Q2 2021 John B Sanfilippo & Son Inc Earnings Call
Good morning, My name is <unk> and I'll be your conference operator today.
This time I would like to welcome everyone to the John B Sanfilippo, installing Inc. Second quarter fiscal 'twenty granted one operating results conference call. All lines have been placed on mute to prevent any background noise.
Remarks, there'll be a question and answer session.
Mr. Mike Valentine Chief Financial Officer, you May begin your conference. Please go ahead Sir.
Thank you Dexter.
Everyone and welcome to our two 'twenty 'twenty, one second quarter earnings Conference call.
Thank you for joining us today on the call with me today is Jeffrey Sanfilippo, our CEO and Jasper Sanfilippo, our C. O O before we start we want to remind 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 in.
Parents in our business.
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.
Starting with the top line net sales for the second quarter of fiscal 'twenty, one decreased five 2% to $233 $6 million in comparison to net sales for the second quarter of fiscal 2020 of $246 $4 million the.
The decline in net sales was primarily due to lower selling prices for tree nuts, which in turn resulted from lower commodity acquisition costs.
The decline in net sales from lower selling prices was offset in part by a one 8% increase in sales volume, which we define as pounds sold to customers.
Sales volume increased nine 9% in our consumer distribution channel and that was mainly due to a 13.
13, 3% increase in sales volume for private brand Peanuts trail mixes and snack mixes.
Current economic conditions have resulted in a shift in consumer preferences for lower priced private label products and lower priced.
Ex that we make.
Increased sales for Fisher snack nuts also contributed to the sales volume increase in the consumer distribution channel.
Sales volume decrease in our commercial ingredients channel by 23 six per cent and that was due to a 29, 4% decline in sales volume in our foodservice business the day.
Decline in foodservice sales volume was due to a decline in air travel nationwide restrictions on indoor restaurant dining and restaurant closures all of which were attributable to COVID-19.
Sales volume declined in the contract packaging distribution channel by 14, 1%, primarily due to the unfavorable impact of lower convenience store foot traffic in one customer's business again from COVID-19.
Turning to sales volume for our branded products in.
In the current second quarter branded sales volume accounted for 25, 5% of total consumer channel sales volume.
Yeah.
Sales volume for our Fisher recipe nuts declined 18, 4% as a result of loss distribution at some grocery customers, which was offset in part by increased sales with our internet retailer customers.
The 13% decrease in sales volume for Orchard Valley Harvest was primarily driven by lower foot traffic at a major customer in the non food sector due to COVID-19 reduced promotional activity and loss distribution at some other customers.
The 32% increase in sales volume for Fisher snack nuts resulted mainly from increased promotional activity.
On southern style nuts sales volume declined by four 2% and that was due to reduced merchandising and promotional activity compared to last year's second quarter and that was offset in part by distribution gains with new customers.
Net sales for the first two quarters of the current fiscal year decreased to $443 $8 million from $464 $3 million for the first two quarters of fiscal 'twenty.
This decrease in net sales was primarily attributable to lower selling prices for the same reason I discussed in the quarterly comparison.
The decrease in net sales was also attributable to a 0.7% decline in sales volume.
Sales volume increased 7% on the consumer distribution channel primarily for the same reasons I cited in the quarterly comparison.
Sales volume decreased 25, 6% on the commercial ingredients distribution channel, mainly as a result of a 35, 5% decline in sales volume in our foodservice business for the first two quarters.
The decline in foodservice sales volume occurred for the same reasons I cited in the quarterly comparison.
Sales volume declined in the contract packaging distribution channel by 13, 2%.
For the same reason I also cited in the quarterly comparison as well as the loss of some peanut butter business with another customer and that was attributable to a temporary peanuts supply shortage that existed in the first quarter of fiscal 'twenty and 'twenty one.
Second quarter gross profit increased $2 $8 million or five six per site and gross profit margin as a percentage of net sales increased to 22 six per cent for the second quarter of fiscal 2021 from 23 per cent for the second quarter of fiscal 2020.
The increases in gross profit and gross profit margin were mainly due to lower commodity acquisition costs per tree nuts.
And increased sales volume.
Gross profit for the first two quarters of the current fiscal year declined by $100000 in gross profit margin.
As a percentage of net sales increased to 28% from 19, 9% for the same period last year.
The increase in gross profit margin in the year to date comparison, primarily was due to lower commodity acquisition costs per tree nuts.
Total operating expenses for the current second quarter decreased $500000 in the quarterly comparison.
The decrease in operating expense.
It was due to the recognition of a $2 $3 million gain on the estimated final insurance settlement related to the fire that occurred in our carries Berg North Carolina facility that occurred in the second quarter of fiscal 2020.
Gain from the insurance settlement was largely offset by increases in freight compensation and advertising expenses.
Total operating expenses as a percentage of net sales increased to 10, 7% from $10 four per cent compared to last years second quarter due to lower net sales base.
Total operating expenses for the current year to date period decreased $3 $2 million and as a percentage of net sales total operating expenses declined to 10, 2% from 10, 5% compared to the first two quarters of fiscal 2020.
The decrease in total operating expenses was mainly due to the insurance settlement gain I cited in the quarterly comparison.
Declines in compensation and travel expenses also contributed to the decline in total operating expenses in the year to date comparison.
Interest expense for the second quarter and year to date period of fiscal 'twenty, one declined slightly compared to interest expense for both periods in fiscal 'twenty 'twenty.
The decreases in interest expense in both comparisons were due to a lower weighted average interest rate from the reduction of long term debt.
The benefit from a lower weighted average interest rate was largely offset by higher average short term debt levels in both periods.
Net income was $19 $9 million or $1 72 per share diluted for the second quarter of fiscal 2021 compared to $17 $5 million or $1 52.
Per share diluted for the second quarter of fiscal 2020.
Net income for the first two quarters of fiscal 2021 was $32 $7 million or $2 83 per share diluted compared to net income of $34 million or $2.64 per share diluted for the first two quarters of fiscal 2020.
Now taking a quick look at inventory.
On a value of our inventories on hand at the end of the current second quarter decreased nine 8% compared to the total billable value of inventories on hand at the end of the second quarter of fiscal 2020. The decrease in inventory value was due to lower commodity acquisition costs for all major tree nuts, and lower quantities of peanuts and on hand.
The weighted average cost per pound of our raw nut and dried fruit input stocks on hand at the end of the second quarter of fiscal 2021 decreased four 6% compared to the weighted average cost per pound of these input stocks at the end of the second quarter of last year.
The decrease in the weighted average cost per pound of our interest input stocks was attributable to lower commodity acquisition costs for all major tree nuts.
This was offset in part by a shift in product mix from lower price peanuts to higher price walnuts and pecans I will now turn the call over to Jeffrey Sanfilippo, our CEO to provide additional comments on operating results for the second quarter of fiscal 'twenty one Jeffrey.
Thank you Mike good morning, everyone.
<unk> reported record net income and diluted earnings per share in our second quarter coming off of a record second quarter last year I am so proud of our management team and all of our associates for overcoming enormous headwinds to achieve record results for our second quarter of fiscal 2021.
This is a considerable accomplishment given the trio of challenges we faced in our foodservice business in our contract packaging distribution channel and with our Orchard Valley Harvest brand from the impact of COVID-19.
As has been the case in recent quarters, we saw strong sales volume growth in our consumer distribution channel from increased sales of private brand snack nuts trail mixes snack mixes and Fisher snack nuts.
Sales volume in the consumer distribution channel accounted for 78, 2% of total sales volume in the current second quarter.
<unk> has had an unfavorable impact on our foodservice business it might as Mike alluded to however, foodservice results have continued to improve in fiscal 'twenty, one as a decline in foodservice sales volume in the current second quarter was 29, 4% compared to 63, 3% in the fourth quarter of <unk>.
<unk> 2020.
It has been a very strong first half of fiscal 2021 as you may have seen from our press release last night, our board of directors approved the payment of a special dividend of $2 50 per share. This special dividend will be paid on March 16th 2021 to stockholders of record at the close of business.
On February 26 2021.
These dividends reinforce our goal of creating long term stockholder value through the responsible use of cash these dividends would not be possible without the hard work and dedication of all of our employees.
We demonstrated exceptional results despite having to overcome many challenges, including a shortage of capacity in the transportation industry, which are service providers believe is due to driver concerns related to the impact of COVID-19, and an increase in demand driven by additional spending on consumer goods.
From the start of the pandemic our entire organization came together to keep each other safe while still focusing on building our business. Our teams have not stopped working to drive continuous improvement projects optimize supply chain efficiencies and maintain best in class quality and service levels for our <unk>.
<unk> and consumers.
Turning to sales review by Jbs S business channel in the consumer channel distribution increased $3 $9 million or two 1% and sales volume increased nine 9% in the second quarter of fiscal 'twenty one.
Our sales marketing innovation and R&D teams have been working hard on new product development and distribution.
We recently launched Fisher recipe nut flowers in the marketplace at the end of our second quarter preliminary.
Preliminary customer and consumer feedback has been positive and we are finalizing plans to gain retail distribution.
You can already purchased our Fisher nut flowers at Amazon Dot com.
In addition, our company will be Gatecrashing. This Valentine's day, with our new Ruby real premium gift not launch social media and marketing plans have already been executed and the product was recently launched on Amazon Dot com as well so look for it.
In the commercial ingredient channel distribution decreased by 40% in dollars and 23 six percentage sales volume in the second quarter of fiscal 'twenty one.
The decline in sales volume was due to 29, 4% decrease in volume in our foodservice business.
Sales volume declined in our foodservice business.
It resulted in a decline in air travel and nationwide restrictions on indoor restaurant dining and closures of restaurants, all of which were attributable to the pandemic.
And our first quarter of fiscal 'twenty, one volume declines were 40% in this quarter volume declines were only 30%.
Although demand has been suppressed from our foodservice customers the rate of decline is recovering from its low point in our fourth quarter of fiscal 2020.
And we believe that as the COVID-19 vaccines become more widely distributed and accepted by the public and restrictions are again loosen sales volume with our foodservice restaurant and non commercial customers will continue to improve and we expect to eventually return to pre pandemic levels.
I know the foodservice sales team has been laser focused on getting expanded distribution in place for our products in preparation for reopening and re engagement with their customers.
In the contract packaging channel distribution decreased by 12, 8% in dollars and 14, 1% in sales volume in the second quarter of fiscal 'twenty, one compared to the second quarter of fiscal 'twenty as Mike mentioned the decline in volume was primarily attributable to the unfavorable impact of lower convenience store foot traffic.
On our customers' business as a result of the pandemic.
Here too in the contract packaging channel, we anticipate a slow but eventual return to pre pandemic levels of volume is vaccines become more widely distributed and accepted by the public and restrictions are again loosen.
Turning to category updates I will share some of the insights from this past quarter.
As always all the market information I'll be referring to is the IRI reported data and for today. It is the period ending December 27th 2020.
When I refer to Q2, I'm, referring to 13 weeks of this quarter ending December 27th Rep.
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 average price per pound.
Breakouts of the recipe snack and produce categories are based on our customer custom definitions developed in conjunction with IRI.
On the term velocity refers to the sales per point of distribution.
As has been mentioned COVID-19 had positive and negative impacts upon our results for the second quarter of fiscal 'twenty 'twenty, one and we continue to see evidence of a shifting consumer preferences to shop and smaller store formats like grocery and online.
Growth in private label and moves to larger value sizes continue to drive category growth.
The total nut category increased in both sales dollars and pound volume by 4% and 5% respectively in Q2.
This was slightly behind pound growth, we saw in Q1, but a head and dollar growth.
With pound and dollar growth rates are ahead of the category growth rate last year at this time.
Overall prices for the quarter were down 1% versus the prior year.
Now I will cover each category in more depth, starting with recipe nuts.
Based on Iri's total U S multi outlet market data consumers continue to do much more cooking and baking at home.
However, consumers also changed holiday behavior with smaller gatherings for Thanksgiving and Christmas given travel bans and Lockdowns the.
On the recipe nut category grew 4% in dollar sales and 6% in pound sales. This.
This is down from the previous quarter of 16% in dollar growth and 13% in pound growth.
Despite category growth overall Fisher brand continues to be challenged by a decline in distribution with two key retailers on Fisher recipe nuts decreased 20% in dollar sales and 19% in pound sales for the quarter versus last year we.
We did show gains in velocity, we have distribution this was not enough to.
Set distribution declines.
As a result Fisher share in the category decreased $4 nine point share points versus last year.
Fisher continues to be the branded share leader in the recipe category when using the broader multi outlet definition or within the U S food channel.
Now, let me turn to the snack category in Q4, the snack category increased 4% in dollar sales and 6% in pound sales.
Fisher snack also grew 4% in dollars and 10% in pound volume sales in Q2 with a 17% increase in pound velocity on core Fisher snack nuts, driven by increased promotional activity and an 8% pound growth rate on our oven roasted never fried line.
Pound volume for southern style nuts brand at retail decreased by 19% in the quarter due to decreased due to decreases in merchandising and promotional activity while pound volume for the total trail and snack mix category decreased by 2% in the quarter.
In Q4, the produce nut category increased 6% dollar sales and 4% in pound volume.
Orchard Valley harvest, our produced nut brand decreased 14% in pound sales, resulting in pound share decline, a 0.2 points versus last year.
The volume decline was due to reduced promotional activity and loss distribution at some customers.
In closing, we face a number of future challenges with the uncertainty of the pandemic and its continued impact on our business.
But we also see significant opportunities for growth our management team and all our associates are not wasting any time waiting to expand our business. The teams are working incredibly hard to build stronger brands to build more innovative product platforms and to provide higher levels of quality and service.
We have a stronger foundation today than we did at the start of the pandemic and Jbs S is positioned well for a bigger and brighter future. We have a dedicated team of leaders throughout the company who are doing what matters most to deliver strong financial results.
We are investing in new talent, we are investing in new capabilities and we are investing in our brands.
Sure recipe Fisher snack Orchard Valley harvest squirrel, and southern style nuts are all relevant brands in our portfolio with enormous opportunities for growth and.
And we have the right strategies and human capital to continue to build our business and provide exceptional value and innovation for our customers our consumers and our stockholders.
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 Mike.
Thank you Jeff.
We will now open the call to questions from participants Dexter please queue up the first question.
Okay. Okay. That's a reminder to ask a question you need to press star one wondering coming from Europe.
Question press the pound key.
Okay.
On a day from Keybanc.
Right.
And our first question comes from the line of Chris Mcginnis from Sidoti Your line is open.
Good morning, Thanks for taking my questions and congratulations on another good quarter.
Morning, Chris Thanks, Chris.
I was wondering if we could just maybe start with the gross gross margin line.
And just talk about I guess, one maybe.
On the benefits over the prior year, how much of that is.
Maybe consumer.
Now that that's a heavier portion of the mix versus the lower <unk> prices and can you just maybe dig into that a little bit more and then maybe as you think about whether next quarter on the next 12 months you know how that plays out on a lower trained up.
Prices into net margin line.
For the next year.
I'll take that Chris So as we mentioned in the release.
Virtually all of the improvement on that line came from lower commodity costs.
And as we mentioned, it's just about all the major tree nuts.
That we process.
Probably with the exception maybe haynesville months, so it's pretty interesting that's not something we've.
We can recall seeing in recent years, where every tree nut.
It's down pretty significantly year over year, and that's really what what drove that going forward.
You know, we're pretty much locked in for the remainder of the crop year from the North American tree nuts.
And that would pretty much take us through next summer. So our costs are fixed we do have some more pricing actions to take in January as we typically do.
And.
Overall, you know, we think we will see some margin expansion simply because of the lower acquisition costs.
Alright, alright so.
For some time then.
Our gross margin.
Level I guess, if you want to call it.
Right.
Okay.
And you said, it's unprecedented can you maybe just share your insight obviously, you've been around it for a long time, just maybe your thoughts around what's driving kind of the decline in the pricing.
How sustainable that is.
Hey, Chris it's Jeffrey so it's a combination of things. It's just been extraordinary you're a couple of years for growers. So theres been so much more planting of almonds walnuts pecans in some places so you've just seen an increase in the supply side because the growers have made so much money and it has been such a profitable industry day.
Investing over the last 10 years and so now you're seeing the results of those increases in acreage planting so you've got.
Close to 3 billion pound almond crop you've got a record close to record walnut crop, let record pistachio crop pecan crop in Mexico continues to grow as well as places like South Africa, and so you've seen just increases in supply and it just takes a while for demand to catch up with that so that's part of the reason you're seeing some of this price deflation today.
As a result of just larger crops around the world.
Okay.
And can you just.
Thinking about the.
The pandemic on their business, obviously consumer you've obviously benefited from.
I guess as things start to come back on the other two segments of the company you know how do you see that playing out on the margin from.
Do you want that to come back or you know.
I know you I know, it's still important but.
This beneficial kind.
Kind of.
It's obviously benefited the consumer.
More for you can you hold the gains on the other side too on it.
Come back to thinking the economy.
Just thinking about your portfolio you want to change it at all during the pandemic.
Yes, so as we've talked to what you've seen a shift to E. Commerce, we've seen a shift to people eating and cooking at home.
I believe as states reopen youre going to see some of that shift back to and we hope to see day shift back to foodservice, where people are going out to eat and traveling again, we expect to see that I think some of the gains you've seen in consumer some of that will stick. We're hopeful that consumers are now used to cooking at home and they've learned to cook at home that increase we saw on our.
In the recipe program and even down that recipe aisle and we're hoping that we can maintain some of that volume even though the pandemic is once the pandemic subsides and so we're hopeful that we can keep that recipe category growing strong continuing to educate consumers on how they can use nuts to cook and what to do with them and I think the foodservice piece our team has been.
Really laser focused on building distribution, so that when states do reopen we have our product portfolios in place to optimize the volume again in that channel. That's why I'm really confident once we do get back to some new level of normalcy Youll see that foodservice piece come back again, it's just a matter of time when states start to reopen and people are.
Confident and comfortable to go back on TV again in travel.
Okay. Chris This is Mike I would add debt.
If we were to see a decline in private label snack nuts and trail mixes in favor of.
Foodservice walnuts and pecans, where we're seeing a lot of decline right now that would actually be a very positive development for us because as you know we're vertically integrated in those two nuts, we tend to have better.
Gross profit per pound.
Measures with the nuts that we shall in debt.
Actually I think.
B a positive for us if we had saw that shift.
Okay. Thanks.
Thanks for that I really appreciate it.
And just with some other loss business.
On the recipe side is there an opportunity to go back and get that I know has been from talk about that at times and just your confidence around that brand and obviously still.
Strong position on that marketplace, but just the ability to go out and gain on some more sports.
<unk>.
Yes, Chris this is Jeffrey so we absolutely believe there are opportunities to regain that distribution or some of it.
Obviously retailers are looking at brands every year and they bid some out every couple of years. If you looked at on velocity versus some of our competitors in the marketplace. It's just so much higher and I believe we really investing our consumers we investing educating people on recipe nuts I just think we have a very strong we have very strong brand equity.
D with Fisher and I think with the marketing efforts that we're making on some of the changes in our brand positioning we're bringing value to retailers that carry Fisher I really believe that some of the loss distribution. We can get we can regain that with some of the success stories were having another other places.
Maybe is there opportunities for M&A in this environment for you and maybe just your thoughts around.
Maybe the conflict from the competitive landscape as well.
Sure sure. So we always look at M&A, we've talked about it periodically on these calls we're always looking at companies.
That has been that important or we felt was that strategic debt.
That made sense for us at this point or perhaps pricing wasn't right, but we are continually looking at opportunities in M&A, whether it's a new capability that we currently don't have it's a new product platform or its got a.
Brand that reaches a consumer that we currently don't reach you know a lot of opportunities and strategies, we have in M&A and we'll continue to look at them just nothing that made sense up until now.
And maybe you can just talk on the competitive landscape at this point.
I guess, just as you know.
All of the different changes moving parts within the industry.
Just how are they attack it maybe the consumer side.
Yes so.
Competitors are responding to the pandemic and just trying to understand the dynamics with consumption trends in consumer behavior.
Yes.
<unk> seen some of our competitors Diamond for example, being very aggressive on building their share.
Their recipe nut distribution planners, it's been aggressive for investing in their brands and trying to continue to expand distribution and so the brands are still they're trying to.
Play a stronger role at retail and on the shelves and try to mitigate some of the impact that these big private brand programs are having with shelf space.
We don't anticipate major changes with competitors I, just think youre going to see.
People watching what happens with the pandemic and continued changes in consumer behavior and respond accordingly.
Sure. Okay. Thanks for taking my questions and good luck in Q3, thanks, Chris.
Your next question comes from design, a fever B call from capital Management. Your line is open.
Congratulations on another great quarter, and look forward to the new products.
Thanks, Tim Thanks, Tim.
Oh.
Do you expect interest expense to decline over upcoming years as you pay down long term debt to close to zero.
Yes based.
Basically.
Our average interest rate on long term debt is about twice as much as it is on short term debt.
All of our debt amortize is so yes, we do.
There were some capital expenditures with.
The pandemic do you expect capital expenditures to go down over time post pandemic.
Okay.
The capital expenditures, we made for the pandemic.
Actually we are pretty small percentage of our total capex in fiscal 2020, our plant was actually pretty well laid out.
That allowed us to create a safer working environment without a lot of capex the big the big increase in Capex that youre seeing for fiscal 'twenty, one that we disclosed in our.
The 10-K at the end of 2020.
Really attributable to product line expansion.
That's great.
You had.
Near record sales and earnings in consumer sales were 82% of the base, which is huge.
As the economy Reopens I think you said you believe you have enough capacity when on foodservice and specialty retail sales in other areas.
Open up and demand nuts from you.
I believe you said you have enough capacity to handle that from these levels is that right.
That is correct, yes, we've got an amazing infrastructure at all our facilities as Tim and we've invested over the years and as our business grew we invested in new packaging new capabilities robotics.
Extraordinary to investments we've made in manufacturing so as we even the product line shift or volume shifts we've got available capacity to meet those demands. So as foodservice comes back and we see that growth return, we've got the capacity to handle that additional growth. In addition to keeping the volume growth we've seen in the consumer channel.
That's terrific do you expect to sell the Gary's Berg facility.
We haven't made a final decision on that yet, but currently we do have inventory there.
We are doing some shipping and receiving.
More than likely we probably will put it up for sale in the fourth quarter, but were still studying our options.
Yes, if you are a buyer Tim let us know.
Yeah.
Okay.
Okay.
On their last call Smucker indicated they had a solid ship.
Jeff price increases.
Due to higher costs than they thought those price increases will stick long term.
And Meanwhile, we have conagra buying.
We're selling Peter Pan.
In other nut lines to post.
How does this competitor activity affect your company.
Well, the peanut butter business or the majority of our peanut butter business is private brands.
We took some pricing activity early mid last year, the timing because of the crop yes because of the crops. So we did take some pricing in mid last year because of the pricing just as smokers and some other brands did.
We anticipate I don't anticipate huge changes in the peanut butter segment. It's still a strong segment I think you are seeing growth there as a result of Covid current economy. Today. It is a low price high protein items for families and so we've seen a lift with our current private brand peanut butter customers as well as obviously the food pantries around the country.
Huge growth in demand there.
Well. Thank you for all your hard work and success.
We appreciate it thanks, Tim for your support.
Okay.
Per cent participants to ask a question press Star then the number one on your telephone keypad, that's far one on your tennis won't see Pat.
There are no further question at this time I would now like to turn the conference back to you Mike Valentine.
Okay. Thank you Dexter again, thank you everyone for your interest in J B S. S. And this concludes the call for our second quarter fiscal 2021 operating results have a good day.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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