John B. Sanfilippo & Son, Inc.
Q3 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the John B. Sanfilippo & Son, Inc. Third Quarter Fiscal 2017 Operating Results Conference Call. At this time all participants in a listen only mode. [Operator Instructions] As a reminder, this conference call may be recorded. At this time, I would like to turn the conference call over to Mr. Mike Valentine, Chief Financial Officer. Please go ahead, sir.

[Mike Valentine:]

Thank you, Chuck. Good morning, everyone, and welcome to our 2017 third quarter earnings call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; Jasper Sanfilippo, our COO; and Howard Brandeisky, our Senior Vice President of Global Marketing. Before we start, we may make some forward-looking statements today. These statements are based on our current expectations and they 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 made, including Forms 10-K and 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties. Starting with the income statement. Net sales for the third quarter of fiscal 2017 decreased by 19.6% to $173.4 million compared to net sales of 215.7 million for the third quarter of fiscal 2016. The decrease in net sales was attributable to a 10.8% decrease in sales volume and a 9.9% decline in the weighted average selling price per pound. The decline in the weighted average selling price per pound primarily resulted from lower selling prices for almonds. Sales volume decreased for all major product types and in all distribution channels as well. The decrease in the consumer channel sales volume was primarily attributable to a decline in sales of cashews and mixed nuts with private brand customers. Sales volume also declined for our branded products in the quarterly comparison as follows

[Jeffrey Sanfilippo:]

Thank you, Mike. Good morning, everyone. Following the fifth consecutive year of record second quarter results for net income and diluted earnings per share, the company’s third quarter results for net income and EPS were also very strong. Net income of $6.3 million and earnings per share of $0.55 in this quarter were the second-highest Q3 results in the company’s history, significant performance in spite of the headwinds we faced with volume top line revenue. As discussed on previous calls, commodity prices, commodity price decreases and the loss of a bulk almond butter customer in our commercial ingredients channel had an unfavorable impact on net sales during this quarter. In addition, we faced decreases in merchandising activity in the consumer and contract manufacturing channels that negatively impacted branded, private brand and contract manufacturing volumes. To offset the negative impact on net income from this sales decline, we recognized that we would have to increase gross profit margin, capture savings in our selling and admin expenses and focus on growing sales volume. Since last year’s third quarter, we made significant improvements in managing our walnut inventory aligning our selling prices and acquisition costs and leveraging our procurement expertise to drive the considerable increase in our gross profit margin that occurred in the quarterly comparison. We’re also successful in reducing selling and administrative expenses and we accomplished a great deal with continuous improvement projects, fixated at quality, operating efficiencies and manufacturing costs. While sales volume was generally down for our brands at retail, our Fisher recipe nuts and Orchard Valley Harvest brands outperformed in their respective categories in quarterly comparison according to IRI market data. Our success is due to the entire team effort across the organization. These results would not be possible without the hard work and dedication of our management team and every one of our employees and I thank each of them for their hard work, leadership and support. Turning to sales review by business channel. Net sales in the consumer channel decreased by 14.8% in dollars and sales volume decreased 6.1% in the third quarter of fiscal ‘17. The sales volume decrease, as Mike mentioned, was driven by lower volume of cashews and mixed nuts with private brand customers and decreased sales of our branded products. We saw changes in private brand strategies with some of our key customers, which had a negative impact on volume in the third quarter. In addition, decreases in merchandising and promotions across both private brand and branded segments in the snack segments negatively impacted volume. Net sales in the commercial ingredient distribution channel decreased by 38.9% in dollars and 26.3% in sales volume in the third quarter, mainly from lost distribution from that bulk almond butter customer, which occurred in the second quarter of fiscal ‘17. Our efforts to share resources from industrial segment to pursue more profitable business segments are beginning to pay off. We’re seeing strong results in food service as we complete the major customer, product and brand repositioning work executed over the last few years, essentially streamlining who we sell to and what we sell them, while driving increased branded product distribution. These efforts have driven solid double-digit growth on Fisher and Orchard Valley Harvest branded products in the food service channel. Further, the overall customer and product mix shift is driving margin improvements. We have specific initiatives to continue growth of the food service channel with efforts against all three of our strategic pillars

[Mike Valentine:]

Thank you, Jeff. We will now open the call to questions. Chuck, please queue up the first question.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Francesco Pellegrino with Sidoti & Company. Your line is open.

[Francesco Pellegrino:]

So this was a pretty nice quarter despite a lot of components to your top line that didn’t really go your way. And I guess, just before I dig a little bit deeper, pecan cost year over year, were they up, down or flat?

[Jeffrey Sanfilippo:]

Was it pecan cost? I’m sorry, I didn’t hear. Yes, it’s a little up this year versus last year significantly.

[Francesco Pellegrino:]

So your pecan costs were up because I noticed that sales by product type, the only product type that increased was pecan. I know you’re vertically integrated for pecans, walnuts and peanuts. So when I just think about the top line struggles, I’m thinking that a lot of this margin expansion you got was probably from your cost structure. And when I think about your cost structure, I think about seller margin and then I also think about your procurement expertise. Can you maybe just give us a little bit of color in regards to how your sheller margins performed as compared to maybe some favorable impact you got from maybe some opportunistic buying for cashews and almonds as compared to the year ago period?

[Mike Valentine:]

I can take that, Francesco. In respect to sheller margins, we’d like to talk about that in respect to the entire shelling industry. So with market increases that we’ve seen with pecans this year, we believe that margins for pecan shellers have expanded this year compared to last year.

[Francesco Pellegrino:]

Okay. And I guess maybe with some other nuts that you’re not vertically integrated for cashews and almonds. If -- when you talk about overall sheller industry margin is expanding, then I would think that you would be hurt by greater margins for almond shellers and cashew shellers. It just seems as if something on your cost structure contributed to have really the impressive quarter? And I’m just trying to dig a little bit deeper to see if it would -- the nuts that you’re vertically integrated for or maybe it was opportunistic buying for others, and I’m not sure if you could give a little bit of color or if you can’t for competitive reasons?

[Mike Valentine:]

Again -- I’ll start with sheller margins and I’ll talk about each -- entire industry. So it’s my belief that with the recent rise in peanut market prices, I believe that peanut sheller margins have expanded this year compared to last year. We also have seen a recent increase in walnut market prices, and I believe the same case could be made for walnut sheller margins. So obviously, when the entire industry sheller margins expand, typically, we would expand with them and of course same goes in the other direction. As you mentioned before, we don’t shell almonds and cashews, so a contraction of sheller margins for those particular nuts typically would benefit us.

[Jeffrey Sanfilippo:]

We’ve got such good visibility from our procurement team just being in the industry so long. I think we did a great job at acquiring inventories and managing our positions very well and we do a great job aligning our costs with our selling prices. So a lot of times we are the first to market with price changes just because of our visibility and understanding of market dynamics and consumption, which helps us.

[Francesco Pellegrino:]

It’s interesting you say that because in the year-ago period, you guys actually got burnt on the plummet in walnut prices. And I guess really just what I’m getting at is, when I look at your investor deck, and I look at that slide that has peanut and tree nuts spot market prices versus your rolling 4 quarter gross margins, I see a plummet in almond prices and then I see a quick rebound. And I’m just wondering if you guys really lucked out by some strong opportunistic buying maybe for almonds if I try to maybe narrow in a little bit more on my questioning in regards to what contributed to this strong quarter? Did almond gross profit per pound increase for you guys in this quarter as compared to the year-ago period?

[Mike Valentine:]

Sure, I’ll take that, Francesco, as I’m ultimately responsible for buying almonds. We did have a significant improvement in profitability on almonds this year compared to last year. We did, we have a lot of expertise in that area and have to give our almond buyer a lot of credit for timing his purchases at the right time.

[Francesco Pellegrino:]

Was it luck or, when you think about is the personnel and the skill set, I don’t know if you would call it something like tree nut alpha or something. How would you put the competency level of these guys against the rest of the industry because it almost seems as if there might be a competitive advantage?

[Mike Valentine:]

Well, we’ve always touted the fact that we have probably the most experienced nut procurement team in the industry, people with decades of experience. And in many cases that experience helps you beat the market, and this year, I think, that was the case, especially for almonds.

[Jeffrey Sanfilippo:]

And then let me also add, we’ve talked about this on many calls, we have focused on growing a more profitable business, more value-added business with customers that are looking for something differentiated. So that helps and also operations team has done a great job driving cost [indiscernible] profitability as well. It’s really a combination of procurement, expertise and other things we’re doing in the company.

[Francesco Pellegrino:]

Okay. As I said before, a lot of your revenue drivers during the quarter weren’t that impressive and you just think if, maybe you did have one of those revenue drivers be a little bit stronger, how much more impressive of a quarter this could be? My question for you is, the third quarter of this year, so we have this significant decline in total volume sales whether you want to look at the branded category or the private label category. And I’m wondering if it’s more of a timing issue and maybe we could see a nice rebound in volume sales in the fourth quarter despite the fact that we are going to be lapping the lost almond butter business, I mean, maybe given insight into where retailer inventory levels are, or just maybe what’s happening with private label, could that be rebounding going into the fourth quarter? Just a little bit of commentary would be helpful with that.

[Jeffrey Sanfilippo:]

Sure. Let’s take a couple of things. One is, we have no control over some of our private brand customers in the way they merchandise and the way they set their shelves. We saw some adjustments they made in Q2 that impacted Q3. We have since then seen some readjustments. So we would expect some of that volume declines to turn around going forward. And then as far as merchandising and promotion activity, we’re optimistic of volume growth going forward.

[Francesco Pellegrino:]

I was operating under the assumption that some of the product placement issues at some of these retailers for private label nuts was more of a 2016 issue and that we were going to be favorably lapping that right now, but it seems as if some of these situations are getting worse?

[Mike Valentine:]

Almost sounds like...

[Jeffrey Sanfilippo:]

Yes, I don’t want to say it’s getting worse. There is some inventory loading by some retailers in Q2. So up through December, we’re seeing some of that cycle through volume that’s impacted Q3 volume, some promotions and some information [indiscernible] that’s starting to move through that inventory now.

[Francesco Pellegrino:]

So the product placement last year which was bad is even worse this year, which I would think would set up for an easy [indiscernible] if can just get their act together?

[Jeffrey Sanfilippo:]

I think it’s a good comment.

[Francesco Pellegrino:]

Okay. And if the opportunity for greater volume sales persists into the fourth quarter exists, then, your finished goods inventory looks a little bit light as compared to the year-ago period. So would you think that maybe you’re not positioned necessarily well for a strong fourth quarter volume uptick?

[Mike Valentine:]

We’ll let Jasper address that. Go ahead, Jasper.

[Jasper Sanfilippo:]

I would say that our inventory position reflects what we look in our forecast, and I think it reflects certainly the demand that we’re foreseeing. The position’s typically because of new [indiscernible] requirements, we are having to take shorter positions with respect to on-time deliveries and we’re taking more deliveries from our suppliers quicker. So we have better inventory turns due to freshness in additional processing that we have to do on our nuts.

[Operator:]

Thank you. Our next question comes from Stefan Mykytiuk with ACK. Your line is open, go ahead please.

[Stefan Mykytiuk:]

Just sorry to be redundant, but Jeffrey you were breaking up on some of those answers. I didn’t hear what you were saying in terms of the -- just the volume rebound. I guess, when I look at Q4, we’ve got another quarter of the almond butter contract rolling off and then last year you had the extra week. So I guess, as we look to Q4, is it logical to think that we have a similar volume decline in Q4 that we did in Q3, and then in the fall we start to get some of that back?

[Jeffrey Sanfilippo:]

With the extra week, obviously, that’s something that we can’t make up from a timing standpoint, but we got new business that we’ll be shipping in Q4. We’ve seen changes that impacted Q2 and Q3 from retail or private brand decisions that we had no control over, we’re tending to see readjustments. They’ve seen the same volume challenges that we’ve experienced from a manufacturing side. So we anticipate some of that volume to shift, so we wouldn’t see that declining trend, but at least stability in that items that [indiscernible].

[Stefan Mykytiuk:]

Okay. Sorry, you broke up again in the end. So you’re saying that kind of incremental decline we saw in Q3 we get back in Q4 you think from some of the new business or private label coming back?

[Jeffrey Sanfilippo:]

Correct.

[Stefan Mykytiuk:]

Got you. But we still have the almond butter and then the extra week that we got to compare against.

[Jeffrey Sanfilippo:]

Cycle through. Yes. Exactly.

[Stefan Mykytiuk:]

And then the overall price decline was -- had been coming down the last couple -- was down 10% in Q1 and then 7% in Q2, and I would have thought that we would have seen like further mitigation in Q3. What was it that all of the sudden turned in Q3 and caused further average price decline?

[Mike Valentine:]

I can take that Jeff. There was a further decline in almond prices from Q2, and I think that, that kind of bumped it back up.

[Stefan Mykytiuk:]

Got it. So in Q4 now with pecan prices going up and peanut prices going up, does the average price decline mitigate at all in Q4 or [indiscernible]?

[Mike Valentine:]

Well, I think, we started to get into lower almond prices in last year’s Q4. So that large change that we saw in Q3 over Q3 is going to come down quite a bit. Everything else should be pretty comparable with the last year and then, of course, we’re going to see increasing cashew prices just as we did a bit in this last quarterly comparison. So I don’t think that change in weighted average selling price is going to have as much of an impact on our top line as it did in this current third quarter.

[Stefan Mykytiuk:]

Got it. Okay. And then just one other thing Jeffrey, you had mentioned kind of headwinds and tailwinds going into next year. Can you just elaborate a little bit more. We’ve probably touched on a few of them here, but I’m just curious what are the other kind of tailwinds and headwinds as you look forward?

[Jeffrey Sanfilippo:]

As for tailwinds, we do have some little bit over the last 6 months. So that we’ll start shipping in Q4 as we see some positive impact on volume growth and with those new customers I think our sales and marketing team are doing a great job expanding distribution with our Fisher recipe and Orchard Valley Harvest brands as we expect some tailwinds going into fiscal ‘18 with new distribution and new customers there. The headwinds, again, we’ve got the short week for Q4, and then just some of the volatility in cashew prices, as Mike mentioned, we’ll see some severe increases coming down the pike in the very near future from commodity standpoint. But from a gross standpoint and volume, we’re laser-focused on that. We realized we’ve got some more work to do, but we’re optimistic on what we’ve got in place right now going forward.

[Operator:]

[Operator Instructions] And our next question comes from Mitch Pinheiro with Wunderlich Securities. Your line is open. Go ahead please.

[Mitch Pinheiro:]

I was trying to figure out, you said total nut, when Jeffrey, when you were giving the IRI data, total nut volume was flat in the period. That was the category correct?

[Jeffrey Sanfilippo:]

Correct. Yes, top line.

[Mitch Pinheiro:]

Can you talk about the category in general, maybe -- first of all, you are seeing ecommerce, Amazon and the like, are they taking any share out of your conventional channels? And do you participate in these channels at all?

[Jeffrey Sanfilippo:]

And so we do see -- it’s hard to measure exactly what’s shifting from typical bricks and mortar retail to ecommerce, but we do believe and have seen some shipments in consumer consumption that are shifting to ecommerce. We are focused on ecommerce channel as part of our expanding consumer reach and our alternative strategic growth initiative. So we are looking at ecommerce and working with several players now in that channel. And we do anticipate in the future more consumption being done online.

[Mitch Pinheiro:]

Is there -- and anything else with the category itself, I mean, nuts haven’t lost their healthy luster. Is there something -- for flat volume, is there anything else happening that you could call out?

[Jeffrey Sanfilippo:]

Howard, you want to say anything specific, since you’ve got little good perspective on general dynamics or consumption dynamics?

[Howard Brandeisky:]

All we see is snack nut category was down about 3%. We already talked a little bit about the recipe nut category was down 7%. The produce -- as we measure it, the produce part of the store actually grew the most, had the strongest performance in our third quarter and that was driven by the drop in prices that we’ve seen in pistachio. And so we saw a big surge in pistachio volume and in the category that is. And so that resulted in the overall flat sales for the category.

[Mike Valentine:]

Howard, can you also talk a little bit about the recipe nut category that was down about 7% in quarterly comparison.

[Howard Brandeisky:]

Yes. So the category, as you mentioned, is down 7% and very different by nut type, the walnut prices that we’ve already talked about came down. So we did see a little bit of growth in walnuts of 2%, but it was offset by the pecans and the almonds. Pecans have gone up about, I think, 7% in prices at retail on average and so we saw 11% drop. And the almonds went down 15% in the recipe nut category. But if you look at almonds overall, they were up 5%. As I think Jeffrey maybe mentioned in his commentary, we see -- and we see this every quarter some rotating between the different parts of the store. And in the case of almonds, we saw some strength in the produce section of the store and the snack section of the store as people rotated out of the recipe nut section. As overall almonds were up, but in recipe nuts, they were down as we measure it.

[Mitch Pinheiro:]

Okay, that was helpful. And then, I guess, my final question just on gross margin. You’ve done a terrific job improving on such a sales decline, having an increasing gross profit, it’s terrific performance. The thing -- I’d love to understand, like what part of that is sustainable? I mean, as you look over the next couple of quarters, I mean, clearly you’re moving to -- you’re focused on higher-margin channels, your higher margin customers. Is that sustainable? Or is there some items in the quarter that sort of helped? I mean, you’ve done it all year long, that’s not just in this quarter, but what -- can you talk a little bit about that, that would be helpful?

[Jeffrey Sanfilippo:]

You want to cover that Mike? Or I was thinking...

[Mike Valentine:]

Go ahead…

[Jeffrey Sanfilippo:]

Okay. So as we shift our focus from the industrial business, which was typically low margin, we shift from some of the lower margin consumer business into more branded and value added product type. That’s sustainable margin enhancement because we control the pricing, we control our brands, we control the spending against our brands. We control [indiscernible] as you see our bands grow, that is sustainable margin impact. As long as we’re not seeing huge shifts or fluctuations in commodity prices, we’ve got much better control over that margin going forward.

[Operator:]

And at this time I’m showing no further questions. I would like to turn the call back over to Mr. Mike Valentine for closing remarks.

[Mike Valentine:]

Thank you, Chuck. Again, thank you, everyone, for your interest in JBSS. And this concludes the call for our third quarter fiscal 2017 operating results.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.