Good day, ladies and gentlemen, and thank you for standing by. Welcome to the John B. Sanfilippo & Son Second Quarter Fiscal 2019 Operating Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will have a question-and-answer session. And now, it's my pleasure to turn the call to our Chief Financial Officer, Mike Valentine.

Thank you, Carmen. Good morning, everyone, and welcome to our 2019 second quarter earnings conference call. Thank you for joining us today. On the call with me is Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO. Before we start, we want to alert participants 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 risk factors that could negatively impact results are explained in the various SEC filings that we have made, including Forms 10-K and 10-Q with updates. We encourage you to refer to these filings to learn more about these risks and uncertainties that are inherent in our business. Starting with the income statement, first, we want to alert participants that references to changes in sales volume, which we define as pounds sold, that we will make on this call, do not include the decline in sales volume for peanut crushing stock sold to peanut oil processors in both the quarterly and year-to-date comparisons. The sales volume decline for this product had no significant impact on net sales, due to very low selling prices, which is typical for this product. The declines in sales volume for this product in both comparisons resulted from the shutdown of our peanut shelling plant in Bainbridge, Georgia, as we completed Phase 2 of 3 phases, replacing our shelling equipment in that facility. The shutdown commenced in July and ended in December of the current fiscal year. Net sales for the second quarter of fiscal 2019 decreased by 2.1% to $253.3 million in comparison to net sales for last year's second quarter of $258.8 million. The decrease in net sales was primarily due to a shift in sales volume from higher-priced tree nuts to lower-priced peanuts. Sales volume…

Thank you, Mike. Good morning, everyone. We continue to have another quarter of strong volume and sales growth in our consumer distribution channel. The company is investing in our brands, and I am proud of the results our consumer sales and marketing teams have achieved in gaining new distribution and expanding consumption. Sales volume in the consumer distribution channel accounted for 73% of our total sales volume in the current second quarter compared to 64.2% of total sales volume for last year's second quarter. The increase in sales volume in the consumer distribution channel was driven by increased sales of private brand, Orchard Valley Harvest and Fisher snack nut and trail mix products. Additionally, distribution gains for Fisher recipe nuts at several new grocery customers helped to offset some of the lost distribution at a major customer, as Mike mentioned. It's been a major strategic growth objective to build value-added business across segments in our consumer channel, and these results demonstrate the success of that goal. The entire organization has been working hard to drive continuous improvement projects, optimize supply chain efficiencies and enhance JBSS margins. As we noted in the year-to-date comparison, the increase in incentive compensation expense was a significant driver for the increase in total operating expenses as this expense accounted for 32% of the increase. Our rising gross profit has allowed us to increase our incentive compensation over the prior year, while still delivering value to our shareholders. At this time last year, I talked about JBSS investing in our Expanding Consumer Reach growth strategy. The goal is to get our branded products in the hands of more consumers and have our brands available where consumers are when they buy food products. We made a strategic acquisition of the Squirrel Brand business to expand our consumer…

Okay, thank you, Jeffrey. At this time, we will now open the call to questions. Carmen, can you, please, queue up the first question?

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

Hi, guys, back on track this quarter. It's great.

Good morning, Craig.

Good morning. Including the plant that was offline, looks like the volume fell by a little less than 1%. That plant is back up, you've lapped the Walmart lost recipe volume, you've lapped I think the first of the two contract packaging losses. So, will volume flip positive in the second half and can you ballpark that?

We've got a lot of new business, Craig, that we picked up that just started shipping in January and will pick up new business, actually that will start shipping through the end of the - back half of the year, as we do anticipate strong volume growth in the consumer channel. Commercial ingredients still has some work to do to regain some of the negative volume trends in that channel, same with contract packaging. But I'm confident that the volume growth we've anticipated in the consumer channel will be very positive and should offset some of the other declines.

Okay. And then, how material is that the pickup from the new private label recipe and the new distribution for Fisher snacks?

It's significant. When we - we don't give guidance and quantify it on the call. But I will tell you, it's significant new value added private brand business that we either never had or haven't had in a long time.

Okay. And then, is there are any other nascent or looming customer shifts on any of the three categories that we should be aware of?

Yeah. I wouldn't say - I don't have a crystal ball, so it's hard to say what retailers will do. We don't anticipate anything. We've got very good relationships and good visibility on what retailer direction is and expectations. So I do not anticipate any huge transitions in the coming couple of quarters.

Okay. And is the 27% year-over-year gain in Fisher snack volume was - it was outstanding. I know you guys were working toward that. How much of that was distribution versus sales per ACV or velocity?

I don't have exact number. I would say majority of that is new distribution, that Fisher Oven Roasted Never Fried product portfolio. The team has done a good job expanding that program into retailers where we've never had distribution before. So if I had to guess, I would say majority is new distribution.

So you have like the percentage ACV this quarter versus last quarter or versus a year ago?

Well the Fisher snack right now, we're about a 4% volume share and about 5.2% dollar share. I don't have an ACV number on that one in front of me. But definitely a growth in that category for Fisher snack.

And the new customers for snack, are they pulling planners or another brand to add you? And then, how did you perform versus the prior brand?

It's a combination of things. We're either adding product lines to the portfolio, that our whole goal with the Fisher Oven Roasted Never Fried is to provide some more healthy snack alternatives for consumers in the channel. So what retailers will typically do is look at the most underperforming product lines whether it's a branded product or in some cases a private brand item and they'll replace that with a Fisher Oven Roasted item.

Okay. I don't want to monopolize the calls. If there's somebody else on line I'll go back, otherwise I can keep going.

Keep going, Craig.

Okay. So Orchard Valley Harvest volume, 16% growth, that's solid. But it's a little slower by OVH standard. Do you have its percentage ACV versus last quarter and a year ago?

Yeah. So we've actually increased the ACV for Orchard Valley Harvest. It's now at 45% versus this time last year it was 33%, so significant gains. Yeah.

It seems like with that pickup in volume, with that pickup in ACV, your sales for ACV must have slipped a little. It is promotion that drives velocity for the most part, I assume?

Yeah, the velocity is driven a lot by promotion. New product launches, usually those see higher velocity just as consumers start to sample the new product in the category. So it's a combination of things. But lot of is driven by promotional activity for sure.

Okay. And you're looking at nut prices declining in the second half. Is that going to give you opportunities to get promotional with OVH?

It will. Yeah. So we're going to see price deflation in walnuts, pecans and cashews.

And peanuts.

And peanuts as well, which I did mention earlier. So it gives lot of opportunity for additional promotional activity, possibly hitting some price points that we haven't been able to hit in a while. It really supports consumption growth.

Okay. And then almond prices you're looking for more or less flat?

Not sure. Yeah. We really it's going to be subject to what occurs during the bloom period at the end of February. But right now, it's pretty much flat compared to last year.

And that decline in the other key nuts, just ballpark?

Yeah. We're looking at pretty much like 10% declines in acquisition costs for pecans and walnuts. A similar number for cashews, it could be even as much as 15% for all those nuts. And then peanuts are roughly about an 8% decline.

Okay. And then peanuts, I think you guys were concerned that past Hurricane there could be a shift in acres planted toward cotton. Is that playing out or what's your current outlook?

Well, farmers are now just starting to make that decision. Of course, they'll start planting in the latter part of April and early part of May. But we do keep an eye on the December cotton contract. And last time I checked, it was still in the low-70s, which makes peanuts at today's current market levels pretty competitive, so far, no big concerns that a lot of acreage is going to shift to cotton.

Okay. Looks like freight in the quarter was about $6 million or $0.08 per pound, is that - one, if that's right. But two, is that kind of your run rate and or you guys have offsets come in?

Hey, Craig. This is Jasper. Yeah, that is pretty close. And I think, that will be our run rate going forward.

Okay. And then as far as the eye can see or do you start to lap that and put down with some of the changes you've made?

Well, December was probably our first clean overlap, and then, obviously, as we go through the back half of the year we'll be overlapping, I think some pretty consistent numbers in June of last year, we had to go on the open market completely as we were transitioning 3PL providers as well as getting our own [TMF] [ph] system up and running. And then July 4, we were on our new rates and under our new contracted rates with our own carriers. So I do expect the counts that you saw last year will be pretty accurate going forward.

Okay. Now I'm going to try to do this question without being too convoluted. But the gross profit per pound improved from $0.51 in Q2 last year to $0.58, so that's very solid. But you guys were $0.59 in Q2 in 2015 and 2016, this is gross profit per pound. And in the interim, your percentage from consumer has climbed from 60% to 75%. So with the shift to consumer shouldn't the gross profit per pound be trending up a little further?

Right, Craig. That would be something that we would expect. However, you should also remember that a lot of our consumer growth came in peanuts that tend to have a lower gross profit per pound, simply because they have a lower selling price.

Okay. And then what caused the shift toward peanuts?

We're just - we've picked up a lot of new consumer - new business in the consumer channel for peanuts, but also we're just growing at existing customers more so on peanuts than any other nut.

And it's just because of the price differential versus the tree nuts or?

That's a good question, because we're not necessarily - while we've seen some pretty good snack peanut increases according to USDA reports, which we have now not seen for two months. But - so it does reflect somewhat what's happening overall in the category.

Okay. All right. Well, thanks a lot. That's it for the questions I got ready.

Thanks, Craig.

Thank you. [Operator Instructions] And our next question comes from Timothy Call with Capital Management. Your line is now open.

Good morning. Congratulations on a good quarter. With your strong cash flow, you're paying down debt. What's the optimal level of debt after this Squirrel Brand acquisition?

Well, most of our debt, it really is used to buy pecans and walnuts and to a lesser extent peanuts from farmers. So it will fluctuate and can get - we've had years where due to higher acquisition costs, it's gotten up to as much as $90 million on the revolver balance. So that really what drives at that level it's not really anything we've targeted.

I guess there's a thought that, because you spent cash and incurred some debt for the Squirrel Brands that your special dividends won't be as stronger as numerous, not too special dividends in a year. Is there a time frame, where you see that being reconsidered?

Well, actually the debt we incurred for the Squirrel Brand business, really in the whole scheme of things wasn't that large compared to what commodity acquisition costs can do. And so, yeah I would say that we're looking at a considerable decrease in the amount of dollars we're going to spend on commodities and kind of especially the ones we buy from growers. So it does open up the opportunity to take a look at that special dividend that we've been paying in July, in recent years and it might put us in a good position. In terms of working capital and the cash and possibly revisit that $2 a share amount.

With that acquisition, were there any one-time nonrecurring costs that were expensed that we're about to comp in the next or quarter or two?

No. That acquisition we did back in November of 2017, and just as a reminder, that was an existing contract packaging customer. So it's probably one of the easiest integrations in the history of acquisitions. So we really didn't have any material one-time costs associated with it.

And what about the recent disruption at the plant shelling facility, are there any one-time costs that you've incurred because of that?

No. It was all planned and we probably had some unfavorable absorption variance in our COGS in the second quarter. However, it looks like the new equipment has the ability to produce about 40% more throughput than what we currently had. We had a great shelling week last week. We expect to shell the entire crop by the end of this fiscal year and basically recapture that unfavorable absorption variance in the next two quarters.

Transportation costs went up over the last year because of gas prices and driver shortage. Do you see any relief there?

We may see a little in the fuel surcharge going forward, but general rates are about the same as what we saw last year back half of the year.

Well. Congratulations again. And it's a great success what you're doing with the branded products. Thank you.

Thanks.

Thanks, Timothy.

Thank you. And this concludes our Q&A session for today. I would like to turn the call back to Mike Valentine for his final remarks.

All right. Thank you, Carmen. Again, thanks everyone for your interest in JBSS. And this concludes the call for our second quarter fiscal 2019 operating results.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.