Ladies and gentlemen, thank you for standing by and welcome to the John B. Sanfilippo & Son, Inc., Third Quarter Fiscal 2021 Operating Results Conference Call. I would now like to hand the conference over to your speaker today, Mike Valentine, CFO. Thank you. Please go ahead, sir.

Thank you, Dee. Good morning, everyone, and welcome to our 2021 Third Quarter Earnings conference call. We 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 to the fact that we may make some forward-looking statements today. These statements are based on our current expectations, and they involve certain risks and uncertainties. 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.

Thank you, Mike. Good morning, everyone. As was the case in the second quarter of fiscal 2021, we reported record net income and diluted earnings per share despite the continuing challenges we faced in our food service business and our contract packaging distribution channel, as well as with our Orchard Valley Harvest brand due to the impact of COVID-19. These record results were driven, in large part, by lower commodity acquisition costs, as Mike mentioned, for all major tree nuts and strong sales volume growth for private brand products in our consumer distribution channel. We continue to see improvement in our foodservice business as we did in the first two quarters of fiscal 2021, with dining out and air travel having increased. Our record performance over the last two quarters put us in a strong position to pay a $2.50 per share special dividend during the current third quarter. Team members from every department across our organization worked hard and led with dedication and commitment to deliver these strong results and service our customers and consumers. At this time last year, our company established a COVID-19 crisis management team that had met daily to discuss risks faced by the company and mitigation strategies.

Okay. Thank you, Jeffrey. At this time, Dee, can you please queue up the first question?

Your first question comes from the line of Chris McGinnis of Sidoti & Company.

I know you mentioned increases in freight, and it sounds like pallet, but outside of that, the raw materials are coming down. I think you're probably the only industry I cover that sees deflationary raw material costs. Can you just talk about maybe the outlook there? How confident or what you think in terms of raw material costs over the next maybe twelve months as you see it? Agriculture has obviously seen increases in some pricing. So I'm wondering how that could possibly impact you longer term?

Yes. Chris, this is Jasper. As it stands now, we're covered through the fall. Obviously, we bought our crops last year, so our positions are very good through fall. Certain crops have not really developed yet. For example, pecans and walnuts are just coming off of bloom. It looks like we have a decent almond crop. Cashews are pretty tight. So we're not necessarily seeing that there's going to be anything that could be really impactful from a major price increase unless we have some disasters as these crops are developing. From a labor standpoint, there's nothing really that we're seeing as well that's going to cause any effect there. So I think commodities will stay stable for the first half of our year. And then depending on harvest and crop sizes, we'll determine the back half of the year.

Yes. And Chris, I would also add that we have some pretty significant carryovers on just about all the tree nuts, except cashews. So that should also keep a lid on those market prices.

Great. I don't want to say it's elevated since it's been consistent for some time, but about the margin profile you've been achieving on the growth side, do you think that will remain sustainable for the next few quarters based on your earlier comments?

Yes. Chris, this is Jeffrey. I would expect that at-home demand to still continue. I think people are still slowly getting back into traveling and eating out. But I expect this next probably two quarters, you'll see that slowly. I think you're going to see that maintain, but you'll slowly see that increase, as I talked about in the foodservice channel and the contract packaging channel as people are more comfortable going out again.

Okay. And just on the impact of that margin profile. Okay. I understand that. And I guess just in thinking about some of the loss, I guess, the changes with maybe Fisher, maybe the recipe. Can you just talk about some of the lost channels, how you're going to approach that? You made some commentary that you're kind of refocusing a little bit on some of the loss share. Can you just talk about how you're going to change that strategy going forward and take that back over the next six to twelve months?

Sure. If we start with Fisher, that business was up for distribution at two major retailers, but we lost it to another brand. However, this business will be available again next year. We're concentrating on building our brand equity and focusing on product innovation in this category. For instance, our nut flour is gaining traction with new distribution. We are positioning our brand equity and product portfolio effectively so that when those bids return, we're well prepared to compete. Regarding velocity, it measures how much product moves in stores where we are distributed. We've improved our velocity through promotional activities and consumer engagement, achieving significant success with Fisher in other retailers. Our aim is to showcase these successes to retailers that currently don't carry Fisher, encouraging them to include our products. For Orchard Valley Harvest, our health and wellness brand, we're heavily focused on understanding our consumers and differentiating our brand and product offerings. The team is working on an exciting initiative that will launch in the upcoming months. We've been testing chickpea chips under our OVH brand, where our R&D team has crafted some appealing new flavors. This will help us make a stronger entry in the salty snack market. As for Squirrel, our indulgent brand, significant efforts are underway. We had a successful Valentine's promotional campaign with a product called Ruby Royal, which performed well on QVC. We’re reassessing our product portfolio to enhance the offerings under the Squirrel brand, aiming to attract new consumers and strengthen the brand. There's a lot of potential on the branded side, and we are actively working on our brand positioning and consumer engagement, which makes us very optimistic about our future prospects.

I really appreciate it. That's very helpful. Just to touch on the trail and snack mix, obviously, pretty strong in the last few quarters. How much room does that still have to grow? Is that more of the change in consumer, the expansion with the distribution customers? Can you just talk about that because that's been a really strong channel for you for a while now?

Sure. Yes. So trail mix has always been a very strong segment in the category. We did see some shift to lower cost trail mixes, especially with peanuts, as consumers looked at the economy and just income in general. So we did see a shift to lower cost trail mixes. But we also see growth in the health and wellness trail mixes. If you look at something like a keto mix, which is relatively new to the category, we're seeing substantial growth with that type of health and wellness trail mix. I think you'll continue to see more development in that segment of trail mixes with more health and wellness type of products.

I appreciate that. And then you just mentioned the competitive landscape increasing a little bit in some components. Can you just maybe discuss that broadly across any of the portfolio? Have you seen any real change in strategy in terms of pricing?

Not really. People have been focused on managing through the pandemic. We haven't observed any significant competitive price changes. As we experienced price deflation, much of that was transferred to consumers through lower retail prices. This situation has also allowed us to create more meaningful promotions when we noticed these lower commodity costs coming through, which has helped us attract new consumers to the nut category and reach price points we couldn't achieve before. Competitors have also been concentrating on navigating the pandemic while managing their pricing and driving promotions similarly to us. We are aware of Hormel's acquisition of Planters, but we haven't seen any changes yet as it is still a new process. We will keep an eye on that and anticipate seeing developments from that transition once Hormel assumes control of the brand.

And then just, obviously, a strong balance sheet. Just your thoughts around capital and any M&A opportunities out there that you see?

Sure. Chris, we are always exploring mergers and acquisitions. It's crucial to consider options beyond our current product range or capabilities. We have evaluated a few companies and are consistently searching for business opportunities. Over the past year, our primary focus has been on strengthening our core business, reimagining our brands, and supporting our workforce. However, mergers and acquisitions will certainly remain a component of our strategic growth plan moving forward.

And then, Chris, we're also making a major investment to enter a new product category. That investment has already started and will continue through fiscal 2022, and then we'll start to see some benefits of that investment in fiscal 2023. It's a major project for us.

Is that a new product offering that has been announced? Or is that a new product that has not yet been announced?

It has not been announced.

Soon.

Yes.

Your next question comes from the line of Tim Call with Capital Management.

Congratulations on a strong quarter. This seemed to be your last quarter with hard comparisons. And yet you reported strong quarterly results. And so with easier comparisons and volumes down in quarters in the previous year. Should we expect to see an acceleration of fundamentals?

Well, actually, our fourth quarter was a monster quarter last year because of pantry building. So we still have one more quarter of a challenging comp. But I agree with you after that, we should be able to build some momentum there.

I want to emphasize that we are experiencing a strong recovery, particularly in our foodservice channel. Our industrial channel is also making a comeback. The consumer group and all of our sales and marketing teams have performed exceptionally well, positioning us strongly with distribution, new product placements, and strategic partnerships that will be crucial as the economy and market evolve after the pandemic. You can already see those results coming through in our backlog.

So contract manufacturing might return. Food service used to account for 10% of your overall sales, and your branded products are sold in many stores that were closed during the pandemic. Are you prepared to manage all the increased demand that might arise from those areas simultaneously? When considering companies that could significantly benefit from the reopening of America, should we include your firm?

Yes, Tim, this is Jasper. From a capacity standpoint, we're well prepared to handle the increased demand. Some of our product lines, like food service, have dedicated equipment. If we return to normal levels, the equipment we have will be sufficient to meet that demand. We have also been continuously investing in our retail side, whether through rigid packaging like PET jars, cans, or standup bags. So I believe we are in good shape in terms of capacity.

And you mentioned Planters, and hopefully, there's some disruption there, but their last calendar year had sales of roughly $1 billion of those Planters product lines that were sold. And the sales price was around $3.35 billion cash. Your last fiscal year, you had sales of around $0.9 billion. And your market cap and the stock market is around $1 billion; very little debt. There seems to be a vast difference in valuation of what the market was paying for Planters and what the market is paying for your firm, what do you think can be done to narrow that gap? Do you think just more investors need to find out about John B. Sanfilippo?

Yes. Tim, one significant aspect is the surprising multiple that was paid for Planters. It's a strong brand with a rich heritage. I believe Hormel will manage it well. When we compare our profits and valuations, it's evident that brands hold substantial importance for investors. High-margin brands often have better control over their future growth. As we continue to develop our brands within our portfolio, while also supporting our private brand and industrial business as well as our contract packaging operations, we'll likely see our valuation multiple increase. The stronger our brands are, the greater our market share and distribution across the country, which will ultimately enhance our company's valuation.

Well, thank you for all your hard work. It's great seeing it pay off. Congratulations on a great quarter.

I'm showing no other questions at this time.

Okay. Since there are no other questions, thank you again for your interest in JBSS, and this concludes the call for our third quarter of fiscal 2021 operating results.

Thank you again for participating in today's conference call. You may now disconnect.