Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Third Quarter Fiscal 2018 Operating Results Conference Call. [Operator Instructions] I would now like to introduce Chief Financial Officer, Mr. Michael Valentine. Please go ahead.

Thank you, Andrew. Good morning, everyone, and welcome to our 2018 third quarter earnings call. We appreciate your joining us today. On the call with us is Jeffrey Sanfilippo, our Chief Executive Officer, who is calling in from the road. Before we start, we want to remind everyone that we may make some forward-looking statements today. 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-K and 10-Q. We encourage you to refer to these filings to learn more about the risks and uncertainties that are inherent in our business. Starting with the income statement. Net sales for the third quarter of fiscal 2018 increased by 17.2% to $203.2 million compared to net sales of $173.4 million for the third quarter of fiscal 2017. The increase in net sales was attributable primarily to a 12.5% increase in sales volume, which we measure as pound sold to customers and a 4.2% increase in the weighted average selling price per pound. The majority of the sales volume increase came from increased sales of private brand peanuts, almonds, snack mixes and trail mixes in our consumer distribution channel. Sales volume for Fisher recipe nuts fell by 4.6% primarily as a result of lost distribution of some items at a major customer. This was due to the introduction of private brand recipe nuts by that customer in that category. We anticipate regaining a portion of the lost distribution at this customer for Fisher recipe nuts in the first half of fiscal 2019. The decline in sales volume from this lost distribution was partly offset by Fisher recipe nut distribution gains at new and other existing grocery customers. The…

Thank you, Mike. Good morning, everyone. We reported record earnings per share for a third quarter. I'm proud of our entire organization for executing the strategies we developed for growth across our brands and with our collaborative customers. Third quarter diluted EPS increased by 35.9% to a third quarter record of $0.75 per share. These results were achieved in spite of headwind due to increased freight costs we experienced. This record third quarter was mainly driven by strong performance, as Mike mentioned, in our consumer distribution channel. Continued growth in private brand products, primarily with existing customers, accounted for 65.2% of the sales volume growth. And as I mentioned in our last few calls, the company continues to invest in our JBSS brands. Increased sales for our Orchard Valley Harvest and Fisher snack nut brands also contributed significantly to the volume growth in the consumer distribution channel. Our brands performed well at retail as well in the quarterly comparison according to IRi market data. Fisher recipe nut pound volume increased by 6% from distribution gains with new customers, while the total recipe nut category pound volume increased by only 2%. Orchard Valley Harvest pound volume increased by 69%, while the total produced category pound volume fell by 3%. Fisher snack nut pound volume increased by 3%, while pound volume for this total snack category increased by 2%. As we announced in the second quarter, we acquired the Squirrel Brand business at the end of November. The integration of the Squirrel Brand business was completed early in the current third quarter with the successful transition of all significant customers. With the integration now behind us, we are focused on growing the Squirrel Brand and Southern Style Nut brands in our consumer and commercial ingredient distribution channels, as part of our strategy…

Thank you, Jeff. At this time, we will open the call to questions. Andrew, can you please queue up the first question?

[Operator Instructions] And our first question comes from the line of Francesco Pellegrino with Sidoti & Company.

So first of all, very nice quarter for a third quarter. I know third quarters aren't supposed to be that nice. So obviously, I want to jump into that and sort of better understand the read-through for the rest of the year. The commentary in the press release and on the call, you had discussed not necessarily being able to get walnut and pecan price increases for the first three quarters. I was wondering what those conversations look like this quarter, if you're able to get any price increases for those two nut types this quarter? And maybe if that was sort of responsible for the strong performance since you're vertically integrated for those two?

So Francesco, we were able to get pricing aligned on our walnut program at retailers, so we did take pricing in the -- middle of -- beginning to middle of third quarter. We have aligned that and pecan prices as well. We're much better aligned now going into fourth quarter.

Got it. The strong volume that you guys recognized during the third quarter. It -- is the third quarter, it's a low seasonal demand period. So initially, I might say it's nothing to right home to mom about, but then when I look at what you guys did on EBITDA per pound basis, your EBITDA per pound was really, really strong for not putting that much volume through your manufacturing facilities. I'm just sort of wondering what drove that? Because at least the way that I'm calculating it, it was probably 50% higher than what I would probably look for, for a traditional third quarter.

Francesco, I'll take that, this is Mike. I think that boost in the gross profit that came from the volume increase really flows down to the operating income line, as you can see in our income statement. And that's really the primary driver for the improvement in EBITDA.

Well, I guess, then what I'm sort of thinking about going forward and I'll touch on it in a couple of minutes is, your private label business grew probably -- the volume growth for private label was twice as much as the volume growth for your branded product platform. So if you're seeing this EBITDA per pound as strong as it was in the third quarter, if you could regain some of this Fisher recipe nut business, these numbers could be really, really impressive. Is that the correct way to look at it? Because I don't really think the product mix shift to private label is what you guys want. But there seems to be more upside with some of your branded initiatives, just given what you guys were talking about for the first half of 2019.

Jeff, do you want to take that question, please?

Sure. So it's really a combination, Francesco. We still are committed to going private brands with some of our key strategic retailers. We think it's still a very important part of our business, but we're focused on the value-added pieces. So trail mixes, for example, is a key focus of ours for private brand. But you're right, we're really more focused on building our branded distribution larger and faster than our private brand business, however, just we were able to take some advantage this year in third quarter for private brand. But going into the fourth quarter and in the fiscal '19, we've got some great programs in place to build our Fisher recipe, our Fisher snack programs and our Squirrel Brand as well and especially, an Orchard Valley Harvest. So key focus, you're right, we've got a lot of momentum going into Q4 and into fiscal '19 with some strong growth opportunities for our brands, and we should be able to margin up those brands as well.

Last quarter, Orchard Valley Harvest at retail and your shipment volumes change year-over-year was really impressive. And now you come in the third quarter, right now, and you report a 126% increase in OVH volumes. You attributed to new introduction than distribution gains. How much of that volume gain was attributable probably to new distribution? And how much of it was due to new product introduction?

Yes, Mike, I don't know if you can answer that or I don't know if Howard's in the room. I don't have some of the details in front. I would take the combination, Francesco, of both new distribution at new retailers and then some expanded product lines. So salad toppers, for example, is a brand new product launch in the marketplace and then some of the Heart Healthy and Antioxidant Mix is that relatively new product launch, but really new distribution gains there.

Okay. Do you guys -- I would think just looking at how much Orchard Valley Harvest volume shipment was up, and then how much it -- the change or the velocity change at retail was up? It looks like shipment pounds were up twice as much as the change at retail. Some investors could potentially be concerned and saying what may be the inventory channel is getting a little bit backed up, but since a lot of that came from new distribution. Actually, this -- actually offers an opportunity for sustained volume growth going forward and maybe could calm some investor concern that channels are actually getting backed up for those -- for that brand. Is that the right way to view it?

That's exactly the right way to view it. I would say we are not backing up inventory at retailers, where it's gaining new distribution at new retailers and expanding the product lines that we've launched.

And then just two more questions from me. I was a little bit shocked just to see where your inventory number was for the third quarter. I actually thought it was a really great number to have on the balance sheet, but then also realizing that there's going to be a drawdown on that third quarter number as we start going into fiscal 2019 makes me ask the question, how strong is your free cash flow going to be in the fourth quarter because that's really going to determine the size of the special dividend that you're able to authorize or the board is able to determine at some point or in the first half of 2019? Like I'm backing into maybe $3 of free cash flow for the fourth quarter.

I will take that, Jeff. Francesco, we don't quite have that number nailed down, but I will tell you that we will continue to see significant declines in inventory, primarily driven by significantly lower quantities of walnuts compared to the same period in the prior year. And that definitely will continue through the fourth quarter and into our first quarter.

But Mike, correct me if I'm wrong. Because you're going be -- you take ownership of various raw materials in your second and third quarter and you drawdown that inventory in the fourth quarter. So you're not going to be bringing in any more inventory unless you're hand-to-mouth for certain specific nuts until the second quarter of 2019. So you should sort of be able to have, maybe a -- your mind wrapped around it a little bit better for what the fourth quarter would be, as compared to maybe this conversation and me asking the question about the second or third quarter?

Well, I think -- again, we have not quantified that particular forecast yet. But I would think that we would see significant declines in inventory in our fourth quarter as we saw in our third quarter.

Are you short any particular nut that could make such a drawdown not occur?

As I mentioned, our walnut quantities are quite a bit lower than they were in the prior year, so we will draw that down very quickly. And again, I'm talking about the walnuts that we buy from growers, and we'll rely more on the shelled walnuts that we buy from other sellers, which we will do more -- take more of a just-in-time approach on that. So again, the dollars that we had in Walnut inventories last year, in our fourth quarter and first quarter, will be significantly lower in this upcoming two quarters.

If you're a walnut seller and you have to go out to the spot market to buy shelled walnuts and knowing that walnuts aren't necessarily that great of a volume contributor to overall volume sales, can this be a significant headwind in the first half of 2019, as you get ahead -- as you sell into the fall season, the baking season, where the -- where walnuts are more of a desirable product for the holiday season?

Well, we're anticipating a record walnut crop. And also walnut shipments, primarily exports have been down this entire crop year. So we have a very favorable walnut market out there. So we don't anticipate any headwinds from walnuts.

So there won't be any price gouging from sellers out there just knowing where potentially your inventory position is for walnuts?

Well, I don't expect that to be the case. Like I said, with shipments down significantly and with the big crop coming our way, I think all handlers are anxious to prevent any kind of losses and will be aggressive sellers.

Only the thing, know a couple of years ago, it came down to walnuts that you're long on at a high acquisition cost, that's sort of hurt you. And now it just seems as if you might be able to sort of benefit from the strong crop coming in and other sellers just trying to get rid of their inventory before the new crop comes in, which makes sense.

Yes. I'm not predicting a windfall here, but we are positioned very well for a record walnut crop coming this fall.

And our next question comes from the line of Craig Bibb with CJS Securities.

I apologize if my questions are too short. But the branded products as a percentage of total sales, I had to jump on from another call, you may have said that already.

Yes, we'll get that for you, Craig. You want to go to your next question, and we'll get back here on that...

Sure. Orchard Valley Harvest, you guys are just blowing the doors out, but there are a lot of moving parts there. So what percentage of ACV is Orchard Valley Harvest than today? And how much did that grow year-over-year?

So ACV is actually -- yes, I was going to say that Orchard Valley Harvest ACV is relatively small. So huge upside on opportunities to expand distribution of our Orchard Valley Harvest brand. It's -- we're really just gaining traction now with some of the key retailers, but there are lot. There are still opportunities for Orchard Valley Harvest.

But it's like 40% of ACV now or where are we?

Let's see, if I have that number. I don't know if Howard's there.

No, he is not.

Okay. Let me see if I had it in my notes.

Well, Jeff's looking for that, Craig. So branded as a percentage of our total sales year-to-date are 40% compared to 41% in the same period last year. That slippage is primarily due to the increased volume as private label that's offset the growth that we've had in -- on branded. And again, that's -- those are percent of total sales in the consumer channel.

In the consumer channel. Okay. Great. That's helpful. And then, are you likely to -- is there -- as you lap the increase in private label, would branded continue to grow? Or is that not a trend that you could talk about?

Yes. We've grown distribution, especially fisher recipe with new retailers. So in spite of the major retailer expanding their private brand recipe nut program, we gained significantly new distribution with other key retailers. So we do anticipate making up that private brand market share shift with other retailers.

Okay. I'm just looking for percentage of ACVs. I'm assuming salad toppers is in a pretty small percentage of stores and multi-packs is all the stores that are at the Orchard Valley Harvest? Or is that still also being rolled out?

Correct. Now multi-pack has been very successful across all of our distribution. Salad toppers was really a relatively new launch just this -- within this past year. So we started out in club channel, and we're expanding it now to typical retailers. So again, very, very early stages, but we anticipate there's a lot of opportunities to expand salad toppers. It's been just very successful and we've got distribution, and there's a lot of interest in salad toppers in general.

Okay. And so I know you don't have the numbers right in front of you. So your percentage of ACV went up and then your sales per ACV, I assume given the results must have increased also?

Correct, yes. Well, velocity is -- yes -- I'm on the road, so I don't have some of those numbers in front of me. I would say the velocity was relatively stable. I wouldn't say we increase velocity, but it's stable, but definitely, total points of distribution expanded.

And the last one and you probably touched on this earlier, but just the latest on the lost distribution for the Fisher recipe nuts at the large retailer?

So we've worked with that large retailer to look at how we can expand. There were some challenges that were faced with their new private brand program. For example, they eliminated a lot of the small ounce weight sizes, and their consumers look for that pack size, especially outside of the holiday season. And so we're working together to try to reinitiate some of those smaller pack sizes for that retailer. But again, it's really made up of adding additional retailers to overcome some of that shift in private brand at that major retailer, in addition, expanding our Fisher recipe distribution with that major retailer, again.

Okay. In that -- the shelf space that was reallocated to private label to someone else's private label. That's not -- they're continuing -- that's going to remain private label? Or do you have any chance...

It's going to continue private brand, correct. We will be making up some of that shelf space with Fisher recipe due to some of the negative changes that took place once they move to a complete private brand program for some products in ounce weights.

But you still have the large packs there?

Correct, yes. Correct.

[Operator Instructions] And our next question comes from the line of Dustin Henderson with Eagle Asset Management.

Just have one quick question. Anything that is worrying you guys about tariffs in China?

We have -- yes, go ahead, Mike.

Okay. So in the short term, we think that any demand reduction that arises from tariffs in China could be beneficial for us, especially, on almonds and pecans. But, of course, in the long run, trade wars don't benefit anyone. But at least in the near term, we think we would call that a positive.

Just because you'd have more to sell here or something?

Right...

Correct. It would reduce the -- China is a major importer of pecans and almonds, but significantly, pecans. They're taking close to 25% to 30% of the crop. And so, if tariffs going to effect, you'll see less exports to China we anticipate, which would mean growers in the U.S. have to find and Mexico have to find homes for those pecans, which could negatively impact the price of unshelled pecans this coming crop year.

And I'm showing no further questions. So with that, I would like to turn the call back over to Michael Valentine for closing remarks.

Thank you, Andrew. Again, we'd like to thank everyone for their interest in JBSS. This concludes the call for our third quarter fiscal 2018 operating results.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.