John B. Sanfilippo & Son Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 3 speakers on the call.

Operator

Good day, and welcome to the John B. Sanfilippo and Sons Third Quarter Fiscal 20 24 Operating Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this call is being recorded.

Operator

I would like to turn the call over to Jeffrey Sanfilippo, CEO. Please go ahead.

Speaker 1

Thank you, Michelle. Good morning, everyone, and welcome to our 2024 Q3 earnings conference calls. Thank you for joining us. On the call with me today is Jasper Sanfilippo, our COO and Frank Pellegrino, our CFO. We may make some forward looking statements today.

Speaker 1

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 ks 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. Looking at results, I'm happy to report the Lakeville acquisition increased quarterly sales volume by £18,100,000 or 24.1 percent over Q3 of fiscal 2023 and increased our quarterly net sales by Our integration team has made great progress in optimizing the operations in Lakeville and we currently expect it to become accretive to our operating income during the upcoming Q4, which is significantly ahead of our initial schedule. We also sold in the 3rd quarter approximately $3,200,000 of our own internally developed nutrition bars from our Elgin, Illinois manufacturing facility.

Speaker 1

This complements the snack bars produced in Lakeville. I'd like to personally thank all our employees who have worked with passion, dedication a sense of urgency to optimize the operations in Lakeville and continue to drive improvements. The company just held our Board of Directors meeting in Lakeville where the officers had a chance to tour the plant. I am so proud of the management team in that facility who are now part of the JDSS family. Their commitment to quality, safety and customer service is remarkable.

Speaker 1

Even though we continue to operate in an environment of elevated retail selling prices and cautious consumers, our consumer distribution channel delivered strong results. Our private brand business reversed 2 consecutive quarters of decreasing sales volume. While our branded business sales volume decreased in the quarter, it represented a significant improvement over the decreases we experienced over the last three quarters as we continue to see strong momentum at a major e commerce customer for our branded products. This time last year, we started seeing signs of a challenging operating and inflationary environment. Despite these headwinds, our company executed our strategies, optimized our cost structure and supply chain and created capabilities to expand our product offerings.

Speaker 1

In Q3 of fiscal 2023, we started shipping our 1st private brand bars to a major retailer. Since that time, we have gained new private brand business at many other retailers across the country. We continue to receive favorable feedback from our partners and expect to gain additional new customers in subsequent quarters. And we are working on numerous innovative sales opportunities utilizing our new bar capabilities. Our Board of Directors met yesterday and approved a dollar per share special cash dividend, reinforcing our goal of creating long term shareholder value by returning capital to our shareholders.

Speaker 1

The dividend will be paid on June 20, 2024 to stockholders of record as of May 31, 2024. Looking ahead to the Q4 and fiscal 2020 5, we are optimistic about the contributions of the Lakeville acquisition to our operating results based on the current performance on ongoing and expected future operational improvements. We initially estimated the current fiscal year dilution due to the Lakeville acquisition to range from $0.80 to $1 per diluted share, which we have now updated to $0.25 to $0.50 per diluted share as a direct result of our team's excellence in optimizing the operations in Lakeville during the Q3. Our strong operating results would not be possible without the dedication of our talented team members who continue to exceed expectations and create value for our customers and shareholders. Consumers have reacted to higher retail prices at the shelf and there have been demand destruction because of increased prices.

Speaker 1

Our insights team has done an extraordinary job understanding price elasticities in the nut and trail and snack bar categories. We are testing price changes based on these insights and achieved significant initial success at a major retailer. We are monitoring this positive trend and are initiating plans to execute this price strategy with other retail partners. In addition to entering new product categories such as the snack and nutrition bars, our long term growth plan also includes transforming our branded portfolio. Last year, the company relaunched and rebranded our Orchard Valley Harvest product line.

Speaker 1

The new products and packaging have had mixed results in the market and we are assessing next steps for the brand. It is a difficult environment for most brands across the snack category as consumers have tightened their wallets due to current inflationary pressures. While we continue to focus on expanding distribution, building brand awareness and trial with innovative marketing programs and allocating a portion of the sales of OVH to support our partnership with conscious alliance to help end child hunger. I'll now turn the call over to Frank to discuss our financial performance.

Speaker 2

Thank you, Jeffrey. Starting with the income statement. Net sales for the Q3 of fiscal 2024 increased $33,300,000 or 14 percent to $271,900,000 and for net sales of $238,500,000 for the Q3 of fiscal 2023. Net sales for the current Q3 include approximately $46,900,000 of net sales in the Lakeville acquisition. Excluding Lakeville acquisition, net sales decreased 13,600,000 or 5.7 percent.

Speaker 2

Decline was due to a 4.3% decrease in the weighted average sales price per pound, combined with a 1.4% decrease in sales volume, which is defined as pounds sold to customers. Decrease in weighted average selling price primarily resulted from lower commodity acquisition costs for all major tree nuts, except walnuts, which was partially offset by higher commodity acquisition costs for peanuts. Sales volume declined for all major nut types in the 3rd quarter. Sales volume increased 33.1% in the consumer distribution channel, primarily due to the late sale acquisition, whose sales volume is almost exclusively private brand bars. Excluding the impact of the Lakeville acquisition, sales volume increased 0.3% in the consumer distribution channel, primarily due to a 0.5% increase in private brand sales volume.

Speaker 2

The 0.5% increase in sales volume for our private brand and consumer distribution channel was driven by increased peanut butter and nutrition bar distribution, which was partially offset by a decrease in snack and trail mix volume at a mass merchandising retailer. Additionally, new sales distribution of SNAK and trail mix at a grocery store retailer was partially offset by lost distribution at a drug channel customer. The 5.8% decrease in sales volume for our branded products, which includes Fisher recipe nuts, Fisher snack nuts, Orphale Harvest and selling style nuts in the consumer distribution channel was primarily attributable to a 15.8% decrease in sales volume for Fisher snack nuts due to lost distribution at the mass merchandising retailer and decreased sales volume at several grocery store retailers. These decreases were partially offset by increased e commerce sales volume for our branded products. Sales volume decreased 2.4% in the commercial ingredients channel due to competitive pricing pressures and non recurring peanut bar sales at a foodservice distributor that occurred in the Q3 of fiscal 2023.

Speaker 2

This decrease was partially offset by new peanut butter business at 2 other foodservice distributors and sales volume of loose granola associated with the Lakeville acquisition. Excluding the impact of the Lakeville acquisition, sales volume decreased 3% in the commercial ingredients channel. Sales volume decreased 11.3% in the contract packaging distribution channel due to decreased cashew and mixed nook distribution by a major customer due to soft consumer demand. 3rd quarter gross profit margin as a percentage of net sales decreased to 18.1% compared to 20.9% for the Q3 of fiscal 2023, mainly related to higher net sales base from the Lakeco acquisition. Excluding the impact of the Laetco acquisition, gross profit margin decreased slightly by 30 basis points due to higher commodity acquisition costs for peanuts and walnuts, reduced production volume and increased expenditures relating to facility repairs and maintenance, non compliant inventory and incentive compensation.

Speaker 2

Gross profit, which was positively impacted by approximately $3,000,000 due to the Lakeco acquisition, all of which approximately $1,700,000 was related to a partial release of an inventory valuation reserve initially reported at the acquisition date, decreased slightly by approximately $600,000 or 1.2 percent due to the same reasons contributing to the decrease in gross profit margin. Excluding the impact of the Lakeco acquisition, gross profit decreased by $3,600,000 or 7.2%. Total operating expenses for the Q3 increased $2,900,000 in the quarterly comparison, of which approximately $1,800,000 directly relates to operating expenses associated with the Lake Flow acquisition. Excluding the Lake Flow acquisition, total operating expenses increased $1,100,000 mainly due to increase in incentive compensation, which was partially offset by decreases in freight and advertising expenses. Total operating expenses for the current 3rd quarter decreased to 11.3% of net sales from 11.7% for last year's Q3 due to the reasons cited before and a higher net sales base due to the Laingco acquisition.

Speaker 2

Excluding the impact of Laingco acquisition, total operating expenses as a percentage of net sales increased to 12.9% from 11.7% due to the reasons cited before and a lower net sales base. Interest expense for the current Q3 increased to 800,000 dollars from $600,000 for the Q3 of fiscal 2023, primarily due to higher average debt levels due to the Lakeville acquisition. Net income for the Q3 of fiscal 2024 was $13,500,000 or $1.15 per diluted share compared to $15,700,000 or $1.35 per diluted share for the Q3 of fiscal 2023. Now taking a look at inventory. The total value of inventory on hand at the end of the current Q3 increased $20,300,000 or 10.7 percent, mainly due to the additional $24,900,000 of inventory associated with the Elanco acquisition.

Speaker 2

Excluding the Elanco acquisition, the value of total inventories on hand decreased $4,500,000 or 2.4% year over year. The decrease in the value of total inventories was primarily due to lower quantities of finished goods and lower quantity and commodity acquisition for work in process, raw materials, cashews and almonds. This was offset by higher quantities of pecans and walnuts, higher commodity acquisition costs for walnuts. The weighted average cost per pound of raw nut and dried fruit input stock on hand, excluding the impact of the Laicco acquisition, decreased 7.7% year over year, mainly due to higher quantities of peanuts and ginshaw walnuts and peacocks. Moving on to year to date results.

Speaker 2

Net sales for the 1st 3 quarters of the current year increased 4.1 percent to $797,200,000 compared to the 1st 3 quarters of fiscal 2023, primarily due to the Lakeco acquisition. Excluding the impact of the Lakeco acquisition, net sales decreased 5.7% to $721,600,000 primarily attributable to a 3.8% decline in sales volume and a 2% decrease in the weighted average selling price per pound. Sales volume increased 8.8%, primarily due to Lakeville acquisition. Excluding the impact of the Lakeville acquisition, sales volume decreased 3.8%, primarily due to sales volume decreases in the consumer and contract packaging channels. Gross profit margin increased slightly from 20.5 percent to 20.6 percent of net sales.

Speaker 2

Total operating expenses for the current year to date period increased 5,400,000 dollars to $93,600,000 The increase in total operating expenses was mainly due to increases in incentive compensation, incremental operating expenses associated with the Lakeco acquisition, advertising expense and charitable food donations. These increases were partially offset by the one time bargain purchase gain from the Laicco acquisition and the decrease in freight expense. Net income for the 1st 3 quarters of fiscal 2024 was $50,200,000 or $4.30 per diluted share and net income of $48,200,000 or $4.14 per diluted share for the 1st 3 quarters of fiscal 2023. Please refer to our 10 Q, which was filed yesterday for additional details regarding our financial performance for the Q3 of fiscal 2024. Now I'll turn the call back over to Jeffrey to provide additional comments on our operating results for the Q3 of fiscal 2024 and discuss category trends.

Speaker 1

Thanks, Frank, for the financial updates. Now let's turn to retail consumption. I will share some category and brand results with you for the quarter. As always, market information I'll be referring to is in SIRCONA reported data and for today it is the period ending March 24, 2024. When I refer to Q3, I'm referring to 13 weeks of the quarter ending March 24, 2024.

Speaker 1

References to changes in volume or price versus the corresponding period 1 year ago. We look at the category on SIRKAMA's total U. S. Definition, which includes food, drug, mass, Walmart, military and other outlets, unless otherwise specified. And when we discuss pricing, we are referring to average price per pound.

Speaker 1

Breakouts of the recipe snack and produce nut segments are based on our custom definitions developed in conjunction with Surcona. Snackbar category is the syndicated view as defined by Surcona and the term velocity refers to the sales per point of distribution. In the last quarter, we continue to see a shift in consumer behavior in the broader snack aisle as defined by Sarcana. We continue to see volume declines no longer offset by price across the entire snack aisle as consumers continue to tighten their budgets. The snack aisle declined 2.7% in volume and was down 1.1% in dollars in Q3.

Speaker 1

This is similar to the declines we experienced in Q2. The total nut and trail mix category was down 4.1% in dollars and down 3.4% in pound volume in Q3. This is actually slightly better performance than we saw last quarter as nut and trail mix prices have moderated with price per pound flat versus the prior year. Our prices have stabilized, the price per pound is still close to a 5 year high. Now I will cover a segment in more depth, starting with recipe nuts.

Speaker 1

The recipe nuts segment was down 4.1% in dollar sales and was flat in pound sales. This is an improvement in performance versus what we saw in Q2 as we continue to see pricing declines in this category across walnuts and pecans. Our Fisher recipe brand declined in Q3, driven mainly by lower distribution. Fisher declined 9% in dollars 10% in pounds, a slight improvement versus the performance we saw in Q2. Fisher is still the branded recipe nut leader and we are actively working on ways to engage consumers with the right price pack architecture and promotions as we plan for this year's holiday season.

Speaker 1

Now let me turn to the snack nuts segment. In Q3, the snack nuts segment was down 4.3% in dollars and down 4.1% in pound sales. This is consistent with the performance we saw in Q2. Some good news is that pricing continues to stabilize in the snack net category, prices flat versus a year ago. This year snack performed worse than the category down 26% in dollars and 18% in pounds.

Speaker 1

This continues to be driven by significant distribution loss in the mass channel. We are continuing to find a balance between the right pricing and promotional strategy with margin in this competitive category. Private label snack nuts are performing consistent with the category, down 5% in dollars and down 3.6% in pounds. The trail and snack mix category was down 3% in dollars and down 3% in pounds in Q3, consistent with the performance we saw in Q2. The prices of trail mix were flat versus a year ago.

Speaker 1

Our Southern Style Nuts brand declined 13% in dollars 13% in pounds. The clients were almost entirely driven by the club channel distribution loss we mentioned previously. Private brands, the shared leader in trail mix performed slightly worse than the category, down 4% in dollars 4% in pounds, driven by poor performance in the mass channel. Our last segment, produce nuts declined 5% in dollars and 3% in pound volume in Q3, slightly better than the performance we saw in Q2. Our produce nut brand Orchard Valley Harvest declined 17% in dollar sales and 10% in pound sales, driven by distribution declines in the mass channel.

Speaker 1

The brand is continuing to see growth in the food channel, growing 4% in pounds in Q3. And we continue to drive awareness and trial of our new products and packaging at retail. Now we will switch to the snack bar category, which we will now start reporting in our earnings calls. In Q3, the snack bar category declined 6.5% in dollars 10.8% in pounds. This is primarily driven by total recall of a major branded snack bar player earlier this year.

Speaker 1

Snack bar pricing increased by 4.8% in Q3. Private label bars continued to grow 10.6% in dollars and 6.8% in pounds. Private label bars continued to expand in stores picking up 3% more in TDP distribution, while prices rose 3.6%. We continue to see positive momentum in private label in the snack and energy bar category. In closing, we face several challenges in the future, which include the impacts of ongoing inflation in food and other input prices, sustain higher interest rates and the potential for an economic downturn in the markets in which we operate.

Speaker 1

However, I am confident in the strategic investments we have made in our people, our customers and capabilities to overcome these challenges and continue to deliver strong operating results and create long term value for our shareholders. We are also cautiously optimistic that consumer demand will stabilize and slowly begin to recover in the core nut and trail mix categories. We will continue to optimize our cost structure, product portfolio and flexibility as we respond to ongoing macroeconomic volatility. Our company and our team of dedicated leaders and frontline associates throughout the organization remain steadfast and strong. We have always adapted quickly to overcome headwinds.

Speaker 1

Our insights, innovation, R and D, marketing, sales and operations teams are laser focused at consumer behavior and consents and trends to develop new products, pursue new branded opportunities and support increased demand from 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'll now turn the call back over to Michelle to open the line for questions. Michelle?

Operator

Thank you. I'm not showing any questions. I'd like to turn the call back over to Jeffrey B. Sanfilippo for closing remarks.

Speaker 1

We appreciate your participation in the call today and thank you for interest in our company. Thank you and have a great day.

Operator

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.

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Earnings Conference Call
John B. Sanfilippo & Son Q3 2024
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