Welcome to the John B. Sanfilippo & Son Incorporated Third Quarter Fiscal 2022 Operating Results Conference Call. My name is James and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. And now I'd like to turn the call over to CFO, Frank Pellegrino. Mr. Pellegrino you may begin.

Thank you, James. Good morning, everyone, and welcome to our 2022 third quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; Jasper Sanfilippo, our COO; and Mike Valentine, our Group President. 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 third quarter of fiscal 2022 increased 5.1% to $218.6 million, compared to net sales of $207.9 million for the third quarter of fiscal 2021. The increase in net sales was attributable to an 8.1% increase in the weighted average sales price per pound and was offset in part by a 2.8% decrease in sales volume, which is defined as pounds sold to customers. The increase in the weighted average selling price was attributable to price increases implemented during the third quarter in response to higher commodity acquisition costs for all major tree nuts and peanuts and increases in freight, labor, and other input costs. Sales volume decreased 5.8% in the consumer distribution channel, primarily driven by a 57.1% decrease in peanut butter sales volume due to the planned downtime associated with the upgrade of our peanut butter line that occurred and was completed in the third quarter and the discontinuance of our inshell peanut product line, which occurred in the fourth quarter of fiscal 2021. These two factors accounted for substantially all the sales volume decline in the consumer distribution channel. Sales volume in the consumer distribution channel accounted for 75.3% of total sales volume in the current third quarter. Looking at sales volume for our branded products in the consumer channel, sales volume for Fisher recipe nuts fell 24.5%, primarily due to the later Easter holiday this year, higher at-home cooking and baking nut consumption in our prior fiscal year due to COVID-19 restrictions and reduced purchases due to the impact of higher selling prices at retail. The 12.5% increase in sales volume for Orchard Valley Harvest was attributable to increased promotional activity at a grocery customer and increased distribution at a major customer in the nonfood sector as this retail continues to recover from COVID-19 restrictions. Fisher snack nut sales volume decreased 23.5% primarily due to the discontinuance of our inshell peanut product line, which was partially offset by distribution gains of our Oven Roasted Never Fried product line at existing customers. Excluding the impact of the discontinued product line, Fisher snack nut sales volume increased 14.4% due to increased distribution and velocity of the Oven Roasted Never Fried product line. Sales volume for Southern Style Nuts decreased 2% due to reduced purchases as a result of higher selling prices at a mass merchandising retailer. Sales volume increased 11.2% in the commercial ingredients channel, mainly due to a 19.9% increase in sales volume to foodservice customers, attributable to improved conditions in the restaurant industry from fewer COVID-19 restrictions. However, this increase was offset in part by the impact of the Omicron surge that occurred during the beginning of the current third quarter. Sales volume increased 3.1% in the contract packaging distribution channel due to business where a new customer that started to ship in the third quarter. Net sales for the first three quarters for the current year increased to $698.1 million from $651.7 million for the first three quarters of fiscal 2021. The increase in net sales was attributable primarily to a 5.6% increase in sales volume and a 1.5% increase in the weighted average selling price per pound mainly from an increase in commodity acquisition costs for peanuts and all major tree nuts except walnuts. For the first three quarters of fiscal 2022, sales volume increased in all three of our distribution channels. Sales volume increased 2.8% in the consumer distribution channel primarily from an 8.6% increase in private brand sales volume driven by increases for trail and snack mixes and mixed nuts mainly from new distribution at existing customers. This increase was partially offset by decreases in sales volume for private brand peanuts and cashews and a sales volume decline for peanut butter and our Fisher snack nuts for the same reasons I cited in the quarterly comparison. Sales volume increased 24.8% in the commercial ingredients distribution channel mainly as a result of a 36.6% increase in sales volume in our foodservice business that occurred for the same reasons I discussed in the quarterly comparison. Sales volume increased 3.6% in the contract packaging distribution channel for the same reason referenced in the quarterly comparison as well as increased distribution and new product offerings by a major customer in this channel. Third quarter gross profit decreased $6.6 million and gross profit margin as a percentage of net sales decreased to 18% for the third quarter of fiscal 2022 from 22.1% for the third quarter of fiscal 2021. The decreases in gross profit margin and gross profit were mainly attributable to higher commodity acquisition costs for pecans, almonds and walnuts and other inflationary cost increases, including labor, freight and manufacturing supplies. Gross profit for the first three quarters of the current year increased $5.3 million while gross profit margin as a percentage of net sales decreased to 20.5% from 21.2% for the same period last year. The increase in gross profit was due to increased sales volume which was partially offset by the same reasons I cited in the quarterly comparison. The slight decrease in gross profit margin was attributable to higher commodity acquisition costs for pecans, cashews and almonds which was mainly offset by increased sales volume. Total operating expenses for the current third quarter decreased $3 million in the quarterly comparison and total operating expenses as a percentage of net sales decreased to 10.1% from 12% compared to last year's third quarter. The decrease in total operating expenses was mainly due to a decrease in incentive compensation, which was partially offset by increases in freight, compensation, advertising, consumer insight research and related consulting and sales broker commission expenses. The increase in freight expense resulted from higher freight rates compared to the prior year. Total operating expenses for the current year-to-date period increased 11.5% of net sales from 10.8% for the first three quarters of fiscal 2021 and total operating expenses increased $10 million. The increase in total operating expenses was due to increases in advertising, consumer insights research and related consulting freight, compensation and sales broker commission expenses which was partially offset by a decrease in incentive compensation. The increase in freight expense resulted mainly from higher freight rates and an increase in sales value made on a delivered basis. Interest expense for the current third quarter increased to $500,000 from $300,000 for the third quarter of fiscal 2021. Interest expense for the first three quarters of the current year increased to $1.3 million from $1.1 million for the first three quarters of fiscal 2021. The increase in interest expense in both comparisons primarily resulted from higher average short-term debt levels driven mainly by increased commodity acquisition costs. Net income was $11.9 million or $1.02 per share diluted for the third quarter of fiscal 2022 compared to $14.7 million or $1.27 per share diluted for the third quarter of fiscal 2021. Net income for the first three quarters of fiscal 2022 was $44.4 million, or $3.83 per share diluted compared to net income of $47.4 million or $4.10 per share diluted for the first three quarters of fiscal 2021. Now taking a look at inventory. Total value of inventories on hand at the end of the current third quarter increased $59.4 million or 39.1% compared to total inventory value at the end of the third quarter fiscal 2021. The increase in value of total inventories was primarily due to higher commodity acquisition costs for our raw nut and dried fruit input stocks. Higher on-hand quantities of almonds and finished goods also contributed to the increase in total inventories. The weighted average cost per pound of raw nut and dried fruit input stock on hand at the end of the current quarter increased 52.1%, due to higher commodity acquisition costs. I will now turn the call over to Jeffrey Sanfilippo, our CEO to provide additional comments on our operating results for the third quarter of fiscal 2022.

Thank you, Frank. Good morning, everyone. Despite all the headwinds, this was our third best Q3 in the company's history. As anticipated, the third quarter of fiscal 2022 was challenging as we continue to navigate through this unprecedented operating environment. However, there were many successes, and we believe the actions taken during the quarter should improve future operating performance. Our pricing actions to help offset the inflationary input costs were fully implemented by the end of the third quarter, but we will not see a full quarter impact of these actions until the fourth quarter. The good news is our margins in period 10 have started to normalize again. The challenging news is we continue to observe a difficult cost environment, and the procurement and operations teams are monitoring additional inflationary cost pressures on pecans, fuel, aluminum-based lidding stock, and certain ingredients, including roasting oil. The company is working on mitigation steps to manage supply chain volatility. Lead times for several ingredients and packaging materials have doubled and even tripled for some products. Nevertheless, our teams across the organization have done an extraordinary job taking care of our customers and maintaining best-in-class quality and service levels. I'm so thankful and proud of our team's hard work and dedication. Frank mentioned the main reasons for the decline in volume in the quarter. Discontinuation of our inshell peanut business, which occurred in the fourth quarter of fiscal 2021, Easter holiday falling two weeks later this year on the calendar, which pushed some volume into Q4, and the volume declines in peanut butter due to the plant downtime of our production line in Georgia. It's important to note that, on the operations side the upgrade of our peanut butter line in our Georgia manufacturing facility is expected to improve our peanut butter quality and manufacturing capabilities and efficiencies. The investments made to this production line will allow us to pursue new customers and continue to grow our peanut butter business. The company is also investing heavily in automation and expanding capacity for other parts of our business. The challenging labor market across the country has required us to make critical CapEx decisions to optimize our production lines and reduce the headcount of temporary employees in our plants. We're also making important investments in R&D and insights to build an innovation pipeline for our brands and private brand customers. Turning to priorities by JBSS business channel, the consumer channel as Frank mentioned, net sales increased 2.5% in dollars and decreased 5.8% in sales volume in the third quarter of fiscal 2022. The decline in our inshell peanut business volume was partially offset by distribution gains of our Oven Roasted Never Fried product line at existing customers. The sales team continues to focus on expanding distribution of this important product line. Our Fisher recipe program had a very successful holiday season in the second quarter. The strong success of bringing new consumers to the baking and cooking aisle and growing consumption is the catalyst to gain new and expanded distribution with customers and to grow our volume and our market share. The commercial ingredient channel, distribution increased 21.2% in dollars and 11.2% in volume in the third quarter. We are seeing significant growth in our foodservice business due to improved conditions in the restaurant industry as the country opens up from fewer pandemic restrictions. Q3 started out with negative impact from the Omicron surge in periods 7 and 8. However, volume has since come back very strong. The foodservice business managers have done an exceptional job gaining new distribution of our branded products in front-of-house noncommercial locations around the country. As summer approaches, our products will be available for consumers to purchase in more locations than at any other time in the company's history. And the teams are continuing to pursue other alternative retail opportunities. The contract packaging channel increased 11.5% in dollars and 3.1% in sales volume in the third quarter. The contract packaging team has done a nice job establishing new business with a new customer and volume just started shipping in the third quarter. It is our investment in manufacturing and our supply chain expertise that provides value during these challenging times to various snack food companies. Turning to category updates. I will share some category and brand results with you for the quarter. As always, market information I'll be referring to is IRI reported data and for today, it is for the period ending March 20, 2022. When I refer to Q3, I'm referring to the 13 weeks of the quarter ending March 20th. References to changes in volume or price are versus the corresponding period one year ago. We look at the category on IRI's total U.S. definition which includes food, drug, mass, Walmart, military and other outlets, unless otherwise specified. When we discuss pricing, we are referring to average price per pound. Breakouts of the recipe, snack, and produce nut segments are based on our customer definitions developed in conjunction with IRI and the term velocity refers to the sales per point of distribution. The total nut and trail mix category was down 1% in dollars and 3% in pound volume in Q3. This is slightly down versus the rate we saw last quarter. We continue to see strong growth in the trail mix segment, slightly offsetting declines in the recipe and snack nut segments. This produce segment was slightly up on dollars, but flat on volume. And overall prices across categories were up in Q3 versus the prior year by 2.9%, with almost all nut types increasing. Now I will cover each segment in more depth, starting with recipe nuts. The recipe nuts segment declined 2% in dollar sales and 6% in pound sales. This is similar to the decline that we saw in Q2. As a reminder, the recipe nut segment has seen significant growth throughout the pandemic driven by more consumers cooking and baking at home. Additionally, Easter was earlier this year versus last year, April 4th of 2021 versus April 17th of 2022, causing timing shifts of promotions. Our Fisher brand performed on par with the recipe segment in Q3, declining 3% in dollars and 6% in pounds. Fisher's performance resulted in a dollar share decline of 0.2 points in Q3, although Fisher remains the branded leader. Fisher's performance was driven by slowing velocity in the grocery and mass channels, driven by higher pricing and lapsing at-home cooking and baking at home and a later Easter. Now let me turn to the snack nuts segment. In Q3, the snack nut segment declined 4% in dollar sales and 7% in pound sales. This is greater than the decline we saw in Q2. All nut types except macadamias are declining in both dollars and pounds. Prices across all nut types except macadamias are up versus the prior year. Fisher snack did not repeat a club rotation this year and declined 6% in dollars and 18% in pound sales at the total outlet level. However, without the club item, Fisher snack continues to grow faster than the category and grow share. The Oven Roasted Never Fried line continues to grow 24% in dollars and pounds driven by strong distribution growth. We are seeing strong results in the Oven Roasted Never Fried line across our large sizes as consumers continue to look for better-produced snacks at a good value. We are focused on continuing to build distribution and drive velocities against this line. The trail and snack mix segment grew dollars and pounds in Q3, up 8% and 4% respectively. This segment continues to accelerate growth as it laps out of modest performance during the pandemic. Pricing was up 3% in this segment. Our Southern Style Nuts brand declined 2% in dollars and 5% in pound sales due to velocity slowdown in our mass channel, given increasing competition from private brands. Private brands continue to drive the trail mix category growth. Our last segment, produce nuts, increased 2% in dollar sales and was flat in pound volume sales in Q3. This is slightly lower growth than we saw in Q2. The growth is still being driven by pistachios, which were up 24% in dollars versus last year. Our produce nut brand, Orchard Valley Harvest, was flat in dollar sales and up 10% in pound sales, driven by strong performance in the grocery channel as we continue to activate new merchandising and trade strategies. In closing, I made a comment last year at this time about how extraordinary it was to see the world change since our third quarter of 2020 and yet here we are in 2022 with events changing our world in a significant way again. As we look ahead, there will be numerous challenges we will need to overcome including the ongoing and potential new supply chain issues and inflationary cost pressures due to the conflict in Ukraine and the potential impact on consumption from higher retail selling prices. However, I am very confident in the strategic investments we have made in our people, our customers, and our capabilities to overcome these challenges and drive future earnings growth. Our company and our team of dedicated leaders and frontline associates throughout the organization remain steadfast and strong. We are adapting quickly to overcome supply chain disruptions and cost volatility. And our insights, innovation, R&D, learning, and sales teams are laser-focused on consumer behavior and consumption trends to develop new products and pursue new brand opportunities and pursue elevated demand with our private brand retail partners. We have the right strategies, talent, and business model to continue to grow and provide exceptional value and innovation for our customers and consumers. 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 Frank.

Thanks, Jeffrey. We will now open the call to questions. James, please queue up our first question.

Thank you. Our first question comes from Chris McGinnis of Sidoti & Company.

Good morning. Thank you for taking my questions and for the insights shared. To start, could you discuss the current inflationary environment and any related supply chain issues, particularly in light of the Russia-Ukraine conflict? Are there specific challenges in that region that you encounter?

This is Jasper. The most pressing issue we're facing from Ukraine is related to sunflower oil, as Ukraine produces around 60% of the world's supply. This has created pressure on other oils, including those that we use in some of our products. We are currently assessing this situation and searching for substitute oils. We are also dealing with inflation across the board, impacting supplies, capital expenditures, and equipment, with lead times and costs rising significantly. Balancing our inventory to ensure we can service customers has been a challenge for the past two years. Regarding aluminum, which we use for packaging, our procurement team is actively seeking alternatives. Additionally, there are inflationary pressures concerning wages and hiring employees. We've implemented automation in our manufacturing processes to help address labor shortages, investing in automation because of the difficulty in filling positions. We made progress in automating in 2022, but equipment lead times have extended to about a year. However, we feel prepared as we approach the busy season in Q2. Our vertical integration allows us to control much of our supply chain, especially regarding major nuts. Freight has posed challenges, particularly in Q1 and Q2, but we’ve utilized this time to conduct RFPs, especially for rail transport from California to Chicago, and we executed that in Q3. We are now onboarding new carriers, which will have an impact starting in Q4. Like other manufacturers, we face challenges with labor and supply chain issues, including long lead times and higher costs. Forecasting accuracy has become more crucial than ever, and we are working closely with customers to maintain accuracy to ensure we have sufficient materials and supplies to meet our service levels, aiming for 99% or better.

Great. I appreciate all the insight there. Just thinking about the later Easter, will that positively impact Q4? I know there's one more week, so can you talk about the expected impact on Q4?

Yes, that should have a positive impact on Q4. The year-over-year comparison should be impacted by Easter falling in Q4.

Okay. And I guess just thinking about consumer, there was a lot of kind of moving parts within that. The new distribution wins are you continuing to see new gains as you invest more around the marketing side and the insights?

Hi Chris, this is Jeffrey. So definitely the team, sales, marketing, operations, R&D are all of them are doing a great job building their current pipeline for customers. The dynamics in the industry today are from a consumption perspective, you're starting to see price increases take effect that were initiated in Q3. So, you're seeing higher retail prices. We're seeing a little bit of a shift from higher priced nuts to mixed nuts and cashews to lower-priced trail mixes and peanuts, as we're monitoring that shift. But the opportunities are substantial. With the company's scale and our access to supply chain and just as Jasper mentioned, just managing it better than a lot of other companies. We just feel this actually will create new opportunities for us with some other supply chain challenges. And just with our scale, we've got opportunities to continue to grow. The marketing team has invested a lot in repositioning our Squirrel brand in our Orchard Valley Harvest brand. A lot of those efforts are taking place now but won't have an impact until later Q4 and actually into fiscal '23. So, we won't see a lot of that impact, but the investments are being made now for those brands for future growth. We're also seeing a shift from a lot of branded business to private brands. And so of course, with our big private brand presence, we are working with our key retail partners to make sure that we can meet that new demand in private brands as consumers look to them.

Great. I appreciate that. One of the things I think I remember was that the consumer changed to a larger package size during COVID. Are you seeing that shift back down to the smaller sizes? And how does that change? And then, I guess thinking about the inflationary price environment and the customer switching there, can you just talk about those two components if you're seeing that?

You are still seeing strong demand in the larger sizes, as they offer great value at retail. If inflation continues and prices increase further, consumers who are willing to spend around $10 may begin to look for smaller items in that category. However, we haven't observed that shift yet.

Yes. And Chris, I'd like to add that as the convenience store business and the foodservice business opens up and people are going back to work, a lot of our On-the-Go program and a lot of the On-the-Go items do service those. So we have seen a shift from our average ounce per pound produced going back down. So we're packing more units with similar pounds. The good thing was, we were really well set up prior to COVID hitting to be able to efficiently handle that. And so we're just kind of seeing a little bit more of a return to normal pre-pandemic with respect to that ratio of On-the-Go versus large format bags.

And then maybe just on the commercial business. Obviously, things are improving there, sustained growth from here. And how do you think about pre-COVID to where you're at now, and then include market share gains in that? What's the run rate of that business you think longer term?

So I would just say, from a distribution standpoint, all throughout COVID, the teams have been really focused on building distribution. Even though places weren't open, we negotiated contracts, agreements to build that distribution. So once they did reopen and traffic increase, we had our products available in those outlets. So I will say, we have more distribution points today than we did pre-COVID or ever in the company's history. And now that places are reopening and restrictions are limited and summer is approaching, we've got more distribution. So we should expect to see a lot further growth in the foodservice channel. And it's not measured. It's not like a market share like you would see in the consumer channel. They don't have that specific of metrics from a distribution standpoint.

Okay. Great. I appreciate that. That’s all I have for now. I’ll jump back in queue. Thank you.

Thanks, Chris.

And we have no more questions.

Again, thank you for your interest in JBSS. This concludes the call for our third quarter fiscal 2022 operating results.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.