Sanfilippo John B & Son Inc Q3 FY2025 Earnings Call

Thank you for standing by. My name is Gail, and I will be your operator for today's call. At this time, I would like to welcome each and every one of you to the John B. Sanfilippo & Son, Inc. Third Quarter Fiscal Year 2025 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. It is now my pleasure to turn today's call over to John B. Sanfilippo & Son, Inc. Chief Executive Officer, Jeffrey Sanfilippo. Please go ahead.

Thank you, Gail. Good morning, everyone, and welcome to our 2025 third quarter earnings conference call. We appreciate you joining us. On the call with me today is Frank Pellegrino, our CFO. We may make some forward-looking statements today. These statements are based on our current expectations and may 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 the filings to learn more about these risks and uncertainties that are inherent in our business. I am encouraged to share the positive results and improvements we've made in our financial performance this quarter. Although we saw a decrease in sales volume during the third quarter, we improved our gross profit and achieved a 50% increase in diluted earnings per share. This was driven by, among other things, strategically controlling our costs and the continued alignment of our selling prices with increasing commodity acquisition costs. When we exclude the impact of inventory valuation on the current quarter's gross profit, there is a modest sequential improvement. Like other snack food companies, our third quarter performance was impacted by a challenging macroeconomic and consumer environment. The sales volume decline, coupled with the risk of additional declines due to rising retail selling prices and changing consumer behavior, underscores our strategic priority to execute on our Long-Range Plan and adapt our strategies to meet evolving customer needs. To support this, we are committed to investing in our future growth, planning to spend approximately $90 million on equipment to expand our domestic production capabilities and improve our related infrastructure by the end of fiscal 2026. This historic investment in production equipment and infrastructure in our US facilities reflects our confidence in domestic manufacturing. There is a great deal of uncertainty in the market with macroeconomic factors out of our control that may have an impact on our business, but there is so much that we can control within our company to drive efficiencies, deliver innovation, differentiate our products and services, and optimize our cost structure. The investments we are making demonstrate our commitment to growing our business, being a more valued partner to our customers, and providing more job opportunities for the dedicated team members throughout our organization. I would like to thank all our employees who have worked with passion, dedication, and urgency to manage our business through these challenging times. As we face several headwinds impacting the demand for nuts, trail mixes, and bars, let me share how our company is responding to mitigate negative impacts on our business while investing in growth. First, there are higher commodity costs for most nuts we procure, including almonds, walnuts, pecans, and cashews due to supply and demand volatility. The cocoa market has continued to stay at almost record prices. We are having difficult discussions with our customers to pass on necessary price increases. At the same time, we are offering options to change product formulas, pack sizes, and product mixes to mitigate these cost increases. Second, the impact of tariffs, whether actual, pending implementation, or threatened by the US government or other governments on our costs and supply chain. There are items such as cashews, pepitas, pine nuts, and macadamias that do not grow in the US or have little production here. So, most of these items are incurring a 10% tariff today, with other products incurring over a 140% tariff. We are working very closely with our major customers to define the financial impact of these costs on their finished products and deciding how best to manage purchases, inventories, and potential demand destruction. Our procurement team is doing an extraordinary job looking for alternative suppliers where possible to mitigate supply chain disruptions. Third, changing industry trends as consumers' purchasing preferences evolve. There are so many factors impacting consumers today, including inflation, economic volatility, health and wellness, and reduced government support through programs such as SNAP or a variety of other macroeconomic reasons. Even where and how consumers get their information about food has dramatically shifted. JBSS has invested heavily in a robust consumer insights team to track consumption, monitor consumer behavior, and assess price elasticity models, recommending opportunities for our retail partner to optimize their portfolios with the right products, prices, and promotions. These same recommendations from our consumer insights team are also being applied to our brand portfolio, including Fisher snack, Fisher recipe, and our Orchard Valley Harvest brand. It is a difficult environment for most brands across the snack category, as consumers have tightened their wallets due to current inflationary pressures, but we continue to focus on expanding distribution, building brand awareness and trial with innovative marketing programs and allocating a portion of the sales to support our partner Conscious Alliance to help end child hunger. I will now turn the call over to Frank to discuss our financial performance.

Thank you, Jeffrey. Starting with the income statement, net sales for the third quarter of fiscal 2025 decreased 4% to $260.9 million compared to net sales of $271.9 million for the third quarter of fiscal 2024. The decrease in net sales was due to a 7.9% decrease in sales volume, or pounds sold to customers, which was partially offset by a 4.2% increase in the weighted average sales price per pound. The increase in the weighted average selling price primarily resulted from higher commodity acquisition costs for all major tree nuts. Sales volume declined for substantially all major product types in the third quarter. Sales volume decreased 9.2% in the Consumer Distribution Channel, primarily due to an 8.3% decrease in private brand sales volume. The private brand volume decrease was due to a 16% reduction in bars' volume, mainly due to reduced sales to a mass merchandising retailer following an increase in bar sales from a national brand recall in the third quarter of fiscal 2024. Our strategic decision to reduce sales to a grocery retailer and lost distribution in our grocery retailer further contributed to the decline in bars volume. Additionally, decreases in sales of almonds, snack nuts, and trail mix caused by higher retail prices and the discontinuation of peanut butter at the same mass merchandising retailer contributed to the overall reduction in sales volume. These declines were partially mitigated by increased sales of walnuts and pecans at the same retailer along with new distribution at two grocery store customers. Sales volume decreased 12.9% for our branded products, primarily driven by a 33.8% reduction in Orchard Valley Harvest sales, mainly due to delayed orders from a major customer in the non-food sector. Sales volume decreased 8.3% in the Commercial Ingredients Distribution Channel, mainly driven by decreased sales volume due to competitive pricing pressures and decreased foodservice peanut butter sales. Sales volume increased 6% in the Contract Manufacturing Distribution Channel, primarily due to increased granola volume processed in our Lakeville facility. Sales of new customers and opportunistic sales of current customers also contributed to the overall increase. These gains were significantly offset by reduced peanut sales volume on major customers due to soft consumer demand. Gross profit increased by $6.7 million or 13.7% to $55.9 million compared to the third quarter of last year, driven by inventory valuation adjustments that we anticipated, which were driven by rising commodity input costs and may not recur next quarter. The inventory valuation adjustment was primarily driven by a transition from a lower-cost to a higher-cost crop year for walnuts and pecans. To a lesser extent, gross profit benefited from favorable manufacturing efficiencies. These gains were partially offset by higher commodity acquisition costs for all major tree nuts. Third quarter gross profit margin, as a percentage of net sales, increased to 21.4% compared to 18.1% for the third quarter fiscal 2024 due to the reasons previously mentioned. Total operating expenses for the third quarter decreased $3.1 million compared to the prior quarter, mainly due to a reduction in incentive compensation expense, which was partially offset by an increase in rent expense from our new Huntley, Illinois facility. Total operating expenses for the third quarter of 2025 decreased to 10.6% of net sales from 11.3% for last year's third quarter due to the reasons previously mentioned and was partially offset by a lower net sales base. Interest expense was $1.1 million for the third quarter of fiscal 2025 compared to $800,000 for the third quarter of fiscal 2024. Net income for the third quarter of fiscal 2025 was $20.2 million or $1.72 per diluted share, compared to $13.5 million or $1.15 per diluted share for the third quarter of fiscal 2024. Now, taking a look at inventory. The total value of inventories on hand at the end of the current third quarter increased $47.1 million or 22.4% compared to the total value of inventories on hand at the end of the prior year of comparable quarter. The increase was mainly due to higher quantities and cost of finished goods, work in process, and almonds, as well as higher commodity acquisition costs for walnuts and pecans. The weighted average cost per pound of raw nuts and dried fruit increased 33.9% year-over-year, mainly due to higher commodity acquisition costs for almost all major tree nuts. Moving on to year-to-date results, net sales for the first three quarters of fiscal 2025 increased 5.1% to $838.2 million compared to the first three quarters of fiscal 2024. Excluding the 2025 first quarter impact of the Lakeville acquisition, net sales remained relatively unchanged, rising slightly from $792.2 million to $797.7 million. Sales volume increased 6.7%, primarily due to the Lakeville acquisition. Excluding the impact of the Lakeville acquisition, sales volume remained relatively unchanged. Gross profit margin decreased from 20.6% to 18.5% of net sales. The decrease was mainly attributable to increased commodity acquisition costs for substantially all major nuts, as well as competitive pricing pressures and strategic pricing decisions, which were offset by factors cited previously and improved profitability on bars due to manufacturing efficiencies. Total operating expenses for the current year-to-date decreased by $3.5 million to $90.1 million compared to $93.6 million for the first three quarters of fiscal 2024. The decrease in total operating expenses was mainly driven by decreases in incentive compensation, advertising, and consumer insight expenses. These decreases were partially offset by a one-time bargain purchase gains in the Lakeville acquisition, which did not repeat in the current year-to-date period, as well as increases in salary and wages, freight, and rent expenses. Interest expense was $2.3 million for the first three quarters of fiscal 2025, and $2.1 million for the first three quarters of fiscal 2024. Net income for the first three quarters of fiscal 2025 was $45.4 million, or $3.87 per diluted share, compared to net income of $50.2 million, or $4.30 per diluted share, for the first three quarters of fiscal 2024. Please refer to our 10-Q for additional details regarding our financial performance for the third quarter of fiscal 2025. Now, I'll turn the call over to Jeffrey to provide additional comments on our operating results for the third quarter of fiscal 2025 and discuss category trends.

Thanks, Frank. Turning to category updates, I'll share the category and brand results for the quarter. All the market information I'll be referring to is Circana panel data, and for today it is the period ending March 30, 2025. When I refer to Q3, I'm referring to 13 weeks of the quarter ending March 30, 2025. References to changes in volume are versus the corresponding period one year ago. For pricing commentary, we are using scanned data from Circana, which includes food, drug, mass, Walmart, military, and other outlets, and we are referring to the average price per pound. We are using the nut, trail mix, and bar syndicated views of the category as defined by Circana. In the latest quarter, we continued to see modest growth in the broader snack aisle as defined by Circana. Volume and dollars were up 2% and 3%, respectively. This is consistent with the performance we saw in Q2. In Q3, the snack nut and trail mix category was down 2% in pounds and up 2% in dollars as we saw prices start to rise. This is slightly worse volume performance than we saw in Q2, but similar dollar performance. We saw prices rise 2% in snack nuts and 3% in trail mixes, with almonds, mixed nuts, and pistachios all showing higher prices. Fisher snack and trail mix performed worse than the category, with pound shipments down 17%. This was driven primarily by declines at a major specialty retailer due to inventory changes and not repeating a promotion. On Southern Style Nut brand, pound shipments increased 10%, driven primarily by velocity growth in mass and e-commerce. Orchard Valley Harvest brand, which primarily plays in trail mix, was down 34% in pound shipments, driven by delayed orders from a specialty retailer. Excluding that customer, pound shipments were actually up 11% with strong growth in club and e-commerce. Commodity increases, including cocoa and some tree nuts, are resulting in higher prices for Orchard Valley Harvest. We continue to focus on innovation and cost savings opportunities to mitigate this significant commodity pressure. Our private label consumer snack and trail shipments performed relatively in line with the category, with pound shipments down 3% versus last year. Now, let me turn to the recipe nut category. In Q3, the recipe nut category was down 1% in pounds and up 10% in dollars as prices for both walnuts and pecans continue to increase. This is an improvement in dollar performance and relatively stable volume performance versus Q2. Our Fisher recipe pound shipments were down 3% in Q3, with volume softness tied to increased costs of our commodities. Now, let's switch over to the bar category. In Q3, the bars category continued to rebound as the major player continued to re-enter the market after a recall last winter. The category grew 6% in pounds and 8% in dollars. Private label was down 1% in pounds and up 2% in dollars as the previously mentioned national brand retook some of the share it lost to private label last year. Our private label bar shipments were down 16% versus a year ago as we lapped significant growth after filling empty shelves because of the national brand recall. In closing, as we look ahead, maintaining agility and swiftly adapting to the dynamic external environment is imperative to our business. We continue to monitor the impact and timing of import tariffs on internationally sourced items, which represent approximately 15% to 20% of all our raw material purchases. As I mentioned, items such as cashews and pepitas do not grow in the United States, and we are proactively working with strategic suppliers to quantify the potential impact of tariffs and develop solutions to manage cost increases while ensuring minimal disruptions to our supply chain. Additionally, we are collaborating closely with customers to assess the impact of tariffs on retail selling prices and consumer demand and to identify solutions to attempt to mitigate that impact. Furthermore, we will continue to rigorously pursue opportunities to enhance internal efficiencies and drive long-term shareholder value. I am confident in the strategic investments we have made in our people, customers, and capabilities to overcome these challenges and deliver strong operating results. Our company and our team of dedicated leaders and associates throughout the organization remain steadfast and strong. We have always adapted quickly to overcome headwinds. Our insights, innovation, R&D, marketing, sales, operation, and finance teams across the organization are focused on consumer behavior and consumption trends to develop new products, pursue new opportunities, and manage our financial performance and inventory levels. We have the right strategies, talent, and commitment to quality and service to continue to grow and provide exceptional value for our customers and our 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 Gail to open the line for questions.

Thank you, Jeffrey. I will now handle questions.

Hi, guys. Just wanted to start the questions off on the tariff exposure. So, for that 15% to 20% raw materials exposure, do you think you'll be able to pass off this cost to your customers just in general, because it's everyone in the industry affected?

Yes, the entire industry is feeling the impact. Our focus is on the main commodities that generate the highest value in tariffs, which involve three or four key items and customers. We are currently in discussions with our customers regarding how these increases will affect their finished goods. Our goal is to pass on these tariff costs to our key customers. For smaller items with less than a 10% increase on finished goods, we will look into optimizing production and managing inventory. However, for the key items that carry the most volume and value, we will be passing on the increases to our customers.

So, like if that 46% comes back overall, you'll pass it off on for Vietnam, for example?

Correct.

I was trying to do some rough calculations last night after your release regarding your cashews business, and it seems to appear that it's operating at breakeven. Is that accurate, or what are the earnings looking like in that area overall?

Which commodity, sorry? Was that cashews?

Yeah, your cashews and mixed nuts segment.

No, it's a profitable segment. I think if the 46% tariffs come across, that would be a challenge to get those price increases through and then the impact to consumer demand will be dramatic. But currently, cashews and mixed nuts are consistent with our overall profit profile.

Yeah, I would add. So, over the last couple of years, since cashew prices came down to almost historic lows, we did see growth in the cashews segment in the snack category. I think with these higher prices that are even separate from the tariffs, just the commodity supply and demand, we've seen an increase in cashews. I think you'll see a shift in consumption away from cashews to almonds, peanuts, and some of the other lower-priced retail products, but still a profitable item for us. But as Frank said, with these increases in tariffs potentially, you could see more demand destruction as we do pass those increases on.

And then, if you can't pass them on, would you just get out of the cashew business overall?

So, it's still a big piece of the business. I don't know if we would get out of it completely. I will say if these higher tariffs do hit, just like we're having conversations with key retailers today at pepitas that come mainly from China with a 145% increase, those discussions are taking place when those potential increases hit finished goods in July and August. So, the questions are whether the retailers will still continue those items or hold off and wait until prices come back down and just not have them available on the shelf. We have seen some retailers that are doing just that. There's a straight pepita item that is sold at retail; some of those retailers are saying let's just not buy the item and wait until those markets come down again.

And Nick, one add-on to cashews, if the 45% or so tariffs from Vietnam do come back, like Jeffrey said, consumer demand would decline, which will result in the underlying cashew price having declined because of the lower demand. So, in theory, some of the increases due to the tariff will be offset by a lower commodity cost of the underlying cash flow.

And then, would you just be set up to, like, you could capture this back though where like you said consumers buy more peanuts, pecans, walnuts, something like that as well...

Absolutely.

I guess, they'll switch to that...

Yeah, we anticipate...

I would like to clarify my understanding of the inventory transition you mentioned. Do you still expect to reach the $0.60 per pound gross margin level in the next quarter and beyond with the price increases you have implemented?

The price increases went in place during the current quarter. I think, Nick, the best way to look at it is if you look at our gross profit section, if you just back out the impact of the inventory valuation, which we cited in the release in the Q, and that should be a good indication of what our gross profit per pound should be going forward.

Okay. And then, that $90 million spend, is that the addition of two more bar lines to your bar business overall?

So, Nick, good question. It's a big investment we're making. It's a combination of things. So, we do believe there's opportunity for growth in the bar category. So, some of that $90 million is going towards bar infrastructure. As we talked about in previous calls, we moved our warehouse distribution center to Huntley, Illinois, just down the street, to free up space in our Elgin headquarters to expand production. So, a big chunk of that will go to expanding bar capabilities, but also other parts of our business to expand production capacity.

I was just wondering too like you're comped on incremental capital at 10%. So, I was wondering is that the hurdle rate or what's the underwriting return that you're expecting on that investment.

That's correct. 10% is the correct number to use.

All right. And then, I guess, on bars, if we exclude that impact from one producer just being out of the market for a bit, like how did bars perform overall? Did they grow? Were they flat without this effect? I was just wondering getting down to it.

The exciting news is that as private label share increased within the category due to the recall, we have noticed a significant retention of that share. Private label has certainly gained market share, which we are pleased about. The impact was considerable, as the recall was prolonged. In some cases, consumers had no other option but to purchase private label products. However, once they tried them, they appreciated the quality and value offered. Many of these consumers have continued to prefer private label products. Given the current economy and market volatility, we observe not only a retention of consumers in private label but also a shift towards private label for lower-priced goods.

All right. Thanks, guys. Great quarter. Thanks. I don't have any more questions.

Thanks, Nick.

Thank you, Nick.

Thank you. So, your first question comes from the line of Nick Otton with CWB Wealth. Please go ahead.

Thank you. Good quarter in navigating through a challenging time. I have a quick question about inventory. First, are you seeing any signs of relief regarding price or cost increases for various nuts beyond the tariff issues? Second, does the increase in pounds and price per pound indicate anything beyond seasonality?

Sure. So, I'll cover the first question, Ronald, first commodity. So, we have seen stability in some of the markets. So, cashews, for example, actually came down a little bit since they hit historic highs. We've seen some stability there. I believe with the demand destruction that we're going to see with these high retail prices, we should expect some of those commodity prices to come down further. I would say the same for potentially almonds and some of the other nut commodities. These high retail prices, which were passed on in January, there will be additional increases in June, July time period. Those retail prices will get tough for some consumers. So, we should expect some of those commodity costs to come down as a result of lower demand.

I think that might have been part of the strategy. Just to add one more question before we move to part B, can we understand from Nick's questions about gross margin that you're aiming for around 18.5% excluding the IVA?

That's in the right range, Ron, yes.

Okay, thank you.

And then, your second part of your question...

Yeah, thanks.

Inventory has increased primarily due to a few key factors. First, we are seeing a rise in work-in-progress and finished goods, which we expect to sell through in the fourth quarter. As noted, our volume softened in the latter part of the quarter, leading to production of that inventory, which we plan to sell during the early months of Q4. The overall increase in inventory is largely a result of this mix. Additionally, the crops we source from the shellers, such as walnuts and pecans, have seen higher acquisition costs. We typically hold inventory of these crops for nine to twelve months until the next harvest, which contributes to the rising inventory cost and value, as the crops that do not sell within a month are escalating in price.

Okay, good. Do you have any further updates on your strategy going forward, aside from what you've already mentioned about capital expenditures? I understand that the larger quarters aren't immediately coming up, but I would appreciate any insights you can share.

So, strategically we're actually working on holiday programs right now, just building up promotional programs pricing, obviously I mentioned will be redone in June, July. And so, really the strategy is just to get through some of the volatility in the market, make sure that we have the right price points out there for consumers, the right product mix where if things change and the economy changes dramatically, we've got the right products on the shelf that consumers can still buy. Strategically, the investment in the bar category is important. We're going to continue with that. We believe there's a lot of growth and white space in the bar category, especially for private label. And then, M&A, obviously, always looking at it. Nothing has come up, but we're always part of our strategic plan to see where we can participate in other categories and apply our competitive advantage in differentiation and manufacturing to other categories.

Okay. That's it. Good. Thanks, Jeff, and thanks, Frank. Good luck.

Thanks, Ron.

One last question from Ronald Netarico, a private investor. Please go ahead.

Thanks, Gail. So, I appreciate everyone's participation on the call today. Thank you for the smart questions. These are volatile times, and we know what to do. We know what needs to be done throughout our organization to continue to provide shareholder value and value for our customers and consumers. So, appreciate your interest in JBSS, and have a great day.

Thank you, everyone. That concludes today's call. You may now all disconnect. Have a nice day everyone.