Ladies and gentlemen, thank you for standing by, and welcome to the John B. Sanfilippo & Son, Inc. First Quarter Fiscal 2021 Operating Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Mike Valentine, CFO of John B. Sanfilippo & Son, Inc. Please go ahead, sir.

Thank you, Helena. Good morning, everyone, and welcome to our 2021 first quarter 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 want to alert you to the fact 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 that are inherent in our business. Starting with the income statement. Net sales for the first quarter of fiscal 2021 declined by 3.5% to $210.3 million in comparison to $217.8 million for last year's first quarter. The decline in net sales resulted from a 3.5% decline in sales volume, which we define as pounds sold to customers. Sales volume increased in the consumer distribution channel by 3.8% primarily from a 6.9% increase in private brand sales volume for trail and snack mixes, mixed nuts, cashews and peanuts, primarily at existing customers. The increase in sales volume for these products was partially offset by a decline in peanut butter sales volume due to a temporary peanut supply shortage that occurred during the current quarter. Increased sales of Fisher snack nuts also contributed to the sales volume increase in the consumer distribution channel. Sales volume declined 27.7% in the commercial ingredients distribution channel due to a 40.9% decline in sales volume for almond, peanut, walnut, sunflower and pecan products in our food service business. The decline in the food service sales volume was due to a…

Thank you, Mike, and good morning, everyone. The first quarter of fiscal 2021 net income and diluted earnings per share nearly equaled the record results we reported in last year's first quarter despite COVID-19-related challenges in our food service business. We also continued our goal of returning profits to our stockholders by increasing our regular annual dividend by 8.3% to $0.65 per share. And we supplemented that with a special dividend of $1.85 per share, both of which were paid in the first quarter of fiscal 2021. It takes a talented group of dedicated individuals across an entire organization to deliver consistent, strong results as we have done here at JBSS, especially during these unprecedented times we face as a business, as a country and as a world in the midst of a pandemic. I am proud of every person in our company whose leadership and commitment to providing outstanding quality, service and value to our customers and consumers is unwavering. There are significant changes to industry trends as consumer preferences shift to shopping in smaller store formats like grocery and shifting to e-commerce purchasing. With restaurant closures and other limitations due to the impact of COVID-19, consumers are also doing more cooking and baking at home, which has had a positive impact on certain aspects of our consumer business but a negative impact on our food service business. The JBSS business model puts us in a strong position to follow shifts in consumption and demand wherever they go between our consumer, commercial ingredient and contract manufacturing channels. We expect to redirect our promotional and advertising activity with respect to our brands to focus on more digital and e-commerce platforms to match consumer behavior. We continue to see strong e-commerce and grocery performance across our Orchard Valley Harvest and Fisher…

Thank you, Jeffrey. At this time, we will open the call to questions. Helena, would you please queue up the first question?

[Operator Instructions] Your first question is from the line of Chris McGinnis from the Sidoti & Company.

I was wondering if you could just start off maybe just any notable changes from the beginning of the quarter to the end of the quarter and maybe playing out in early October, and just across the 3 kind of segments? I know there's a lot of moving pieces between the brands and everything, but can you just maybe talk about that cadence that you've seen, how it unfolds through the last quarter and maybe where it's at today?

Sure. And Chris, this is Jeffrey. So if you look at the -- looking at by channels, consumer channel, we continue to see growth there, a shift in people eating out and cooking and snacking at home. So we continue to see that going into -- through Q1 and now into Q2. And I don't anticipate that's going to change with just the situation the country is in today. I think people are going to still be reluctant to go out to eat as much, and they're going to stay home and cook at home. And so I think we'll see strong growth in the consumer channel, both in snacking and especially in recipe nuts. The shift in e-commerce is also something that's continued from first quarter into second quarter. And I, again, don't anticipate that to change either. People have become accustomed to buying and shopping online and they like the convenience of it and the safety of it. And so I think you're going to continue to see e-commerce grow. That's why we're reallocating some of our investments in marketing and sales support to the e-commerce channel. The commercial ingredient channel, although we have seen some positive momentum there, it's still not where it was a year ago. And I don't anticipate that happening really until the next couple of quarters until we get a better handle on what's happening in the country. Although, positive side is we have seen some improvement. I think you're seeing people feeling a little bit more comfortable going back to restaurants. And when they are open, you're seeing some decent turnout there. But it is a challenge. And so our teams in the food service channel are looking at other opportunities outside of just restaurants to build distribution and they're focused heavily on that. And then the contract manufacturing is really the largest customer in that channel, their biggest piece of business is mainly convenience stores. And we still have not seen a return to the traffic in convenience stores. So as a result, we've seen continued declines in the contract packaging channel.

I can add to what Jeffrey said, Chris, in respect to private label snack nuts, that was -- that growth rate was pretty steady throughout the quarter. In respect to food service, we saw an improvement from a 43% year-over-year decline to about a -- finished up the quarter with about a 40% year-over-year decline. So made a little progress there. And then on contract packaging, we also saw some improvement as we progress through the quarter, especially with respect to the customer Jeff referenced earlier.

Very helpful. And I appreciate that. It seems like things are starting to open up a little bit, so that should help, especially on that contract side start to open up here. I guess, just in terms of your expectations on the holiday season, any normal maybe potential gains in customers there? Just how do you -- it feels like given the strength that you've seen with the consumer staying at home, it should be a really good season. How are you changing maybe any go-to-market strategies there or any opportunities to, again, win customers there?

Sure. Yes. So we're in a really strong position, especially on Fisher recipe where we have distribution with strong retailers across the country. We've got very competitive prices this year. We've got strong promotional activity that our sales and marketing teams have pursued. So I believe we're in a very strong position to take advantage of that increase in cooking at home, with the current -- with distribution and the setup we have. E-commerce is another area where there's great opportunities. And so we've really got our brands, both recipe and snack, well positioned in e-commerce to take advantage of a holiday spike. And I think you'll see some -- you will see travel, obviously, Thanksgiving and Christmas, huge travel times. I don't think it will be where it was last year, but I think you'll see a pickup where it should have some positive impact in the food service channel.

Yes. Plus, we picked up some merchandising space at that one customer, where we didn't have that last year. So...

Okay. And just thinking about, I guess, just around Orchard Valley, it sounds like it's just that 1 nonfood customer. As the economy are starting to open, stores are starting to open, are you seeing that change? Do you expect that to -- that brand start to kind of rebound as the economy is open? What it takes for that nonfood customer start to order again food.

Yes. So they are opening more stores. It's pretty consistent. It's just a matter of getting that traffic to come back to the stores. So they are open. We've got the distribution as we had last year. So I'm optimistic that you're going to start to see more traffic come through that nonfood retailer where we've got the OVH distribution, especially this time of year for the holiday season.

Great. And then just can you just talk around just that peanut butter supply issue you talked about. How much in sales is that? Was that -- I mean, you mentioned it in the release. So I'm just wondering how much of a pressure that was in the quarter.

Yes. I think our total peanut butter sales volume was down roughly about 1 million pounds in the year, in the quarterly comparison.

The optimism or the good news is that the peanut supply is coming back, and we don't anticipate that change coming in the coming year?

Yes. Yes. We're on -- yes, we're going to see the second largest crop in history, we believe. So we feel pretty good about our net supply going forward.

Okay. And I guess just you spent some time talking about acquisition costs. How do you see that playing out with the margin profile for the remainder of the year on the gross margin side? And then I can -- you can jump to the operating margin after that or operating expenses after that.

Okay. So as Jeff mentioned, both almonds and walnuts are down pretty significantly year-over-year. So that generally leads to improved gross profit margins. The big challenge is, is to maintain the gross profit per pound in our pricing. And when they get as low as they're getting, that becomes difficult to do. So you need to be able to get those gross profit dollars. We're going to need some volume increases, especially on those 2 nuts.

And Chris, one of the good things is we're able to hit price points that we haven't seen in quite a few years in a lot of these heavy volume commodities. And so that's exciting going into this holiday season.

Okay. You might be able to offset that with some volume growth, obviously, kind of around that. And what's driving the decline in the acquisition of -- is it COVID-related? Or is it just the amount of supply that's coming on market over this year?

Go ahead, Jeff.

So it's a combination of both. I mean we've got some record crops of almonds. Walnut crop is huge this year. The corn crop is extremely strong. There have been some negative impact from a demand perspective. Part of it is trade situations. Part of it is just the lack of travel around the world, which has impacted consumption as well.

And then just, I think last question for me, just around the operating expenses. Obviously, a great job on controlling that. But how sustainable is that? And I guess as you start to reallocate your spending, how do you see that play out over the coming quarters?

Well, why don't you talk about advertising?

Yes. So from a marketing and trade spend perspective, as I mentioned, we're going to shift more resources towards e-commerce, digital marketing and then really expanding our reach in e-commerce. But also, there's opportunities from a brand-building and in launching new innovative items. I've talked in the past about our club store strategy and how that is important to the company. We have not been as successful as I'd hoped up until now. But we've got new members of a talented team in place that are really laser-focused on re-romancing, rebuilding our brands, our positioning, our engagement with consumers. So you're going to see a lot more investment go towards our brands and where we market them.

All right. I'll talk a little bit about compensation, Chris. There's a few things driving that. First, our incentive compensation expense is down a bit compared to last year. Remember, last year, we got off to a great start, and we're generating a lot of EVA improvement. So we were accruing for higher bonus expenses in the first half of last year than we have this year. The other area where we've seen a decline in compensation-related expenses is with medical insurance expense. And I'm sure you've read about this. Employees are not going to the doctor as much as they typically do. And so that's being reflected in that line. And then the last one, consulting, we actually had a big project last year in the first quarter to retune our strategic plan. We also had some consulting expenses related to an acquisition that did not occur. And that's what drove that favorable comparison this quarter.

And I apologize, just one more question. There seems to be a notable increase in advertising around nuts. And I've got this question from a number of investors. Is there something -- are you seeing that as well? Just kind of given the stronger demand over the stay-at-home? Are you seeing that kind of level of increase maybe from some of your customers in terms of trying to go out and market more?

Actually, you're seeing that from a combination of places. One of the trade associations are doing a great job in increasing the investment they're making in marketing and expanding demand for the almonds industry, the pecan industry, the walnut industry, really all have stepped up to promote the consumption of nuts and the usage of nuts. The brands are stepping up as well. We've seen that recently. And as we are as well. So I think it's just -- it's a combination of people looking at the opportunities and the stay-at-home and the snacking-at-home demand change. And so they're pursuing that. But also just the fact that we've got such large crops coming on. We've got to find valuable homes for such huge supplies. So you're seeing that investment as well.

Okay. And can you maybe just talk a little bit about the competitive environment, and then I'll jump back in the queue.

Sure. So obviously, private brand is extremely strong. We've seen a shift in private bank growth really across almost every channel or category. And so you're seeing that growth. The brands source competition on the private brand supply side, but the brands are stepping up as well, investing a lot more in the categories than we've seen in quite a while. And so you're seeing, as we've talked about, we've lost some distribution in our Fisher recipe customer base, due to some competitive pricing and competitive offers. But at the same time, it's an exciting time for the business. There's so many opportunities across multiple channels as we follow these shifts in demand around the country.

Your next question is from Tim Call of Capital Management.

Was this the first quarter where the consumer distribution was over 75% of your sales?

Yes. I think it was Tim.

Now I was going to mention that. I didn't -- I don't have a final record, but I believe it's probably the highest percent of the total business ever set over 75%. So good catch.

Yes, I would agree with that.

It was a challenging quarter, but you had near record sales and near record earnings. It appears that you have excess capacity in each of your divisions. Is that the case?

Want to cover that, Jasper?

Yes, Tim, this is Jasper. I would say on the consumer piece, particularly with the growth that we've seen, we do get a little challenged on capacity. But come January forward, that capacity opens up again. Just due to the nature of our business. Obviously, we're looking at CapEx to continue to support the consumer growth. We certainly have capacity to handle additional food service business as typically those pack styles are a bit different. So I would say overall, for sure, on food service, but we're making adjustments to continue to add capacity on our consumer side.

[Operator Instructions] At this time, I would like to turn it back to Mr. Mike for any further comments.

Hey, thank you, Helena. Again, thank you, everyone, for your interest in JBSS. This concludes the call for our first quarter of fiscal 2021 operating results. Have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.