John B Sanfilippo & Son Inc (JBSS) 2006 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2006 John B. Sanfilippo & Son earnings conference call. My name is Colby and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Mike Valentine, Chief Financial Officer. Please proceed sir.

Thank you. First, we would like to thank everyone for participating in our quarterly conference call for the first quarter of fiscal 2006. Before we start, we would like to remind everyone that we may make some forward-looking statements today. These statements are based on our current expectations and involve risks and uncertainties. The factors that could negatively impact results are explained in our Form 10-K which was filed recently and in other SEC filings that we have made. We encourage you to refer to these filings to learn more about these risk factors.

Joining us today are Jasper Sanfilippo Jr. and Jeffrey Sanfilippo. Also by phone is Jim Barker who will be leading the conference call at about 9:35 to call on an important customer of ours, but he will be happy to take some questions as soon as I finish a review of the quarterly results.

Turning to the income statement, quarterly net sales grew by 2.6% to $138.1 million from $134.6 million in the first quarter. Primary drivers of growth were higher average selling prices in all distribution channels. Sales in the industrial foodservice and contract manufacturing channels each increased between 17 and 18%. Sales in the consumer channel feel by 8% mainly due to lost business at certain private-label customers who would not except price increases over the last year. Further, sales declines at existing customers were offset by gains at other existing customers in the consumer channel.

Sales of Fisher products grew by 18% over sales of Fisher products in the first quarter of 2005. Pounds shipped to customers declined by 11% overall in the quarter with consumer pounds down by 18%, foodservice pounds down by 6%, export pounds shipped were down 4%, industrial pounds shipped were down 2% and pounds shipped in the contract manufacturing channel were unchanged from quarter to quarter. Shipped pounds declined on all measured (ph) nuts that we processed in the quarter, except walnuts.

First quarter gross margin in the current quarter declined to 9.2% from 12.6% a year ago as a percentage of net sales. The decline in gross margin came about as follows. Pounds produced in the quarter declined by approximately 10%, while labor and overhead costs, or spending rather, increased by 4.6% and this spending increase was led by increases in indirect labor costs, interplay and transfer costs and rent expenses. Fewer pounds of pecan shells and private-label snack nuts packaged during the quarter primarily led to the decline in overall produced pounds. Lower quality almonds issued into production generated unfavorable processing variances during the quarter and also contributed to the gross margin decline. There was an increase in gross profit dollars on pecan sales during the quarter. All three factors that negatively impacted gross profit had an impact of approximately $5 million.

In comparison to the first quarter of fiscal '05, sales mix shifted away from consumer and towards industrial contract packaging, or the industrial and contract packaging channels, which typically carry a lower gross margin as a percentage of net sales. This sales mix change also contributed to the decline in gross margins in the current quarter. Walnut gross profit dollars increased by $600,000 and helped offset the negative impact of some of the above factors.

As a result of price increases over the last four quarters, gross margins improved on the sales of cashews, mixed nuts, peanuts, and macadamia nuts, the primary nuts -- or most of the primary nuts that go into our consumer nut products. Quarterly selling and administrative expenses as a percentage of net sales increased to 9.7% from 9.4% in the first quarter of fiscal '05. Quarterly selling expenses fell slightly as a percentage of net sales. Quarterly administrative expenses increased to 2.5% from 2.0% due to higher audit and legal expenses and expenses associated with the retirement plan for certain executive officers that was adopted in late August. In the current quarter, there was an operating loss of $602,000 compared to 4.3 -- to operating income of $4.3 million in the first quarter of 2005.

Interest expense increased to $1.5 million from $311,000 (technical difficulty) last year's first quarter. The increase in interest expense was generated by higher short-term debt upon (ph) higher inventory levels, higher interest rates on the short-term debt facility, interest on the long-term credit facility that was secured upon the facility consolidation project in fiscal 2005.

Looking at the balance sheet, inventories versus a year ago were up approximately $64 million, or 47%. Pounds of bulk nets or input stocks increased by 28%. Pounds are up on all of the major nuts that we processed in comparison to the first quarter of '05.

The increase in other assets over the year and amount reflects the recording of an intangible asset for past service cost under the retirement plan that was adopted in August. This intangible asset is equal to the retirement plan long-term liability shown separately in the liabilities section of the balance sheet.

At this time, I would like to turn comments over to Jim Barker who will talk about the consumer distribution channel.

Thanks Mike. The consumer channel as everyone has seen and Mike discussed, the overall revenue's down due to wholesale volume declines on private-label. This is driven in a number of ways. One, Mike referred to a lost private-label business where we made the decision not to sell at lower prices as we were going through the price increase to some of our largest customers. Lower unit volume, the super value in (ph) snack nuts baking nuts and peanut butter as our contract has expired, we have also exited the chocolate chip and coconut categories, so we're no longer supplying those. We also lost promotions on the Great Value brand at Wal-Mart in the indulgent item volume or with specifically cashews and mixed nuts is down due to the higher pricing in discussing or analyzing the category. Really the consumer is trading over to some of the branded products because the value isn't there between Great Value and some of the branded products.

The good news is the Fisher brand grew in Q1. This is driven by better execution on the base and existing business we have, it's also new distribution we gained in grocery, mass drug and in dollar channels for the snack nut brand. We have also increased our baking nut distribution on the grocery channel.

Turning over to AC Nielsen data, the category unit volumes still are in decline and this is in the grocery channel for the 52-week period ending September 24 of '05. This is a trend that we've seen over the past four or five conference calls and when you look at the snack nut category, while units grew 1.7% for the 12-month period ending 9/24, for the trailing six, unit volumes are down 3.2% in snack nuts in the trailing three 4.9% (ph). So we see a further decline in unit volume in snack nuts. Now retail pricing or the dollar sales are up driven by the price increases the category has seen.

In baking nuts, unit volumes are also down flat to the 12-month period, down 3.1% for the six-month period and down 2.9% for the three-month period. Now interesting, dollar revenue growth is higher in baking nuts because we've seen actual average retail prices higher in baking nuts or more price increase pass through in baking nuts than snack nuts. I had a couple of conversations last week on why the retail pricing average retail prices don't seem to be as high or aren't reflected in the grocery numbers that we report. A couple of things that drive that. First, peanuts, which were 42% of the category, are holding the category ARPs down, and there has been a switch in the merchandising mix from tree nuts to peanuts. And that's why when you look at the numbers, peanut prices, the average retail prices are down where every other nut type is up.

Also category, promotion activity is off versus year-ago and two-year ago. There are just less net promotions and there's also more salty snack promotions. People or other companies in other categories are competing with space now that Atkins is dead that some of these other categories and brands where there are promotional dollars, retailers are taking those and we have lost the promotional frequency.

And finally, Planter's did do a good job of capping the category when they took their price increase for the year and retailers have not or are not comfortable increasing private-label shelf prices as close to Planter's retail prices as they should. So those are some of the effects or why we're not seeing as high of retail price increases across the category.

Private-label volume is worse than category volume for AC Nielsen for these periods and Fisher continues to outpace category growth in the grocery channel for all of these periods in units and dollars as well.

Now I'm going to turn it over to Jeff to cover the other distribution channels.

Thank you, Jim. Turning to industrial channel, net sales were up 18% as Michael mentioned in dollars, but it was down 2% in pounds. What we're seeing in the industrial channel is due to higher commodity prices, we've seen a small decrease in the number of R&D projects considering nuts as an ingredient. But we still have 17 projects we're working on currently with the potential of a launch in fiscal 2006. So we are still optimistic that we're going to see growth in the industrial channel. These product lines include frozen entrees, ice cream, breakfast mixes, health bars, pies and gift baskets. So we're still pursuing a lot of new product lines in the industrial channel.

In the foodservice channel, net sales were up 16% in dollars, but pounds shipped were down 6% over 400,000 pounds. Topline growth is driven by major foodservice distributors as well as pursuing new contracts driven business with chain accounts throughout the restaurants across the United States. Just this past quarter, we were named one of SYSCO's top 100 suppliers, which we're very proud of. That's due to the quality that we provide, the service level and creating value for them as a distributor.

Our airline business was down for the quarter 48%. We shifted some of our sales out from the nuts mixes to pretzels and other extruded snack items, but we're confident we will turn this around with new peanut business we were recently awarded at a major airlines. The buy onboard programs that the airlines have initiated appear to be successful and we continue to offer several Fisher single-serve items to pursue new opportunities in this channel.

Turning to exports, net sales were up 17% in dollars, but again, pounds were flat. They were actually down 3%. And within the export channel, we're going to continue to pursue more retail opportunities with our Fisher brand. We just picked up new distribution in Mexico and we are launching a product line in France that should go into distribution in fiscal 2006.

The contract manufacturing net sales were flat and the pounds were up just a little bit. I continue to work with companies that are looking to use nuts as part of their growth strategy and develop product lines with mixes.

We're all disappointed with this quarter as I'm sure you are as well and one thing sales and marketing is doing, we've taken three initiatives going forward. First, we're going to pursue value-added customers not only in the consumer channel, but we're going to apply that same philosophy to all of our business channels, find ways that we can add value to the customer and get a premium for the products that we manufacture. We've invested in new stand-up bag equipment that we're going to be launching not only in the consumer channel, but applying some of that technology to the foodservice channel as well.

Second initiative is we've centralized our marketing department. We will now be able to support across channel opportunities throughout our channels. What we're seeing is because of retailer consolidation because major food companies are looking to globally procure product lines, we have seen a breakdown of the boundaries between sales channels. So with a centralized marketing department, we can now supports the whole sales process. Just an example of that, we were on a conference call just two weeks ago with a buyer in the Netherlands, which owns grocery chains in Europe. They own a foodservice distributor as well as a retailer on the East Coast. So we had our sales managers from the consumer channel, the foodservice channel and the export channel on the same call. So with this centralized marketing department, we can now capitalize on growing distribution for that type of customer. Also, we will be able to limit costs on duplicated marketing efforts as well as limit costs on overhead and personnel.

Third initiative is we're going to capitalize on snack consumption. Health is the driving force behind consumers' snack attitudes and behavior. So we're going to continue to direct our marketing efforts towards growing the Fisher Brand, educating consumers on the health benefits of nuts so we can capitalize on that trend where people are truly looking for healthier snack alternatives. U.S. consumers, 90% of U.S. consumers eat a snack every day. If you compare that to the breakfast industry where 75% of consumers eat a breakfast, 86% eat lunch, 96% eat dinner. You can see that there is a huge opportunity for us to continue to grow our business in the snack category. Mike?

Thank you, Jeff. Okay, at this point, we will gladly take your questions. Operator would you pleas queue up the first question?

(Operator Instructions). Scott Van Winkle.

Mike, let's go through this gross margin in some more detail. The three issues, again, let's start with the almond issue. Can you explain that a little more simply as to what the issues were? Was it just poor quality almonds?

Actually, I will let Jasper Jr. take that question.

It was an issue of poorer quality almonds and the almond crop was a little later this year by about two to three weeks. So we had to run a little bit more old crop, which typically at the end of each crop year, is poorer quality.

I assume to, just given the inventory levels coming into the quarter, that you would've been up on volume of nuts in pretty much every category.

That's a reasonable assumption to make, Scott, but with -- and you're talking about production volume, or shipping volume?

I'm saying volume of nuts and in inventory coming into the quarter. So your inputs to work with. So it sounds like that wasn't the case for almonds.

No, that wasn't the case. Well, we were up with almonds as far as input stocks go. But I think what really drove the production variances was that as the crop gets older, it becomes drier. So when we go to chop it or dice it or slice it, we generate a lot more byproducts which creates unfavorable production variances.

How much of the $5 million variance you said for all three issues was the almond issue?

The almond issue was roughly about 35% of it. And the first issue, which was the decline -- I can't even remember what it was -- I believe it was the decline in pounds shipped made up roughly about 45% of that.

Okay, so the decline in pounds shipped, how does that immediately affect your cost of goods sold? I assume that your overhead in the quarter is applied to inventory, whether it is a small amount of inventory produced or a large amount of inventory produced. And with so much inventory. I think it would work out over 12 months, not in one quarter.

What happened was that because private-label sales were down, the amount of private-label products that we produced, roasted and packaged in the quarter went down by a corresponding amount. And in the meantime, with labor and overhead expenses increasing, that goes right to bottom line.

It goes right to bottom line in the quarter? In other words, you did not capitalize it as part of inventory, it's just an overhead variance that hits you in the quarter?

That's correct.

Okay, and that's what you're saying was almost half of the variance?

Right.

Would you expect an offset in the December quarter? In other words, volume produced in Q3 is going to partially offset in Q4 by slightly higher volume?

That all depends on units sold. As this point, we have what we would consider a normal beginning amount of finished goods inventory. So if we see increases in units sold, especially in the private-label sector where we get most of our overhead absorption, then we will have to produce more and the trend could reverse.

Okay. What was the third issue again? I apologize.

The third issue was, there was a decrease in gross profit dollars on pecan sales in the quarter.

And the driver there was?

Mainly lower volume sales.

Lower volume, higher commodities as well?

Right. I also want to point too that we've pointed to private-label sales as contributing greatly to our production decline. We also did not shell any pecans to any great extent in the first quarter, whereas last year, we shelled pecans throughout the quarter. So we did lose some labor and overhead absorption there too.

Okay., And again, all of this unallocated overhead is expense in the quarter? None of it is capitalized along -- across a small base of inventory?

That's right. There was some -- obviously, some of this variance went into inventory, but this portion of it did not.

Okay. So I would assume we're not going to be expecting a sub-10% gross margin again?

Unless private-label volume continues to decline even more so than it did in the first quarter, that probably should not happen. We have a lot of catching up to do on pecans and we also saw our almond processing volume go down during the quarter as we purchased more almonds from the outside. So we have some catching up to do there too.

Okay. And within your inventory, where are you up the most by nut type versus a year ago?

In dollars or pounds?

How about both?

Okay. In dollars terms, leading the way are almonds -- I'm sorry -- yes, are almonds. And in pound terms, leading the way are walnuts.

What is the magnitude of the increase year-over-year for those two?

Almonds are up roughly about 80% in dollar terms, and walnuts are up roughly the same amount in pounds terms.

With regard to the private-label going into the second quarter, I would assume that contracts you've lost because of pricing, it's easy to measure. Are you also assuming there's going to be further declines within existing contracts due to lower private-label volume coming off the shelves?

Jim, are you still there?

I'm still here, Mike.

You want to take that one, Jim?

Sure. Scott, we don't expect private-label to rebound much going into the second quarter of the O&D (ph) period, even though we will get more promotional activity than we did first. What's driving that is a two-pronged thing. One, we are seeing Planter's is capturing a little bit more promotional activity than private-label because the price gap is so close, and also because the average until prices, or the retail pricing on private-label, are really capped by where Planter's retails are. Retailers have to promote out of their margin and with private-label in essence being able to or should be delivering more margin, they're making decisions to go to other brands versus private-label. These are conversations I've had directly with customers over the last couple of months. I'm sure I'll be having these conversations these next couple of days as I'm working with retailers.

Now a couple of things with private-label that we're working on and we've executed which we hope will help, is shipper programs with some of our larger customers that allow shippers that don't have clean floor policies. And those have already started to ship and we're hopefully showing up at retail because of the impulse purchase nature of the category, shippers should help.

But those aren't promotion-driven, they're next to the register type of --?

They're both promoted and non-promoted. Some retailers put the shippers up just to relieve or alleviate shelf pressure during the high consumption period, and some are also in support of promotional activity and make sure they don't run of stock. Because when you look at the shelf set, you typically get about a case and a half, whereas a shipper will hold anywhere from five to 8 to 10 cases, depending on the item and the configuration. So really it is to drive volume and prevent out of stocks on promotion leading into the Halloween, Thanksgiving and Christmas.

So I guess may question, does that situation which was -- what occurred in Q1 as well -- does the situation get worse, better or stay the same going into Q2 in your opinion?

I think when you look at the Nielsen data, if you look at private-label volume, just looking at the past three months, the category is down 4.9% in units, private-label is down 10.9. And even if you look at the trailing six for the grocery channel, the category is down 3.2% in units, private-label is down 9.2. I think it's going to stay -- I think it's going to get a little bit better, but it's not going to get significantly better because of the price and margin pressure the retailers are going to feel when they have to promote their brand over taking some of the promotional dollars that the brands do offer.

Thanks, Jim. And, Mike, a couple of financial questions. One, was the liability established for the retirement plan consistent with the accrual you took a couple of years ago when there was no P&L impact and there was an incremental accrual or a give-back a little bit?

We did not actually book anything related to the retirement plan. I think you're talking about two years ago, Scott. We talked about it, but the plan was not approved at that time. But to answer your question, this time the liability offset the assets and we did book an expensive -- roughly about $180,000 in this quarter.

Okay 180,000. Is that all you expect at this point?

We will be booking -- that was actually roughly one-third of one month's worth, so it will probably shake out to roughly about $550,000 a quarter going forward.

Going forward?

Right.

Essentially indefinitely?

Until all executives pass away, I guess, or retire, rather, but yes, you're right.

Okay. And then with regard to the comment about the debt covenant, your assumption there about essentially filing (ph) of that covenant in the next couple of quarters, is that based upon additional losses or just where you stand at this point with debt and the loss we saw in Q1?

That's based on where we stand right now.

Okay. Alright, thank you.

Bob Simonson, William Blair.

Good morning. Could you explain just what that covenant is?

It's the funded debt to EBITDA ratio, and that ratio is currently set at a maximum of 3.5.

Does the potential of violating that change any thoughts of how you thought you were going to be operating in the remaining three quarters of this year? Does it constrain you in some way?

We don't believe it does. We have already talked to our revolving bank group and we are currently in the midst of renewing that agreement and changing it, which we plan on doing in the next four weeks. And we don't that to have any impact on those negotiations.

Okay. Have you, in your move to your new facilities, have you sold or reached any agreements with the sale of any of the existing properties that you're going to be moving out of?

We currently have buyers lined up for all our facilities because there are related parties involved in the transaction with respect to the leases and terminating them. We're working through that right now through an independent committee of the Board, and we do expect that transaction to occur in the second quarter.

Can you give some feel for how much cash is involved here?

No, we haven't disclosed that.

I guess the other big one would be, the there's no guidance in the press release. Have you any thoughts as to how this year might turn out?

Well, you know, you really have to look at this year in two parts. There is the first half and the second half. The first half of this year is going to be very similar to what we basically have endured for the last six quarters or so, and then the second half, once peanut costs and cashew costs and pecan costs come down, we will start to see some improvement over what we've experienced in the last year and a half or so.

And how about revenue growth?

Revenue growth as we stated before, we expect to be probably not more than 5% simply because we will be going up against some pretty sizable declines in pecan prices in the second half of the year as we see that market drop from roughly $5.30 a pound probably down into the low 4's, high 3's. And as you know, pecans make up a substantial part of our sales.

Thank you, Mike.

Mark Chekanow, Sidoti.

You talked about the loss of business on the private-label side, your customer, you're walking away from business. When your costs come down, do you envision going back to these customers and trying to recapture this, or would you view that as just lost business that you would not intend to go after again?

We've already started that process where we've bid on some of the lost business that has come around again because of the price decreases and the opportunities. So it's not lost forever. We will continue to pursue that business and the opportunities are there.

Mark, I would also at that these three particular customers generally put their business up for bid on an annual basis or when commodity markets change, as opposed to many of our other customers who are much more -- place a lot more importance on continuity. So it's pretty easy to get this business back.

Do you expect to be getting it back? How aggressive do you plan on being? You walked away from it because you weren't happy with the pricing. Do you expect to be bidding aggressively to get this back?

We will bid aggressively if it's profitable for us to do so, which we anticipate it will be with the commodities coming down.

You mentioned also now, you talk about -- if you could just go over the pecan prices and where some of the other nut cost, tree nuts as well as peanuts, are currently standing right now? And maybe also a little bit of an outlook for the second half of the year?

Currently, virtually every nut is at the same cost as it was for the last year and a half. Going forward, we expect to see peanut prices come down about 5%, possibly as much as 7. We've already talked about pecans. Cashews --.

Could you run the pecan numbers by again?

Pecans are going to go down from roughly $5.30 to about say $4.00, somewhere in that area. We will see cashews come down roughly about 10%, possibly 15 later in calendar '06, almonds look like plus or minus 5%, and walnuts up about 10%.

Walnut pricing up?

Correct.

When you look at potentially declining tree nut costs, I would imagine that the high costs have -- and you mentioned the R&D projects from some of the industrial manufacturers maybe scaring off a little bit. Do you expect some kind of acceleration of R&D, should these tree nut costs come down and gets a little bit cheaper for these guys to put them in products?

The sticker shock at $5.00 a pound will take a while for them to get over that. If the pecans do get below $4.00, I think there will be more opportunities where they will reconsider R&D projects, the theme really across all nut types. But when they get above $4.00 a pound, this calls for almonds too, it's very difficult for them to manage that type of ingredient in their product lines.

Are there any other -- these customer losses on the private-label side and you had -- last year, you didn't have the Fisher promos in Wal-Mart, and now you talked about this year their Great Value not doing as much of their promos. Can you talk a little bit about the promo calendar, just in recent quarters, maybe the next few quarters and some variances year-over-year that we should be looking at and expecting?

I can't speak specifically, Mark, but we are seeing a shift probably in the case of our largest customers one to two promotion shift away from private-label back to brands. And I think we will probably see that one to two promotion shift carry through the second quarter.

And then you would imagine in the second half of the year when your costs are down being able to be -- the retailers being more aggressive promoting the private-labels?

I believe that to be the case based upon what decisions we make once we understand where pecans, where almonds and where the other commodities will be coming out. We'll be discussing that as a team like probably in the next four weeks and then developing a strategy to go back to our customers.

Any hurricane-related impacts you want to talk about now -- production cops crops, labor, anything?

No impact on peanuts. Jeff, impact on pecans?

Louisiana is a small supplier of pecans, but that's basically gone. Alabama was affected a little bit, but we lost maybe 10 million pounds out of the pecan crop from the hurricanes, but nothing substantial.

Also, the pecan crop is coming in much later than it did last year.

One thing we are seeing though is freight increases as a result of the hurricane, getting trucks from the South up to our distribution centers in Chicago has been a challenge and costs have increased as a result.

Okay, thank you.

Mike, I need to exit and get on my plane, I'm sorry.

Thank you, Jim.

Thank you everyone.

Chuck Cerankosky, Key McDonald.

Mike, as you're looking at your gross profit margin going forward, can you talk a little bit about how you guys are modeling it or anticipating where it might go, especially in light of raw material costs coming down, but also needing to be competitive to get back some of this business you lost?

Well, I think that the second half of the fiscal year will probably, if these markets behave the way we hope they will, we should see an increase in gross margin. It will take us some time to get our costs averaged down and we won't take prices down immediately. But when we do get into the second half of the calendar year of '06, certainly we're going to be working very closely with our retailer customers to share some of those savings with them and encourage them to start promoting private-label products. So that would be the timing of how that would play out.

Do have any precedent whereas the nut prices come down, you're able to slow the decline of your product prices to get that gross margin up?

We have before, but usually it's only on one nut, not on several. And we haven't seen this kind of decline in volume in those situations either so we have to really think this through because we certainly don't want to throw the baby out with the bathwater when it comes to maintaining gross margins.

This is really the first time we've seen historical high levels of not only just one nut type, but you had high levels of pecan pricing, almond pricing, hazelnuts, Brazil nuts, even (indiscernible) kernels were up this year. So it's unprecedented in our industry. So what to expect when the cycle comes down is anybody's guess.

And part of that guesswork is, are you also dealing with differing price elasticity demand curves for the different nuts? I'm thinking out loud here, but something like sunflower kernels might have very low elasticity, whereas it sounds like pecans or maybe almonds had sticker shock?

Sure. Sunflower kernels are cheap to begin with. They're at $0.60 a pound, $0.80 a pound, so you're not going to see that figure change. But pecans, when they got above $5, there was a huge hit. If you look at just the pound volume at retail for pecans, the numbers are down 17% in the last three months, really 15% overall in pounds in the last year in shipments, and that's dramatic.

Okay, so a lot of variables here in trying to pin down where the gross margin goes?

That's right.

Okay, now if you look out a bit, do you have to rethink the pace at which you execute the Chicago consolidation project?

I think more than ever, we actually need to get the pace moved up a bit. As I had mentioned before, one of the factors that drove our gross margin down was that expenses had gone up and they had gone up in areas such as indirect labor, inter-plant transfer expenses and rent expenses. These are all costs that the project will eliminate or reduce substantially. And so as our volume has increased, notwithstanding the decline in the current quarter, we've had to rent more space. We're still moving much more product around than we did a year ago and with more space rented, that just generates even more indirect labor costs in areas such as shipping and receiving, sanitation and quality assurance. So it's imperative that we get the project moving and in that plant as soon as we possibly can to keep these costs down or get them down.

Alright, thank you.

Mark Zuckerman, Oppenheimer.

I'm not a financial analyst, I run money in our high net worth group and I just have a few questions from a different angle. When did you guys feel the disappointment? When did you guys know the numbers were going to be this poor?

We started to see declines in volume as early as the middle of the quarter, but you never know. Customers can ship that pretty quickly. But certainly by the end of the quarter, we knew our volumes were down significantly. What we didn't know was how much of the variances that caused should be capitalized or not. Also, this is a unique quarter in terms of timing because we're resetting standards on all the major nets that we shell. And until those standards are established based on the purchasing activity that we're doing in the months of September and October, it's difficult to determine how much you go to the P&L and how much should go into inventory.

But, didn't you know like a month ago that -- there's an analyst estimate of $0.28 for the quarter. You guys lost 14. You missed by $0.42 for the quarter, you had no idea a month ago -- zero idea?

Zero idea. We had an indication that gross margins would be down, but in the month of October is when we reset our standard costs and do our lower cost (ph) market analysis for all of the major nuts that we shell, which is the bulk of our inventories and where all the dollars are. And until we go through that exercise, we cannot determine how many dollars need to go to the P&L and how many need to go into the ending inventory.

My next question comes from -- you guys did a secondary of $36, correct?

Correct.

Any of the stock go to the company? Any of the amount of money of the shares sold, or it's just selling insiders?

No, no, the Company sold 50% of the shares sold.

And the insiders sold the balance?

Correct.

What has happened in I guess it's a year and half ago, two years?

That was March of '04.

We're talking less than two years then, the stock has gone where the insiders sold at 36 to $14.12. Is there something wrong with the management team right now, or is it just poor planning? Because I need to go and talk to my customers who bought that stock at $36 and ask them if there's any hope that the stock can actually move up here?

I think the biggest factor that has driven down our profitability has been high tree nuts costs, which we could not predict the magnitude of where they would go. In most cases, that was caused by demand that, frankly, went way beyond the expectations of the industry, and I'm talking about the industry in a global sense. There were some commodity or some supply issues on certain nuts that made that even worse. And essentially, we've seen increases in some tree nuts go up as much as 100% in less than a 12-month period, and that has really driven down our gross margins.

And your debt at that time in '04. Did you guys have any debt?

In '04, before the offering?

Yes.

Before the offering, we probably -- I'm not sure what we had, but we probably had a typical amount of short-term debt. And I believe our long-term debt was somewhere around 10 to 15 million.

I will tell you, I can speak from experience, it would be nice to see some of those insiders who sold stock at 36 come around at $14 if the stock is actually cheap at all and purchase the shares. It would help some confidence here. This thing is down 56%. I appreciate your time.

Okay, thank you.

Scott van Winkle.

A couple of questions. When you look at your private-label contracts, in any given year, what percent do you normally turn over?

It's extremely low, Scott. With the exception of those three customers who tend to put their business up for bid on a frequent basis, virtually all of our other customers do not do that. And I think, and Jeff you can clarify this, but I think with respect to all those other customers, we've been doing business with them for at least five years, if not 10.

Most of them are formal year-to-year contracts, but there is a majority that we've been partners with for 10, 15 years. And in those cases, it's just a continual process. Very rarely will they go out to bid or do they even consider another supplier.

Gotcha. And do you see the activity among -- you talked about the three customers, but generally among contracts with private-label suppliers, do you generally find them more likely to go to bid where they normally wouldn't in a situation of a rapid change in commodity prices?

They will go up to bid if it's a rapid increase in pricing or costs. Usually if it's a decrease, they don't look elsewhere.

Go out there and look for the company that has the most inventory willing to get a good price?

Right.

And that's good segue into the next question. How are you handling over the next 12 months, you talk about the first six months, the kind of normal -- I shouldn't say normal -- but an environment consistent with the last couple of years, and then the back half of the year being an environment of falling commodity prices. How are you managing your inventory purchases going into that period, forecasting what you're going to buy, when, and at what price?

It really depends on each commodity. For example, Scott, on pecans, we're coming into both the up-cycle of the crop, so we're anticipating a large size crop and cheaper prices. So we will -- a lot's commodity consumption obviously, but at the same time, look at what our cost is for the product and potentially buying more than we possibly will need this year, just to have a carryover into next year's crop which we anticipate will be much more expensive.

And Mike, back to your comments about in October going through your standard costing, were there any write-downs, write-ups or anything of that nature in inventory in this quarter that negatively or positively impacted earnings?

There was a significant change in our costing of almonds. We saw our almond standard cost go up about -- what would you say, Jasper -- about 15%. Offsetting that was a substantial amount of purchase price variance. We also had some industrial contracts on almonds that we made last fall that went underwater because of that purchasing activity. Although I should stress that we did have cheaper almonds that were blended into that cost that covered those, but there was quite a bit of work to do on the almond standard and quite a few in and outs, but they largely offset each other and had no P&L impact. And that was really the only one of any significance.

Alright. And was there any impact from stock options expense in the quarter?

There was -- about $130,000.

$130,000 -- and is that a good quarterly run rate going forward?

Yes, that's is a good run rate.

Okay, thank you.

Matt Haggerty, Pennant.

Good morning guys. I was wondering if you could just help me with the inventories, in terms of why they remained elevated. I understand inflation impacts, but in terms of pounds up 28%, I guess if you could just help me characterize that and help me with how you expect it to trend over the next two quarters? Thank you.

Okay, and we'll take it nut by nut. Peanuts pounds are up primarily because private-label sales were down, not only in this quarter, but we also saw lower sales of consumer products on peanut items really for the last 12 months. Jasper, would you take walnuts?

Yes. We had probably a record walnut crop this year and the Company is taking a bigger position in buying walnuts to potentially offset the higher comp prices through the fall. We have noticed a shift in current consumption to walnuts. With respect to almonds, the crop is shorter this year than it was last year and we had taken the position earlier on some meats to offset these smaller almond crops. Also, the macadamia crop looks much larger this year than last year's crop and the Company will be in the process of securing our macadamia purchases for the next year over the next several months. And we're anticipating a higher volume in macadamia purchases due to a significant reduction in the price.

Cashews -- our cashew pounds are up, again, the same story as peanuts. Lower private-label sales have caused our cashews to build up. That will correct itself as we go into December and January simply because we have bought fewer pounds to come in in December through, say, March, and that will offset itself.

Pecan inventories -- all of the pounds are pretty close to where they were last year. Dollars were up dramatically as a result of over a dollar a pound more in costs. But we, going into the larger crop, we anticipated having less inventory going in because we wanted take advantage of the cheaper prices. And we're seeing that occur now where we will be shipping our inventories within the next month or so and getting in a new crop as soon as possible at the cheaper prices.

And could you share the dollar amount of the sales loss to private-label on an annual basis?

Do you mean for the last 12 months?

Yes.

We have not seen a decline in dollar sales on private-label over the last 12 months.

Okay, but would you be willing to share the customer losses that you speak of in the press release?

We've mentioned them before. It was Aldi (ph) and Sav-A-Lot and also some almond business I believe with Tosco.

And Cosco really, it wasn't a loss, it was just a timing issue. Right now, we're shipping heavy their private-label almonds, pecans and walnuts in this quarter. So I wouldn't consider that at a loss, but just timing.

Okay, thank you.

Steve Ranieri (ph), Franklin Advisory Service.

Good morning guys. It seems like you were caught a little offguard with the loss of private-label business given how you were positioned inventory and cost wise. And I was wondering if perhaps maybe you took some of that business for granted. And I'm kind of wondering who you lost that private-label business to. And if you couldn't capture that business or retain that business as prices were high, how are you sure that when prices decline, A, the business will come up for rebid, and, B, you will be able to get that business back?

We already know that it has come up for bid. We've already spoken with the accounts, so the opportunity is for us to get it back. Obviously, there's not a crystal ball thing that we will definitely do that. But we will be aggressive to try to get that business back. We feel with the commodities coming off, we've got a good opportunity. Our positions are such that we can pursue the business aggressively going forward. And it wasn't a surprise that once we lost the business, we did look for other opportunities to make up that volume. Unfortunately, snack consumption in general for cashews as an example is down dramatically, so we weren't able to make that up in places we thought we will be able to.

I would also asked to Steve, that, when that business was lost at Aldi and Sav-A-Lot, we had already purchased cashews before that business was lost.

And did you buy those in anticipation of retaining that business? I guess that's sort of what I'm getting at.

That's correct, we did.

So something sort of happened perhaps -- I don't want to say it like at the eleventh hour -- but something kind of happened where you lost it at the very end?

Somebody else came in with a lower price possibly willing to take lower margins or may have had some excess older inventories at lower costs than we had, and they were able to get that business.

So you think it's more of an inventory sort of positioning on your competitors' part, as opposed to -- or is it not, an ongoing on operating cost level at your company?

I think it's probably a blend of possibly having some unsold inventories that we did not have to blend their cost down temporarily. But I also think that there are some smaller regional players that are willing to sacrifice margin to gain market share. Although I don't think that that's a good strategy to take with these particular customers.

And prices are beginning to drop, I would imagine that then they would have a little bit more play to recapture some of that margin. How are you guys going to have an advantage to recapture that business?

I think it always favors the incumbent when the market changes drastically. Obviously -- I'm sorry -- it always favors the party who's not the incumbent. Look at it this way, we can go out into the open market and buy cashews and peanuts at lower levels. It's quite possible that the incumbent has already booked those inventories without anticipating that these markets would come down and they may have done that six months ago. So it's possible we may have an advantage over an incumbent in that respect.

Okay. Do you think -- the business decisions by some of your competitors to up their slotting fees, had that sort of shifted some balance away from you?

It has not hurt our Fisher brand at all. We had a great quarter on Fisher, which is where that impact would occur and we don't think that that has had any impact on private-label.

What about snack nuts, though? You mentioned snack nuts were under pressure.

It's interesting, if you look at specifically the competitor that launched a new snack brand last year, obviously they didn't spend a lot of money in slotting. And surely some of that affect took business away from Planter's. And just looking at some of the retail prices and their average retail compared to even private-label, it could be said that they're taking some business away from the private-label channel as well.

But I mean it is kind of hurting.

It's not hurting our Fisher brand, but it is hurting private-label.

Okay, thanks a lot.

Justin Maurer, Lord Abbott.

Good morning. Just to beat the inventory horse a little bit more here, can you guys talk a little bit about just philosophically about the increases in the last few quarters that we saw in inventory, how much of that was kind of price-driven versus demand-driven and taking advantage of buys and what not?

At least in terms of pounds both at the end of the fourth quarter and the end of the first quarter, we did take a very sizable position on almonds in anticipation of profits going to be down roughly about 15% from last year on a product that has been in very high demand. So that did drive up our inventories. Besides that, though, it has all been primarily cost driving up those inventories and declining volumes.

So generally, the 50, 60% increases have been priced other than almonds have been largely price, not necessarily volume?

It wasn't actually part of our procurement plans to purchase more nuts, and I don't think we did. I think it's a matter of inventory levels and quantity terms are higher mainly because of lower private-label sales.

Okay, but coming into -- a couple of callers have asked about this private-label development is more of a recent development. Given what you guys saw six or nine months ago, presumably you were buying to a level that you thought you were going to have, and then with prices and the lack of ability to get price increases where others are willing to be more aggressive, that's where you decided to draw the line?

That is correct.

Does this -- now as we look forward into a period of price declines, given the inventory you guys are currently sitting on, does that impede your ability to bid on some of this business in the sense that obviously you're going to be bidding some of it at very thin margins, if not losses, or are you just going to take the tack that, hey, we need to clear this stuff out and move on?

We're certainly going to take the tack that we need to clear this stuff and move on, but most of that business that we would bid on, and again, I'm talking specifically private-label snack nuts, we would not even get until probably the middle of next summer. It just takes that long to transition. So by then, all of these high-cost inventories will be gone, especially in the case of cashews and peanuts. So it's really kind of a non-issue from a bidding standpoint.

But presumably then, the margins are going to remain thin as you burn through that higher cost inventory. Is that fair?

Actually, no, because we're seeing improvements in margins on cashews and peanuts, which are the key items in private-label snack nuts. Probably the best margins in terms of a percentage of net sales that we have seen in at least 12 months.

Okay. Is there any of the categories other than almonds that have kind of aging issues, if you will, in terms of -- you talked about the 30% of the variance was related to the almond product, just in terms of byproduct and then those type of things? Are there other categories that also hurt you over time if you hang onto it?

No, not this year.

And then just lastly, has there been a change of philosophy towards managing the inventories that way, just in terms of trying to take advantage as -- you were saying earlier about, now we're coming into a pecan cycle where it maybe makes some sense to take on some volume in anticipation of the following year falling off. I mean, particularly in light of additional capacity that you guys are building coming online? Is that the philosophy that we should expect going forward, as opposed to giving the gyrations of this market the last couple of years because of Atkins and what not, it seems to be much more volatile maybe than it ever has been, then it may make more sense to kind of wait it out, because you never know if prices are going, of course how far they're going to fall ultimately. So you could be getting yourself back into the same situation again in six months.

We have to look at each commodity separately. It makes a lot of sense to take at a longer position on pecans because we know with almost 100% certainty that the next crop is going to be down as pecans alternate from year-to-year. Peanuts, we'll probably play it pretty close to the vest. We're certainly going to buy fewer peanuts this year than we did last year in light of some of the volume declines. But also expect an -- probably a record crop coming in this fall, and we expect that market to decline, especially in the latter part of next summer. So we'll be real cautious there. Jasper, do you want to talk about almonds and walnuts?

Yes, particularly in the case of walnuts, the way that we contract with our growers, we both share that upside and downside risk. So if the markets do come down, it's more of a best efforts marketing kind of pricing with them. And there's a portion of our almond crop that also is bought under that same arrangement. But we are planning on buying quite a fewer amount of almonds than --.

About 25% less.

And then just lastly on Planter's, do you guys get the sense of in terms of how they're managing their inventories? Are they just willing to accept less in a sense from a margin perspective? Therefore, keeping the cap on pricing? Or have they just taken a different inventory tack, and now that things are coming in a little bit, they have been able to take advantage of that buying opportunity?

I think from a pricing standpoint, our belief is that they capped pricing not just because we're going to accept lower margins, but more of a business strategy to gain market share.

For private-label.

From private-label.

Alright, thanks guys.

Margaret Blaydes, Citigroup.

Question was just answered. Thanks.

Thank you.

At this time, there are no further questions in the queue.

Since there are no other questions, our earning conference call for the first quarter of 2006 has now ended. We thank you for your time and your interest in JBSS.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.