Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Incorporation Fourth Quarter Fiscal 2018 Year-end Operating Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today's conference. Mr. Michael Valentine, Chief Financial Officer. Sir, you may begin.

Thank you, Ashley. Good morning, everyone, and welcome to our 2018 fourth quarter and fiscal year earnings conference call. Thank you for joining us today. On the call with me today are Jeffrey Sanfilippo, our CEO, and Jasper Sanfilippo, our COO. Before we start, we would like to note that we may make some forward-looking statements today. These statements are based on our current expectations and involve certain risks and uncertainties that are inherent in our business. 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 these risks and uncertainties. I'll start the call by covering financial highlights for the 2018 fourth quarter and the fiscal year. The current fourth quarter net sales increased by 4.9% to $211.5 million compared to net sales of $201.6 million for the fourth quarter of fiscal 2017. The increase in net sales in the quarterly comparison was due to a 3.2% increase in the weighted average selling price per pound due to a shift in volume to the consumer channel where prices typically are higher than in our other channels. And sales volume increased by 1.7%, we define sales volume as pound sold to customers. Sales volume increased in the consumer distribution channel by 14%, primarily due to increased sales of private brand trail mixes, peanuts and almonds. Increased sales of Orchard Valley harvest produced products and the inclusion of sales from Southern Style Snack mix products in this distribution channel, which were reported in the contract packaging channel in last year’s fourth quarter. Sales volume increased in the commercial ingredients distribution channel, as a result of the inclusion of sales of Squirrel Brand products, which were reported…

Thank you, Mike. Good morning, everyone. The company reported its second best year ever in earnings per share of $2.83, in volume shipped of 269 million pounds and in net sales of $888.6 million. I want to thank the management team and all our dedicated employees for their commitment and leadership. These strong results were achieved in the face of significant competitive activity, freight cost increases and market headwinds in the nut industry. We were again successful in generating cash from our operations in fiscal 2018. Our strong financial position allowed us to pay a cash dividend of $28.4 million. We increased the annual regular dividend by 10% to $0.55 per share and supplemented that with a special dividend of $2 per share, both of which were paid last week on August 17, 2018. These most recent dividend payments mark the seventh consecutive year that we have paid dividends to our stockholders. We are pleased to return cash to our stockholders early in the fiscal year through these dividends. We are executing our growth strategies, implementing continuous improvement projects throughout the organization to optimize our cost structure, and we continue to invest in our people, our brands and our processes. Our sales continue to shift to the consumer distribution channel with another quarter of strong consumer channel volume growth. Sales in the consumer distribution channel amounted to 65% of our total net sales compared to 59% of total net sales for last year's fourth quarter. As Mike mentioned in the second quarter of fiscal 2018, we acquired the Squirrel Brand business and completed the integration in the third quarter with the successful transition of all significant customers. This transition accounts for approximately 16.6% of the annual sales volume increase in the consumer channel. In our fourth quarter, we set the…

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

[Operator Instructions] And our first question comes from the line of Craig Bibb with CJS Securities. Your line is now open.

Hey, Craig.

Craig, if your line is on mute, please un-mute it. [Operator instructions]. And our question comes from the line of Craig Bibb with CJS Securities. Your line is now open.

Sorry about that, that was a little bit of a technical issue.

No worries.

So well I was trying to ask about walnuts. You took a hit in the quarter, but prices have pulled back since then, are margins likely to improve going forward?

Craig, this is Jasper. This really started about Q2 of 2016, when we found that our grower base was larger than the demand that we had. So we cut our grower base back between 2016 and 2017, as we said last year’s crop was smaller and I think our proportional handle of that was even smaller, coupled with increased brand performance and movement of walnut. So going forward, really in April, May, we had much better visibility of what we’d be shipping this fall. So certainly we did have to go out in the open market and cover products, as you said that market has come down. And as we look to July, through really December, I would say that our acquisition costs are very much in line with what our selling prices are.

Okay. And then maybe that would be a transition to talking about the impact of Chinese tariffs on U.S. nuts and what that might do to supply and pricing in months ahead.

Unfortunately, I don't have a crystal ball. But what I can say is we saw a little bit last year, walnut is really a global commodity. There's a lot of the large suppliers in China, India, California, and to a lesser extent, Chile. So I think those global customers do have options. Obviously, the tariff into China, India and Turkey directly impact the California market. But it really is too early to tell how much of an impact that will have, and whether or not global customers really see a value in the California walnuts versus some of the alternative options they have.

And this is Jeffrey, Craig, looking at pecans. So the tariff went into effect, it went from 7% to 47%, we did see some loads that were aimed for China cancelled and those stayed in the U.S. But really, China will start looking at the pecan crop coming up in the next month to two months they are early buyers of the in shell crop out of Georgia originally. So we'll get better visibility on what that tariff will -- how it will impact consumption or demand in China within the next two months.

Craig this is Mike, I just want to follow-up on all the nuts as we noted in our 10-K, we're expecting some significant commodity deflation for this 2018 crop year. And that's driven not only by tariffs in the case of walnuts, and pecans and almonds, but also much larger crops that we expect. And that would be the case for all three of those nuts. So that's our expectation in respect to commodity costs at this time.

Has there -- we're in a changing world here, but has there been a situation with huge increases in tariffs in the past and do nuts get routed throughout other countries to get around that when that happens?

Well, we've seen this with cashews in the past, where quite a bit of that goes through Vietnam and then ultimately into China. But it's our understanding that China is going to be much more aggressive in their enforcement efforts to prevent that. So we do expect to see fall offs in export pounds for really almost all the major tree nuts that are grown in the United States.

Okay. Maybe you could shift to the lost contract packaging volume, what was the actual percentage decrease in volume and explain the reason for that shift there?

Okay. We have a customer. It’s still an existing customer that we were essentially providing a purchasing service for cranberries and raisins as they started up a new product line. Their product line is very successful and as a consequence of that the amount of pounds of raisins and cranberries that they were using, it made a lot more sense for them to buy those themselves. They were low margin business for us. We didn't actually get any processing benefits from it. But we continue to supply them roasted nuts and that part of the business is still growing.

Okay. So that business is obviously not coming back and how much volume does that represent?

I think it represents something like about 3 million pounds per year.

Okay. And that's lower margin?

Yes.

Okay. There's a lot of puts and takes going on with recipe nut volume. It looks like you're regaining some of the lost shelf space and you added new customers. Maybe walk us through a little bit?

Sure. So one of our largest Fisher customers just created a private brand program last year right before the holiday season. And they eliminated a lot of the Fisher SKUs, specifically the smaller size two ounce bags. And as a result, we saw pretty significant volume declines with our branded business at this retailer. Since then, they realized maybe they went too far on private brand side and eliminated items that were really valuable for their consumers shopping, especially outside of the holiday season that wanted smaller sizes. So since that time -- since last year, we reinstated some of those smaller bag sizes, we've expanded some other distribution on other pack sizes at that retailer and we have just started and they just did the resets in Q4, at the end of Q4. And so we'll start to see some of that value come back in volume going into Q1 and Q2 of this fiscal year.

Okay. So it sounds like you're going to see growth in recipe nut volume starting next quarter and potentially for the whole year is that…

Correct, yes. And we've done a really good job expanding beyond this major retailer. Fisher as I mentioned earlier is the number one brand in recipe nuts, we've got a great success story. We've invested a lot in the consumer in that category providing new ideas and how they can use recipe nuts for cooking. And so we've really built a lot of brand equity in the Fisher brand. And that's been successful as well as in growing the category.

Perfect. If there is someone else in queue I'll get off otherwise I can keep going, what would you guys prefer?

Keep going.

Yes, keep going, Craig.

Okay. You added two new customers for stock nut, how material is the volume from that will likely to be and how is it gone?

Yes, our Fisher, really we've been focused on our Fisher brand in the Midwest the core markets core geographies for the brand since its inception. But now with the launch of our Fisher Oven Roast Never Fried we've seen such a good feedback from consumers and from retailers that we decided to launch it nationally. But the initial retailers that we gained were in the Midwest, but now we've got such great success in the velocity of those items in the Midwest that we're starting to expand it nationally. So very excited it's early to talk because we've just launched it in beginning of Q4 of fiscal 2018. So not a lot of volume at this point, but we believe with the success we're having and the velocity we've got a lot of good opportunities to gain new distribution beyond what we currently have in fiscal 2019.

Okay. And actually while you're talking about retailer, could you detail or maybe just give us a little insight on the changes at Whole Foods since the Amazon purchased them?

We haven't seen tons of changes. Obviously Amazon is using Whole Foods we started to see some changes in distribution in some of the products that they're carrying. But I think they're really leveraging the facilities that brick and mortar facilities that Whole Foods have. They’re taking a lot of the expertise that Whole Foods provided from a procurement, marketing product standpoint and starting to apply that in e-commerce. And then I think Amazon is using their expertise in distribution and their global presence to expand Whole Foods consumption as well. So they're still getting their arms around the whole retail business I believe. But I think there is certainly they make some things work for them for themselves.

Okay. And the 148% increase in OVH volume at retail, outstanding. It looks like is that three quarters distribution and one quarter from increased sales per door or how should we look at that?

It's a combination of new distribution and velocity. We've done a great job expanding the product portfolio especially with the Heart Healthy and Omega 3 and antioxidant additions. They've just been very well received. So I don't have the exact testament on what is new distribution versus velocity but it's they're both very positive and that's what's driving such strong results. And because we have such great velocity and a success story, we're able to gain new distribution at retailers that currently don't carry Orchard Valley Harvest.

What percentage of ACV is Orchard Valley Harvest now or at least at the end of the quarter?

I don't have that number here I'm sorry about that. None of us have it here, sorry about that, Craig.

It's up versus a year ago obviously.

Up significantly I think would be a good way to put it.

How did salad toppers do or is it too early?

We've gotten good initial response from buyers and from consumers. We launched it originally in the club channel and now we're expanding that into grocery. So it's a brand new launch for us, so it's a little bit early to tell. But we're optimistic about gaining new distribution with that product portfolio.

You've owned Squirrel brand for a couple of quarters now, what changes have you made or expansion of distribution, et cetera?

So a couple of things, we're looking at the product portfolio. As I mentioned on the call, we're really focused, we think there are great opportunities in the club channel. And so we've actually created some club channel pack sizes and some new products to offer to that channel specifically. So that's one area of focus. Secondary is Squirrel was not strong in grocery before we brought them. And we've got such a great distribution sales and marketing arm for the grocery channel. So we're starting to develop some items under the Squirrel portfolio to start selling into grocery. And then the alternative channels that Squirrel was very strong in, we continue to grow that business as well with some of the new products that we’ve put in the pipeline to launch. So very optimistic about the growth opportunities for Squirrel in the coming year.

Okay. It looks you're doing a good job of managing the increase in freight expenses. So what are you doing to offset higher trucking costs?

This is Jeff. One of the things that we have done, is we have brought one of our freight in-house, we have invested in our own transportation system, whereby we have the flexibility of contracting with 3PLs like we have done in the past, coupled with allowing ourselves to contract directly with carriers for high velocity lanes, with a plan that ultimately we do want to take more of our freight in-house. The new setup that we have provides us that flexibility to continue to service our customers and then evaluate lane by lane with different carriers to contract internally and take those contracts away from our 3PL, to in essence save on their margin, as well as have better control of our deliveries. Obviously a lot of retailers have OTI signs in place and between our TMS being able to control our carriers directly and partnering with the really strong 3PL, I think it positions ourselves very well to try to mitigate our freight expense going forward, as well as service our customers.

All right, thanks a lot guys.

All right. Thank you.

Thank you. [Operator Instructions]. And I am not showing any further questions, at this time, I would now like to turn the call back over to Michael Valentine, Chief Financial Officer, for any closing remarks.

Okay, Ashley, thank you. Before we end the call, please note, that we will be presenting at the Sidoti and Company Fall 2018 conference in New York, on September 27th and we will posting an updated investor presentation on our site that date. Again thank you everyone for your interest in JBSS, this concludes the call for our fourth quarter and fiscal year 2018 operating results.

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