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Edited Transcript of JBSS earnings conference call or presentation 22-Aug-19 2:00pm GMT

Q4 2019 John B Sanfilippo & Son Inc Earnings Call

ELGIN Sep 27, 2019 (Thomson StreetEvents) -- Edited Transcript of John B Sanfilippo & Son Inc earnings conference call or presentation Thursday, August 22, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jasper B. Sanfilippo

John B. Sanfilippo & Son, Inc. - COO, President, Assistant Secretary & Director

* Jeffrey T. Sanfilippo

John B. Sanfilippo & Son, Inc. - Chairman & CEO

* Michael J. Valentine

John B. Sanfilippo & Son, Inc. - CFO, Group President, Secretary & Director

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Conference Call Participants

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* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Timothy Colin Call

The Capital Management Corporation - President & CIO

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Fourth Quarter and Fiscal 2019 Year-End Operating Results Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference call, Mr. Mike Valentine, Chief Financial Officer. You may begin.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. - CFO, Group President, Secretary & Director [2]

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Thank you, Kevin. Good morning, everyone, and welcome to our 2019 fourth quarter and fiscal year earnings conference call. We thank you all 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 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 on occasion, form 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties.

I'll start the call by covering financial highlights for the 2019 fourth quarter and fiscal year. The current fourth quarter net sales increased by 2.4% to $216.8 million compared to net sales of $211.7 million for the fourth quarter of fiscal 2018. The increase in net sales in the quarterly comparison was primarily due to a 7.3% increase in sales volume, which we define as pounds sold to customers. The impact on net sales from the sales volume increase was largely offset by lower selling prices, mainly for products containing cashews, pecans and walnuts. The reduction in selling prices for these nuts resulted from lower acquisition costs that we passed on to customers.

Sales volume increased in the consumer distribution channel by 13.8% and that was primarily due to increased sales of private brand trail mixes and snack nuts from distribution gains at new and existing customers, also increased sales of Southern Style Nuts products contributed to the sales volume increase. Sales volume declined by 1.9% in our commercial ingredients distribution channel and that was due to lower sales of bulk products to other food manufacturers. Sales volume declined by 4.9% in our contract packaging distribution channel and that was primarily due to the discontinuance of a product line by a major existing customer.

Now looking at sales volume for our brands and our consumer channel. Fisher recipe nut volume declined by 11.8%, primarily due to competitive pricing pressure from private brand recipe nuts and also some lost distribution at an existing customer. The 1.5% increase in sales volume for Orchard Valley Harvest brand primarily came from distribution gains for our salad toppers product line and multipack items at -- again at new and existing customers.

Fisher snack nut volume increased by 3% and that was mainly due to distribution gains at an existing customer and also increased promotional activity for our Oven Roasted Never Fried product line that was introduced earlier in the year.

Sales volume for Southern Style Nuts increased by 69.4% as a result of distribution gains at a new customer and the introduction of new package sizes, which drove new distribution gains at grocery retailers.

Fiscal year 2019 net sales decreased by 1.4% to $876.2 million compared to fiscal 2018 sales of $888.9 million. Although sales volume increased by 1.4%, lower selling prices more than offset the positive impact on net sales from the sales volume increase. The decline in selling prices again resulted from a shift in sales volume from higher-priced tree nut products to lower-priced peanut and trail mix products. And as was the case in the fourth quarter, lower selling prices for products containing cashews, pecans and walnuts, driven by lower commodity costs also contributed to the decrease in net sales.

Sales volume increased by 10.5% in the consumer distribution channel and that volume increase was primarily driven by increased sales of private brand trail mixes and snack nuts from distribution gains with new and existing customers and increased sales of Orchard Valley Harvest produce products and Fisher snack nuts.

Sales volume declined by 7.3% in the commercial ingredients channel, for the same reason I cited previously in the quarterly comparison. And sales volume declined in the contract packaging channel, for the same reasons I cited in the quarterly comparison, in addition to the loss of some bulk business with an existing customer.

Gross profit increased by $43.6 million in the fourth quarter of fiscal '19 compared to $32.9 million in last year's fourth quarter, and gross profit margin, as a percentage of net sales, increased to 20.1% compared to 15.6% in the prior year's fourth quarter. The increases in both the gross profit and gross profit margin were due primarily to increased sales volume and lower commodity acquisition cost for cashews, pecans and walnuts.

Gross profit for fiscal year 2019 increased to $158.3 million compared to $138.9 million in fiscal 2018. And gross profit margin increased to 18.1% of net sales from 15.6% for fiscal '18. The increases in both gross profit and gross profit margin were again primarily due to lower acquisition cost for cashews, pecans and walnuts, in addition to the sales volume increase that occurred in the fourth quarter.

Total operating expenses for the quarter increased by $4.7 million and total operating expenses, as a percentage of net sales, increased to 12.5% from 10.6% in the quarterly comparison. The increase in total operating expenses was mainly attributable to increases in incentive compensation expense and to a lesser extent increases in other compensation expenses. This increase was offset in part by declines in shipping, advertising, legal and amortization expenses.

Total operating expenses for fiscal 2019 increased by $17 million compared to last year, and total operating expenses, as a percentage of net sales, increased to 11.4% from 9.3% in fiscal '18. The increase in total operating expenses was mainly due to increases in incentive and other compensation, shipping and advertising expenses and amortization expense of $1 million related to the acquisition of the Squirrel Brand business that occurred in the second quarter of fiscal 2018.

Additionally, total operating expenses included $2.5 million for legal and consulting expenses that was related to an acquisition opportunity that we evaluated but ultimately elected not to pursue.

Interest expense decreased to $600,000 for the fourth quarter of '19 from $900,000 in last year's fourth quarter. And interest expense for the current fiscal year decreased to $3.1 million from $3.5 million in fiscal '18. The decreases for both comparisons was mainly due to lower average debt levels during both periods.

Net income was $11.3 million or $0.98 per share diluted for the fourth quarter of fiscal '19 compared to $5.6 million or $0.49 per share diluted for the fourth quarter of fiscal 2018. And then net income for fiscal 2019 was $39.5 million or $3.43 per share diluted compared to net income of $32.5 million or $2.84 per share diluted for fiscal 2018.

Now taking a quick look at inventory. The total value of inventories on hand at the end of the current fiscal year decreased by $17.3 million, or 9.9%, compared to the total value of inventories at the end of fiscal 2018. The decline in the total value of inventories was primarily due to lower quantities on hand for peanuts and cashews and lower acquisition cost for cashews, walnuts and pecans. As a result of the decline in acquisition cost for these nuts, the weighted average cost per pound of our raw nut and dried fruit input stocks on hand at the end of the fiscal year fell by 12.2% compared to those stocks at the end of last year.

I will now turn the call over to Jeffrey Sanfilippo, our CEO, to provide additional comments on our performance for the current quarter and fiscal year. Jeffrey?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. - Chairman & CEO [3]

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Thank you, Mike. Good morning, everyone. After reporting record results for our third quarter of fiscal 2019, the company finished very strong with record results for the fourth quarter and for the year, which we achieved record fourth quarter net income of $11.3 million and earnings per share of $0.98. We also reported record performance for the year with net income of $39.5 million and earnings per share of $3.43.

Sales volume increased over 7% in the quarter and 1.4% for the year. Our strong financial position allowed us to pay a cash dividend of $29.1 million in August of 2018, and we increased the annual regular dividend by 9% to $0.60 per share and supplemented that with a special dividend of $2.40 per share, both of which were just paid this week on August 20, 2019. These most recent dividend payments marked the eighth consecutive year that JBSS has paid dividends, and we are pleased to return cash to our stockholders early in the fiscal year through these dividends.

I am very proud of these results, and I thank our management team and all of our employees for their dedication, hard work and leadership. This success is possible because we have talented people across our organization, and we invest in them to do what matters most for our customers, our consumers and our shareholders. We are executing our growth strategies, implementing continuous improvement throughout projects throughout the organization to optimize our cost structure, and we continue to invest in our people, brands and processes to better serve our customers and consumers.

We experienced a major shift in volume for our consumer sales channel this past year as we continue to grow our brands and build upon private brand opportunities. Sales in the consumer distribution channel reached 70% of our total net sales in fiscal 2019 compared to 65% of total net sales in fiscal 2018.

The company's long-term objective is to drive profitable growth that includes 3 growth pillars: One, continue to grow Fisher Orchard Valley Harvest, Squirrel Brand and Southern Style Nuts into leading nut brands by focusing on consumer insights in the snack, recipe, trail snack mix and produce categories; two, provide integrated nut solutions to grow private-branded businesses in each of our distribution channels; and three, expand our offerings into alternative distribution channels.

Turning to a year-end sales review by channel. Net sales in the consumer channel increased by 6.1% in dollars and 10.5% in sales volume in fiscal 2019. As Mike just said, a primary driver of this growth was a 13% increase in sales of private brand trail mixes and snack nuts with new and existing customers. We have seen significant interest from consumers looking for innovative trail mixes.

In addition, increased sales of Orchard Valley Harvest products and Fisher snack nuts of 13.3% and 4.3%, respectively, also contributed to our sales volume growth. And accounting for 10.9% of the volume growth, we increased an additional sales volume related to Southern Style Nuts snack mix products, which resulted from the acquisition, which occurred late in our fiscal 2018 second quarter.

Sales volume for Fisher recipe nuts declined 12.3%, primarily due to competitive pricing pressure from private brand recipe nuts and some lost distribution at an existing major customer. However, IRI market data from June 2019 indicates that Fisher recipe nuts continues to be the branded market share leader in the overall recipe nut category.

Net sales in the commercial ingredient distribution channel decreased by 9.1% in dollars and 7.3% in sales volume compared to fiscal 2018. The company has faced challenges in this channel, sustaining our industrial customer base, while growing our foodservice business. While we have strong growth strategies in place, it has taken longer than expected to achieve planned results. In the fourth quarter, the company made changes with the leadership team and structure in the commercial ingredients channel, and we believe these changes are better aligned to enhance customer development and successfully achieve our growth objectives in the future.

Net sales in the contract packaging distribution channel decreased by 23.8% in dollars and 20.2% in sales volume in fiscal 2019. As Mike mentioned, the decline mainly came from the discontinuance of our product line and reduction in unit ounce weights for tree nut items from an existing contract packaging customer. There was also a loss of bulk business with another customer. The company has reallocated some resources from the contract manufacturing channel to support other growing parts of our business.

Turning to category updates. I'm happy to share category and brand results for the quarter and for the fiscal year. As always, all market information I'll be referring to is IRI reported data and for today, it is for the period ending June 30, 2019. When I refer to Q4, I'm referring to 13 weeks of the quarter, ending June 30. References to changes in volume or price are versus the corresponding period one year ago. We look at the category in IRI's total U.S. definition, which includes food, drug, mass, Walmart, military and other outlets, unless otherwise specified. And when we discuss pricing, we are referring to average price per pound. Breakouts of the recipe, snack and produce categories are based on our custom definitions developed in conjunction with IRI. And the term velocity refers to sales per point of distribution.

First, let me review some category dynamics. The total nut category increased in sales dollars by 1% and pound volume by 1% in Q4. Overall, prices in Q4 increased 1% versus the prior year. For the quarter, prices decreased on walnuts by 10% and pecans by 2% versus last year. And that resulted in a 13% pound sales increase for walnuts and a 10% increase for pecans.

Looking at the entire 2019 fiscal year, the nut category increased 2% in dollars and was flat in pound volume sales. Category pricing during the fiscal year increased 1% versus the prior year. Pricing on walnuts and peanuts decreased 2% and drove an increase of 1% on walnuts but peanuts declined 1%. Pistachios increased 3% in price versus last year but sales increased a whopping 17% in pound volume.

Now I'll talk about each category in a little more depth. Starting with recipe nuts. In Q4, the recipe nut category increased 4% in dollar sales and 11% in pound volume sales. Prices decreased on walnuts and pecans by 12% and 3%, respectively, resulting in a 13% pound volume increase in both of these nut types. Our Fisher recipe nuts increased 16% in dollar sales and 12% in pound sales for the quarter versus last year. As a result, Fisher's share in the category increased 0.2 versus last year. The growth was driven by implementing strong merchandising programs at retailers where Fisher gained new distribution this past year.

Looking at the full fiscal year, the recipe category decreased 1% in dollar sales and was flat in pound sales. Pricing on walnuts and pecans decreased 2%, resulting in a 5% increase in pecans and flat volume for walnuts versus a year ago. Fisher recipe nut dollar sales decreased 3% and pound volume was down 10% for the year. Pound share for Fisher decreased 2.7 points versus last year. Fisher recipe nut sales volume declined primarily due to competitive pricing pressures I mentioned from private brand recipe nuts and a reduction in shelf space for Fisher at an existing customer. Despite this decrease, Fisher continues to be the #1 brand in the recipe aisle.

Now let's turn to the snack category. In Q4, the snack category increased 4% in dollar sales and 2% in pound sales. Fisher snack increased 12% in sales dollars but declined 1% in pound volume in Q4. The increase in dollars was driven by an increase in ACV of almost 2 points as we expand beyond our core geography. For the full fiscal year, the snack category increased 4% in dollars and 3% in pounds versus the last year. Fisher snack sales dollars increased 22% and pound volume increased 8% in fiscal 2019 versus last year. The sales volume increase for Fisher snack nuts was mainly due to distribution gains at an existing customer and increased promotional activity for our Fisher Oven Roasted Never Fried product line.

Fisher Oven Roasted Never Fried offers consumers a full lineup of nuts that are not roasted in oil, including whole cashews, deluxe mixed nuts, almonds, pecans and peanuts. With no extra added oil, the ingredient line is simply nuts and sea salt, which fits with the needs of today's consumers who want simple ingredient lines. We are supporting the brand with an integrated marketing plan of in-store merchandising and customer programming, which includes radio, digital and social media marketing.

In Q4, the produce nut category decreased 4% in dollar sales and 6% in pounds volume sales. Orchard Valley Harvest decreased 7% in dollars and 13% in pounds at IRI reporting customers.

OVH share pound -- pound share declined 0.2 versus last year. The decline was driven by retailers shifting their promotion from Q4 to the back-to-school time period. Total points of distribution increased by 7% as more retailers are accepting more Orchard Valley Harvest items into their sets. For the fiscal year, the produce nut category decreased 1% in dollars and 3% in pound volume sales. OVH increased 17% in dollars and 10% in pounds at IRI reporting customers.

OVH shared the category increase 0.5 points in dollars and 0.2 points in pound sales versus last year. Total points of distribution increased by 3% versus last year.

In closing, fiscal 2019 was a strong year, especially considering some of the volume headwinds we faced and had to overcome. I'm proud that JBSS outperformed many of our competitors in our space. And I am optimistic about this coming year. We are pursuing several new customers and launching exciting innovative products. A major priority this year is the club business where we already have a strong infrastructure in place to provide innovation and value to retailers and consumers in this channel. The management team and all our dedicated employees have a steadfast commitment to develop business opportunities that creates shareholder value and provide relevant, profitable, innovative products and services to our customers and consumers across all of our channels.

We appreciate your participation in the call and thank you for your interest in our company. I will now turn the call back over to Mike.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. - CFO, Group President, Secretary & Director [4]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Chris McGinnis with Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [2]

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Nice quarter. I was just wondering just on the structure of the margin profile for 2019, can you maybe just talk about how much of that is sustainable due to the shift to the consumer brand? And maybe some thoughts around 2020 and where that may shake out?

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. - CFO, Group President, Secretary & Director [3]

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You know the -- certainly, we had a benefit from a shift from contract packaging to consumer, especially private label. But really the major driver on the margin improvement was volume increase and those lower commodity costs.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [4]

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And if -- just in thinking about 2020, the rate that you had in 2019, pressure there or you think that that's possible to kind of keep in that level?

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. - CFO, Group President, Secretary & Director [5]

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That will be primarily dependent upon what we pay for new crop nuts this fall because that certainly impacts the back half of 2020. So it's difficult to say but certainly -- as far as the first half of 2020 goes, we expect to have the same cost structure and pricing structure that we've had over the last 2 quarters.

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. - Chairman & CEO [6]

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And Chris, this is Jeffrey. We're going to continue to invest in the brands as we have. Obviously, we've taken some ownership of new private brand business as opportunities came up and helping those retailers build their private brand programs. We're also really focused on our branded business. And as Mike mentioned, our visibility right now, the crops look very optimistic, we don't see any dramatic changes as of today. And so we're optimistic that we can continue the success of our margins this coming year.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [7]

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Okay. That's great news. Can you maybe just dig in a little bit on the Southern Style growth and seemingly that -- obviously that acquisition playing out like you thought? Maybe some comments there, but also just the growth with the new customer versus the new packaging gains at the grocery store?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. - Chairman & CEO [8]

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Sure. So Southern Style, part of the growth is because it wasn't reported in the back half of fiscal '18. So -- yes, fiscal '18 and so we are benefiting from just that volume that got added to the consumer channel. But also, the team has done a good job expanding distribution at the existing accounts that Squirrel Brand had at the time and also gaining some new distribution and launching new items at new retailers. So it's really a combination of new product launches, gaining some distribution and enhancing some of the promotions that we've had with the existing customers that Squirrel had at the time. And we're launching -- we launched 2 new items in that brand portfolio this year, and we'll continue to look at gaining new distribution, especially in the grocery channel where Squirrel did not have that much distribution when we purchased them.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [9]

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Okay. And just one more question and I'll jump back in queue. But can you -- I don't know if you can do this for competitive reasons, but you mentioned new products, obviously, you've had a pretty successful run there. Can you maybe just talk a little bit about what you have in, kind of, introductions for 2020?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. - Chairman & CEO [10]

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Sure. So we look at the nut butter space and that's been a growing area for consumption and so we've built on our Orchard Valley Harvest brand portfolio and added nut butters to that lineup. We just shipped our first orders at the beginning of Q1 of fiscal 2020. We've gotten very good feedback from buyers and initial consumer reception is positive. So that was one of the new launches. And then also looking at plant proteins, expanding into the chip aisle, which we've never been in before. So looking at plant protein snacks is another area that we're focused on.

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Operator [11]

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Next question comes from Tim Call with Capital Management.

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Timothy Colin Call, The Capital Management Corporation - President & CIO [12]

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Congratulations on a strong quarter. Do you expect the momentum in Southern Style Nuts to continue?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. - Chairman & CEO [13]

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So actually, Tim, we're really just getting started with the brand. It's been in our portfolio for a little over a year now. We've done a lot of consumer testing, a lot of consumer insight studies. As I mentioned in the call, trail mixes and savory and health and wellness snacks is continuing to grow. Consumers are looking for more innovative snack mixes and so we just think there's a great opportunity to continue to really expand that line. And as I said, really focus on the grocery channel and then we haven't even touched the convenience store channel nor the drug store channel, so all opportunities in those 2 channels that are just beginning to be looked at.

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Timothy Colin Call, The Capital Management Corporation - President & CIO [14]

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Is it possible that transportation costs will continue to decline slightly in the next 6 months?

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Jasper B. Sanfilippo, John B. Sanfilippo & Son, Inc. - COO, President, Assistant Secretary & Director [15]

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Yes. This is Jasper, Tim. We are cycling against lower cost this year versus last year. We started turning favorable in February of this year. And so I think you'll probably continue to see that trend until we start cycling against lower cost that we paid starting in February of '19.

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Timothy Colin Call, The Capital Management Corporation - President & CIO [16]

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Some peanut crushing facilities were off-line in the first 2 fiscal quarters and if they're operating well in the next 2 quarters, would that have a meaningful impact on earnings?

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Jasper B. Sanfilippo, John B. Sanfilippo & Son, Inc. - COO, President, Assistant Secretary & Director [17]

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Well, I think, Tim, you're referring to the fact that a couple quarters back we talked about how our Bainbridge shelling plant was down as we refitted it. And as a result of that peanut crushing stock sales volume had fallen. I believe that's what you're referring to and if that's the case, we sell peanut crushing stock for roughly $0.20 to $0.25 per pound. It's really more of a byproduct than it is our main product line and it doesn't really generate a lot of gross profit dollars. So whether volume goes up or down, it really has an immaterial impact on our profitability.

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Timothy Colin Call, The Capital Management Corporation - President & CIO [18]

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And about a year ago, there was a loss of a recipe nut line at a customer. Has that annualized or does that still have an effect going forward?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. - Chairman & CEO [19]

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So it was a customer that decided to build their own private brand recipe nut category, which took some shelf space away from our Fisher brand. So that's -- we're still cycling against that even in this coming quarter and next 2 quarters actually because you'll see that continue within the next 2 quarters that potential loss of some of the distribution in volume.

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Timothy Colin Call, The Capital Management Corporation - President & CIO [20]

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Does it have a -- is that a declining headwind over the next 6 months?

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Jeffrey T. Sanfilippo, John B. Sanfilippo & Son, Inc. - Chairman & CEO [21]

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We've done a great job making that volume -- distribution volume loss up in the grocery channel with other retailers so it won't have as negative an impact, I believe, as we've seen over the last year. I think we've made up a lot of that volume.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. - CFO, Group President, Secretary & Director [22]

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And Tim, this is Mike. I would add that, that started about a year ago and has ramped up throughout the fiscal year. But we're -- it is slowing the amount of shelf space we're losing. So as Jeff said, we will be a bit unfavorable, but the magnitude of it won't be anything like what we've seen over the last 3 or 4 quarters.

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Operator [23]

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(Operator Instructions) And I'm not showing any further questions at this time. I would like to turn the call back over to Mike.

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Michael J. Valentine, John B. Sanfilippo & Son, Inc. - CFO, Group President, Secretary & Director [24]

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Okay, thank you, Kevin. Again, thank you, everyone, for your interest in JBSS, and this concludes the call for our fourth quarter and fiscal 2019 operating results.

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Operator [25]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.