Q2 2023 John B Sanfilippo & Son Inc Earnings Call

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Okay.

To our fiscal 2023 second quarter earnings conference call.

For joining us.

On the call with me today is Frank.

CFO .

For Sanfilippo our C O.

We make some forward looking statements today.

<unk> are based on our current expectations and involve certain risks and uncertainties.

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 the filings to learn more about these risks and uncertainties that are inherent in our business.

First let me start off by performance during the second quarter net sales increased over $21 million or eight 3% compared to last year's second quarter.

And we delivered strong bottom line growth is our diluted EPS increased 26, 5% to $1 45 per share.

Our strong quarterly performance results from numerous continuous improvement initiatives, our focus on reducing our operating costs reduced discretionary spending and selling price alignment efforts initiated last fiscal year as a response to inflationary cost increases.

We continue to see strong demand for our products, especially from our private brand customers in our consumer channel.

Our sales volume grew over 3% in the consumer channel excluding the one time loss of our private brand grocery customer compared to the overall decline in the snack nut category.

During the quarter, we continued to execute against our long range plan.

First we paid a dollar per share special dividend reinforcing our goal of creating long term shareholder value by returning capital to our shareholders.

Second we completed the acquisition of the just the cheese brand, which is part of our strategic initiative to further diversify our product offerings.

We are excited to have just the cheese to our branded portfolio as it complements our current brand offerings in the snack category.

And the acquired production capabilities will help accelerate growth with our private brand and foodservice customers.

Just the cheese was invented and 1991 and relaunched in 2017.

It is manufactured at specialty cheese, and it reads to Bill Wisconsin.

Just the cheese is one of the nation's leading baked cheese snacking brands and offers 100% real cheese snack bars and she has crashed.

The actual acquisition will provide us with a product expands our portfolio into new snacking categories.

And third I'm proud to announce that we began to ship our new product line, a private brand nutrition bars, which our team members across the organization have worked harder literally over the last several years to develop and bring to market.

Jbs S are excited to enter into the snack bar category snack.

Snack bar category is around 8 billion in size across Omnichannel and $6 6 billion in IRI multi outlet and consistently grew for over a decade until the pandemic started.

Post Covid it does bounce back with 10% growth in dollar sales over the last 52 weeks.

One of the white spaces in the category is high quality retailer brand offerings.

We believe that it can be.

The partner of choice in the Nutrition bar segment for retailer brands, given our strong track record of quality service and innovation.

I will share additional details of our new product line in future earnings calls.

The management team is focused on executing the company's long term strategic plan for growth.

<unk> continued to invest the time and resources to look at macro trends consumer insights competitive activity.

Why chain retailer strategies e-commerce, and innovation and manufacturing capabilities.

There's more work to be done, but there is alignment on the direction and path for Jbs has to become a $2 billion business in the future.

A few highlights I will mention we.

We are executing our growth strategies by continuing to invest in our brands and customers.

A great example is our Orchard valley harvest or Ob brand as we call it.

Over the past year, our marketing R&D and consumer insights teams have transformed the Orchard Valley harvest brands.

It is now a purpose led brand which supports our larger social good goal to fight food and security.

<unk> been completely relaunched with new graphics, new price pack architecture, new innovative products and a new marketing campaign to make it more accessible appetizing and approachable.

We've established a partnership with an organization called conscious alignment, whose mission is to stop child hunger.

1% of <unk> sales goes towards tackling child hunger across America.

Our sales teams are working hard and have been actively pursuing new distribution across the country and I look forward to sharing more details in the future.

We are executing our growth strategies by continuing to invest in new capabilities.

Food safety.

More value to our private brand retail partners and foodservice partners.

Both of these business segments are important to the company's success.

The significant expansion of our capabilities into the snack bar category is a great example of GBS us executing its long range growth plan.

In addition, as I mentioned, we have now entered the cheese snack category as well, which provides a new capability and a new snacking segment.

Strategically there are significant opportunities to use cheap snack ingredients and new mixes across our customer base and product portfolio.

Yeah.

And one last comment we are executing our growth strategies by investing in our people and our culture, we are being intentional in diversifying our workforce and creating a robust and inclusive leadership team across the organization.

We are being intentional in improving our impact on the environment and being good stewards in the communities, where we live and work.

I am proud of the hard work and progress our ESG Committee has made in establishing a framework for our goals and plans.

We are living our mission to create real food that brings joy nurses people and protect the planet.

At this time I'd like to turn the call over to frame to cover our financial performance. Thank you Geoffrey.

Starting with the income statement.

Net sales for second quarter of fiscal 2023 increased eight 3% to $274 $3 million compared to net sales of $253 2 million for the second quarter of fiscal 2022.

The increase in net sales was due to a 12, 7% increase in the weighted average sales price per pound, partially offset by a three 8% decrease in sales volume, which is defined as pounds sold to customers.

Sales volume for Peanuts in all major tree nuts, except pecans declined in the current second quarter.

The increase in weighted average selling price.

The resulted from higher commodity acquisition costs for pecans, cashews, peanuts and dried fruit.

Sales volume decreased 2% in the consumer distribution channel, primarily due to a 5% decrease in sales volume for our branded products, which include Fisher recipe nuts Fisher snack nuts Orchard Valley harvest and southern style nuts.

The sales volume decrease for our branded products was mainly attributable to a 24, 1% decrease in the <unk>.

Volume of Fisher snack nuts.

Due to competitive pricing pressures at two grocery store retailers and lost distribution at a number of grocery store retailer.

The overall sales volume decrease in the consumer distribution channel was partially offset by a 0.7% increase in sales volume for private brand sales.

New private brand peanut butter business in mass merchandising retailer and increased seasonal distributions at a nerve mass merchandiser retailer were substantially offset by lost distribution with a private brand grocery customer that occurred in the fourth quarter of fiscal 2022.

Sales volume decreased seven 7% in the commercial ingredients channel.

Due to a 38, 9% decrease in sales volume of bulk products to other food manufacturers as a result of reduced consumption for softened consumer spending.

This decrease was partially offset by a two 9% increase in sales volume to foodservice customers due to new distribution at existing customers.

Sales volume decreased 11, 4% in the contract packaging distribution channel, primarily due to earlier timing of holiday shipments at a major customer in this channel.

Second quarter gross profit margin as a percentage of net sales remained consistent at 26% compared to the second quarter of fiscal 2022.

The consistency in gross profit margin was due to lower acquisition costs for almonds, and walnuts, which were offset by inflationary cost increases, including labor and manufacturing supplies increased depreciation expense and a <unk>.

Decrease in sales volume.

Gross profit increased $4 $3 million or eight 2%, mainly due to higher net sales mix.

Total operating expenses for the current second quarter decreased $1 $9 million in the quarterly comparison due to decreases in advertising spend and incentive compensation.

Loss on asset disposals, and freight expense, which were partially offset by an increase in base and equity compensation.

Total operating expenses for the current second quarter decreased 11, 7% of net sales from 13, 4% for last years second quarter due to the reasons noted above and a higher net sales base.

Interest expense for the current second quarter increased to $600000 from $400000 for second quarter fiscal 2022, primarily due to higher weighted average interest rates.

Net income for the second quarter of fiscal 2023 was $16 9 million or $1 45 per diluted share compared to $13 2 million or $1 14 per diluted share for second quarter of fiscal 2022.

Now taking a look at inventory.

The total value of inventories on hand at the end of this current second quarter decreased $5 7 million or three 2% compared to 12 hours of inventory on hand at the end of the second quarter of fiscal 2022.

The decrease in the value of inventories was primarily due to lower commodity acquisition costs for all major tree nuts, and lower quantities of finished goods N P cards.

Partially offset by higher quantities of cashews raw materials work in process and farmer stock peanuts.

The weighted average cost per pound of raw nut and dried fruit input stock on hand at the end of the current quarter decreased 24, 2% compared to weighted average cost per pound at the end of the second quarter of fiscal 2022, and it was mainly due to lower acquisition acquisition costs for all major tree nuts.

Moving onto year to date results.

Net sales for the first two quarters that occurred in your increased nine 9% to $526 9 million compared to the first two quarters of fiscal 2022.

The increase in net sales was primarily attributable to 11, 1% increase in the weighted average selling price per pound, partially offset by a one 1% decline in sales volume.

The sales volume increase in the contract packaging channel was offset by sales volume declines in the consumer and commercial ingredient channels.

Gross profit margin decreased one 4% to 23% of net sales.

The decrease in gross profit margin was mainly attributable to higher commodity acquisition costs for all major tree nuts, except walnuts and peanuts.

Other inflationary cost increases cited in the quarterly comparison and increased depreciation expense.

Total operating expenses for the current year to date period increased $1 8 million to $60 3 million.

The increase in total operating expenses was mainly due to a nonrecurring gain of approximately $2 3 million from the sale of that Gary's broke North Carolina facility, which occurred in the first quarter of fiscal 2022.

In addition increases in base in equity compensation expense and sales broker expenses contributed to the overall increase but were partially offset by decreases in advertising spend and freight expense.

Net income for the first two quarters of fiscal 2023 was $32 5 million or $2 79 per diluted share compared to net income of $32 5 million or $2 81 per diluted share for the first two quarters of fiscal 2022.

Please refer to our 10-Q, which was filed yesterday for additional details regarding our financial performance for second quarter of fiscal 2023 now.

Now I'll turn the call over to Geoffrey to provide additional comments on our operating results for the second quarter of fiscal 2023 and discuss category trends.

Great. Thanks, Frank.

Sure some category and brand results with you for the quarter.

As always the market information I'll be referring to is IRI reported data and for today. It is the period ending January one 2023.

I refer to Q2, I'm, referring to 13 weeks of the quarter ending January one.

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 Wal Mart military and other outlets unless otherwise specified.

And when we discuss pricing we are referring to the average price per pound.

Breakouts of the recipe snack and produce segments are based on our custom definitions developed in conjunction with IRI.

And the term velocity refers to the sales per point of distribution.

First the total nut intermix category was up 1% in dollars and down 4% in pound volume in Q2.

This is the same pound rate, we saw last quarter, while retail dollars showed slight improvement.

All segments continued to decline in pound volume in Q2, while trail mix recipe and snack nuts grew in dollar sales.

Overall prices across the category were up in Q2 versus the prior year.

By five 3% with almost all nut types increasing.

Now I will cover each segment in more depth, starting with recipe nuts.

The recipe nuts segment was up 4% in dollar sales and down 7% in pound sales.

Slightly better dollar performance than we saw in Q1.

The recipe nuts were up 11, 3% versus last year, the largest pricing increase of any segment.

Our Fisher brand had a successful holiday season, and grew 19% in dollars and 9% in pounds.

Fisher's performance resulted in growing dollar share by two seven points and remaining the branded leader.

Fisher's performance was driven by increased distribution and velocity in the mass and grocery channels.

Velocity growth was driven by focused holiday promotional strategies, including off shelf displays features and pricing.

We're excited to carry this momentum as we head into the new year.

Now, let's turn to the snack nuts segment in Q2, the snack nuts segment was flat at <unk>, 4% in dollar sales and down 4% in pound sales.

This is slightly better than the decline we saw in Q1.

Most nut types, except macadamia and pecan nuts increased in price.

Fisher snack slightly declined in dollars this quarter down, 2% and was down 11% in pounds.

Peanuts, the largest blood type within the Brad we are seeing significant competitive pricing and promotional pressure.

Continue to see strong results in the oven roasted never fried line across our large sizes.

As consumers continue to look for better for you snacks at a good value.

And we are focused on continuing to build distribution and drive velocities against this line.

The trail and snack mix segment was up 5% in dollars in Q2 and down 5% in pounds priced.

Prices of retail mix mixes were up 10% slightly greater than the last quarter.

Our southern style nuts brands delivered 6% dollar growth and declined 1% in pounds, beating the category.

Dollar growth was driven by increased distribution and velocity in the food channel private brands continued to drive trail mix category growth up 11% in dollars in Q2.

Our last segment produce nuts declined 2% in dollars and 3% in pound volume in Q2.

This is slightly worse than the performance we saw in Q1.

Our produced nut brand Orchard Valley harvest declined 8% in dollars and 8% in pound sales driven by distribution declines in mass offsetting strong performance in the grocery channel.

We have started the repositioning and re launch of this brand that matters and should start seeing new products flow into the market over the next several months.

In closing we start the second half of fiscal 2023 with excitement and optimism as we begin to see stabilization in the supply chain modest downward pressure and acquisition cost of tree nuts.

The continuation of our journey to diversify our product offerings.

As always we will continue to respond to challenges, including the current economic and operating environment and the recent category contraction.

I believe we have the right team initiatives and strategies continue to continuously overcome these challenges and deliver long term shareholder value.

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.

<unk> is positioned well for stronger results in the future.

We appreciate your participation on the call and thank you for your interest in our company.

I will now open up the call for questions.

Thank you and ladies and gentlemen, if you have a question. Please press star one on your telephone.

For your name to be announced to withdraw your question. Please press star one again.

And that is star one line if you have a question.

One moment, while we compile the Q&A roster.

Our first question please.

It comes from the line of Danielle <unk> with UBS. Please proceed.

Yes.

Yes, hi, good morning, Jeff and Frank.

And good job in a challenging challenging couple of years, you've done a great job I know you haven't had a few question in the past couple of quarters. So.

Wanted to kind of throw my hat in the ring here and talk a little bit about.

Capital allocation and how you view it I know you guys have been very consistent with paying special dividends.

I just in the context of the Hormel.

The acquisition of plant or is it about three four times three four times sales and I know your branded products are only about a quarter of your sales.

It seems like.

The market isn't giving you enough credit maybe four four for that part of the portfolio or for your private private label portfolio and I wanted to know what you thought about that in the context of capital allocation potentially share repurchases.

So thanks for the question.

For the last quite a few years, we've really been investing in building our brand portfolio. We realized that we've got much strong stronger margins in our brands, we have much more control over what we do with the brands, where we launch what we launch and so capital allocation is extremely important as far as continuing to invest in our brands.

<unk> re launching transformation of our Orchard Valley harvest brand, which is just hitting the market literally this week and so we see the branded portfolio is extremely important and we've talked about how private brands is the biggest piece of our business today. It is still a very critical component of our success and we believe we are really stir.

<unk> value partners with our key retail partners that we work with but definitely brands as a part of our investment in the future and we see a lot of opportunities we see a lot of white space within our brand portfolio to continue to grow them and really build stronger equity in our brands, which in turn is we can build a broker.

Stronger brand portfolio as a percent of our total sales I think we will get.

Improvement in some of our returns in.

Investments as.

As far as your question about share buybacks, and we prefer special dividends as a way to return capital.

Capital to our shareholders now mainly due to our our daily.

Trading volume is pretty low so we think the more shares out there that's better for our trading volume and for our share price and.

We believe our.

Declaring dividends and paying special dividends is a beneficial way to return capital.

Yeah.

Great that makes sense.

Good luck in the future.

Thank you. Thank you.

Thank you again, ladies and gentlemen, simply price Sky one one other question.

Alright, I don't see any further questions in the queue.

Turn the conference back to our CEO Jeffrey Sanfilippo for his closing remarks.

I want to thank everyone for their interest in GBS says this concludes our fiscal 'twenty three Q2 call. Thank you for your interest in the company and have a great day.

And we badly concludes today's conference call. Thank you for participating and you may now disconnect.

Okay.

Yeah.

Yeah.

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

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