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April 29, 2008

Sanfilippo back on track to consistent profit

Originally published by the Medill News Service, Apr. 29, 2008

With its raw-material costs declining and its big moving expenses and redundant costs soon to be out of the way, nut processor John B. Sanfilippo and Son Inc. appears to be on track to turning a profit year-round instead of only in the fall quarter.

“Commodity costs have come back down,” Adam Strauss said. “We expect their gross margins to normalize.” Strauss is the portfolio manager for the Appleseed Fund, a mutual fund offered by Pekin, Singer, Strauss Asset Management Inc. The company is the largest shareholder of Sanfilippo.

The Elk Grove Village-based company has recently struggled on the bottom line outside of its fiscal second quarter, which ends in December, the largest in terms of sales. Holiday-related sales generally are 33 percent higher than summer business, helping the company to reach profitability for the year.

However, in its past two fiscal years the company has lost $30.4 million, and its stock has tumbled from $22 to about $11 recently.

Nevertheless, CEO Jeffrey Sanfilippo recently told investors that he sees the company’s fortunes on the rise.

“Although we still have a lot of work to do, it is evident that the initiatives the company executed over the last year are beginning to demonstrate positive results,” Sanfilippo stated.

Strauss agrees. He said the company has two major reasons for its recent struggles. First, commodity prices in the nut industry were at their highest point in the last 10 years. During a five-year stretch from 2001 to 2006, the average grower price of almonds went from 91 cents per pound to $2.81.

Sanfilippo management specifically highlighted the company’s issues with almond prices in its latest earnings report. Because the prices of almonds dropped soon after the company purchased its almond crop in 2005, the company sustained losses over the next year as it sold through its high-priced supplies.

According to Strauss, the trend of rising prices was exacerbated by fad diets, which pushed nuts as a healthy snack food and stimulated extra demand while supply was down because of crop problems caused by insect issues.

However, this trend is reversing in the nut industry, despite rising food prices elsewhere.

According to Marieke de Rijke, assistant vice president in food and agriculture research at Rabobank Group, this price drop might be seen in almonds this year. “What you see with the almond crop is that the bloom this spring has been good, and the growing conditions have been ideal,” she said.

While she would not comment on prices, de Rijke said that if the crop is big again, there is a possibility of the price declining.

The rising nut costs have been an issue across the industry. Diamond Foods Inc., which markets its nuts under the Emerald Nuts label, was able to pass on the higher prices to customers and weather the pricing issues.

“Over the last three to five years, there has been a big increase in walnut tree plantations. Over the next several years, those will start to come online,” said Michael Lippold, an analyst who covers Diamond Foods Inc. for Craig-Hallum Capital Group LLC. He expects costs to drop and margins to increase for nut companies that have raised their consumer prices to keep pace with their growing costs.

However, de Rijke pointed out that prices may remain firm with the increased demand, especially in Asia, as exports of almonds, walnuts and recently, pecans, are increasing.

“Prices for nuts are really a matter of supply and demand,” she said. “With all nuts, the harvest is still several months away so it is hard to say something about production levels.”

Sanfilippo's other costly problem, now also diminishing, was the consolidation of its manufacturing and processing facilities in Elgin. The company is in the process of moving production lines from three Chicago facilities which has led to charges in excess of $10 million related to the consolidation in the past two quarters.

Redundant operating expenses were estimated at $2.4 million by management as the company continued to produce the same products in two locations during the move.

Although this cost has been hanging over the company, the operations streamlining has almost reached completion and the most difficult move – relocating a peanut butter production line from Elk Grove Village to Georgia – is complete and in operation at its new location.

Recent efforts to accelerate the move have added some incremental costs but CEO Sanfilippo sees the company completing its move of all Chicago operations to Elgin by the end of June.

Despite consolidation, the new facility is only about 50 percent utilized. When investors asked company’s management when the facility would be fully utilized, they were quick to point out that the company did not want to repeat failures in the past.

“The one thing we don’t want to do… we don’t want to go out and capture unprofitable sales, and end up where we were last year,” said CFO Michael Valentine in a recent earnings call.

CEO Sanfilippo reiterated that sentiment: “We are focused on value added customers. We’ve targeted specific retail accounts, food manufacturers, food service companies to grow their business, to grow our business. It could be a five-year horizon by the time we fully get utilized out of this facility.”

While the company still needs to deal with the 800-pound. gorilla in the industry, Planters, owned by Northfield-based Kraft Foods Inc., and upstart Diamond Foods Inc., it is innovating with products like Fisher Snack Naturals, which is aimed at the health-conscious consumer.

“Demand is increasing because of the health benefits of nuts,” de Rijke said.

Sanfilippo points to a qualified health claim on its Web site: “Scientific evidence suggests but does not prove that eating 1.5 ounces per day of most nuts, such as peanuts, almonds, hazelnuts, pecans, pistachio nuts and/or walnuts, as part of a diet low in saturated fat and cholesterol may reduce the risk of heart disease.” The site also lists the nutritional benefits of eating nuts.

Sanfilippo said the company is seeing an uptick in interest from its private label customers, helping to capture back some business which was lacking during the company’s recent struggles.

“We are working with many of our private label accounts to develop new items for their programs,” Sanfilippo said.

As costs and demand improve, so does the outlook for the stock. After Sanfilippo in February reported earnings of 33 cents per diluted share, the shares jumped $2.40 to $9.35, their highest point since October.

Strauss noted that the stock had a market value of only $100 million while its shareholder equity on the balance sheet was near $163 million. With that valuation, he sees room for the investment that his firm has made to grow, especially given the changing nature of the two costly factors that have kept earnings down.

“We saw the two reasons as temporary in nature,” said Strauss.

He noted that, with the economy slowing, many companies are going to see lower earnings.

However, he quickly added, “this is a staple product.”

This entry is tagged: business, clip, Medill, Medill News Service, nuts, peanut, profile, Sanfilippo, walnut

Posted by bmiraski at April 29, 2008 3:57 PM