John B Sanfilippo & Son Inc (JBSS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2006 John B. Sanfilippo & Sons earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Mike Valentine, chief financial officer. Please proceed, sir.

Thank you. First, we'd like to thank everybody for participating in our quarterly conference call for the third quarter of fiscal 2006. Joining me today on the call is Jeffrey Sanfilippo, executive vice president of sales and marketing, Jasper Sanfilippo, Jr., executive vice president of operations, and Bobby Tankersley, senior vice president of industrial sales and marketing.

Before we start I'd 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. Factors that could negatively impact results are explained in our various SEC filings that we've made. We encourage you to refer to these filings to learn more about these risk factors.

Starting with the income statement, third quarter net sales declined slightly by 0.8% to $119 million from $120 million. This decrease is attributed to a 3% aggregate decline in contract packaging, food service and export distribution channels. Unit sales declined by 8.6%, but this decline in volume was mostly offset by an 8.1% higher average selling price. Unit sales declined in all distribution channels and nut types except for macadamias, walnuts and cashews.

High prices for tree nuts continue to suppress promotional activity at retail and usage by customers in other channels. Moreover, significant promotional activity on peanut items at a major customer that occurred in the prior year's third quarter did not recur in the current quarter.

Year to date net sales grew 2.5% to $448.7 million from $437.6. The increase is attributable to growth in food service, industrial, and export distribution channels, ranging between 2% and 9%. Higher average selling prices also contributed to the increase, even though unit sales declined by 10% for the year to date period.

Third quarter gross profit declined by approximately $11.4 million from gross profit reported in the third quarter of fiscal 2005. Gross margin as a percentage of sales declined to 3.8% from 13.3% a year ago. The decline in gross profit margin was primarily attributed to a $4.1 million decline in absorption manufacturing costs as a result of an 11% decline in production volume, while manufacturing expenses increased by about 2%.

Though labor-based manufacturing expenses declined by about 5% in the quarter, we realized the 20% increase in expenses for rent, workers compensation, operating supplies, utilities and interplant transfer costs. Production volume declined in the current quarter when compared to production volume in the third quarter of fiscal '05 in reaction to a decrease in unit volume sold and a concerted effort to reduce finished goods inventory. We also incurred a $4.0 million loss on the sales of almonds into the industrial channel that were related to new contracts entered into the current quarter.

We incurred a loss of $1.5 million from a write-down to market of quarter-end almond inventories that were designated for future sales into the industrial channel. We recorded an $800,000 charge to reflect the impact of an increase in walnut grower payables for those walnuts that were shipped prior to recording the increase from the grower payable. This increase occurred because we met final settlement prices announced by certain other walnut shellers in the current quarter in order to preserve our grower relationships.

We took a -- there was a $700,000 increase in scrap expense from the disposal of walnut and almond byproducts and also discontinued packaging materials. In an effort to accelerate the reduction of our walnut inventories, there was a significant increase in the processing of walnuts in the quarter and this led to the disposal of a larger quantity of walnut byproducts than we have seen in recent quarters.

The year to date gross margin declined to 7.6% from 13.2% a year ago as percentage of net sales. The decline in gross profit margin came about as follows. There were higher tree nut costs in the three quarter period and also declines in unit volumes sold and produced. Third quarter selling and administrative expenses as a percentage of net sales increased from 9.6% in 2005 to 10.0% in the current year. Quarterly selling expenses increased from 7.1% to 7.6% as a percentage of net sales due to increases in expenses for broker commissions, advertising and shipping costs.

Administrative expenses were 2.5% as a percentage of net sales for both the current quarter and last year's third quarter. Increases in expenses for the retirement plan that we implemented recently and legal expenses were offset by $940,000 gain that we recorded for the termination of the [inaudible] facility lease with related parties.

Year to date selling and administrative expenses as a percentage of net sales increased from 8.8% in fiscal 2005 to 9.2% in the current year. Selling expenses as a percentage of net sales were unchanged at 6.7% for the first three quarters for both the current and prior fiscal year.

Broker commissions, advertising -- and advertising expense generated the increase in these expenses in the year to date comparison. Year to date administrative expenses increased from 2.1% to 2.3% and that was driven by the retirement plan, audit and legal and compensation expenses.

Quarterly operating income fell by approximately $11.8 million due to the gross margin decline. Year to date operating income fell by approximately $25.8 million for primarily the same reason. Higher interest rates in both short term and long term debt increased expenses by about $588,000 for the quarter and $2.5 million for the year to date period. Also, higher short term borrowing levels in the quarter and higher short term and long term borrowing levels for the year to date period contributed to this increase.

Primarily due to lower gross margins, the company reported a net loss of $5.9 million in the third quarter compared to net income of $2.1 million in the third quarter of last year. For the same reason, current year to date operating results fell from net income of $11.0 million for the first three quarters of fiscal '05 to a net loss of $7.1 million for fiscal 2006.

Looking at the balance sheet, as a result of higher short-term debt levels and the net loss reported in the first three quarters of fiscal 2006, the company is not in compliance with four financial covenants under its bank credit facility and under its note agreement as of the end of the third quarter. The company has received waivers of its noncompliance of the financial covenants in the bank credit facility. The company is currently working with the note holders to secure a waiver of the noncompliance with the note agreement and it expects to receive that waiver shortly.

The bank credit facility waiver also included an extension to the $20 million facility increase, which was funded last quarter through July 31st, 2006. The company is currently negotiating with the lenders in the bank credit facility to renew this facility on a secured basis. That change is expected to result in the elimination of the financial covenants with which it is currently not in compliance. The company believes that it will continue to be in noncompliance with these covenants under the note agreement over the next three quarters. It will seek waivers from the note holders as needed.

Since the company was not in compliance with financial covenants as of the end of the third quarter and does not have waivers for future covenant noncompliance, the company is required to reclassify approximately $57.8 million of its long-term debt as current maturities on its balance sheet as of March 30th, 2006. This reclassification triggered the noncompliance of the minimum working capital covenant, which was one of the four covenants that was not complied with under both credit facilities.

Inventories on hand at the end of the third quarter fell considerably from $244.6 million a year ago to $207.0 million at the end of the third quarter. Pounds of raw tree nuts and peanuts declined by 9.7%, or 11.1 million pounds. The value of finished goods on hand at the end of the third quarter declined by approximately 22%, primarily as a result of lower quantities.

The average cost per pound of raw input stocks also declined by 7% due to a change in product mix towards walnuts, which have a lower cost than many of the other tree nuts, and also lower acquisition costs for pecans, peanuts and macadamia nuts. This was only the third time in 14 years that we have seen a decline in inventory dollars in the third quarter from the preceding second quarter. In comparison to the second quarter of fiscal 2006, at the end of the third quarter quantity of input stocks was slightly lower, while the average cost per pound of input stocks declined by 7%.

And now I'll turn the call over to Jeffrey Sanfilippo who will comment on distribution channel results.

Thank you, Mike. Good morning, everyone.

I'll summarize the company's sales and marketing efforts across all channels during the third quarter. As Mike mentioned and everyone is aware at the company, this is a very disappointing quarter, especially for sales with respect to unit volumes. This quarter is historically the slow period for nut sales volumes. Total company net sales declined by 0.8% to approximately 119 million in the quarter compared to net sales from last year at 120 million. [inaudible] were led by decreases in the export, food service and contract manufacturing channels.

A positive note, consumer sales were slightly up by 2%. However, total pounds shipped to customers across the company channels declined by 8,.6% in the quarter and all our business units were down, as Mike mentioned, except for the industrial channel, which remained unchanged.

The company was successful in gaining necessary price increases this past year as a result of higher commodity costs. As you can see, this drove our weighted average selling price up 8.1% for the quarter. But we also continue to focus on selling more value added product lines with higher margins across our business channels, which also accounts for some of the higher selling prices.

The unfortunate result of having to pass on price increases is the negative effect higher costs have on snack nut consumption and usage of nuts as an ingredient. There are several reasons for the dramatic volume decreases we've experienced in the past quarter and one of the most significant reasons is price elasticity of nuts, especially in industrial export and food service channels.

Let me recap a little bit on each of the business channels, turning to consumer first. Sales increased 2% for the quarter, as I mentioned. The pounds shipped declined 14%, or 3.9 million pounds for the quarter. Our Fisher brand business saw unit declines of 17% and dollar declines of 20% for the quarter. As Mike mentioned earlier, this is mainly due to an [in and out] peanut promotion that was sold in the third quarter of 2005 that was not repeated this year at a major customer. It alone accounted for $2.3 million of the decline.

We're in the process of restructuring our consumer sales division under the leadership of Ron Williamson to better manage key national accounts and pursue growing opportunities in produce and alternative channels of distribution. The company is already seeing positive results from these changes. JBSS was awarded the private label snack nut business at a Midwest customer and the company regained private label mixed nut and cashew business at another national account. In addition, we regained lost peanut butter business at a major account on the West Coast.

Turning to our food service channel, pounds shipped declined 6%, or almost 368,000 pounds in food service. This was attributed to no customer losses, but volume declines were mainly a result of higher nut prices causing changes in restaurant menu items and recipes formulated to mitigate the cost increases from end users.

And also our airline business was down $600,000 for the quarter and this was attributed to the loss of a pretzel business that we had. As most of you know, airlines are moving to buy-onboard programs and they're eliminating any free goods that they give away onboard. Positive note in our airline division is we were awarded the snack nut contract on Delta Airlines and we are the first nut company to launch a coupon event onboard where passengers can use their bag of peanuts to redeem a $0.25 off on any purchase of Fisher products at their local retailer. We're excited about this marketing opportunity.

Other exciting news in our food service channel, JBSS was awarded the majority of private label business at a major food service distributor.

Turning to our export channel, net sales declined 6.7%, or $600,000 approximately. Pounds shipped declined 12%. One reason for the soft third quarter volume on pounds is in-shell walnuts. Our customers requested earlier delivery schedules this year and we moved up shipment which were reflected in our second quarter sales. In addition, retail sales into Canada were slightly down as a result of higher prices and lack of promotional activity.

Positive news on the export front, we gained Fisher distribution at Wal-Mart in Mexico, as well as Fisher distribution at a major retailer called [Mona Pri] in France.

At this time I'd like to pass the presentation over to Bobby Tankersley to cover the industrial sales channel.

Thank you, Jeffrey.

In Q3 our industrial sales were flat both in pounds and dollars at $27.8 million for the quarter. We continue to focus our efforts on R&D and new product development in major food companies and we've had some good success. We're pleased to announce that we are -- we just received a contract for the cashew business that's going to be going into a breakfast bar for one of our major breakfast bar manufacturers. That's going to roll out in Q4 and it's the results of our efforts through R&D channels with our major food companies around the country.

We had basically no margin in our industrial sales for the quarter, in large part because of the offset of almonds against the other products that we sold. Our almond sales during Q3 were almost the same as last year, they were only down 1%, and that's basically the result of a couple of circumstances that triggered higher almond sales for us for the quarter.

Our quarter Q2 almond sales were down 24%. A lot of our customers were not taking delivery of almonds early and their inventories began to decline and we began to receive additional orders in Q3 to make up for that. It was also triggered by a weather event in California. Almond prices declined in the early part of Q3 until a freeze in late February caused buyers to begin to cover in anticipation of higher prices.

The customers not only took physical delivery, but we had to sell contracts for additional coverage for the rest of the year for some of our key industrial customers. So we ended up with almond sales for Q3 that were approximately the same as the previous year. We even had some customers that chose to take physical delivery of their entire year's requirements. We had one customer that took their entire annual requirement in Q3, which represented 6% of our entire shipments for Q3 in almonds.

We are excited that the opportunities for R&D are still there for us. We have the same number of active R&D projects underway right now that we had this time last year. Unfortunately, the high prices of nuts have resulted in fewer of these projects coming to market. Our sales this year or realized expectations from new projects that are actually rolling out this year are down about 26% from last year and that's entirely the result of higher priced nuts that squeezed the margins of major food companies and have caused a lot [inaudible - microphone inaccessible].

The good news is that we still have the same number of projects [inaudible - background noise] last year and if these come to fruition, they represent a 12% increase over the potential that they did this time last year. As nut prices continue to decline, we're confident that more and more of these are going to roll out.

Thank you, Bobby.

I'd like to cover the marketing efforts and new product development that the company's involved with going forward. Our company is rolling out a new product line called Fisher [Fusion] snack mixes. There are seven mixes in the line in four to six ounce recloseable standup bags. The launch date is June 2006. The launch is being supported by trade initiatives, complete public relations initiatives and unshelled promotions and advertising. In addition, we will roll out three family size Fisher Fusion bags in 20 to 32 ounce standup recloseable packages.

An exciting new holiday and gift line is being presented now to accounts as well. Launch date for this new program is August 1st, 2006. The program will include three exciting snack flavors in holiday theme single-serve packages. [inaudible - microphone inaccessible] specific focus on corporate gift giving opportunities with this product line.

In addition, we are putting together a strong promotion to move more almonds through our consumer and food service channels. We've been successful in already selling up to a million pounds to our consumer channel at different retailers across the United States and we will continue to support this promotional effort.

Looking at the category just for a minute, we talked about the lack of growth just looking at the category in general. For snacks, the past 52 weeks total snack nut sales increased 2.7% in dollars and decreased 1.8% in unit sales versus a year ago. As I mentioned last quarter, we have seen category growth slowing, but this has started to turn around slightly. For the last 13 weeks dollars are up 3.1% in snacks, while units are only down 1.6%.

Turning to the baking category, in the past 13 weeks baking nut sales have increased 9.5% in dollars and decreased 1.2% in unit sales versus a year ago. Also, if you look at average retail prices, they've increased $0.35 when looking at the 13 weeks versus a year ago.

One thing we've seen this past quarter is heavy promotional activity from Planters going forward. This is their anniversary year and they've spent a lot of time promoting the brand through their anniversary promotion as well as launching several new product lines in the snack channel.

This is a disappointing quarter for the entire company, but we're very optimistic about our future and the sales opportunities ahead. Some of the positive trends we see for the start of our fourth quarter, JBSS pounds shipped are up 5% and the consumer division volume is up 2%.

As I mentioned in last quarter's earnings call, we're confident that our sales and marketing strategies in place will help us regain unit volume across all of our channels. The centralized marketing efforts are beginning to show results as we leverage channel opportunities and develop new items -- new value-added items that can be sold across all our channels.

At this time I'll pass the presentation back to Mike.

Thank you, Jeff.

That concludes our presentation. At this time we will gladly take your questions. Operator, please queue up the first question.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of [Chuck Pinacki] with [Kay McDonald]. Please proceed.

Morning. It's Chuck Cerankosky. If we look at the retail side of your market, the consumer side, both baking nuts and snack nuts, how would you sort of describe the situation right now from the retailers' perspective in terms of accepting some of the promotional activity from the branded guys and their decisions to give space to private label? Where are we at in that process right now versus, say, a year ago?

Well, it really depends -- this is Jeffrey. It depends on the retailer. You've got some that are really pushing just to have the national brand and a private label. You've got other retailers that are focusing on having two brands and are considering a third brand. So the landscape is different because you've got obviously more players investing a lot of money in slotting fees and just getting shelf distribution. But if you look at what's happening in the category, across the brands, you've seen Planters unit share -- the total category, as I mentioned, was down 1.8% to prior year. If you look at Nielsen data, Planters unit volume changes is flat. You've got private label is actually down 4% across the snack share. So it's -- you've got more competition. It looks like what's happening now is some of it is being taken -- some of the brand promotions are taking away from private label sales. You're seeing the smaller "all other" category decline dramatically, too; their unit sales are down 6.8%.

You see the -- excuse me, do you see the retailers holding up [portions] for their private label nut lines until prices moderate some, finished product prices moderate some?

We're seeing more promotional activity. As we talked about in the last quarter, the brand leader did not raise prices. There was less of a spread between Planters and private label, so it was difficult for private label accounts to run some of their promotions. The price increases that many people, such as ourselves, took last year as a result of higher commodity costs didn't allow for private label retailers to promote the brand, they couldn't get to the BOGO, buy one get one free, numbers that they were able to prior. So I anticipate with lower commodity costs and being able to be more competitive in private label we will be able to get back to some of those promotional levels we saw last year.

Can you -- can you, this is really a different subject, can you speak to foreign demand for nuts, especially as foreign economies continue to grow and the growing middle class, et cetera, increase in disposable income? How do you view that as having a permanent or long-term effect on the cost of snack nuts in the U.S.?

We don't have specific data that shows what the consumption trends are in Europe, for example. We do know that the per capita consumption of nuts in Europe is higher than it is in the United States. We've seen increases in export shipments over the last couple of years as a result of what we assume is higher consumption and usage of nuts and we anticipate that to grow. I think the dollar variance or the exchange rate will affect that somewhat. The sizes of the crops in Europe will affect whether or not the export shipments from the U.S. go there or stay here. But we anticipate both in Asia and in Europe we expect to see higher consumption, just as we expect to see here as the health benefits of nuts continue to trickle down to consumers.

Thank you.

Okay, Chuck, thanks.

Your next question comes from the line of [Larry Bernstein] with [Amber Martin]. Please proceed.

Yes, hi. Larry Bernstein. Question for you. I noticed when Atkins was going great that the price of nuts would go up and your earnings seems to be following in tune. Now we're seeing a decrease in nut prices. Is that one of the fundamental reasons why profitability is declining?

Well, actually, when consumption -- this is Mike, by the way. When consumption went up -- we actually had a good position in our inventory. So as consumption went up and prices went up, we were actually positioned pretty well for that. And then in fiscal '05 we got into a situation where consumption kept increasing and then we had to go out in the markets and do our purchasing at much higher levels. And then you started to see some deterioration in margin. Nuts are coming down, but we won't see a lot of those lower cost nuts until the fall when new crops come in.

Right.

So in the meantime we have to ride it out.

Got you. And do you have a forecast for nut prices going forward?

If we look at almonds, peanuts, cashews, some of those major nuts, we're starting to see some nice double digit decreases. Pecans, we're going into the off-crop year next fall, so I'm not so confident that we'll see any kind of decline. Probably go up a bit. Macadamias, Bobby -- those are soft, those are coming down nicely. Walnuts will probably be relatively stable. But all in all, much positive -- much more positive outlook than we had in March of 2005.

And the -- you have an inventory of nuts right now. The [inaudible] that you have on the balance sheet, does that represent today's market value?

It does not with the exception of a few almond items that we have written down to the industrial market where that is the only channel we can sell those in. Otherwise, all other nuts are at cost.

Okay. Thank you very much.

Okay, thank you.

Your next question comes from the line of [P.J. Leveret] with [Talkalot Capital]. Please proceed.

Can you give us an update on the almond crop?

And the second question is relating to the contracts with your customers. Are you relying on lower nut prices later this year in order to be profitable on some of these contracts?

Let me speak to that, Bobby Tankersley. The almond crop, the crop that's on the trees is under development and we won't get an estimate until next week. That'll be the first USDA estimate for that crop and expectations are that it's going to be a good crop. The contracts that we have on the books for industrial customers, which are primarily what our contracts are for, are contracts that we'll be delivering basically out of our current inventory and that's why that inventory was written down to [inaudible] with those contracts. We're not selling forward to get to next year's crop. We're not speculating on what that may be. And we're limiting our sales to just this year's crop. Our contract balances at the end of Q3 this year are down 44% in volume against the same number of pounds that we had contracted at the end of last year. So we are limiting contract sales in industrial in order to be able to hold those sales to just the items that aren't suitable for any other channel.

Okay. And then another question is can you talk a little bit about Planters' marketing strategy at this point in time and how that's going to affect the private label snack nut business or the private label snack nuts and other nuts? When they're promoting, it usually is not a good thing for you guys, so I'm just kind of curious.

Well, Planters, it's their 100 year anniversary so we expect to see additional promotional activity from them this year, which could affect private label programs. The challenge we have for private label is the gap between the national brand and the private label brand. And if we can narrow -- or increase that gap and allow private label to get more promotional activity, we expect to see private label regain the share that it's lost. It really hasn't lost much share as far as sales overall for snack, but it is down slightly. So as Planters comes up with the new items that they're pushing and new promotional activity, it will affect private label. But we anticipate with lower commodity costs and being able to promote more to our private label customers, we should be able to maintain and regain some of the lost sales in private label.

Will Planters lower their nut prices or have you seen any of that at this point with these promotional activities?

They have run more promotions. They haven't lowered their list price, but we do see more promotional activity from them.

Okay. And then the last question is on the new products, the mix, are you rolling that out in certain regions first or is that going to be a nationwide thing? Can you talk more about that?

It's rolling out nationally. We are not investing in slotting dollars. We're looking at customer specific programs, finding out where we can gain good distribution and where we've got marketing support behind it. So we'll be rolled out nationally, but not a -- we won't gain 100% [ACV] overnight. It'll be pockets where we know it's a smart investment for us to rollout the product line.

Thank you.

Also it replaces our -- we have a current Fisher standup bag program and this product line replaces some of those items as well as adds additional items to our portfolio.

Okay, thanks.

Your next question comes from the line of [Peter Park] with [Park West Asset Management]. Please proceed.

Hi. I was wondering if you could tell us with respect to the waivers that you're trying to get from the lenders, how do the lenders get comfortable giving you these waivers? Is it more tied to the value that you have in inventory or might it be tied to the value that you have of the buildings and machinery and equipment because obviously we're losing a lot of money right now. So just if you could touch on that that would be great. Thank you.

Okay. The waivers aren't tied to any assets. It's -- as you know, the current facilities that we have are cash flow-based facilities and those are their types of covenants that we violated. The reason why we choose to do business with U.S. Bank and [LaSalle Bank] and Prudential and some of the other insurance companies is in the case of the banks, we borrow -- the people we deal with there are in their ag department, they're agricultural lending experts and they understand when you get into a difficult commodity cycle. So because of their experience, that's why they're comfortable giving waivers.

In the case of Prudential, Prudential's been our long-term lender for well over 10 years now. They've been through a few of these cycles, too, back in the '90s, and they understand that we're in a difficult position in almonds and we're also, to a much lesser extent, have too many walnuts. But they do realize that come next fall when we get out of our almond position and get our walnut inventory quantity right that things should go back pretty much to normal in terms of cash flow.

Okay, so they're not asset-based lenders?

Not yet. We are -- our current bank credit facility is about to expire in about a month or two and we are in the process of renewing that facility with the same lenders. In order to avoid having to secure waivers every quarter and the distraction that that creates not only for us but also for the lenders, we've elected to renew that facility on a secured basis.

And how will you secure it?

It'll be secured with inventory and receivables.

Got it. And then did they -- is it easier to secure it with that or is it to secure with the buildings and the [PP&E] that you have on the balance sheet?

Well, with the revolving credit facility, that facility is there for working capital needs. So that's why it's secured with working capital.

Got it. And as a follow-up to a previous caller, as nut prices come in -- in very simple terms, as nut prices come in over the next few quarters, does that mean profitability should improve?

Well, it all depends on what we sell it at. As Bobby mentioned, in the industrial channel we haven't even begun the contract sales for new crop yet with our industrial customers and that's pretty typical of where we'd be in that process at this time of the year. On the consumer side, certainly there's a need to lower our price to get consumption back and also put private label retailers in a position to have margin, which they currently don't have, to also drive promotional activity. So how that's all going to shake out is difficult to say, but one would think that things should return to normal.

Got it.

Peter, this is Jeffrey. One of the things that will allow us to do it is get more volume through the facilities and more volume through all the business channels. I mean the dramatic increases in prices we've seen over the last year and a half, it's historically high, it's unheard of. If you're looking at a 3.50 average price per pound for pecan, it went up over $5 a pound, you're just going to lose consumption, you're going to lose people's interest in using pecans as a nut. As we expect these markets to come down and we get back to normal levels, you're going to see increased usage of nuts and interest in using them and better margins for promotional activities. So as the price comes down, you can expect or we expect to see higher volume through the facilities.

Right, and better utilization, right?

Correct.

And then can you give us an update on the status of the facility relocation and does any of this temporary slowdown give you pause?

No. This is Jasper Sanfilippo. The current state of the new facility is we are completed with construction, we're doing some minor interior buildout, we're well underway with the installation of our new core equipment. And remember that we have decided to purchase duplicate lines for canning, roasting and jarring capacity, which will be the new core of our production. So once those lines are established and set up, we will begin to move our existing equipment.

And then with respect to -- is there any extra equipment that you have?

No, all the equipment that we have in our current Chicago facilities will be relocated to our Elgin facility.

So you won't be selling anything and taking a gain or a loss relative to book?

No.

Thanks and good luck.

Okay, thank you.

Your next question comes from the line of [Steve Rainery] with [Franklin Templeton]. Please proceed.

Good morning.

Morning, Steve.

I was wondering if you could tell me when you thought the new facility will be up and running?

We are currently going to move our distribution operations in the middle of July. We have a September 1st start date for the new core production equipment. Then starting in January of 2007 we will begin moving the existing equipment from our other facilities in Chicago.

So you'll be running two facilities at the same time?

We currently have five facilities in Chicago. We have sold one of our warehouse facilities -- or terminated our lease with one of our warehouse facilities. Our distribution center where we're currently shipping 100% of our orders out of, that lease terminates at the end of July. So come September 1st we will have the same amount of facilities, but we will be running production out of our warehousing.

Okay, so when -- looking at overall rent expense, will -- are you saying that there won't be an increase in that; that should subsequently drop or will there be?

We'll actually see a decline in rent expense, but we'll also see an increase in expense associated with the new facility as we begin to put part of that into service. As we put each section of the building into service, we will then start recognizing depreciation expense and interest expense that's currently being capitalized.

And what is the capitalized cost today, do you know?

We haven't disclosed that.

Okay. And just to refresh my memory, the total projected capitalized -- or total projected cost if you have a capitalized cost on the project?

It will be $96 million.

Is that all in including interest or is that -- ?

No, that doesn't include interest. That's strictly the construction and equipment budget.

And how much have you spent to date?

We haven't disclosed that.

Okay. How much are you -- I thought you did in the last quarter, you gave a number. How much do you plan to spend on CapEx for this total year?

I think what we said in the previous quarter was that we had roughly about somewhere around 30 to $35 million left to spend on the project. I stand corrected there and we will disclose where we are in that respect in the Q when we file it on Tuesday.

Okay. Real estate sales? I know you [processed] selling some real estate. Where do you stand on that?

Okay, as Jasper mentioned, we have terminated one lease already in Des Plaines. We will be terminating another lease in our warehouse and distribution facility in the summer. We expect to terminate the lease in our major processing facility sometime in the next 60 days. And then after that we have two more buildings to sell, which we will probably hope to sell those also in 60 days. So going 60 days from now, the only property that we will be selling that we currently own will be the original Elgin site that we had bought to build the new facility on and then had switched to another site.

And that Elgin site is being marketed, correct?

Yes, that's currently being marketed. We started about a month ago.

Okay.

And we hope to sell that within the next 12 months.

Okay. And any -- what's it on the market for?

I don't believe that's been published, so we can't disclose it. But we do have a cost in there of about a little over $7 million. We do expect to sell it for at least that much.

I guess the point is when I look at the balance sheet it's certainly not improving, so I'm looking for things that would help make me more comfortable. I mean you mentioned the lenders sort of being cash flow lenders, but you had also hoped that they would renew for a three-year term and we're going to have to go secured with them. So certainly they need to feel more comfortable with things. So I appreciate it if you could help us feel a little bit more comfortable. So maybe you could sort of highlight as to how you expect the balance sheet position to improve given the results that are expected to be over the next few quarters.

Okay, well, first of all we're going to generate at least about $20 million in cash just from the real estate sales and if we can sell the Elgin -- the original Elgin site in the near future, we'll generate even that much more cash. So that'll help the balance sheet a lot. Also, as we're terminating these leases, selling buildings with mortgages on them, that's worth about $6 million in long-term debt, too. So in addition to the cash, you'll see that go down.

And then when the company sells its Selma facility to related parties, hopefully sometime in the next month or two, we may have to put some debt back on the books for that, depending on how that lease is treated. But certainly those transactions will help the balance sheet.

The other thing I want to remind you, too, is that when you look at our balance sheet in March when our inventories are at our highest and notes payables peak, certainly a March -- points at the March balance sheet might lead you in that direction. But just going from March to June and especially from June to September, you'll see a much improved balance sheet simply because notes payables will go down so dramatically.

And taking that a little bit further, noting that we're having declines in nut prices, the fact that you carry the inventory at cost, what would be the mark to market if you had to mark to market the stuff today?

Which product are you talking about?

I would say in total. I don't want to pick...

Oh, in total.

...product.

We have -- whatever mark to marketing we've done in the third quarter is really all we need to do right now based on the distribution channels that all of our products will sell into.

Okay, I mean I recall having this -- you didn't have it with me but we did have this discussion on the call in the last quarter about how you didn't feel like there was a need to reduce, I guess it was almond inventories and you did have a mark to market loss there. And we also expected margins to actually improve into the double digits and we're certainly way off that. So anymore clarity on where you stand, if there's any one particular item that would have large mark to market loss maybe you could highlight that for us.

Well, as we've mentioned before, we are in a position on almonds, an [inaudible] position that if we had to sell all those almonds into the industrial market, which isn't factual but just to paint a worst case scenario, I would say our cost is probably somewhere around $1 a pound above the market. So that obviously could be a very big number. But we have looked at our almond inventories and we've determined which inventories are going to go into the industrial channels and which inventories are going to go into the other channels and we have written down all industrial almonds accordingly. The rest of our inventory is suitable for the consumer and food service channels and right now the pricing in those channels allow us to keep our almond inventories at cost.

How much do you assume goes into industrial?

Well, at this point I think Bobby mentioned our open balances on industrial contracts are pretty small.

But you had an assumption, a mix assumption.

Right, and I would say that we're probably looking at about 80% going into the other channels as things stand right now and about 20% into industrial.

Okay, because I think I recall -- was there a 20 million number mentioned in the last quarter if you had to mark everything down on the almonds?

It might have been, I can't remember exactly what it was. I think if I remember, in the last quarter we had somewhere around 25 million pounds of almond inventories in open purchase commitments and at the time I think the average was somewhere around $0.70 or $0.80 a pound that the worst case scenario would be.

Okay. And today, where does that stand? You mentioned $1 a pound, but how many pounds?

We're probably down to about, I don't know, somewhere around 14 million pounds, somewhere in that neighborhood.

Okay. And then just the last thing on the gross margin, certainly I wasn't exactly expecting a rise in gross margin but I didn't really expect to see what I just saw and I don't think you did either. But what sort of happened all of a sudden from the last conference call to this one that just seems like everything happened all at once and you couldn't recognize it?

Okay. I think Bobby already talked about it. What occurred was in late February we had several days of freezing weather during the critical bloom period. That weather created quite a bit of buying interest on the part of our key industrial customers and we, in order to preserve our relationships with those important customers and working in our long term best interest, we elected to do those industrial sales, not only spot sales but also contracts. And when you lump that altogether, that's probably about somewhere in the neighborhood of about $5 million, 4 or $5 million of the change that we did not plan on.

So that's about four points or so of margin.

Correct.

Okay. Which still is, I believe, not anywhere near double digit.

Right. And then we also identified some almond inventories that were created during the quarter that we felt was not suitable for the other channels and much more suitable for almond -- I'm sorry, for industrial sales, and we also took that down, too, to market so that we could sell that in that channel.

All right, well, I appreciate your time and I look forward to hopefully seeing things improve in the [inaudible] quarters.

Okay, thank you.

Thank you.

Your next question comes from the line of [Ross Brenner] with [Weintraub Capital]. Please proceed.

Hey, guys. Couple of quick questions. Can you give some more clarity into the cost, the excess cost from running all these duplicative facilities, just what it's affecting -- what's being run through the P&L on a cost basis?

As far as in the Chicago area?

Yes.

We haven't actually quantified those costs, but I will tell you which ones they are. First of all, as we mentioned, interplant transfer costs, as we move products among the five facilities we currently have here in Chicago, now it's down to four, given that fuel costs are roughly double where they were even a year ago, that's really increased that cost. We're in a pretty high rent and high tax district compared to where we're going to go and that certainly has affected our cost structure. So I think...

Will all the interplant transfer costs go away?

Yes.

Those will all go away?

Right. All the ones that we...

[inaudible - microphone inaccessible]

Yes, all the ones in the Chicago area, which we're speaking towards right now, those will all go away. But certainly we'll have interplant transfer costs with our out of state facilities.

And you can't give us any sense on -- any reason why you wouldn't give us that sense of what the costs are?

Well, I can't do it on a conference call. That's something that we'd have to put into our filings.

Okay. Well, the reason -- that sort of leads me to the next question, which is getting back to your 17, 18% gross margins. That may be a difficult challenge but can you walk us through how you can get to some level back into the mid teens and give us some sense of what actually needs to happen to get you there?

Well, it's really all about being able to sell almonds profitably. Remember, in this context not only are we talking about the losses we had in almonds, but we're also -- we also have to take into account the gross margins we normally get out of almonds. So it's a much larger swing than just what we're talking about, what I've mentioned in the press release and today. So we need a big contribution from almonds to get back to those levels.

We also are not getting the contribution from cashews and mixed nuts that we normally get. For example, cashews and mixed nuts generally deliver gross margins in the high teens or low 20s. We're not anywhere close to that right now. But to get to those kind of margins we need cheaper almonds, we need cheaper cashews, which is certainly right around the corner, we also need -- we've got lower cost pecans now, we've got lower cost peanuts, so we've taken some steps in that direction, but those are key items that need to contribute to. And then finally we need -- we're operating at roughly 2003 volume levels right now and those levels worked fine in 2003. And the last three years, of course, so many costs are up that volume isn't sufficient to absorb all those costs.

Okay. And then last question, how do you know that you're not losing share to the branded guys? You said you're not losing share, but how do you know that?

Well, based on Nielsen reports. We're looking at their share data versus our share data over the three, six and 12 month period.

Okay, and what's the cost breakdown between -- what's the price discrepancy now on a percentage basis between private label and branded?

Well, historically it's anywhere from 15 to 20%...

Yes.

...difference between private label and branded. That was lowered to, in some cases, 10%, below 10% price difference because, as I mentioned, Planters did not take price increases and kept the cap on the maximum price level on some items. In some cases private label was at the same price as Planters on specific items.

And did you -- then did you -- and you raised prices on Fisher and therefore lost volume?

We did not promote as much. We took a slight price increase on Fisher, but the reality is we did just not promote as much because we didn't have the funds available or the margins to promote.

Okay. Thank you very much.

Okay, thank you, Ross.

At this time there are no further questions. I'd like to turn the call back over to Mike Valentine for closing remarks.

Okay. Since there are no further questions, the call is concluded and we thank all participants for their time and interest in JBSS.

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