Good morning. My name is Dexter, and I will be your conference operator today. At this time, I would like to welcome everyone to the John B. Sanfilippo & Son Inc Second Quarter Fiscal 2021 Operating Results Conference Call. All line has been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. Mr. Mike Valentine, Chief Financial Officer, will begin your conference. Please go ahead, sir.

Thank you, Dexter. Good morning, everyone, and welcome to our 2021 second quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO. Before we start, we want to remind you 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.

Thank you, Mike. Good morning, everyone. JBSS reported record net income and diluted earnings per share in our second quarter coming off of a record second quarter last year. I am so proud of our management team and all of our associates for overcoming enormous headwinds to achieve record results for our second quarter of fiscal 2021. This is a considerable accomplishment given the trio of challenges we faced in our food service business, in our contract packaging distribution channel and with our Orchard Valley Harvest brand from the impact of COVID-19. As has been the case in recent quarters, we saw strong sales volume growth in our consumer distribution channel from increased sales of private brand snack nuts, trail mixes, snack mixes and Fisher snack nuts. Sales volume in the consumer distribution channel accounted for 78.2% of total sales volume in the current second quarter. The pandemic has had an unfavorable impact on our food service business, as Mike alluded to. However, food service results have continued to improve in fiscal '21 as a decline in food service sales volume in the current second quarter was 29.4% compared

Thank you, Jeff. We will now open the call to questions from participants. Dexter, please queue up the first question.

Your first question comes from the line of Chris McGinnis from the Sidoti. Your line is open.

Congratulations on another good quarter. I was wondering if we could just maybe start at the growth -- gross margin line. And just talk about, I guess, one, maybe the benefits over the prior year, how much of that is maybe consumer? Now that's a heavier portion of the mix versus the lower nut prices. And can you just maybe dig into that a little bit more? And then maybe as you think about whether it's the next quarter or the next 12 months, how that plays out in the lower tree nut prices into that margin line for the next year?

I'll take that, Chris. So as we mentioned in the release, virtually all the improvement on that line came from lower commodity costs. And as we mentioned, it's just about all the major tree nuts that we process, probably with the exception maybe hazel nuts. So it's pretty interesting. It's not something we can recall seeing in recent years where every tree nut is down pretty significantly year-over-year, and that's really what drove that. Going forward, we're pretty much locked in for the remainder of the crop year for the North American tree nuts. And that would pretty much take us through next summer. So our costs are fixed. We do have some more pricing actions to take in January as we typically do. And -- but overall, we think we'll see some margin expansion simply because of the lower acquisition costs.

Great. All right. So this is in for some time then, this gross margin level, I guess, if you want to call it?

Right.

Okay. And you said it's unprecedented can you maybe just shed your insight. Obviously, you've been around it for a long time. Just maybe your thoughts around what's driving kind of the decline in the pricing? And how sustainable that is?

Chris, it's Jeffrey. So it's a combination of things. It's just been an extraordinary year -- a couple of years for growers. So there's been so much more planting of almonds, of walnuts, pecans in some places. So you've just seen an increase in the supply side because the growers have made so much money and it's been such a profitable industry to invest in over the last 10 years. And so now you're seeing the results of those increases in acreage planting. So you've got close to 3 billion-pound almond crop. You've got a record -- close to record walnut crop, record crop. Pecan crop in Mexico continues to grow as well as places like South Africa. And so you've seen just increases in supply. And -- but it takes a while for demand to catch up with that. So that's part of the reason you're seeing some of this price deflation today as a result of just larger crops around the world.

That makes sense. And can you just -- thinking about the pandemic on your business, obviously, consumer, you've obviously benefited from -- I guess as things start to come back on the other two segments of the company, how do you see that playing out on the margin front? And do you want that to come back? Or -- I know it's still important, but this beneficial kind of -- it's obviously benefited the consumer more for you. Can you hold the gains on the other side, too, and come back, do you think in the economy? Just thinking about your portfolio, do you want to change it at all during the pandemic?

Yes. So as we've talked about, we've seen a shift to e-commerce. We've seen a shift to people eating and cooking at home. I believe as states reopen, you're going to see some of that shift back to, and we hope to see the shift back to food service, where people are going out to eat and traveling again. We expect to see that. I think some of the gains you've seen in consumers, some of that will stick. We're hopeful that we've -- consumers are now used to cooking at home and they've learned to cook at home. That increase we saw in our -- in the recipe program and even down that recipe aisle. And we're hoping that we can maintain some of that volume, even though the pandemic is -- once the pandemic subsides. And so we're hopeful that we can keep that recipe category growing strong, continue to educate consumers on how they can use nuts to cook and what to do with them. And I think the food service piece, our team has been really laser-focused on building distribution so that when states do reopen, we have our product portfolios in place to optimize the volume again in that channel. That's why I'm really confident once we do get back to some new level of normalcy, you'll see that food service piece come back again. It's just a matter of time when states start to reopen, and people are confident and comfortable to go back out to eat again and travel.

Chris, this is Mike. I would add that if we were to see a decline in, say, private label snack nuts and trail mixes in favor of food service, walnuts and pecans, where we're seeing a lot of decline right now, that would actually be a very positive development for us because, as you know, we're vertically integrated in those two nuts. We tend to have better gross profit per pound measures with the nuts that we shell. And that actually, I think, would be a positive for us if we saw that shift.

Okay. I really appreciate it. And just with some of the lost business on the recipe side, is there an opportunity to go back and get that? I know there has been some talk about that at times and just your confidence around that brand. And obviously, still -- obviously a strong position in that marketplace, but just the ability to go out and gain some more space.

Yes. Chris, this is Jeffrey. So we absolutely believe there are opportunities to regain that distribution or some of it. Obviously, retailers are looking at brands every year, and they bid some out every couple of years. If you look at our velocity versus some of our competitors in the marketplace, it's so much higher. And I believe we really invest in our consumers, we invest in educating people on recipe nuts. I just think we have very strong brand equity with Fisher. And I think with the marketing efforts that we're making and some of the changes in our brand positioning, we're bringing value to retailers that carry Fisher. I really believe that some of the lost distribution, we can get -- we can regain that with some of the success stories we're having in other places.

About maybe -- is there opportunities for M&A in this environment for you? And maybe just your thoughts around what maybe the competitive landscape as well?

Sure. So we always look at M&A. We've talked about it periodically on this call. So we're always looking at companies. Nothing that has been that important or we felt was that strategic that made sense for us at this point, or perhaps pricing wasn't right. But we are continually looking at opportunities in M&A, whether it's a new capability that we currently don't have, it's a new product platform or it's got a brand that reaches a consumer that we currently don't reach. A lot of opportunities and strategies we have in M&A, and we'll continue to look at them. Just nothing that made sense up until now.

And maybe can you just talk on the competitive landscape at this point? Or I guess just the -- all the different changes, moving parts within the industry. Just how are they attacking maybe the consumer side?

Yes. So obviously, competitors are responding to the pandemic and just trying to understand the dynamics with consumption trends and consumer behavior. So we've seen some of our competitors, for example, being very aggressive on building their recipe nut distribution. Planners has been aggressive investing in their brands and trying to continue to expand distribution. And so the brands are still there trying to play a stronger role at retail and on the shelves and try to mitigate some of the impact that these big private brand programs are having with shelf space. But we don't anticipate major changes with competitors. I just think you're going to see people watching what happens with the pandemic and continued changes in consumer behavior and respond accordingly.

Your next question comes from the line of Timothy Call from Capital Management. Your line is open.

Congratulations on another great quarter. I look forward to the new products. Do you expect interest expense to decline over upcoming years as you pay down long-term debt to close to 0?

Yes. Basically, our average interest rate on long-term debt is about twice as much as it is on short-term debt. And all of our debt amortizes. So yes, we do.

There were some capital expenditures with the pandemic. Do you expect capital expenditures to go down over time post pandemic?

The capital expenditures we made for the pandemic, actually we are a pretty small percentage of our total CapEx in fiscal 2020. Our plant was actually pretty well laid out. That allowed us to create a safer working environment without a lot of CapEx. The big increase in CapEx that you're seeing for fiscal '21, that we disclosed in our 10-K at the end of 2020, is really attributable to product line expansion.

That's great. You had near record sales and earnings and consumer sales were 82% of the base, which is huge. As the economy reopens, I think you said you believe you have enough capacity when food service and specialty retail sales and other areas open up and demand nuts from you. I believe you said you have enough capacity to handle that from these levels. Is that right?

That is correct. Yes. We've got an amazing infrastructure at all our facilities, Tim, and we've invested over the years. And as our business grew, we invested in new packaging, new capabilities, robotics. It just extraordinary investments we've made in manufacturing. So as we -- even if product line shift or volume shifts, we've got available capacity to meet those demands. So as food service comes back and we see that growth return, we've got the capacity to handle that additional growth, in addition to keeping the volume growth we've seen in the consumer channel.

That's terrific. Do you expect to sell the Garysburg facility?

We haven't made a final decision on that yet. But currently, we do have inventory there. We are doing some shipping and receiving. More than likely, we probably will put it up for sale in the fourth quarter, but we're still studying our options.

Yes, if you have a buyer, Tim, let us know.

Yes. On their last call, Smucker indicated they had a solid Jiff price increases due to higher costs than they thought those price increases would stick long term. And meanwhile, we have Conagra buying -- or selling Peter Pan and other nut lands to post. How does this competitor activity affect your company?

Well, the peanut butter business -- the majority of our peanut butter business is private brands. We took some pricing activity early -- mid last year over the time because of the crop. Yes, kind of the crop. So we did take some pricing in mid last year because of the pricing just as Smucker's and some other brands did. We anticipate -- I don't anticipate huge changes in the peanut butter segment. It's still a strong segment. I think you're seeing growth there as a result of kind of the current economy today. It is a low price, high-protein item for families. And so we've seen a lift with our current private brand peanut butter customers as well as obviously, the food pantries around the country. Huge growth and demand there.

There are no further questions at this time. I would now like to turn the conference back to you, Mike Valentine.

Okay. Thank you, Dexter. Again, thank you, everyone for your interest in JBSS and this concludes the call for our second quarter 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.