Good day and thank you for standing by. Welcome to the John B. Sanfilippo & Son, Inc. Second Quarter Fiscal 2022 Operating Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Frank Pellegrino, Chief Financial Officer. Please begin, sir.

Thank you, Norma. Good morning, everyone and welcome to our 2022 second quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; Jasper Sanfilippo, our COO; and Mike Valentine, our Group President. 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 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 second quarter of fiscal 2022 increased 8.4% to $253.2 million in comparison to net sales for the second quarter of fiscal 2021 of $233.6 million. The increase in net sales was due to a 6% increase in sales volume which is defined as pounds sold to customers, combined with a 2.3% increase in the weighted average selling price per pound. The increase in weighted average selling price came from a shift in product mix from lower-priced peanuts to higher-priced trail and snack mixes and tree nuts as consumer preferences favored higher-priced products in the current second quarter. Sales volume increased in all three distribution channels in the current second quarter. Sales volume increased 2.2% in the consumer distribution channel, driven by a 7.6% increase in private brand sales volume, primarily from sales volume increases in trail and snack mixes, almonds and mixed nuts, mainly driven by new distribution at existing customers. These increases were partially offset by a decrease in sales volume for private brand peanuts and cashews. Sales volume increases for all branded products with the exception…

Thank you, Frank. Good morning, everyone. I'm pleased to report that we continue to deliver strong net sales and volume growth in this unprecedented operating environment. Coming off a record second quarter in fiscal 2021, the company's performance this quarter was still our third best second quarter ever. We reported sales volume growth in all our distribution channels, a majority of our brands and e-commerce. In addition, our commercial ingredients and contract packaging channels continue to recover from the impact of COVID-19 as sales volume in these channels has approached pre-pandemic levels. However, as many other companies have recently reported, the inefficiencies from supply chain issues, higher-than-anticipated inflationary input costs and labor shortages had a negative impact on our profitability as they outpaced our pricing actions. But our sales and marketing teams have been extremely diligent in implementing necessary pricing actions across our channels and we have completed 90% of those conversations to date. The teams are actively negotiating the balance of our pricing actions with customers. We anticipate these price changes to be completed by the early part of the third quarter which are intended to significantly offset inflationary input costs that we've incurred or expect to incur. Additional pricing action may be required if these inflationary costs exceed our current expectations as we continue to review pricing with our customers on a regular basis. In order to maintain our high service levels and ensure store shelves were stocked during the holiday season, we incurred approximately $1.9 million in temporary incremental payroll costs as we paid an enhanced wage rate to our plant and distribution employees during the holiday season and we paid freight surcharges to ensure our products were delivered on time. Our service levels did not falter in spite of the enormous supply chain headwinds. It is…

Thank you, Jeffrey. We will now open the call to questions. Norma, please queue up the first question.

Thank you. Our first question comes from Chris McGinnis with Sidoti & Company. Your line is now open.

Yes, good morning. Thanks for taking my questions and nice to see that continued volume growth, especially in the market. Just to start off around volume within consumers, some new customer wins. Can you just talk about what's the driving factor of gaining those customers? And were you in there before and maybe it was disrupted by the pandemic? Can you just talk a little bit about how you're winning the new clients at this point?

Sure. Good question, Chris. So it's a combination of things. Number one, we've reorganized our marketing strategies for our brands, really focused on getting better messaging out there, finding consumers where they're looking at messaging. So the increase in velocity, I think, is one of -- a direct result of our change in marketing efforts. So that's increasing velocity. The distribution is a combination of things. We've focused on investing in innovation, consumer insights, so we have better plans to present the right things in the market that we know consumers are looking for and expanding the type of products that we manufacture within our organization. So R&D and innovation has been a critical part of that growth as well.

I appreciate that. And I guess a similar question on foodservice. I think you mentioned in your prepared remarks 20,000 more locations that you weren't in. Was that because those locations were closed during the pandemic? Or is that organic new growth that you're seeing in foodservice -- related to foodservice?

Sure. So obviously, during the pandemic, a lot of locations were shut down. But our team, even throughout the pandemic, have worked hard to gain distribution in those locations. So once they opened up again, we had product available for consumers. And so those are 20,000 locations that we weren't in this time last year that are now starting to come back into the market as places open up again. So it is all incremental new business.

Great. And just with the omicron variant, any issues that you're seeing pressure, maybe the sales there, just kind of given the -- just how quickly it came about?

It's too early to say. December numbers were still strong throughout the holidays. January will be -- that's when you'll see some of the impact on volume would be, I think, January as a result of Omicron. Obviously, foodservice, not -- it's still growing but not as fast as it was prior to omicron but I think people are still active and still getting out there. So -- but I would expect some results probably in January.

All right. And then I guess just one more question around normalized volumes. How long do you think -- I guess just with the wins that you do have, especially around foodservice, you would expect your trends to be higher than a normalized operating environment versus where they were pre-pandemic. Is that, I guess, correct to think?

Yes. I would say that's a fair statement. Like I said, we've gained a lot of new distribution pre-pandemic. I think people want to get out and do things, so I think you'll start to see some of that volume pick up to where it was back in 2019. But the new locations we have and just the new distribution, the new things we're doing with our marketing efforts, I think you should expect to see better volume.

Okay. And when you talk about the $2 billion target longer term, how do you envision that in the sense that how much of it is extensions from the products that maybe you're selling today versus -- I know you've talked about it in the past, new products that you were thinking about maybe entering?

Sure. So it's going to be a combination of things. I'll share more as we finalize the plans. It's going to come from our current business. Obviously, private brand is extremely important to the company. We'll continue to invest in building that business. Our brands are extremely important, so expect to see higher level of brand volume come out of that plan to achieve the $2 billion in the future. And then M&A. We've talked about M&A in the past. We're looking at a lot of different exciting categories where there could be opportunities for growth. And I think you'll also continue to see just the growth in the category, in general, plant proteins, the health and wellness initiatives that are going on. I think consumers are really looking to change their diets and to eat healthier. And I think we'll have -- we're in a perfect place to help optimize that.

Right. And I think following the pandemic, I think everyone can probably use that. Just in terms of the consumer insight that you are -- with the studies that you're doing and the extra spend there, -- can you just talk about maybe some of the early benefits that you're seeing? It sounds like it's already translating a little bit sooner than I would have thought. Just what are you seeing there and in the markets, maybe they're opening that -- or the way you're going to market that you didn't do before the study?

Sure. So the new consumer insights, we're looking at a broader range of data points just helps us to see gaps that exist in the market today that we can take advantage of, whether it's a product, it's a pack size, it's a consumer trend, it's something that's being discussed online. So it's helping us find opportunities almost in real time as we see them. But I think the bigger piece on the investments we're making in consumer insights is forward developing an innovation pipeline, looking at what people are talking about that are just beginning to be trends today that will become bigger in the future. It's having access to that -- those insights that are going to help us build a stronger innovation pipeline for the future.

Perfect. Great. Can you maybe just discuss the competitive landscape and any changes that you see in the competitive landscape at this point?

Yes. So it's been competitive. There's always competitors out there. Obviously, with the Hormel acquisition of planters, they're aggressive. They're trying to build that business, so we expect to see more from them. I think they'll do a nice job with the brand. Private brand competitors has been pretty quiet. I think people these past six months have just been focused on servicing their customers and not doing a lot of new pursuits but always competitive activity but nothing surprising that I can say is a huge impact at this point.

And then I guess, just thinking about gross margin levels at this point. Is this a sustainable level that we're at? Do you expect to see a little bit more of a decline. Can you -- just any color you can provide as we look out?

I think from a commodity standpoint, it's still a little bit early to tell. I think we expect -- we saw higher prices in the pecan industry than we anticipated. We're seeing some softening in other commodities, partly a result of declining consumption. I would say almond market, we're potentially going to see some, maybe cashews would be the two. Nothing significant, though, where we would be adjusting prices dramatically. But in addition to that, then you've got the headwinds with labor still being high, raw materials being high, lead times are creating cost aggravations in operations because we're having to build up some inventories, just to keep up with the supply chain. So it's a combination of headwinds and tailwinds.

Yes, yes. No. And just around labor, how would you change your labor practices kind of -- is it simply just increasing pay rates? Is there more training? What's -- obviously, it's a hot topic this quarter for everybody. Just -- can you just provide an update of what you think about the labor market and going forward?

Sure, Chris. This is Jasper. Obviously, it is a very competitive market. One of the big changes that we had to react to this fall were labor shortages which we had to supplement with temporary employees but a lot of it, really, was fixed by just increasing labor rates. The supply chain issues that we talked about, the biggest impact those have is we couldn't run the machines as long as we wanted to because we didn't have all the packaging machine or we had shortages in labor. So we had to move crews from one line to another to make sure that we kept servicing our customers and meeting our demand. We have made investments over the last several years on automation to help reduce some of those headcounts, times where we look at CapEx investments where we want to have a decent financial return. A lot of those investments have been made. Now we're looking at some investments that we have to make in automation just because we're having a very hard time finding labor. And so, I think you're going to see a combination of continuing to pay market rates to get the labor in that we need as well as investing in automation to hopefully keep a cap on the amount of new employees that we need to hire to support our business.

I appreciate that. And I guess just thinking about a deflationary nut environment but increasing labor and freight costs, it sounds like you're doing well with price increases. Just -- can you just talk about that pricing dynamic as you try to go to your customers and pass it in a deflationary price environment for your nuts, though?

Well, the costs that we've already passed on were commodities that we purchased prior to any kind of deflationary activity. So all the inventories that we own are at the higher prices. That's the pricing that has been discussed with consumer -- with our customers. And so the deflationary items, we won't see that until probably fourth quarter or even into fiscal 2023. And so that will be the conversations. We have very clear discussions with our customers and very transparent with what's happening with commodities. So as hopefully markets come down at the end of the fourth quarter into fiscal '23, you'll have the same type of pricing conversations with them at that time.

Chris, this is Frank. As you know, in our consumer channel, we review -- historically, we review pricing every -- on a semiannual basis. So we view pricing in the fall and in the spring. So we've been doing this for a long time and we have a very -- like Jeffrey said, very transparent relationship with our customers.

Okay, great. I think that's it for my questions now. And again, a nice quarter, especially on that volume growth and congrats on 100 years. It's really amazing. So good luck in next quarter.

Thanks, Chris.

Thanks, Chris.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Frank Pellegrino for any closing remarks. Actually, I have a call -- a question from Tim Call from The Management Company . Your line is open.

Congratulations on a strong volume growth. To follow on to the last question, you mentioned in your press release that the price increases that you've been planning on should be effective early in the fiscal third quarter. Is that what you're talking about you've been working on for several months and they actually go into effect. And when we see the next quarterly report, we should be able to note that in the numbers. Is that correct?

That's correct, yes. Conversations started...

And then...

I'm sorry. Yes, I was going to say conversations started as we saw these commodities and cost changes but a lot of those cost increases go into effect after -- anywhere from January 6 to beginning of March, so you'll start to see those numbers reflected in the Q3 report.

And in your press release, you said you began to see the impact of the new brand strategy. Can you highlight a couple of instances where you've seen that impact? Is it in that volume number? Or do you have any specific examples where you've seen some early signs of payoff.

Sure. So if you look at the Fisher -- the recipe category was down 4%. Fisher was only down 1%, so we did better than the category. We gained market share. And one of the reasons that we've done really well is we've invested in bringing consumers to the recipe, the baking category. We focused on trying to bring millennials and Gen Z consumers to the category, educate them about our marketing efforts to teach them how to use nuts as an ingredient, reach places where they're currently looking for content for their brand purchases. And so that's a good example of where we've invested. We've changed our marketing strategy. We looked at consumer insights and tapped into how can we bring consumers to that category and grow our brand and grow the retailers segment. So I would say that's a perfect example of how the changes we've made in our marketing efforts and sales efforts are starting to pay off and we saw that this holiday season.

As you come out with new varieties or new packages and the distribution, does that mean you have to add a lot of infrastructure? Or do you have excess capacity you can utilize now for those new variations?

Yes, Tim. This is Jasper. We do have excess capacity. We do get a little tight on warehousing storage during the fall but everything that we have in the pipeline now will currently run on our existing equipment. I know part of our long-range plan, there are different technologies that we'll have to explore. But currently, for fiscal '23, we do not see any issues with additional capacity.

And some of the expense that you incurred with the holiday rush to get product out in time, you don't expect to have that in the next three quarters. Is that correct?

That's correct.

Congratulations again on a continuous volume growth; that's terrific.

Thank you.

Appreciate it. Thanks.

Thank you. And I'm currently showing no further questions at this time. I'll hand the conference back over to Frank Pellegrino for closing remarks.

Thanks, Norma. Again, thank you for your interest in JBSS. This concludes the call of our second quarter fiscal 2022 operating results.

This concludes the conference call. You may now disconnect. Everyone, have a wonderful day.