John B Sanfilippo & Son - Q4 2024

Executive Summary

• Q4 net sales rose 15.1% year over year to $269.6M, with gross margin at 18.5% and diluted EPS at $0.86; the quarter was boosted by ~$44.2M of snack bar sales from the Lakeville acquisition but faced margin compression from pricing and mix inefficiencies.
• Full-year FY2024 surpassed $1.07B in net sales for the first time, with bar revenues of ~$131.0M (including ~$120.0M from Lakeville) and acquisition dilution far better than initial expectations (~$0.17 vs $0.80–$1.00).
• Management raised the regular annual dividend to $0.85 and declared a $1.25 special dividend, payable Sept 11, 2024, highlighting capital return amid strategic investments.
• Near-term catalysts: accelerating private label bar momentum, operational optimization at Lakeville, and expanded capacity via a newly leased 400,000 sq ft warehouse; counterweights include competitive pricing pressure in core nut categories and higher chocolate/cashew costs.

What Went Well and What Went Wrong

What Went Well

• Crossed $1B in annual net sales for the first time; bar portfolio delivered ~$131.0M in FY2024, with Lakeville contributing ~$120.0M and dilution per share only ~$0.17 vs initial $0.80–$1.00 expectation: “significantly better than our original expected per share dilution”.
• Consumer channel volume grew +31.0% (+1.8% ex-Lakeville), with private brand volume +35.4%; Orchard Valley Harvest volume +21.8% in Q4 on enhanced promotion and club rotation.
• Capacity expansion: newly leased 400,000 sq ft Huntley warehouse to free ~250,000 sq ft for bars and nut/trail mix packaging expansion.

What Went Wrong

• Gross profit fell $4.7M to $50.0M and margin declined to 18.5% (20.7% ex-Lakeville) due to lower selling prices, reduced volume, and product mix inefficiencies; diluted EPS decreased 31.7% YoY to $0.86.
• Competitive pricing pressures drove lower weighted average selling price and volume declines in peanuts, almonds, pecans, and walnuts (partly offset by cashews and snack/trail mix).
• Branded snack nuts underperformed the category with significant distribution losses; management cited macro headwinds and elevated costs for chocolate and cashews.

Transcript

Jeffrey Sanfilippo (CEO)

2024 Fourth Quarter Earnings Conference Call. Thank you for joining us. On the call with me today is Frank Pellegrino, our CFO, and Jasper Sanfilippo, our COO. 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 proud to report a successful and historic Fiscal 2024, as we exceeded $1 billion in sales for the first time in our company's history.

We also successfully executed a key component of our strategic plan by further diversifying our product offerings through the acquisition, integration, and optimization of our Lakeville bar facility and operations. We raised our annual dividend by 6.3% to $0.85 per share and supplemented our annual dividend with an additional special dividend of $1.25 per share, both of which will be paid on September 11, 2024. These results were due to our team's unyielding perseverance and leadership as we navigated through a challenging operating environment in Fiscal 2024. Additionally, we recognized and rewarded our talented team members for their outstanding contributions in executing our strategic plan. I am so proud of our associates across the company, who worked hard on expanding our product portfolio. Their dedication to quality, service, and innovation, and their commitment to our customers and consumers is remarkable.

Our snack and nutrition bar offering generated approximately $131 million in net sales for the fiscal year, of which $120 million was related to the Lakeville acquisition. In addition, we made substantial progress in optimizing the operations in Lakeville ahead of schedule and are excited about the expected impact it will have on our operating results in Fiscal 2025 and beyond. Through the hard work of our team, our net sales from Lakeville operations were at the top end of our original range and dilution per share from the Lakeville acquisition. And for the fiscal year, was approximately $0.17 per share, which was significantly better than our original expected per share dilution of $0.80-$1.

For the past year, our consumer channel has faced significant headwinds with declining consumption due to inflation and other economic factors in the snack, trail, and recipe nut categories. Our fourth quarter results, although strong, were impacted by investments we made with our customers that we anticipate will deliver future benefits through category growth and increased sales volume. Looking ahead for Fiscal 2025, we are focused on accelerating our volume growth by expanding on the success of our private brand bar portfolio, rebuilding our nut and trail business through price-pack architecture and innovation, and expanding our manufacturing capabilities. We recently leased a new 400,000 sq ft warehouse in Huntley, Illinois, just a few miles from our Elgin headquarters.

We plan to move our warehouse operations to that facility, which will free up about 250,000 sq ft of space to expand production in bars and nut and trail mix packaging. We are confident we can continue to deliver strong operating results and create long-term value for our shareholders through the execution of our long-range plan to become a $2 billion business. We are nuts about creating real food that brings joy, nourishes people, and protects the planet. And JBSS is executing on that mission. I'll now turn the call over to Frank to discuss our financial performance.

Frank Pellegrino (CFO)

Thank you, Jeffrey. Starting with the income statement. Net sales for the fourth quarter of Fiscal 2024 increased 15.1% to $269.6 million, compared to net sales of $234.2 million for the fourth quarter of Fiscal 2023. Net sales for the current fourth quarter included approximately $44.2 million of net sales in the Lakeville acquisition. Excluding the Lakeville acquisition, net sales decreased $8.9 million or 3.8%. Decline was due to a 1.9% decrease in sales volume, which is defined as pounds sold to customers, combined with a 1.9% decrease in the weighted average sales price per pound. The decrease in the weighted average selling price primarily resulted from lower selling prices for all major nut types due to competitive pricing pressures and strategic pricing decisions.

Sales volume declined for peanuts, almonds, pecans, and walnuts, which was partially offset by sales volume increases for cashews and snack and trail mix in the fourth quarter. Sales volume increased 31% in the Consumer Distribution Channel, primarily due to the Lakeville acquisition, whose sales volume predominantly consists of private brand bars and accounted for a 35.4% increase in private brand sales. Excluding the impact of the Lakeville acquisition, sales volume increased 1.8% in the Consumer Distribution Channel, primarily due to a 1.5% increase in private brand sales volume. The sales volume increase for our private brand in Consumer Distribution Channel was mainly driven by new peanut butter distribution and increased volume of mixed nuts at a mass merchandising retailer due to retail pricing adjustments, which were partially offset by decreased consumer demand for almonds at the same retailer.

Distribution of snack and trail mix at a new grocery store retailer and increased distribution of snack and trail mix at current grocery store retailer was tempered by lower consumer demand for snack and trail mix products at another mass merchandising retailer. The 4.3% increase in sales volume for our branded products, which includes Fisher Recipe Nuts, Fisher Snack Nuts, Orchard Valley Harvest, and Southern Style Nuts, the Consumer Distribution Channel, was primarily attributable to a 21.8% increase in the sales volume of Orchard Valley Harvest, due to enhanced promotional activity at grocery store retailer and new rotational distribution at a club store customer.

Sales volume decreased 5% in the Commercial Ingredients Channel, primarily due to reduced distribution caused by competitive pricing pressures at several customers and non-recurring peanut butter sales at a food service distributor that occurred in the fourth quarter of Fiscal 2023. Excluding the impact of the Lakeville acquisition, sales volume decreased 6.3% in the commercial ingredients distribution channel. Sales volume increased 16.9% in the contract manufacturing distribution channel due to increased granola volume processed in our Lakeville facility for a major customer in this channel. Excluding the impact of the Lakeville acquisition, sales volume decreased 20.7% in the contract manufacturing distribution channel due to reduced peanut distribution by a major customer caused by soft consumer demand.

Additionally, the prior year comparable quarter was positively impacted by a new product launch at another customer, which did not reoccur in the current quarter. Gross profit for our fourth quarter of current year, the current year decreased to $4.7 million, or 8.6% to $50 million. Excluding the $3.3 million in gross profit related to Lakeville acquisition, gross profit decreased by approximately $8 million due to decreased selling prices, reduced sales volume, and product mix manufacturing inefficiencies. Gross profit margin decreased to 18.5% of net sales in the current fourth quarter, compared to 23.4% in the fourth quarter of Fiscal 2023, mainly due to higher net sales base in the Lakeville acquisition.

Excluding the Lakeville acquisition, gross profit margin decreased to 20.7% due to reasons previously mentioned. Total operating expenses in the quarterly comparison increased $2.2 million, of which $1.9 million were directly related to the Lakeville acquisition. Excluding the Lakeville acquisition, total operating expenses increased by $300,000, primarily due to an increase in incentive and equity compensation, which was partially offset by a decrease in advertising expenses. Additionally, the prior comparable quarter was negatively impacted by a one-time impairment of a minority investment, which did not reoccur in the current quarter. Total operating expenses as a percentage of net sales decreased to 13.1% from 14.2% in the prior year fourth quarter, due to a higher net sales base resulting from the Lakeville acquisition.

Excluding the Lakeville acquisition, total operating expenses as a percentage of net sales increased to 14.9% from 14.2% due to the reasons previously mentioned and a lower net sales base. Interest expense increased to $500,000 from the fourth quarter of Fiscal 2024, from $300,000 in last year's quarter. Net income was $10 million, or $0.86 per diluted share for the fourth quarter of Fiscal 2024, compared to $14.7 million or $1.26 per diluted share. Now let's take a look at inventory. The total value of inventories on hand at the end of the current fiscal year increased by $23.6 million, or 13.7%, compared to total value of inventories at the end of Fiscal 2023.

The increase in total value of inventories was primarily due to $21.8 million of additional inventory associated with the Lakeville acquisition. Excluding the Lakeville acquisition, the total value of inventories on hand increased $1.8 million, or 1.1% year-over-year, due to higher quantities of in-shell pecans and walnuts and higher commodity acquisition costs for walnuts. This was offset by lower quantities of finished goods and pecan meats and lower quantities and commodity acquisition costs for peanuts and cashew. The weighted average cost per pound of raw nut and dried fruit input stock on hand, excluding the impact of the Lakeville acquisition, decreased 9.2% year-over-year, mainly due to higher quantities of in-shell pecans and walnuts on hand. Moving on to year-to-date results.

Fiscal 2024 net sales increased 6.7% to $1.07 billion, compared to Fiscal 2023 net sales of $999.7 million, primarily due to Lakeville acquisition. Excluding the impact of the Lakeville acquisition, net sales decreased 5.3% to $946.9 million, primarily attributable to a 3.3% decline in sales volume and a 2% decrease in the weighted average selling price per pound. Sales volume increased 12.3%, primarily due to the Lakeville acquisition. Excluding the impact of the Lakeville acquisition, sales volume decreased 3.3% due to sales volume decreases in all three distribution channels.

Gross profit for current fiscal year increased 1.2% to $214.1 million, and gross profit margin decreased from 21.2%-20.1% of net sales, primarily due to the Lakeville acquisition, which was partially offset by lower commodity acquisition costs for all major tree nuts. Total operating expenses for Fiscal 2024 increased $7.5 million-$129 million, primarily due to increases in incentive compensation, incremental direct operating expenses associated with the Lakeville acquisition, increased advertising expense, and charitable food donations. These increases were partially offset by the one-time bargain purchase gains from the Lakeville acquisition and a decrease in freight expense.

Net income for Fiscal 2024 was $60.2 million, or $5.15 per diluted share, compared to $62.9 million, or $5.40 per diluted share. I will now turn the call back over to Jeffrey to provide additional comments on our performance for the current quarter and fiscal year.

Jeffrey Sanfilippo (CEO)

Thanks, Frank, for the financial updates. Now let's shift to consumption activity and category updates. I will share some category and brand results with you for the quarter. As always, the market information I'll be referring to is Circana reported data, and for today, it is for the period ending June 16th, 2024. When I refer to Q4, I'm referring to 13 weeks of the quarter, ending June 16th, 2024. References to changes in volume or price are versus the corresponding period one year ago. We look at the category of Circana'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 the average price per pound. Breakouts of the recipe, snack, and produce nuts subcategories are based on our custom definitions developed in conjunction with Circana.

The snack bar category is the syndicated view as defined by Circana. The term velocity refers to the sales per point of distribution. In the last quarter, we started to see stabilization in the broader snack category. Snack aisle, as defined by Circana, declined eight tenths of a point in pounds and three tenths of a point in dollars. This is an improvement versus the trends we were seeing in Q3. The total nut and trail mix category was down 2% in dollars and down 1% in pound volume in Q4. This is better performance than we saw last quarter. Nut and trail mix prices have moderated and price per pound declined 1% versus the prior year. We are still seeing consumers trade down to less expensive snacks, pack sizes, and nut types and deal seek as broader food and essential prices remain elevated.

Now I will cover each subcategory in more depth, starting with recipe nuts. The recipe nuts subcategory was down 5% in dollars and 4% in pound sales. This is a decline in performance versus what we saw in Q3. Pricing is stable with both walnuts and pecans, the bulk of this subcategory, being flat to slightly down on a price per pound basis. Our Fisher brand declined in Q4, driven mainly by velocity performance in the grocery channel. Fisher declined 11% in dollars and 9% in pounds, on par with the performance we saw in Q3. The brand was flat in the mass channel. 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 holiday season. Now let me turn to the snack subcategory.

In Q4, the snack category was down 3% in dollar sales and down 2% in pound sales. This is an improvement versus the performance we saw in Q3. Pricing continues to stabilize, with prices flat versus a year ago. Fisher Snack performed worse in this subcategory, down 29% in dollars and 33% in pounds. This continues to be driven by significant distribution losses. We are actively working on new promotional plans and new products that give the consumers new, exciting products with the value they are looking for. Private label snack nuts are performing consistent with the subcategory, down 4% in dollars and down 1% in pounds. The trail and snack mix subcategory was down 2% in dollars and down 2% in pounds in Q4, an improvement versus last quarter. Prices of trail mixes were flat versus a year ago.

Our Southern Style Nuts brand grew 2% in dollars and 6% in pounds, driven by strong velocity performance in mass and club. Private brands, the share leader in trail mix, performed slightly worse than the subcategory, down 3% in dollars and pounds, driven by poor performance in the mass channel. Our last subcategory, produce nuts, declined 1% in dollars and grew 1% in pound volume in Q4, better than the performance we saw in Q3. Our produce nut brand, Orchard Valley Harvest, performed better than the subcategory, up 10% in dollar sales and 16% in pound sales, driven by velocity and distribution gains in the grocery channel. We are entering year two of our relaunch and are excited to introduce new products and pack sizes to continue momentum on this brand. Now we will switch to the snack bar category.

In Q4, the snack bar category declined 6% in pounds and 4% in dollars. We are continuing to see the effect of a total recall of a major branded snack bar player earlier this year. Snack bar pricing increased by 2% in Q4. Private label bars continued to grow 14% in dollars and 12% in pounds. Private label bars continued to expand in stores, picking up 12% more in TDP distribution, while prices rose 2%. We continue to see positive momentum in private label in this category, with dollar share in the quarter up 1.2 points versus last year. In closing, we see great opportunities to build our bar business and enter new snack bar segments with innovative products.

Our Fisher Recipe portfolio, the number one brand in the recipe category, is well positioned for a successful holiday season coming up in Q2. We do continue to face challenges in the future on a macro level, which include declining consumption trends in the snack category. Also, higher costs for chocolate and cashew nuts due to supply and demand. However, our sales and marketing, R&D, and procurement teams are working with a sense of urgency to find solutions to overcome these headwinds. Through Fiscal 2023, the company achieved five consecutive years of record earnings. While we did not continue that performance trend this year, our teams accomplished so much in Fiscal 2024 that will position JBSS for strong growth and profitability in the future. These results demonstrate the underlying strength and resilience of our company.

These achievements are also a testament to the fortitude of our business model, the commitment of our people, and the mutual trust and depth of our customer and supplier partnerships. We are executing our growth strategies, implementing continuous improvement projects throughout the company to optimize our cost structure, and we continue to invest in our brands and processes to better serve our customers and consumers and create value for our shareholders. We appreciate your participation in the call, and thank you for your interest in our company. I will now open the call to questions.

Operator (participant)

Thank you. At this time, we'll conduct a question-and-answer session. To ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Again, as a reminder, to ask a question, you'll need to press star one one on your telephone. I'm showing no questions at this time. I would now like to turn it back to Jeffrey for closing remarks.

Jeffrey Sanfilippo (CEO)

We'd like to thank you for participating in our earnings call today.