Q4 2019 Earnings Call

Thank you Kevin.

Good morning, everyone.

Welcome to our 2019 fourth quarter and fiscal year earnings Conference call.

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 forms 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 will start the call by covering financial highlights for the 2000, <unk> 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.

The increase in net sales in the quarterly comparison was primarily due to a 7.3% increase in sales volume, which we defined as pounds sold to customers.

The impact on net sales and the sales volume increase was largely offset by lower selling prices.

Mainly for products containing cashes pecans and walnuts.

Reduction in selling prices for these notes 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 not products contributor to the sales volume increase.

Sales volume declined by 1.9% and our commercial ingredients distribution channel and that was due to lower sales of both 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 a major existing customer.

Now looking at sales volume for our brands and our consumer channel Fisher recipe nuts volume declined by 11.8%, primarily due to competitive pricing pressure for private brand recipe nuts and also some loss distribution at an existing customer.

The 1.5% increase in sales volume for Orchard Valley Harvest brand, primarily came from distribution gains for our salad toppers product line and multi pack items and 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 much increased by 69.4% as a result of distribution gains at a new customer and they introduced introduction of new package sizes, which drove new distribution gains and grocery retailers.

Fiscal year, 2019 that 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 that sales for the sales volume increase.

The decline in selling prices again results well resulted from a shift in sales volume from our price tree nut products to lower price per unit and trail mix products and as was the case in the fourth quarter lower selling prices for products containing cashes 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 brands and 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 within an existing customer.

Gross profit increased by $43.6 million in the fourth quarter of fiscal 19 compared to $32.9 million and last year's fourth quarter gross profit margin as a percentage of net sales increased to 20.1% compared to 15.6% in the prior years fourth quarter.

The increases in both gross profit and gross profit margins were due primarily to increased sales volumes and lower commodity acquisition costs for cashes pecans and walnuts.

Gross profit for fiscal year, 2019 increased to $158.3 million compared to $138.9 million in fiscal 2018.

Gross profit margin increased 18.1% and that sales from 15.6% for fiscal 18 increases in both gross profit and gross profit margin were again, primarily due to lower acquisition cost for cashes 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.

It was mainly attributable to increases in incentive compensation expense and to a lesser extent increases and other compensation expenses.

Yeah. 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% in fiscal 18.

The increase in total operating expenses was mainly due to increases in incentive and other compensation.

Shipping in advertising expenses.

Yeah, and Amherst amortization expense of $1 million relates to the acquisition of the scroll 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 also ultimately elected not to pursue.

Interest expense decreased to $600000 for the fourth quarter of 19 from $900000 in last years fourth quarter.

And interest expense for the current fiscal year decreased to $3.1 million from $3.5 million in fiscal 18 decreases for both comparisons was mainly due to lower average debt levels during both periods.

Net income was $11.3 million or 98 cents per share diluted for the fourth quarter of fiscal 19 compared to $5.6 million or 49 cents per share diluted.

For the fourth quarter of fiscal 2018.

And then net income for fiscal 2019 was $39.5 million or $3 to 43 cents per share diluted compared to 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 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 for these nuts, the weighted average cost per pound of raw nut and dried fruit input stocks on 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 our performance for the current quarter and fiscal year Jeffrey.

Thank you Mike good morning, everyone.

After reporting record results for our third quarter fiscal 2019. The company finished very strong with record results for the fourth quarter and for the year.

Mitch we achieved record fourth quarter net income of 11.3 million and earnings per share of 98 cents.

We also reported record performance for the year with net income of $39.5 million and earnings per share $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 60 cents per share in supplemented that with a special dividend of $2.40 per share both of which were just paid this week on August Twentyth 2018.

These most recent dividend payment marked the eighth consecutive year. The Jvs has paid dividends and we're pleased to return cash to our stockholders stockholders early in the fiscal year through these dividends I'm very proud of these results and I think 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 the organization and reinvesting them to do what matters, most for customers or 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 volumes for consumer sales channel. This past year as we continue to grow our brands and build upon private brand opportunities.

Sales in the consumer distribution channel reach 70% of our total net sales in fiscal 290 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. One continue to grow Fisher Orchard Valley Harvest school bread and southern so much into leading not brands by focusing on consumer insights in the snack recipe trail snack mix and produce categories to provide integrated nut solutions to grow private branded businesses in each of our distribution channels and three expand our offerings into alternative distribution channels.

Turning to a year end sales review by channel.

Net sales in the consumer channel increased by six 1.1% in dollars and 10.5% in sales volume in fiscal 2019.

As Mike just said the primary driver of this growth was a 13% increase in sales of private brand trail mixes and snack nuts with new and existing customers. We have seen significant interest from consumers looking for innovative trail mixes.

In addition increased sales of what you're really harvest products and Fisher snack nuts over 13.3% and 4.3% respectively also contributed to our sales volume growth.

And accounting for 10.9% of the volume growth and increase in additional sales volume related to southern style mud snack mix products, which result resulted from the acquisition, which occurred late in our fiscal 2018 second quarter.

Sales volume for Fisher recipe nuts declined 12.3%, primarily due to competitive pricing pressure from private brand recipe nuts, and some loss distribution at an existing major customer. However, IRA market data from June 2019 indicates that Fisher recipe nuts continues to be the branded market share leader in the overall recipe nut category.

Net sales in the commercial ingredients distribution channel decreased by 9.1% in dollars and 7.3% in sales volume compared to fiscal 2018.

The company has faced challenges in this channel sustaining our industrial customer base, while growing our foodservice business.

Well, we have strong pull strategy is in place it is taking longer than expected to achieve planned results.

In the fourth quarter the company made changes with the leadership team and structure in the commercial ingredient channel and we believe these changes are better aligned to enhance customer development and successfully achieve our growth objectives in the future.

Net sales in the contract packaging distribution channel decreased by 23.8% in dollars and 20.2% in sales volume in fiscal 2019, as Mike mentioned the decline mainly came from the discontinuance of a product line and a reduction in unit owns wage for tree nut items from existing contract packaging customer.

There was also lots of both business with another customer.

The company has reallocated some resources from the contract manufacturing channel to support other droving growing parts of our business.

Turning to category updates I'm happy to share category and brand results for the quarter and for the fiscal year.

As always all market information I'll be referring to is I IRI reported data and for today. It is for the period ending June Thirtyth 2019.

When I refer to Q4, I'm, referring to 13 weeks of the quarter ending June Thirtyth.

References to changes in volume or price are versus the corresponding period, one year ago. We look at the <unk> category I raised 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 custom definitions developed in conjunction with our right.

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

First let me review some category dynamics, the total nut category increased in sales dollars by 1% in pound volume by 1% in Q4 overall prices in Q4 increased 1% versus the prior year.

For the quarter prices decreased on walnuts by 10% and pecans by 2% versus last year and that resulted in a 13% pound sales increase for walnuts and a 10% increase for pecans.

Looking at the entire 2018 fiscal year and that category increased 2% in dollars and was flat in pound volume sales.

Category pricing during the fiscal year increased 1% versus the prior year.

Pricing on walnuts, and peanuts decreased 2% and drove an increase of 1% of all modes, but peanuts declined 1%.

Pistachios increased 3% in price versus last year sales increased a whopping 17% in pound volume.

Now I'll talk about each category in a little more depth, starting with recipe nuts in Q4, the recipe nut category increased 4% in dollar sales and 11% in pound volume sales.

Prices decreased on walnuts, and pecans by 12% and 3%, respectively, resulting in a 13% pound volume increase in both of these nut types.

Our Fisher recipe nuts increased 16% in dollar sales and 12% in pound sales for the quarter versus last year.

As a result Fisher share in the category increased two tenths of a point versus last year. The growth was driven by implementing strong merchandising programs at retailers for Fisher gained new distribution this past year.

Looking at the full fiscal year, the recipe category decreased one person in dollar sales it was flat in pound sales.

Pricing on walnuts, and pecans decreased 2%, resulting in a 5% increase in pecans and flat volume for walnuts versus year ago.

Fisher recipe nut dollar sales decreased 3% in pound volume was down 10% for the year pound share for Fisher decreased 2.7 points versus last year.

Fisher recipe nut sales volume declined primarily due to competitive pricing pressure as I mentioned from private brand recipe nuts, and a reduction so shelf space for Fisher at an existing customer. Despite this decrease Fisher continues to be the number one brand in the recipe I'll.

Now, let's turn to snack category in Q4, the snack category increased 4% in dollar sales and 2% in pound sales Fisher snack increased 12% in sales dollars, but declined 1% in pound volume in Q4 decrease in dollars was driven by an increase in ACB of almost two points as we expand beyond our core geography.

For the full fiscal year, the snack category increased 4% in dollars and 3% in pounds versus last year.

Fisher snack sales dollars increased 22% in pound volume increased 8% in fiscal 2019 versus last year. The sales volume increase for Fisher snack nuts was mainly due to distribution gains at an existing customer and increased promotional activity for Fisher oven roasted never fried product line.

Fisher Robyn Rhodes never fried offers consumers a full lineup of lots that are not roasted in oil, including whole cashews deluxe mixed nuts, almonds, and pecans and peanuts.

With no extra added oil the ingredient line is simply nuts, and sea salt, which fits with the needs of today's consumers, who want simple ingredient lines.

We are supporting the brand with an integrated marketing plan of in store merchandising and customer programming, which includes radio digital and social media marketing.

In Q4, the produce nut category decreased 4% in dollar sales and 6% in pound volume sales.

Fortunately harvest decreased 7% in dollars and 13% in pounds that I or I'd be putting customers.

OVH your tone pound share declined two tenths of a point versus last year. The decline was driven by retailers shifting their promotion from Q4 to the back to school time period.

Total points of distribution increased by 7% as more retailers are accepting more orchard valley harvest items into their sense.

For the fiscal year, the produce nut category decreased 1% in dollars and 3% in pound volume sales OVH increased 17% in dollars and 10% in pounds and IRA reporting customers.

It will be a share of the category increased.

0.5 points in dollars and 0.2 points in pound sales versus last year total points of distribution increased by 3% versus last year.

In closing fiscal 2018 was a strong year, especially considering some of the volume headwinds, we faced and had to overcome I'm proud that GBS us outperform many of our competitors in our space and I'm optimistic about this coming year, we are pursuing several new customers and launching exciting innovative products.

A major priority. This year is the club business, where we already have a strong infrastructure in place to provide innovation and value to retailers and consumers in this channel.

The management team and all our dedicated employees have a steadfast commitment to develop business opportunities that create shareholder value and provide relevant profitable innovative products and services to our customers and consumers across all of our channels.

We appreciate your participation on the call and thank you for your interest in our company I will now turn the call back over to Mike.

Thank you Geoffrey.

At this time, we will open the call to questions. Kevin can you. Please queue up the first question, ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered you were somewhat yourself from the queue. Please press the pound key.

Our first question comes from Chris Mcginnis with Sidoti and company.

Hi, good morning, Thanks for taking my questions and nice quarter.

Good morning, Chris.

I was just wondering just on the.

Structure of the margin profile for for 2019 Keaton, maybe just talk about how much of that is sustainable due to the shift to the consumer brands and.

You know maybe some.

Thoughts around 2020, and where that might shake out. Thank you.

You know the you know 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 a volume increase and those lower commodity costs.

And it's just been thinking about 2020, you know the rates that you had in in 2019, <unk> you know pressure, there or or do you think that that's possible to kind of keep in that level.

You know that will be a 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 you know we expect to have the same cost structure and pricing structure.

That we've had over the last two quarters.

And Chris Chris. This is Jeffrey we are going to continue invest in the brand as we have obviously, we've taken some some ownership of new private brand business has opportunities came up in 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 the crops look 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.

Thank goodness can you maybe just dig in a little bit on the southern style growth and seemingly that out obviously the acquisition playing out like you thought.

Maybe some comments there, but also just the growth with the new customer versus the new packaging gains.

That's the grocery store thanks.

Sure. So southern style, it's part of the growth is because it wasn't reported in the back half of fiscal 18. So yes fiscal 18, and so were benefiting from just that volume that got added to the consumer channel, but also the team has done a good job expanding distribution at the existing accounts that scroll brand had at the time and also gaining some new distribution and watching 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 school had at the time were launching we've 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 were school did not have that much distribution when we purchased them.

Okay and just to.

One more question I'll jump back in queue, but Gee I don't know if you can do this for competitive reasons, but you mentioned new products, obviously, you've had a pretty successful run there. If you maybe just talk a little bit about what you have and kind of introductions for 2020. Thanks for so when we look at the nut butter space and Thats been a growing area for consumption and so weve expense built on our Orchard Valley harvest brand portfolio and added nut butters to that line up.

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 the chip bio, which we've never been in before I was looking at plant protein snacks is another area that we're focused on.

[laughter].

Thank you. Our next question comes from Tim call a couple of management.

Congratulations on a strong quarter.

Thanks, Tim.

Do you expect the momentum in southern style and that's to continue.

So actually Tim we're really just getting started with the brand it's been in our portfolio for little over a year now we've done a lot of consumer testing a lot of consumer insights studies as I mentioned in the call trail mixes and savory and health and wellness snacks is continuing to grow our 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 drugstore channel. So all opportunities in those two channels that are just beginning to be looked at.

Hi is it possible that transportation costs will continue to.

Our declined slightly in the next six months six months.

Oh, Yeah. This is Jeff Miller, Tim we are cycling against a lower cost this year versus last year. We started turning favorable in February of this year and so I think you probably continue to see that trend until we start cycling against a lower cost that we paid a starting in February of 19.

So mark.

Crushing facilities were off line and the first two fiscal quarters.

And if there are operating well in the next two quarters.

Well they have a meaningful impact on earnings.

Oh, I think Tim you are referring to the fact that.

A couple of quarters back we talked about how our beverage shelving plant was down as we re fit at 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 a peanut crushing stock for roughly.

20 to 25 cents per pound, it's really more of a byproduct and it is our main product line in it.

It doesn't really generate a lot of gross profit dollars. So a you know.

Why the volume goes up or down it really has an immaterial impact on our profitability.

And ER and about a year ago, there was a loss of recipes not line at all I don't customer.

Has that annualized or is that still have an effect going forward.

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

Potential loss of some of the distribution and volume.

Does it have a.

Instead of declining headwind over the next six months.

You know, we've done a great job, making that volume.

Distribution volume was up in the grocery channel with other retailers. So it won't have as negative impact I believe as we've seen over the last year I think we've made up a lot a lot of that volume.

And Tim This is Mike I would add that you know 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 you know as Jeff said, we will be a bid on favorable but the magnitude of that won't be.

Anything like what we've seen over the last three or four quarters.

Well, a great quarter and thanks for managing the company so well.

Thank you Tim appreciate it.

Again, ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone.

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And I'm not showing any further questions at this time I turn the call back over to Mike.

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

Ladies and gentlemen, it does conclude todays presentation. You may now disconnect and have a wonderful day.

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