Transcript
Thank you, Helena. Good morning, everyone, and welcome to our 2021 first quarter earnings conference call. Thank you for joining us today. On the call with me today are Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO. Before we start, we want to alert you to the fact 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 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 income statement. Net sales for the first quarter of fiscal 2021 declined by 3.5% to $210.3 million in comparison to $217.8 million for last year's first quarter. The decline in net sales resulted from a 3.5% decline in sales volume, which we define as pounds sold to customers. Sales volume increased in the consumer distribution channel by 3.8% primarily from a 6.9% increase in private brand sales volume for trail and snack mixes, mixed nuts, cashews and peanuts, primarily at existing customers. The increase in sales volume for these products was partially offset by a decline in peanut butter sales volume due to a temporary peanut supply shortage that occurred during the current quarter. Increased sales of Fisher snack nuts also contributed to the sales volume increase in the consumer distribution channel. Sales volume declined 27.7% in the commercial ingredients distribution channel due to a 40.9% decline in sales volume for almond, peanut, walnut, sunflower and pecan products in our food service business. The decline in the food service sales volume was due to a decline in air travel and nationwide restrictions on occupancy rates in and closures of restaurants, both of which were attributable to COVID-19. Sales volume in the contract packaging distribution channel declined 12.2%, and that was due to the unfavorable impact of lower convenience store foot traffic on one customer's business, again, as a result of COVID-19 and the loss of peanut butter business with another customer due to the temporary peanut supply shortage I mentioned earlier. Looking at sales volume for brands in our consumer channel. Sales volume for Fisher recipe nuts fell by 14.1% as a result of loss distribution at some customers, which was offset in part by increased sales with Internet retailers and increased sales with other existing customers in the grocery sector. Sales volume for Orchard Valley Harvest declined by 16.1%, mainly from some lost distribution at one customer and reduced foot traffic at a major customer in the non-food sector as a result of COVID-19. Fisher snack nut sales volume increased by 12.6% due to increased promotional activity and distribution gains at new and existing customers for our Oven Roasted Never Fried product line. Southern Style Nuts sales volume decreased by 8.4% due to lower promotional activity at several customers, which was offset in part by distribution gains with new grocery customers and increased sales with Internet retailers. Gross profit declined by 6.9% to $39.3 million in the first quarter of fiscal '21 compared to $42.2 million in last year's first quarter. Gross profit margin, as a percentage of sales, declined to 18.7% in the current quarter from 19.4% in the first quarter of fiscal 2020. The decline in gross profit dollars and gross profit margin were primarily due to the decline in sales volume that we talked about earlier. Total operating expenses declined to 9.7% of net sales for the first quarter of fiscal '21 from 10.6% for last year's first quarter. And total operating expenses declined by $2.7 million. The decline in total operating expenses resulted mainly from reductions in advertising, compensation and consulting expenses. Interest expense in the current first quarter declined by $70,000 in the quarterly comparison due to a reduction in our weighted average interest rate. As a result of the above, net income was $12.8 million, or $1.11 per share diluted, for the first quarter of fiscal '21 compared to $12.9 million, or $1.12 per share diluted, for the first quarter of fiscal 2020. Taking a look at our inventory. Total value of inventories on hand at the end of the current first quarter declined $6.1 million, or 3.9%, compared to the total value of inventories on hand at the end of the first quarter of fiscal 2020. The decline in total inventory value was primarily attributable to lower quantities of farmer stock peanuts and shelled pecans and shelled walnuts on hand. Lower acquisition costs for almonds and cashews also contributed to the decline in total inventory value. The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of the first quarter of fiscal 2021 increased by 7.8% compared to the weighted average cost at the end of the first quarter of fiscal 2020. This increase was mainly attributable to a shift in product mix from lower-priced farmer snack peanuts to higher-priced inshell pecans. I will now turn the call over to Jeff Sanfilippo, our CEO, who will provide additional comments on our operating results for the first quarter of fiscal 2021.
Thank you, Mike, and good morning, everyone. In the first quarter of fiscal 2021, our net income and diluted earnings per share were nearly on par with the record results from last year’s first quarter, despite facing challenges in our food service business due to COVID-19. We also continued our commitment to our stockholders by raising our regular annual dividend by 8.3% to $0.65 per share and adding a special dividend of $1.85 per share, both distributed in the first quarter of fiscal 2021. Achieving consistent and strong results during these unprecedented times is a testament to the talented and dedicated individuals across our organization. I am proud of our team’s leadership and commitment to delivering exceptional quality, service, and value to our customers and consumers. The industry is experiencing significant changes as consumer preferences shift toward shopping at smaller store formats like grocery stores and increasing e-commerce activity. With restaurant closures and limitations stemming from COVID-19, more consumers are cooking and baking at home, positively affecting specific areas of our consumer business while negatively impacting our food service sector. Our business model positions us well to adapt to shifts in consumption and demand across our consumer, commercial ingredient, and contract manufacturing channels. We plan to adjust our promotional and advertising focus towards digital and e-commerce platforms to align with changing consumer behavior. We continue to see robust performance in e-commerce and grocery sales through our Orchard Valley Harvest and Fisher recipe brands and anticipate more opportunities to connect these brands with consumer interests in functional snacking and cooking ideas. Sales volume is growing in our consumer distribution channel, primarily due to increased distribution of private brand products and Fisher snack nuts. The consumer channel represented about 75.8% of our total sales volume in the current fiscal quarter, highlighting a significant shift in our channel performance. However, we continue to face distribution challenges with our Fisher recipe brand at certain retailers, attributed to competition for shelf space from both branded and private label products. Our sales and marketing teams are concentrating on enhancing retail programs for the holiday season with key customers where we have strong distribution to counteract volume losses in areas where we have lost distribution. We believe our holiday promotional and merchandising strategies are highly competitive and will enable Fisher to perform effectively in the upcoming months. Our food service business has been adversely affected by COVID-19, especially within the air travel and restaurant sectors. However, we've seen some improvement as the decline in sales volume in this channel has eased since the fourth quarter of fiscal 2020. The demand remains unpredictable, as states vary in how they manage restaurant capacity based on local positivity rates. Nonetheless, our food service and operational teams are quickly adapting to market conditions and pursuing new business opportunities across the country. Together with our major foodservice customers, we believe that as consumers are allowed to re-engage with restaurants, demand for food prepared away from home will rise. On the supply side, as we entered the harvest season, our procurement teams have noted a decrease in acquisition costs for walnuts and almonds for the 2020 crop year, which impacts our current fiscal year. Peanut prices have remained relatively stable compared to last year. The pecan harvest has just started, so we do not yet have insight into how these prices compare to the previous year. However, we foresee acquisition costs either decreasing or stabilizing for other major tree nuts, and we believe our inventory levels are appropriately aligned with our commitments and selling prices as we approach the busy holiday season. Our purchasing teams have worked closely with our domestic and global suppliers to ensure a steady supply of raw materials, ingredients, and packaging. Now, let’s move on to updates on our snack, recipe, and produce segments. I’ll share some results for the quarter. All market information I will refer to is based on IRi reported data for the period ending September 20, 2020, and any references to changes in volume or price compare to the same period last year. COVID-19 has had mixed effects on our results for the first quarter of fiscal 2021, with evidence showing a shift in consumer preferences towards smaller store formats and online shopping. Growth in private label products and larger value sizes has continued to drive volume increases across categories. The total nut category experienced growth in both sales dollars and volume, with increases of 6% and 5% respectively in Q1, consistent with the growth rate from last quarter and ahead of last year’s growth rate. Prices for the quarter remained flat compared to the previous year. Regarding recipe nuts, IRi data indicates consumers are increasingly cooking and baking at home, leading to a 22% increase in the entire baking aisle category sales. Although this was down from the previous quarter's peak of 49%, it's still a significant increase from last year. This shift in behavior is driving robust growth in the recipe nut category, which saw a 16% increase in dollar sales and a 13% increase in pound volume in Q1. Despite this strong growth, our Fisher brand faces challenges with a decline in on-shelf placement at two key retailers. Fisher recipe nuts saw a decrease of 13% in dollar sales and 16% in pound sales compared to last year, resulting in a loss of 0.4 point in share. However, this decline at a major customer in the mass merchandiser sector was somewhat offset by gains in grocery, where Fisher recipe nuts increased by 10% in pound volume, maintaining its position as the branded share leader in the recipe category. In terms of the snack category, we saw a 6% increase in dollar sales and a 9% increase in pound sales in Q1. Fisher snack outperformed the category with a 15% rise in sales dollars and an 18% rise in pound sales volume, driven by increased distribution points and velocity. This growth is largely due to the Fisher Oven Roasted Never Fried line, which expanded beyond its core geographic areas and boosted sales by 106%. The Southern Style Nuts brand experienced a 2% decline in pound volume at retail because of lost distribution on certain flavors, although this was partially mitigated by growth in the club channel. The total trail and snack mix category saw a 3% decrease in pound volume compared to last year. In the produce category, we recorded a 7% increase in dollar sales, but pound volume sales were flat. Orchard Valley Harvest, our produce brand, reported a 27% decline in pound sales, leading to a 0.6 point reduction in pound share compared to last year, attributed to lost distribution at a major mass merchandiser. In traditional grocery, Orchard Valley Harvest faced a 5% decline in both dollars and pounds. In conclusion, we will continue to navigate volatility in fiscal 2021 due to COVID-19 and the uncertainties surrounding future local, state, and federal restrictions designed to control the pandemic. However, I am confident we have the right people, processes, brands, expertise, and financial strength to adapt and successfully guide our company through these challenging times while continuing to grow our business. Success requires smart strategies and a solid business model for sustainable growth, and we have both here at JBSS. We will maintain a competitive edge, differentiate ourselves, and be an innovative and valuable partner. The management team and our dedicated employees remain committed to developing plans that generate shareholder value and provide relevant, profitable, and value-added products and services to our customers and consumers. Thank you for your participation in the call and for your interest in our company. I will now turn the call back over to Mike.
Thank you, Jeffrey. At this time, we will open the call to questions. Helena, would you please queue up the first question?
I was wondering if you could just start off maybe just any notable changes from the beginning of the quarter to the end of the quarter and maybe playing out in early October, and just across the 3 kind of segments? I know there's a lot of moving pieces between the brands and everything, but can you just maybe talk about that cadence that you've seen, how it unfolds through the last quarter and maybe where it's at today?
Sure. Chris, this is Jeffrey. When looking at the consumer channel, we continue to see growth, reflecting a trend of people dining out less and opting to cook and snack at home. This trend is expected to persist into Q2, given the current situation in the country. I believe individuals will remain hesitant to eat out frequently and will prefer staying home to cook. As a result, we anticipate strong growth in the consumer channel, particularly in snacking and recipe nuts. The shift toward e-commerce has also continued from the first quarter into the second quarter. Again, I expect this trend to persist as consumers have adapted to the convenience and safety of online shopping. We are reallocating some of our marketing and sales investments towards e-commerce. The commercial ingredient channel has shown some positive momentum, but it remains below last year's levels. I don't expect significant changes in that area for a couple of quarters until we gain a better understanding of the overall situation. On a positive note, more people seem to feel comfortable returning to restaurants, where we are seeing decent attendance when they are open. However, challenges remain. Our teams in the food service channel are seeking opportunities beyond just restaurants to expand distribution and are focusing heavily on that effort. In contract manufacturing, which primarily serves convenience stores, we have not yet seen a rebound in store traffic. Consequently, we are experiencing ongoing declines in the contract packaging channel.
I can add to what Jeffrey said, Chris, regarding private label snack nuts, that growth rate remained steady throughout the quarter. In terms of food service, we saw an improvement from a 43% year-over-year decline to about a 40% year-over-year decline by the end of the quarter. We made some progress there. Additionally, in contract packaging, we also noted improvements as we moved through the quarter, particularly concerning the customer Jeff mentioned earlier.
I appreciate the insights. It appears that conditions are beginning to improve, which should be beneficial, particularly for contracts. Regarding your expectations for the holiday season, do you anticipate any usual increases in customer numbers? Given the strong performance from consumers spending time at home, it seems poised to be a prosperous season. How are you adapting your go-to-market strategies or identifying opportunities to attract more customers?
We are in a very strong position, particularly with our Fisher recipe products, as we have distribution through major retailers nationwide. Our prices are competitive this year, and our sales and marketing teams have implemented strong promotional activities. This sets us up well to capitalize on the increase in home cooking. E-commerce also presents significant opportunities, and we have positioned our brands, both in recipes and snacks, to benefit from the holiday surge. While we anticipate increased travel during Thanksgiving and Christmas, it may not reach last year's levels. However, we do expect a positive impact on the food service channel.
Yes. Plus, we picked up some merchandising space at that one customer, where we didn't have that last year. So...
Okay. Regarding Orchard Valley, it seems that there's just one nonfood customer. As the economy is starting to open up and stores are reopening, are you noticing any changes? Do you anticipate that brand beginning to recover as the economy improves? What is needed for that nonfood customer to start ordering food again?
Yes. So they are opening more stores. It's pretty consistent. It's just a matter of getting that traffic to come back to the stores. So they are open. We've got the distribution as we had last year. So I'm optimistic that you're going to start to see more traffic come through that nonfood retailer where we've got the OVH distribution, especially this time of year for the holiday season.
Great. Can you discuss the peanut butter supply issue you mentioned? How much did it impact sales? I'm curious about the extent of the pressure it created in the quarter.
Yes. I think our total peanut butter sales volume was down roughly about 1 million pounds in the year, in the quarterly comparison.
The optimism or the good news is that the peanut supply is coming back, and we don't anticipate that change coming in the coming year?
Yes, we believe we are going to see the second largest crop in history, so we feel pretty good about our net supply going forward.
Okay. You mentioned acquisition costs. How do you see that affecting the margin profile for the rest of the year, particularly regarding gross margins? After that, we can discuss operating margins or operating expenses.
Okay. So as Jeff mentioned, both almonds and walnuts are down pretty significantly year-over-year. So that generally leads to improved gross profit margins. The big challenge is, is to maintain the gross profit per pound in our pricing. And when they get as low as they're getting, that becomes difficult to do. So you need to be able to get those gross profit dollars. We're going to need some volume increases, especially on those 2 nuts.
And Chris, one of the good things is we're able to hit price points that we haven't seen in quite a few years in a lot of these heavy volume commodities. And so that's exciting going into this holiday season.
You might be able to offset that with some volume growth. What's driving the decline in the acquisition? Is it COVID-related or just the amount of supply coming to market this year?
Go ahead, Jeff.
So it's a combination of both. I mean we've got some record crops of almonds. Walnut crop is huge this year. The corn crop is extremely strong. There have been some negative impact from a demand perspective. Part of it is trade situations. Part of it is just the lack of travel around the world, which has impacted consumption as well.
And then just, I think last question for me, just around the operating expenses. Obviously, a great job on controlling that. But how sustainable is that? And I guess as you start to reallocate your spending, how do you see that play out over the coming quarters?
Well, why don't you talk about advertising?
Yes. So from a marketing and trade spend perspective, as I mentioned, we're going to shift more resources towards e-commerce, digital marketing and then really expanding our reach in e-commerce. But also, there's opportunities from a brand-building and in launching new innovative items. I've talked in the past about our club store strategy and how that is important to the company. We have not been as successful as I'd hoped up until now. But we've got new members of a talented team in place that are really laser-focused on re-romancing, rebuilding our brands, our positioning, our engagement with consumers. So you're going to see a lot more investment go towards our brands and where we market them.
All right. I'll talk a little bit about compensation, Chris. There's a few things driving that. First, our incentive compensation expense is down a bit compared to last year. Remember, last year, we got off to a great start, and we're generating a lot of EVA improvement. So we were accruing for higher bonus expenses in the first half of last year than we have this year. The other area where we've seen a decline in compensation-related expenses is with medical insurance expense. And I'm sure you've read about this. Employees are not going to the doctor as much as they typically do. And so that's being reflected in that line. And then the last one, consulting, we actually had a big project last year in the first quarter to retune our strategic plan. We also had some consulting expenses related to an acquisition that did not occur. And that's what drove that favorable comparison this quarter.
I apologize, but I have one more question. I've noticed a significant increase in advertising for nuts, and I've received this question from several investors. Are you observing this trend as well? Given the heightened demand during the stay-at-home period, are you seeing some of your customers step up their marketing efforts?
Actually, you're seeing that from a combination of places. One of the trade associations is doing a great job increasing investment in marketing and expanding demand for the almond, pecan, and walnut industries. They have all stepped up to promote nut consumption and usage. The brands are also stepping up, which we've seen recently, and we are doing the same. It's a combination of people recognizing the opportunities and the shifts in demand due to more time spent at home and increased snacking. They are pursuing that, but it's also driven by the need to find valuable markets for the large crops that are coming in. So, you're witnessing that investment as well.
Okay. And can you maybe just talk a little bit about the competitive environment, and then I'll jump back in the queue.
Sure. So obviously, private brand is extremely strong. We've seen a shift in private brand growth really across almost every channel or category. And so you're seeing that growth. The brands source competition on the private brand supply side, but the brands are stepping up as well, investing a lot more in the categories than we've seen in quite a while. And so you're seeing, as we've talked about, we've lost some distribution in our Fisher recipe customer base, due to some competitive pricing and competitive offers. But at the same time, it's an exciting time for the business. There's so many opportunities across multiple channels as we follow these shifts in demand around the country.
Was this the first quarter where the consumer distribution was over 75% of your sales?
Yes. I think it was Tim.
Now I was going to mention that. I don't have a final record, but I believe it's probably the highest percentage of the total business ever set over 75%. So good catch.
Yes, I would agree with that.
It was a challenging quarter, but you had near record sales and near record earnings. It appears that you have excess capacity in each of your divisions. Is that the case?
Want to cover that, Jasper?
Yes, Tim, this is Jasper. I would say on the consumer piece, particularly with the growth that we've seen, we do get a little challenged on capacity. But come January forward, that capacity opens up again. Just due to the nature of our business. Obviously, we're looking at CapEx to continue to support the consumer growth. We certainly have capacity to handle additional food service business as typically those pack styles are a bit different. So I would say overall, for sure, on food service, but we're making adjustments to continue to add capacity on our consumer side.
Thank you, Jeffrey. At this time, I would like to turn it back to Mr. Mike for any further comments. Hey, thank you, Helena. Again, thank you, everyone, for your interest in JBSS. This concludes the call for our first quarter of fiscal 2021 operating results. Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.