John B. Sanfilippo & Son, Inc.
Q4 2019 Earnings Call Transcript

Published: 22 Aug 2019

[Operator:]

Good day, ladies and gentlemen. Welcome to the John B. Sanfilippo & Son, Inc. Fourth Quarter and Fiscal 2019 Year-End Operating Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]I would now like to introduce your host for today's conference call, Mr. Mike Valentine, Chief Financial Officer. You may begin.

[Mike Valentine:]

Thank you, Kevin. Good morning, everyone, and welcome to our 2019 fourth quarter and fiscal year earnings conference call. We thank you all for joining us today. On the call with me is Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO.Before we start, we want to alert you that 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 Form 10-K and on occasion Form 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties.I'll start the call by covering financial highlights for the 2019 fourth quarter and fiscal year. The current fourth quarter net sales increased by 2.4% to $216.8 million compared to net sales of $211.7 million for the fourth quarter of fiscal 2018. Increase in net sales in the quarterly comparison was primarily due to a 7.3% increase in sales volume which we define as pounds sold to customers. Impact on net sales from the sales volume increase was largely offset by lower selling prices, mainly for products containing cashews, pecans and walnuts. Reduction in selling prices for these nuts resulted from lower acquisition costs that we passed on to customers.Sales volume increased in the consumer distribution channel by 13.8% and that was primarily due to increased sales of private brand trail mixes and snack nuts from distribution gains at new and existing customers. Also, increased sales of Southern Style Nuts products contributed to the sales volume increase. Sales volume declined by 1.9% in our commercial ingredients distribution channel and that was due to lower sales of bulk products to other food manufacturers. Sales volume declined by 4.9% in our contract packaging distribution channel and that was primarily due to the discontinuance of a product line by major existing customer.Now, looking at sales volume for our brands in our consumer channel. Fisher recipe net volume declined by 11.8%, primarily due to competitive pricing pressure from private brand recipe nuts and also some lost distribution at an existing customer. The 1.5% increase in sales volume for our Orchard Valley Harvest brand primarily came from distribution gains for our salad toppers product line and multipack items again at new and existing customers.Fisher snack nut volume increased by 3% and that was mainly due to distribution gains at an existing customer and also increased promotional activity for our Oven Roasted Never Fried product line that was introduced earlier in the year.Sales volume for Southern Style Nuts increased by 69.4%, as a result of distribution gains at a new customer and the introduction of new package sizes, which drove new distribution gains at grocery retailers.Fiscal year 2019 net sales decreased by 1.4% to $876.2 million, compared to fiscal 2018 sales of $888.9 million. Although sales volume increased by 1.4%, lower selling prices more than offset the positive impact on net sales for the sales volume increase. The decline in selling prices again resulted from a shift in sales volume from higher priced tree nut products to lower priced peanut and trail mix products. And as was the case in the fourth quarter, lower selling prices for products containing cashews, pecans and walnuts driven by lower commodity costs also contributed to the decrease in net sales.Sales volume increased by 10.5% in the consumer distribution channel and that volume increase was primarily driven by increased sales of private brand trail mixes and snack nuts from distribution gains with new and existing customers, and increased sales of Orchard Valley Harvest produce products and Fisher snack nuts.Sales volume declined by 7.3% in the commercial ingredients channel for the same reason I cited previously in the quarterly comparison. And sales volume declined in the contract packaging channel for the same reasons I cited in the quarterly comparison, in addition to the loss of some bulk business with an existing customer.Gross profit increased by $43.6 million in the fourth quarter of fiscal ‘19 compared to $32.9 million in last year's fourth quarter. And gross profit margin as a percentage of net sales increased to 20.1%, compared to 15.6% in the prior year's fourth quarter. The increases in both the gross profit and gross profit margin were due primarily to increased sales volume and lower commodity acquisition costs for cashews, pecans and walnuts.Gross profit for fiscal year 2019 increased to $158.3 million, compared to $138.9 million in fiscal 2018. And gross profit margin increased to 18.1% of net sales from 15.6% for fiscal ‘18. The increases in both gross profit and gross profit margin were again primarily due to lower acquisition costs for cashews, pecans and walnuts, in addition to the sales volume increase that occurred in the fourth quarter.Total operating expenses for the quarter increased by $4.7 million, and total operating expenses as a percentage of net sales increased to 12.5% from 10.6% in the quarterly comparison. The increase in total operating expenses was mainly attributable to increases in incentive compensation expense and to a lesser extent increases in other compensation expenses. This increase was offset in part by declines in shipping, advertising, legal and amortization expenses.Total operating expenses for fiscal 2019 increased by $17 million compared to last year, and total operating expenses as a percentage of net sales increased to 11.4% from 9.3% fiscal ‘18. The increase in total operating expenses was mainly due to increases in incentive and other compensation, shipping and advertising expenses, and amortization expense of $1 million, related to the acquisition of the Squirrel Brand business that occurred in the second quarter of fiscal 2018. Additionally, total operating expenses included $2.5 million for legal and consulting expenses that was related to an acquisition opportunity that we evaluated, but ultimately elected not to pursue.Interest expense decreased to $600,000 for the fourth quarter of ‘19 from $900,000 in last year’s fourth quarter. And interest expense for the current fiscal year decreased to $3.1 million from $3.5 million in fiscal ‘18. The decreases for both comparisons was mainly due to lower average debt levels during both periods.Net income was $11.3 million or $0.98 per share diluted for the fourth quarter of fiscal ‘19 compared to $5.6 million or $0.49 per share diluted for the fourth quarter of fiscal 2018. And then, net income for fiscal 2019 was $39.5 million or $3.43 per share diluted, compared to a net income of $32.5 million or $2.84 per share diluted for fiscal 2018.Now, taking a quick look at inventory. The total value of inventories on hand at the end of the current fiscal year, decreased by $17.3 million or 9.9% compared to the total value of inventories at the end of fiscal 2018. The decline in the total value of inventories was primarily due to lower quantities on hand for peanuts and cashews, and lower acquisition cost for cashews, walnuts and pecans. As a result of the decline in acquisition cost of these nuts, the weighted average cost per pound of our raw nut and dry fruit input stocks at hand at the end of the fiscal year, fell by 12.2% compared to those stocks at the end of last year.I will now turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on the performance for the current quarter and fiscal year. Jeffrey?

[Jeffrey Sanfilippo:]

Thank you, Mike. Good morning, everyone.After reporting record results for our third quarter of fiscal 2019, the Company finished very strong with record results for the fourth quarter and for the year, which we achieved record fourth quarter net income of $11.3 million and earnings per share of $0.98. We also reported record performance for the year with net income of $39.5 million and earnings per share of $3.43. Sales volume increased over 7% in the quarter and 1.4% for the year.Our strong financial position allowed us to pay a cash dividend of $29.1 million in August of 2018. And we increased the annual regular dividend by 9% to $0.60 per share, and supplemented that with a special dividend of $2.40 per share, both of which were just paid this week on August 20, 2019. These most recent dividend payments mark the eighth consecutive year that JBSS has paid dividends. And we are pleased to return cash to our stockholders early in the fiscal year through these dividends.I am very proud of these results and I thank our management team and all of our employees for their dedication, hard work and leadership. This success is possible because we have talented people across our organization, and we invest in them to do what matters most for our customers, our consumers and our shareholders. We are executing our growth strategies, implementing continuous improvement projects throughout the organization to optimize our cost structure. And we continue to invest in our people, brands and processes to better serve our customers and consumers.We experienced a major shift in volume for consumer sales channel this past year, as we continued to grow our brand and build upon private brand opportunities. Sales in the consumer distribution channel reached 70% of our total net sales in fiscal 2019 compared to 65% of total net sales in fiscal 2018.The Company's long-term objective is to drive profitable growth that includes three growth pillars

[Mike Valentine:]

Thank you, Jeffrey. At this time, we will open the call to questions. Kevin, can you please queue up the first question?

[Operator:]

[Operator Instructions] Our first question comes from Chris McGinnis with Sidoti & Company.

[Chris McGinnis:]

Good morning. Thanks for taking my questions, and nice quarter. I was just wondering, just on the structure of the margin profile for 2019. Can you maybe just talk about how much of that is sustainable due to the shifts to the consumer brand, and maybe some thoughts around 2020 and where that may shake out? Thank you.

[Mike Valentine:]

Certainly, we had a benefit from a shift from contract packaging to consumer, especially private label, but really the major driver on the margin improvement was volume increase and those lower commodity costs.

[Chris McGinnis:]

And I’ve just been thinking about 2020 the rate that you had in 2019, pressure there or do you think that that's possible to kind of keep in that level?

[Mike Valentine:]

That will be primarily dependent upon what we pay for new crop nuts this fall, because that certainly impacts the back half of 2020. So, it's difficult to say. But certainly -- as far as the first half of 2020 goes, we expect to have the same cost structure and pricing structure that we've had over the last two quarters.

[Jeffrey Sanfilippo:]

We're going to continue to invest in the brands as we have. Obviously, we're taking some ownership of new private brand business as opportunities came up and helping those retailers build their private brand programs. We're also really focused on our branded business. And as Mike mentioned, our visibility right now with the crops, very optimistic; we don't see any dramatic changes as of today. So, we're optimistic that we can continue the success of our margins this coming year.

[Chris McGinnis:]

It’s great news. Can you allow me to dig in a little bit on the Southern Style growth, and seemingly that -- obviously that acquisition is playing out like you thought, maybe some comments there? But also, just the growth with the new customer versus the new packaging gains at the grocery store? Thanks.

[Jeffrey Sanfilippo:]

Sure. So Southern Style, part of the growth is because it wasn't recorded in the back half of fiscal ‘18, so -- yes, fiscal ‘18. And so, we're benefiting from just that volume that had added to the consumer channel. But also, the team has done a good job expanding distribution at the existing accounts that Squirrel Brand had at the time, and also gaining some new distribution and launching new items at new retailers. So, it's really a combination of new product launches, gaining some distribution and enhancing some of the promotions that we've had with the existing customers that Squirrel had at the time. We're launched two new items in that brand portfolio this year. And we’ll continue to look at gaining new distribution, especially in the grocery channel where Squirrel did not have that much distribution when we purchased them.

[Chris McGinnis:]

Okay. And just one more question, and I'll jump back in queue. But, I don't know if you can do this for a competitive reason. But, you mentioned new products; obviously you had a pretty successful run there. Can you maybe just talk a little bit about what you have in kind of introductions for 2020?

[Jeffrey Sanfilippo:]

So, we look at the nut butter space, and that's been a growing area for consumption. And so, we've built on our Orchard Valley Harvest brand portfolio and added nut butters to that lineup. And we just shipped our first orders at the beginning of Q1 of fiscal 2020. We've gotten very good feedback from buyers and initial consumer reception is positive. So, that was one of the new launches, and then also looking at plant proteins, expanding into chip isle which we've never been in before. So, again plant protein snacks is another area that was focused on.

[Operator:]

Thank you. Our next question comes from Tim Call with Capital Management.

[Tim Call:]

Congratulations on a strong quarter. Do you expect the momentum in Southern Style Nuts to continue?

[Jeffrey Sanfilippo:]

So, actually, Tim, we’re really just getting started with the brand. It's been in our portfolio for a little over a year now. We've done a lot of consumer testing, a lot of consumer insight studies. As I mentioned in the call, trail mixes and savory and health wellness snacks is continuing to grow. Consumers are looking for more innovative snack mixes. And so, we just think there is a great opportunity to continue to really expand that line. And as I said, we focus on the grocery channel. And then, we haven't even touched the convenience store channel, nor the drug store channel, so all opportunities in those two channels that are just beginning to be looked at.

[Tim Call:]

Is it possible that transportation costs will continue to decline slightly in the next six months?

[Jasper Sanfilippo:]

Yes. This is Jasper, Tim. We are cycling against lower cost this year versus last year. We started turning favorable in February of this year. And so, I think you’d probably continue to see that trend, and so we start cycling against the lower cost that we paid, starting in February of ‘19.

[Tim Call:]

Some peanut crushing facilities were offline in the first two fiscal quarters. And if they are operating well in the next two quarters, will they have a meaningful impact on earnings?

[Jasper Sanfilippo:]

I think, Tim, you're referring to the fact that, a couple quarters back, we talked about how our Bainbridge shelling plant was down as we refitted it. And as a result of that peanut crushing stock sales volume had fallen. I believe that's what you're referring to. And if that's the case, we sell peanut crushing stock for roughly $0.20 to $0.25 per pound. It's really more of a byproduct than it is our main product line and it doesn't really generate a lot of gross profit dollars. So, whether volume goes up or down, it really has an immaterial impact on our profitability.

[Tim Call:]

And about a year ago, there was a loss of recipe nut line at a customer. Has that annualized or is that still having effects going forward?

[Jeffrey Sanfilippo:]

So, it was a customer that decided to build their own private brand recipe nut category, which took some shelf space away from our Fisher brand. So, that's -- we're still cycling against that even in this coming quarter and next two quarters actually, you'll see that continue within the next two quarters that potential loss of some of the distribution and volume.

[Tim Call:]

Is that a declining headwind over the next six months?

[Jeffrey Sanfilippo:]

We've done a great job making that distribution volume loss up in the grocery channel with other retailers. So, it won't have as negative an impact, I believe as we've seen over the last year. I think we've made up a lot of that volume.

[Mike Valentine:]

And Tim, this is Mike. I would add that that started about a year ago and has ramped up throughout the fiscal year. But, it is slowing, the amount of shelf space we're losing. So, as Jeff said, we will be a bit unfavorable but the magnitude of it won't be anything like what we've seen over the last three or four quarters.

[Tim Call:]

Great quarter, and thanks for managing the Company so well.

[Jeffrey Sanfilippo:]

Thank you, Tim. I appreciate it.

[Operator:]

[Operator Instructions] I’m not showing any further questions at this time. I'd like to turn the call back over to Mike.

[Mike Valentine:]

Okay. Thank you, Kevin. Again, thank you everyone for your interest in JBSS. And this concludes the call for our fourth quarter and fiscal 2019 operating results.

[Operator:]

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.