Good day, ladies and gentlemen, and thank you for standing by. Welcome to the John B. Sanfilippo & Son, Inc. Third Quarter Fiscal 2017 Operating Results Conference Call. At this time all participants in a listen only mode. [Operator Instructions] As a reminder, this conference call may be recorded.

At this time, I would like to turn the conference call over to Mr. Mike Valentine, Chief Financial Officer. Please go ahead, sir..

sales volume for Fisher recipe nuts fell by 3.2%, primarily due to inventory reduction initiatives implemented by some customers during the third quarter; Fisher snack nut sales volume decreased by 9.4% due to lower merchandising activity; sales volume for Orchard Valley Harvest and Sunshine Country produce brands decreased by 5.5% due to a decline in sales for our Sunshine Country produce brand, which resulted from lost distribution.

The Sunshine Country sales volume decline was partially offset by a 4.6% increase in sales volume for Orchard Valley Harvest produce brand due to increased merchandising activity. The decrease in sales volume in the contract packaging channel was attributable to a reduction in merchandising activity implemented by a customer in that channel.

The sales volume decline in the commercial ingredients channel resulted mainly from lost business with a bulk almond butter customer, which occurred in the second quarter of fiscal 2017. Net sales for the first three quarters of the current year decreased to $645.0 million from 720.5 million for the first three quarters of fiscal 2016.

The decline in net sales in the year-to-date comparison was primarily attributable to an 8.8% reduction in the weighted average selling price per pound which primarily occurred as a result of lower selling prices for almonds and walnuts.

Additionally, the decline in net sales was also attributable to a 1.9% decrease in sales volume, which was driven by lower sales volume for almonds and mixed nuts. The volume decline for those nuts was partially offset by sales volume increases for peanuts, snack and trail mixes and walnuts.

Sales volume increased in the consumer and contract packaging channels and declined in the commercial ingredients channel. The sales volume increase in the consumer channel came mainly from increased sales of Fisher recipe nuts, Orchard Valley Harvest produce products and private brand snack nuts.

The sales volume increase in the contract packaging channel resulted primarily from increased sales of snack and trail mixes, peanuts, cashews and almonds to our existing customers.

The sales volume decrease in the commercial ingredients channel was driven by the loss of the almond -- bulk almond butter customer that we mentioned before and also lower sales of bulk inshell walnuts to international customers and lower sales of peanuts to other peanut shellers.

Third quarter gross profit increased by 11.1% and gross profit margin as a percentage of net sales increased to 16.4%, up from 11.9% for the third quarter of last year.

The increases in both gross profit and gross profit margin were primarily related to lower acquisition costs for almonds and improved alignment of selling prices and acquisition costs for pecans and walnuts.

Gross profit for the first three quarters of the current year increased by 4.3% and gross profit margin as a percentage of net sales increased to 16.8% from 14.4% for the first three quarters of last year. The increases in gross profit and gross profit margin primarily occurred for the same reasons I cited in the quarterly comparison.

Total operating expenses for the current third quarter decreased by $2.1 million and total operating expenses as a percentage of net sales for the third quarter increased to 10.4% from 9.3% for the third quarter of last year.

Total operating expenses for the current year-to-date period decreased by $3.3 million and total operating expenses as a percentage of net sales increased to 9.5% from 9% for the first three quarters of fiscal 2016.

The decreases in total operating expenses in both comparisons were due to lower advertising expense due to later Easter holiday and reductions in compensation and broker commission expenses, which were partially offset by an increase in shipping expense.

The increases in total operating expenses as a percentage of net sales for bulk comparisons were due to a lower net sales base. Interest expense for the current third quarter was $900,000, which was consistent with the interest expense for the third quarter of last year.

Interest expense for the first three quarters of the current year decreased to $2.1 million from $2.6 million for the first three quarters of last year. The decrease in interest expense in the year to date comparison primarily resulted from lower debt levels during the first half of the current fiscal year.

Net income for the third quarter of fiscal 2017 was $6.3 million or $0.55 per share diluted compared to net income of $3.1 million or $0.27 per share diluted for the third quarter of fiscal 2016.

Net income for the first three quarters of fiscal ‘17 was $29.4 million or $2.58 per share diluted, compared to net income of $23.1 million or $2.04 per share diluted, for the first three quarters of fiscal 2016. Taking a quick look at inventory.

Total value of inventory on hand at the end of the current third quarter decreased by $5.9 million or 2.9% compared to the total inventory value on hand at the end of the third quarter of fiscal 2016.

The decrease in the total value of inventory on hand was primarily driven by lower quantities of finished goods combined with a lower weighted average cost per pound for finished goods.

Higher acquisition costs for pecans, which were largely offset by lower acquisition costs for almonds, led to a 1.4% increase in the weighted average cost per pound of raw nut and dried fruit input stocks on hand in the quarterly comparison.

Finally, I would like to take a moment to alert investors that we will be presenting at the East Coast IDEAS Investor Conference on Wednesday, May 17, at the Boston Park Plaza in Boston. Our presentation is scheduled to begin at 11:20 a.m.

Eastern Time and the presentation will be webcast live and may be accessed at the conference website, www.ideasconference.com. And now, Jeffrey Sanfilippo, our CEO, will provide additional comments on our performance in the current quarter.

Jeffrey?.

first, grow JBSS Brands; efforts centered around Fisher value-added products for menu applications; and [indiscernible] flavor, variety and quality that consumers demand. In addition, these products relieve kitchen labor cost pressure of restaurant operators and help with food consistency. Second, expand consumer reach.

We are focused on distribution and placement of Orchard Valley Harvest snack items. This is being executed by adding specific resources that have had success in this area and by performing partnerships with companies that service these locations. And third, create value with key customers.

The opportunity to expand with national chain restaurants and strong regional players by adding appropriate culinary resources and developing customized solutions. In particular, help these customers grow through customized net based menu solutions, driving traffic and increase check average. We are just starting that work now.

And while these types of initiatives tend to have longer payback cycles, we’re looking for solid results in the coming year.

Net sales in the contract packaging distribution channel decreased by 6.1% in dollars and 3.9% in sales volume in the third quarter, sales volume decrease for the quarterly period was primarily due to reduction in merchandising attributes I mentioned earlier. Turning now to category updates.

Market information I’ll be referring to is IRI-reported data and for today, it is for the 12 week period ending March 19, 2017. When I refer to Q3, I’m also referring to the 12 week period ending March 19. References to changes in volume or price are versus the corresponding period one year ago. We look at the category on IRI is totally 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. Breakouts of the recipe, snack and produce nut categories are based on our custom definitions developed in conjunction with IRI.

And the term velocity refers to the sales per point of distribution. First, let me review category dynamics. The total nut category was flat in pound volume and declined in dollar sales by 1% in Q3. Overall, prices at this macro level declined 1% versus a year ago. Now let’s look at each category a little more in depth, starting with recipe nuts.

In Q3, the recipe nut category continued to struggle, declining 12% in dollar sales and 7% in pound sales. Walnut pound sales were up 2% driven by a 16% decline in weighted average walnut prices versus prior year. But the walnut sales pound increase was offset by pecans and almonds.

Pecan pound sales declined 11%, driven by an 8% increase in average prices versus the prior year. And almond pound sales declined 15% despite a 7% decrease in average prices. Consumers continue to migrate to the snack or produce section of the store for almonds as almond pound consumption in both sections increased versus last year.

Despite those category headwinds, our Fisher brand had a positive quarter and continues to gain momentum behind our integrated marketing efforts. Fisher recipe nuts increased 3% in pound sales and was flat in dollar sales in the quarter versus last year. As a result, Fisher pound share in the category increased 2.4 points versus last year.

Fisher recipe is a leading branded recipe nut with an overall share of 24.6%, which is 9.9 share points ahead of our nearest branded and competitor. The growth was driven by an increase in distribution and velocity.

Distribution, measured as ACV, increased 7 percentage points versus last year as our sales team continues to translate our retail success into greater retail penetration. Distribution for Fisher recipe nuts is now at 56% ACV, with room to continue to grow. In addition to the distribution gains, pound velocity increased 3%.

The velocity growth was driven by strong merchandising performance at new and existing customers and the effectiveness of our brand, no preservatives and non-GMO messaging. Our continued brand equity efforts on Fisher, coupled with our distribution gains helped the brand overcome category weakness and deliver growth in the third quarter.

Now let me turn to the snack category. In Q3, the snack category decreased 4% in dollars and 3% in pound sales versus last year. And weighted average prices decreased 2%, driven by declines in almonds of 10% and peanut declines of 2%. Fisher snack decreased 13% in sales dollars and 3% in pound sales as measured by IRI.

This was driven by a decrease of 4% in total points of distribution and a reduction of merchandising activity by 9% versus last year. We are working on repositioning our Fisher snack program to overcome this poor performance. Our Orchard Valley Harvest brand had a strong third quarter increasing 44% in dollar sales and 55% pound sales.

Orchard Valley Harvest grew faster than the category, which was up roughly 12% in pounds resulting in 2 cents of a point increase in pound share. Our velocity increased 32% behind strong merchandising efforts and our average item per store selling increased 16% versus last year.

We have upsized the consumer by migrating them to our multipacks, which now comprise 91% of the dollar sales of the portfolio. And velocity on the multipacks is 3 times that of our minis. We continue to build the core business success by launching new products such as Omega 3 mix and dark chocolate covered fruits, both in multipacks.

Sunshine Country, our other brand in the produce section of the store, did not perform as well as Orchard Valley Harvest. The brand declined 20% in dollar sales and 16% in pound sales. The brand declined due to lost distribution at a key customer versus the prior year.

Our total produce business, Orchard Valley Harvest and Sunshine Country, grew 18% in pounds in the third quarter compared to a year ago. In closing, we face a number of challenges in the future such as volatile commodity markets for certain nuts, especially pecans and cashews.

Conversely, we have seen acquisition costs for tree nuts such as almonds decrease in the 2016 crop year. There are headwinds and tailwinds going into the remaining quarter of fiscal ‘18 and into fiscal 2018 and the management team remains focused on consistent execution of our corporate goals to create customer and shareholder value.

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 Mike..

Thank you, Jeff. We will now open the call to questions. Chuck, please queue up the first question..

Thank you. [Operator Instructions] And our first question comes from Francesco Pellegrino with Sidoti & Company. Your line is open..

So this was a pretty nice quarter despite a lot of components to your top line that didn’t really go your way.

And I guess, just before I dig a little bit deeper, pecan cost year over year, were they up, down or flat?.

Was it pecan cost? I’m sorry, I didn’t hear. Yes, it’s a little up this year versus last year significantly..

So your pecan costs were up because I noticed that sales by product type, the only product type that increased was pecan. I know you’re vertically integrated for pecans, walnuts and peanuts. So when I just think about the top line struggles, I’m thinking that a lot of this margin expansion you got was probably from your cost structure.

And when I think about your cost structure, I think about seller margin and then I also think about your procurement expertise.

Can you maybe just give us a little bit of color in regards to how your sheller margins performed as compared to maybe some favorable impact you got from maybe some opportunistic buying for cashews and almonds as compared to the year ago period?.

I can take that, Francesco. In respect to sheller margins, we’d like to talk about that in respect to the entire shelling industry. So with market increases that we’ve seen with pecans this year, we believe that margins for pecan shellers have expanded this year compared to last year..

Okay. And I guess maybe with some other nuts that you’re not vertically integrated for cashews and almonds. If -- when you talk about overall sheller industry margin is expanding, then I would think that you would be hurt by greater margins for almond shellers and cashew shellers.

It just seems as if something on your cost structure contributed to have really the impressive quarter? And I’m just trying to dig a little bit deeper to see if it would -- the nuts that you’re vertically integrated for or maybe it was opportunistic buying for others, and I’m not sure if you could give a little bit of color or if you can’t for competitive reasons?.

Again -- I’ll start with sheller margins and I’ll talk about each -- entire industry. So it’s my belief that with the recent rise in peanut market prices, I believe that peanut sheller margins have expanded this year compared to last year.

We also have seen a recent increase in walnut market prices, and I believe the same case could be made for walnut sheller margins. So obviously, when the entire industry sheller margins expand, typically, we would expand with them and of course same goes in the other direction.

As you mentioned before, we don’t shell almonds and cashews, so a contraction of sheller margins for those particular nuts typically would benefit us..

We’ve got such good visibility from our procurement team just being in the industry so long. I think we did a great job at acquiring inventories and managing our positions very well and we do a great job aligning our costs with our selling prices.

So a lot of times we are the first to market with price changes just because of our visibility and understanding of market dynamics and consumption, which helps us..

It’s interesting you say that because in the year-ago period, you guys actually got burnt on the plummet in walnut prices.

And I guess really just what I’m getting at is, when I look at your investor deck, and I look at that slide that has peanut and tree nuts spot market prices versus your rolling 4 quarter gross margins, I see a plummet in almond prices and then I see a quick rebound.

And I’m just wondering if you guys really lucked out by some strong opportunistic buying maybe for almonds if I try to maybe narrow in a little bit more on my questioning in regards to what contributed to this strong quarter? Did almond gross profit per pound increase for you guys in this quarter as compared to the year-ago period?.

Sure, I’ll take that, Francesco, as I’m ultimately responsible for buying almonds. We did have a significant improvement in profitability on almonds this year compared to last year. We did, we have a lot of expertise in that area and have to give our almond buyer a lot of credit for timing his purchases at the right time..

Was it luck or, when you think about is the personnel and the skill set, I don’t know if you would call it something like tree nut alpha or something.

How would you put the competency level of these guys against the rest of the industry because it almost seems as if there might be a competitive advantage?.

Well, we’ve always touted the fact that we have probably the most experienced nut procurement team in the industry, people with decades of experience. And in many cases that experience helps you beat the market, and this year, I think, that was the case, especially for almonds..

And then let me also add, we’ve talked about this on many calls, we have focused on growing a more profitable business, more value-added business with customers that are looking for something differentiated. So that helps and also operations team has done a great job driving cost [indiscernible] profitability as well.

It’s really a combination of procurement, expertise and other things we’re doing in the company..

Okay.

As I said before, a lot of your revenue drivers during the quarter weren’t that impressive and you just think if, maybe you did have one of those revenue drivers be a little bit stronger, how much more impressive of a quarter this could be? My question for you is, the third quarter of this year, so we have this significant decline in total volume sales whether you want to look at the branded category or the private label category.

And I’m wondering if it’s more of a timing issue and maybe we could see a nice rebound in volume sales in the fourth quarter despite the fact that we are going to be lapping the lost almond butter business, I mean, maybe given insight into where retailer inventory levels are, or just maybe what’s happening with private label, could that be rebounding going into the fourth quarter? Just a little bit of commentary would be helpful with that..

Sure. Let’s take a couple of things. One is, we have no control over some of our private brand customers in the way they merchandise and the way they set their shelves. We saw some adjustments they made in Q2 that impacted Q3. We have since then seen some readjustments. So we would expect some of that volume declines to turn around going forward.

And then as far as merchandising and promotion activity, we’re optimistic of volume growth going forward..

I was operating under the assumption that some of the product placement issues at some of these retailers for private label nuts was more of a 2016 issue and that we were going to be favorably lapping that right now, but it seems as if some of these situations are getting worse?.

Almost sounds like....

Yes, I don’t want to say it’s getting worse. There is some inventory loading by some retailers in Q2. So up through December, we’re seeing some of that cycle through volume that’s impacted Q3 volume, some promotions and some information [indiscernible] that’s starting to move through that inventory now..

So the product placement last year which was bad is even worse this year, which I would think would set up for an easy [indiscernible] if can just get their act together?.

I think it’s a good comment..

Okay. And if the opportunity for greater volume sales persists into the fourth quarter exists, then, your finished goods inventory looks a little bit light as compared to the year-ago period.

So would you think that maybe you’re not positioned necessarily well for a strong fourth quarter volume uptick?.

We’ll let Jasper address that. Go ahead, Jasper..

I would say that our inventory position reflects what we look in our forecast, and I think it reflects certainly the demand that we’re foreseeing. The position’s typically because of new [indiscernible] requirements, we are having to take shorter positions with respect to on-time deliveries and we’re taking more deliveries from our suppliers quicker.

So we have better inventory turns due to freshness in additional processing that we have to do on our nuts..

Thank you. Our next question comes from Stefan Mykytiuk with ACK. Your line is open, go ahead please..

Just sorry to be redundant, but Jeffrey you were breaking up on some of those answers. I didn’t hear what you were saying in terms of the -- just the volume rebound. I guess, when I look at Q4, we’ve got another quarter of the almond butter contract rolling off and then last year you had the extra week.

So I guess, as we look to Q4, is it logical to think that we have a similar volume decline in Q4 that we did in Q3, and then in the fall we start to get some of that back?.

With the extra week, obviously, that’s something that we can’t make up from a timing standpoint, but we got new business that we’ll be shipping in Q4. We’ve seen changes that impacted Q2 and Q3 from retail or private brand decisions that we had no control over, we’re tending to see readjustments.

They’ve seen the same volume challenges that we’ve experienced from a manufacturing side. So we anticipate some of that volume to shift, so we wouldn’t see that declining trend, but at least stability in that items that [indiscernible]..

Okay. Sorry, you broke up again in the end.

So you’re saying that kind of incremental decline we saw in Q3 we get back in Q4 you think from some of the new business or private label coming back?.

Correct..

Got you. But we still have the almond butter and then the extra week that we got to compare against..

Cycle through. Yes. Exactly..

And then the overall price decline was -- had been coming down the last couple -- was down 10% in Q1 and then 7% in Q2, and I would have thought that we would have seen like further mitigation in Q3.

What was it that all of the sudden turned in Q3 and caused further average price decline?.

I can take that Jeff. There was a further decline in almond prices from Q2, and I think that, that kind of bumped it back up..

Got it.

So in Q4 now with pecan prices going up and peanut prices going up, does the average price decline mitigate at all in Q4 or [indiscernible]?.

Well, I think, we started to get into lower almond prices in last year’s Q4. So that large change that we saw in Q3 over Q3 is going to come down quite a bit. Everything else should be pretty comparable with the last year and then, of course, we’re going to see increasing cashew prices just as we did a bit in this last quarterly comparison.

So I don’t think that change in weighted average selling price is going to have as much of an impact on our top line as it did in this current third quarter..

Got it. Okay. And then just one other thing Jeffrey, you had mentioned kind of headwinds and tailwinds going into next year. Can you just elaborate a little bit more.

We’ve probably touched on a few of them here, but I’m just curious what are the other kind of tailwinds and headwinds as you look forward?.

As for tailwinds, we do have some little bit over the last 6 months.

So that we’ll start shipping in Q4 as we see some positive impact on volume growth and with those new customers I think our sales and marketing team are doing a great job expanding distribution with our Fisher recipe and Orchard Valley Harvest brands as we expect some tailwinds going into fiscal ‘18 with new distribution and new customers there.

The headwinds, again, we’ve got the short week for Q4, and then just some of the volatility in cashew prices, as Mike mentioned, we’ll see some severe increases coming down the pike in the very near future from commodity standpoint. But from a gross standpoint and volume, we’re laser-focused on that.

We realized we’ve got some more work to do, but we’re optimistic on what we’ve got in place right now going forward..

[Operator Instructions] And our next question comes from Mitch Pinheiro with Wunderlich Securities. Your line is open. Go ahead please..

I was trying to figure out, you said total nut, when Jeffrey, when you were giving the IRI data, total nut volume was flat in the period.

That was the category correct?.

Correct. Yes, top line..

Can you talk about the category in general, maybe -- first of all, you are seeing ecommerce, Amazon and the like, are they taking any share out of your conventional channels? And do you participate in these channels at all?.

And so we do see -- it’s hard to measure exactly what’s shifting from typical bricks and mortar retail to ecommerce, but we do believe and have seen some shipments in consumer consumption that are shifting to ecommerce. We are focused on ecommerce channel as part of our expanding consumer reach and our alternative strategic growth initiative.

So we are looking at ecommerce and working with several players now in that channel. And we do anticipate in the future more consumption being done online..

Is there -- and anything else with the category itself, I mean, nuts haven’t lost their healthy luster.

Is there something -- for flat volume, is there anything else happening that you could call out?.

Howard, you want to say anything specific, since you’ve got little good perspective on general dynamics or consumption dynamics?.

All we see is snack nut category was down about 3%. We already talked a little bit about the recipe nut category was down 7%. The produce -- as we measure it, the produce part of the store actually grew the most, had the strongest performance in our third quarter and that was driven by the drop in prices that we’ve seen in pistachio.

And so we saw a big surge in pistachio volume and in the category that is. And so that resulted in the overall flat sales for the category..

Howard, can you also talk a little bit about the recipe nut category that was down about 7% in quarterly comparison..

Yes. So the category, as you mentioned, is down 7% and very different by nut type, the walnut prices that we’ve already talked about came down. So we did see a little bit of growth in walnuts of 2%, but it was offset by the pecans and the almonds. Pecans have gone up about, I think, 7% in prices at retail on average and so we saw 11% drop.

And the almonds went down 15% in the recipe nut category. But if you look at almonds overall, they were up 5%. As I think Jeffrey maybe mentioned in his commentary, we see -- and we see this every quarter some rotating between the different parts of the store.

And in the case of almonds, we saw some strength in the produce section of the store and the snack section of the store as people rotated out of the recipe nut section. As overall almonds were up, but in recipe nuts, they were down as we measure it..

Okay, that was helpful. And then, I guess, my final question just on gross margin. You’ve done a terrific job improving on such a sales decline, having an increasing gross profit, it’s terrific performance.

The thing -- I’d love to understand, like what part of that is sustainable? I mean, as you look over the next couple of quarters, I mean, clearly you’re moving to -- you’re focused on higher-margin channels, your higher margin customers.

Is that sustainable? Or is there some items in the quarter that sort of helped? I mean, you’ve done it all year long, that’s not just in this quarter, but what -- can you talk a little bit about that, that would be helpful?.

You want to cover that Mike? Or I was thinking....

Go ahead….

Okay. So as we shift our focus from the industrial business, which was typically low margin, we shift from some of the lower margin consumer business into more branded and value added product type. That’s sustainable margin enhancement because we control the pricing, we control our brands, we control the spending against our brands.

We control [indiscernible] as you see our bands grow, that is sustainable margin impact. As long as we’re not seeing huge shifts or fluctuations in commodity prices, we’ve got much better control over that margin going forward..

And at this time I’m showing no further questions. I would like to turn the call back over to Mr. Mike Valentine for closing remarks..

Thank you, Chuck. Again, thank you, everyone, for your interest in JBSS. And this concludes the call for our third quarter fiscal 2017 operating results..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day..