Edited Transcript of JBSS earnings conference call or presentation 30-Apr-20 2:00pm GMT

Looking at the impact of COVID-19 on our total sales volume for the third quarter. The 13.7% sales volume growth in the current quarter was attributable in part to pantry loading by consumers in anticipation of the shelter-in-place directives that ultimately occurred.

For January and February, sales volume increased by a total of 9.1%. We believe the increase in sales volume in January and February was primarily related to the factors I cited in our sales volume discussion earlier. In March 2020, sales volume increased by 23.6% compared to March 2019. After considering our sales volume growth rate for the first 2 months of the current quarter, we estimate that approximately 1/3 of the sales volume increase for the current third quarter was attributable to pantry loading.

Within the commercial ingredients channel, foodservice sales volume was relatively unchanged from fiscal 2019 third quarter. Sales volume increases in January and February were fully offset by a significant amount of order cancellations in March by foodservice distributors, and that was due to restaurant closures primarily.

Net sales for the first 3 quarters of the current fiscal year increased to $675.9 million from $659.4 million for the first 3 quarters of fiscal ’19. The increase in net sales was attributable to a 9% increase in sales volume. This increase in net sales from sales volume was offset in part by lower selling prices primarily due to the factors I discussed in the quarterly comparison.

Sales volume increased by 12.9% in the consumer distribution channel primarily for the same reasons I cited in the quarterly comparison as well. Sales volume increased by 7.2% in the commercial ingredients distribution channel primarily from increased sales of peanuts to peanut oil processors, including the ones I mentioned in the quarterly comparison.

Sales volume declined in the contract packaging distribution channel by 7.4% primarily for the reasons I cited in the quarterly comparison and also a reduction in promotional and merchandising activity by some other customers in this channel.

Third quarter gross profit increased by $4 million and gross profit margin as a percentage of net sales increased to 20.2% for the third quarter of fiscal 2020 from 19.2% for the third quarter of last year. The increases in gross profit and gross profit margin were primarily attributable to increased sales volume, manufacturing efficiencies and reduced manufacturing spending per produced pound.

Gross profit for the first 3 quarters of the current year increased by $20.4 million and gross profit margin as a percentage of net sales increased to 20% from 17.4% for the same period last year. The increases in both gross profit and gross profit margin were mainly due to the reasons I cited in the quarterly comparison as well as lower acquisition costs for cashews and pecans.

Total operating expenses for the current third quarter decreased to 11.1% of net sales from 11.6% for last year’s third quarter primarily due to a higher net sales base. Total operating expenses were unchanged as increases for incentive compensation, product donations to food banks and broker commissions were fully offset by decreases in legal expenses, consulting, freight and advertising expenses. Additionally, we recognized a $700,000 gain from an insurance recovery. Net recovery was related to a fire we had in our Garysburg, North Carolina facility, which occurred in the second quarter of fiscal 2020.

Total operating expenses for the current year-to-date period decreased to 10.7% of net sales from 11% for the first 3 quarters of last year. And again, that was due to a higher net sales base. Total operating expenses decreased by $400,000, as increases in expenses for incentive compensation, product donation to food banks and broker commissions were more than offset by decreases in legal consulting, freight and advertising expenses as well as the gain I mentioned from the insurance recovery earlier.

Interest expense for the current third quarter decreased to $600,000 from $800,000 in last year’s third quarter. And interest expense for the first 3 quarters of the current year decreased to $1.5 million from $2.5 million for the first 3 quarters of last year. The decrease in interest expense in the quarterly comparison resulted from lower interest rates. The decrease in interest expense in the year-to-date comparison came from lower average debt levels and also lower interest rates.

Net income for the quarter was $13.5 million or $1.17 per share diluted for the third quarter of fiscal ’20 compared to $10.3 million or $0.90 per share diluted for last year’s third quarter. And net income for the first 3 quarters of 2020 was $43.9 million or $3.80 per share diluted compared to net income of $28.2 million or $2.45 per share diluted for the first 3 quarters of last year.

Now taking a quick look at inventory. The total value of our inventories on hand at the end of the current third quarter increased by $9.6 million or 5.4% compared to the total value of inventory in last year’s third quarter. The increase in the value of total inventories was primarily due to increased quantities of peanuts, cashews, almonds, pistachios and work in process inventory. The weighted average cost per pound of our raw nut and dried fruit input stocks increased by 3.4%, and that was due primarily to increased acquisition costs for walnuts and higher quantities of tree nuts compared to quantities of lower cost peanuts on hand.

And now I’ll turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on our operating results for the third quarter of fiscal 2020. Jeffrey?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [3]

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Thank you, Mike. Good morning, everyone. The third quarter of fiscal 2020 marks the fifth consecutive quarter in which we reported record net income and diluted earnings per share. This quarter’s results were the second highest for any quarter in the company’s history. This solid performance was driven by strong volume growth in our consumer distribution channel. We’ve talked a lot in the past about our strategies to make our consumer sales channel a larger portion of our overall business. And I’m happy to report that sales volume in the consumer distribution channel accounted for approximately 70% of our total sales volume in the current third quarter. The increase in sales volume, as Mike mentioned, was driven mainly by increased sales of private brand products complemented by increased sales for our Fisher snack nuts, Orchard Valley Harvest produce products and Southern Style Nuts snack mixes.

Prior to the COVID-19 impact on sales volume, we had strong volume with 6.8% growth in the first half of the current fiscal year and 9.1% growth for January and February. Our employees were already working very hard to deliver these results when the March sales volume surge occurred. During March, our business required even more effort, and our employees delivered with the majority of our orders shipping on time and complete. This truly demonstrates how committed our team members are in fulfilling our obligation to provide food to American consumers during these difficult times.

While we are meeting these unprecedented challenges, we took many measures to improve the safety of our employees. The company established a COVID-19 crisis management team that meets daily to discuss risks faced by the company and mitigation strategies. We quickly began implementing work-from-home requirements for the majority of our office employees, staggering shifts and breaks for our production employees, installing partitions on lines where social distancing could not be affected, performing daily temperature screening for all employees upon arrival, and providing face masks for all employees and requiring their use throughout our facilities.

We also recognized the need to take a different approach to our employee compensation during this period. Consequently, we temporarily increased manufacturing employee compensation by 10% based on hours worked, extended personal time off weeks for those who are self — in self-quarantine or ill and provided weekly allowances to cover costs incurred by those employees working from home.

We also committed to supporting our communities and donated products valued at over $0.5 million to provide peanut butter and snacks to food banks located near major customers and facilities in the current third quarter. And we continued to donate food in these areas to help families in need.

Going forward, we expect sales volume in our consumer distribution channel to normalize as consumers adjust to their current circumstances. Food service sales, which are within our commercial ingredient channel, had been growing this fiscal year and are within our — and such sales represented 10% of our total sales volume in the current year-to-date period. However, we expect our foodservice sales to decline significantly in the coming months until its travel restrictions and restaurant closings are lifted. Our procurement team is working closely with our domestic and global suppliers to source and maintain consistent inventories of raw materials, ingredients and packaging to provide a steady supply of our products to our customers and consumers.

Turning to a sales review by JBS channel. In the consumer channel, as Mike mentioned, it increased by 11.9% in dollars and 19.3% in volume in the third quarter. Sales volume was driven mainly by increased sales of trail and snack mixes and peanuts, and to a lesser extent, from increased sales of cashews, almonds and mixed nuts with existing private brand customers. We did see a spike as a result of pantry loading in March, and we anticipate our consumer volume will remain steady going forward as consumers will eat more at home and order online with the stay at home and travel restrictions in place. Net sales in commercial ingredient distribution channel decreased by 6.6% in dollars and increased by 9% in sales volume.

As I previously mentioned, we anticipate foodservice sales volume to decline in the coming quarter as a result of COVID-19, but our teams are working hard to manage our inventories and look for growth opportunities, and they will be ready for business when travel restrictions and stay at home orders are lifted.

Net sales in the contract packaging distribution channel decreased by 17.8% in dollars and 6.4% in sales volume. One of our major customers in this channel provides a lot of products for convenience stores. And with COVID-19 restrictions in place, we believe this business will continue to be flat to declining in the coming months until travel restrictions are lifted.

Turning to category updates for the quarter and for the fiscal year. As always, the market information I’ll be referring to is IRI reported data and for today is for the period ending March 22, 2020. When I refer to Q3, I’m referring to 13 weeks of the quarter ending March 22. References to changes in volume or price are versus the corresponding period 1 year ago. We look at the category and IRI’s total U.S. definition, which includes food, drug, mass, Walmart, military and other outlets. 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 IRI, and the term velocity refers to the sales per point of distribution.

First, let’s review some category dynamics. The total nut category increased in sales dollars and pound volume by 5% and 6%, respectively, in the third quarter. Overall prices for the quarter decreased 1% versus the prior year. The volume growth in the current third quarter was attributed in part to pantry loading by consumers in anticipation of the shelter-in-place directives that ultimately occurred. The last 2 weeks of the quarter, sales for the overall category increased 36% in dollar sales and 41% in pound volume versus last year. The previous 11 weeks saw the category flat in sales versus a year ago.

Now I’ll talk about each category in a little more in depth, starting with recipe nuts. In Q3, the recipe nut category increased 8% in dollars and 13% in pound volume. Prices for the category decreased 4% versus last year. Walnut and pecan pricing decreased by 4% and 7%, respectively. Our Fisher recipe nuts decreased 24% in dollar sales and 23% in pound sales for the quarter. As a result, Fisher’s share in the category decreased 7 points — pound share points versus last year. The decrease in sales volume for Fisher resulted from loss distribution at a major customer that we’ve talked about in the past. In traditional grocery, which IRI calls the U.S. food channel, Fisher recipe increased 29% in pound volume, behind an increase of total points of distribution of 22%. Fisher continues to be the brand share leader in the recipe category when using the broader multi-outlet definition and within the U.S. food channel.

Now let’s turn to the snack category. In Q3, the snack category increased 7% in dollar sales, 10% in pound sales. Pricing declined 2% versus last year in the snack category. Fisher snack increased 25% in sales dollars and 18% in pound volume in Q3. Promotional sales for the brand increased by 17% and total distribution increased by 19%, driving sales.

Fisher Oven Roast Never Fried continues to expand beyond the core Fisher geography and increased in pound sales by 85%. Pound velocity and total points of distribution increased by 5% and 6%, respectively, versus last year. Oven Roast Never Fried contributed 64% of the growth of the Fisher snack business.

In addition to the successful quarter, trial and repeat continued to be solid. Consumers are purchasing the product, enjoying their experience and repeat purchasing the item, which is a good sign for long-term success.

In Q3, the produce category was flat in dollars and decreased 5% in pound volume sales and prices increased 5%. Orchard Valley Harvest decreased 17% in dollars and 15% pounds and OVH pound share decreased 0.2 point versus last year. The volume decline was due to loss distribution related to the reduction in shelf space in the produce section at a major customer. OVH shipments are up, which is attributable to distribution of new items with a current customer that does not report data to IRI and new brand distribution within traditional grocery. Two recent Orchard Valley Harvest line extensions are spread into peanut butter and our chickpea chips are available at a limited number of retailers. The Spread ‘n Dip peanut butter taps into the popular consumer behavior of dipping fruits and vegetables and nut butters for healthy snacking. OVH Spread ‘n Dip makes it — makes that easy with a wide mouth humus-like tub. Both (inaudible) and OVH Chickpea Chips offers — offering taps into the consumer’s desire for more plant-based snacks. Both line extensions are being supported with in-store merchandising and social and digital consumer support. It’s still too early to report on their specific performances, but we are excited about the potential to expand the brand into the nut butter and the chip categories.

In closing, it is extraordinary how the world has changed since our last earnings call just 3 months ago at the end of January. We will face challenges in the remaining periods of fiscal 2020, and there will be headwinds going into fiscal 2021 as a result of the COVID-19 pandemic. But our company and our team of dedicated leaders and frontline associates throughout our organization are steadfast and strong. We will adapt quickly to the dramatic changes in consumer behavior and seize opportunities where they arise. The company has strong brands in our portfolio with enormous opportunities for growth. And we have a manufacturing footprint that can meet new consumer demand for retailer private brands and our branded business in e-commerce.

We will continue to prioritize the health and productivity of our associates and follow the most up-to-date guidance from health authorities to ensure we are doing all that we can in our manufacturing facilities and offices to keep everyone safe.

Lastly, we have the right strategies and business model to continue to grow and provide exceptional value and innovation for our customers and consumers and our shareholders. And I was proud that we announced last night that the company will be paying a $1 per share dividend, which will be paid out in June. We appreciate your participation in the call, and thank you for your interest in our company.

I will now turn the call back over to Mike.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. – CFO, Group President, Secretary & Director [4]

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Okay. Thank you, Jeff. We will now open the call to questions. Norma, can you please queue up the first question?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Chris McGinnis of Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC – Special Situations Equity Analyst [2]

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Nice quarter. Can you maybe just dig in a little bit just around COVID and the pantry loading that you talked about? Just maybe the impact you’ve seen on business in April. Does that benefit continue, at least on the consumer side? And then I know you talked a little bit on the commercial side already. But obviously, as restaurants are closed, that will be a negative impact. But we’re starting to see states open. Have those conversations started to change just on that side of the business? If you could just — I know it’s still early, but maybe just a little bit more update on what you saw and the more recent trends.

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [3]

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Sure. Good questions. So we did see a little bit of pantry loading and volume increase in the very beginning of April. There were still states that had just started closing in April, so we saw pantry loading at that time. We see the trend leveling off. But I would say that as these stay-at-home orders and travel restrictions continue, you’re seeing more consumers either eat at home and cook at home or they’re ordering online for delivery. And so we expect to see that continue until these stay-at-home orders are lifted. So we should see a little bit of a bump in our consumer demand going forward.

As far as foodservice, as states do open up, we are watching and monitoring them closely. And as they do open up, we are ready to start supplying those distributors and foodservice customers in most states with product. And we’re starting to see a little — but it’s very early, because they’re just starting to open up now. And a lot of the restaurants have limited capacity, but they’re allowed to let people in. And so we don’t anticipate that foodservice channel coming back quickly anytime soon. But the more states that lift restrictions, the better that will become in the future.

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Christopher Paul McGinnis, Sidoti & Company, LLC – Special Situations Equity Analyst [4]

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Sure. Understood. And I guess just thinking about the commercial side. How much inventory — I don’t know how much that impacts the demand on your side that you think the distributors are holding. And maybe, I don’t know, if you think about that in months. Is that a few months of maybe excess inventory that they have? Or do they move through that pretty quickly?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [5]

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Typically, it’s a month to 1.5 months of inventory. We are working with a lot of our distributors that, specific for our example, airline distributors, with their travel restrictions, we’re working with them to try to move the inventory that they might have in-house to other locations such as food banks or places that are putting together meal kits for families.

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Christopher Paul McGinnis, Sidoti & Company, LLC – Special Situations Equity Analyst [6]

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Okay. And then just thinking about the 9% growth that you were seeing before that. Can you maybe just dig in a little bit about what was driving that? Is that newer account wins? Is that a factor of pricing in the marketplace? Can you maybe just dig in a little bit more? Because that was, obviously, some pretty solid growth.

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [7]

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It’s a combination really. It was no one specific thing. Some of it was new business that we picked up last year, especially in private brands. We’ve had good success with our Oven Roast Never Fried Fisher distribution as I mentioned. So we saw growth there. We saw some growth with new distribution in other areas of our business. So it really was a combination of a lot of different things.

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Christopher Paul McGinnis, Sidoti & Company, LLC – Special Situations Equity Analyst [8]

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Okay. Great. And then maybe if we can just move on to the margin front real quick. I don’t know if there’s a way to quantify maybe a margin benefit in the period, if there was one, just due to the extra volume coming through. And then maybe on the reverse side of that, the higher compensation, safety measures are coming in. How do you see that playing out going forward? If you don’t mind on that.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. – CFO, Group President, Secretary & Director [9]

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I’ll start with the impact of volume on gross profit. So as you know, our gross profit dollars increased by — let me just look out here, okay, by about $4 million. And roughly 25% of that is just related to manufacturing efficiencies and the other $3 million is just generated from the additional volume that we sold.

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Christopher Paul McGinnis, Sidoti & Company, LLC – Special Situations Equity Analyst [10]

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Okay. So maybe 1/3 of that, 75% is what, roughly, I guess, you would think?

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. – CFO, Group President, Secretary & Director [11]

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1/3 of what?

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Christopher Paul McGinnis, Sidoti & Company, LLC – Special Situations Equity Analyst [12]

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Of the COVID, maybe the extra volume coming in from COVID. I was just wondering if that played anything material on the margin front. So a little bit, I guess.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. – CFO, Group President, Secretary & Director [13]

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No. It’s proportional to what we saw with sales.

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Christopher Paul McGinnis, Sidoti & Company, LLC – Special Situations Equity Analyst [14]

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Exactly. Okay. Great. And then maybe just going forward, just with the new measures in place and then also the pay increases.

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [15]

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So yes, as far as the business going forward, again, we’re going to watch foodservice. It’s unfortunate because we had a lot of good new distribution in our foodservice channel leading up to COVID-19, especially with noncommercial places that don’t sell food as their main priority. And so a lot of that has stopped now with these travel restrictions and stay-at-home orders. So — but we are going to watch what happens with these — when these states lift their orders to follow-up on that piece of our business. The team is looking at other opportunities. E-commerce, for example, in the consumer channel, we’ve seen enormous growth there. So we’re going to follow what happens in e-commerce, both for our brands and for some of the private brand options that we produce. They are pursuing more e-commerce platforms. And then the cooking at home has become a big thing now that people are staying home. And so we see growth in the recipe nut category and we see growth in this — potential further growth in the snack category. And so — and as far as employees, we’re going to continue to monitor the situation with our employees. We extended our — the increase in compensation through May 7, and we’ll continue to monitor things. And if we need to do that further, we will do that to take care of our people.

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Operator [16]

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(Operator Instructions) Our next question comes from Tim Call of Capital Management Corp.

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Timothy Colin Call, The Capital Management Corporation – President & CIO [17]

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Congratulations on a great quarter again. And your interest expense keeps going down partially as you pay down debt over time. Do you think you might be debt-free within 2 or 3 years?

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. – CFO, Group President, Secretary & Director [18]

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Well, that’s — it depends what time of the year you’re talking about, Tim. We’ll always be drawing on a revolver from time to time. And just as a reminder, that revolver usually peaks near the end of our third quarter. So at that time of the year, I’m sure there’ll be some debt. I think we have about 3 years left on our mortgages. And we have quite a few years left on our financing obligation for our Selma facility.

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Timothy Colin Call, The Capital Management Corporation – President & CIO [19]

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The special dividend, this is a little bit earlier in the year than when you usually announce a special dividend. Does that — and you have higher inventory now for seasonal reasons. So does that just mean you’re that profitable of a company that you can pay a special dividend earlier in the year?

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. – CFO, Group President, Secretary & Director [20]

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Well, we want to be cautious about this. Obviously, we had, as Jeff mentioned, the second best quarter we’ve ever had in our history. And for that to be a third quarter, it’s pretty unusual and remarkable. But we felt like given the performance in the quarter, it made sense for us to go ahead and pay a spring dividend. But obviously, there’s a lot of uncertainty going forward. And if it turns out that we may have to reduce our special dividend that we typically pay in August for this dividend, we’re prepared to do so. Hopefully, it won’t come to that. And we certainly are committed to paying our regular annual dividend in August.

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Timothy Colin Call, The Capital Management Corporation – President & CIO [21]

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The headwinds you faced from losing a recipe nut customer, have those annualized now? Or is that no longer a headwind starting with this next quarter?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [22]

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Yes, that’s really annualized now. We’re seeing some stable and actually growth in the recipe nut category, as I mentioned before, because people are staying at home and cooking. But we’ve cycled against the loss distribution on the shelf that we experienced, so you should see those numbers normalize for Fisher going forward.

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Timothy Colin Call, The Capital Management Corporation – President & CIO [23]

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Some competitors like Smucker’s have put out announcements saying they’re cutting promotional activity and just focusing on getting product on the shelves. Are you considering a similar move? And how do you see the competitive environment changing in recent months?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [24]

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Yes. So from a retail perspective, we’re doing the same thing. A lot of it is actually being initiated by retailers who want to limit the number of people in their stores during this crisis. And so they’re reducing their promotional activity and just focusing on the key staples and the key high-volume items that consumers are looking for as they come into the store. So we have seen a decrease in trade spend and promotional spending as a result. Also, a little bit less shippers and different distribution vehicles that we used to use and promote our products, you’re seeing some of that get mitigated as well as a result of more clean store environments and less people in the store.

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Operator [25]

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(Operator Instructions) Our next question comes from [Bruce Winter], investor.

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Unidentified Participant, [26]

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Yes. When you sell ingredient nuts to producing power bars and stuff like that, do you sell fried ingredient nuts or Oven Roasted Never Fried ingredient nut?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [27]

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For the ingredients, it’s anything from raw materials to roasted products. The Oven Roast Never Fried is our — is in our branded portfolio, our Fisher branded portfolio. So we don’t really use that or offer that type of product in the ingredient channel. It’s not a focus for us. But you’re right, bar businesses do use roasted or dry roasted nuts in their bars.

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Unidentified Participant, [28]

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Are your Oven Roasted Never Fried healthier than what goes into those bars?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. – Chairman & CEO [29]

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Well, if it’s a dry roasted nut that goes into a bar, it would be just as — it would be very similar to our Oven Roast Never Fried. Correct.

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Operator [30]

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I’m showing no further questions. I’d like to hand the call back over to Mike Valentine for any closing remarks.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. – CFO, Group President, Secretary & Director [31]

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Okay. Thank you, Norma. So we appreciate everyone’s interest in JBSS and joining us on this call today. And this concludes our call for our third quarter of fiscal 2020 operating results.

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Operator [32]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.