks, Nick. Thank you.

Thank you. If you would like to ask a question, please press star 1 on your telephone. And at this time, there are no more questions in the queue. I'd like to turn the call back over to Jeffrey for closing remarks. Please go ahead.

Thank you, Lisa. Again, I want to thank all of you on the call for your interest in JBSS. concludes the call for our second quarter fiscal 2025 operating results and have a great day thank you all for joining today's conference call you may now disconnect