John B Sanfilippo & Son Inc (JBSS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Fourth Quarter and Fiscal 2006 Year End Earnings Conference Call

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Mike Valentine, Chairman and Chief Financial Officer. Please proceed, sir.

Okay. Thank you, Jeff. Thank you, everyone, for participating in our quarterly conference call for the fourth quarter of fiscal 2006. Joining the call with us today will be Jeffrey Sanfilippo, Executive Vice President of Sales & Marketing, Jasper Sanfilippo, Jr., Executive Vice President of Operations, Bobby Tankersley, Senior Vice President of Industrial Sales & Marketing and also responsible for Almond & Walnut Procurement.

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 various SEC filings that we have made, and we encourage you to refer to these filings to learn more about these risk factors.

Starting with sales. In the fourth quarter, net sales declined by 9.2% to $130.8 million from $144.1 million in the fourth quarter of fiscal 2005. The dollar decrease is primarily attributable to the extra week in the prior year's fourth quarter. In respect to units sold, unit sales declined by 9%, mostly from the extra week in the previous quarter - previous year's quarter. Unit sales declined in all nut types except for macadamias, walnuts, and cashews, and in all distribution channels except the export channel.

High prices for tree nuts continue to suppress promotional activity at retail and usage by customers in other channels, specifically in the industrial channel. Moreover, significant promotional activity on peanut items at a major customer that occurred in the prior year's fourth quarter did not recur in the current quarter. Sales in unit volumes sold declined in the consumer industrial channels while export sales increased in both dollar and volume terms.

Year-to-date net sales decreased slightly to $579.6 million from $581.7 million. This decrease is attributable, again, to the extra week in the prior year's fiscal year and a 10% decline in unit sales, even though average selling prices were 11% higher in the fiscal year.

Fourth quarter gross profit declined by approximately $16.8 million from gross profit reported in the fourth quarter of fiscal 2005. Gross margin declined to 2.9% from 14.3% a year ago as a percentage of net sales. The decline in gross profit margin was primarily attributable to a $4.1 million decline in the absorption manufacturing cost as a result of the 17% decline in production volume. the labor-based manufacturing expenses decreased slightly by about 1%. we realized increases in rent for external warehousing and also for workers' compensation expense.

Production volume declined in the current quarter when compared to production volume in the fourth quarter of fiscal '05 in reaction to a decrease in unit volumes sold and a concerted effort to reduce finished goods inventory by the company. A $3.9 million unfavorable change pertaining to the changes in our estimates of bulk stored inventories also caused a swing as fiscal 2005 benefited from significant increases in our estimate of bulk stored pecans and peanuts to a lesser extent.

Additional production costs of $1.5 million related to an unusually high level of reprocessing of walnuts and almonds also led to increased production costs and this is primarily due to lower-quality input stocks, especially in the case of walnuts. The reprocessing has been completed and these goods are now saleable which should allow us to continue to reduce inventories in preparation for this year's harvest.

A change in sales mix towards walnuts, which had an unusually low gross margin, and declines in margins for almonds, cashews, and mixed nuts contributed to a decline in gross profit by approximately $4.7 million. A $1.9 million expense for the disposal of walnut and almond byproducts and discontinued packaging materials also contributed to the decline.

In an effort to accelerate the reduction of walnut inventories, as I mentioned before, there was a significant increase in the processing of walnuts in the quarter, and this also led to a disposal of a larger quantity of walnut byproducts than we typically see.

Year-to-date gross margin declined to 6.5% from 13.5% from a year ago as a percentage of net sales. As we've mentioned in the past, the decline in gross margin came primarily from higher tree nut costs and decline in unit volumes sold and produced.

Fourth quarter selling and administrative expenses as a percentage of net sales increased from 9.4% in 2005 to 10.7% in the current quarter. Quarterly selling expenses increased from 7.0% to 7.6% as a percentage of sales primarily because of the decline in sales while some costs are fixed in nature. Administrative expenses increased from 2.4% to 3.1% as a percentage of net sales due to increases in the costs associated with a retirement plan and stock option expense, in addition to the impact of a lower sales base.

Year-to-date selling and administrative expenses as a percentage of net sales increased from 8.9% in fiscal 2005 to 9.3% in the current fiscal year. Selling expenses increased slightly from 6.8% to 6.9%, mainly as a result of higher advertising expenses. Year-to-date administrative expenses increased from 2.1% to 2.6%. Again, these were caused or this increase was caused by the retirement plan and also higher legal costs that were primarily associated with the refinancing, stock option, and some other compensation expenses.

Comparable interest rates on short-term and long-term debt kept interest expense at $2.0 million for both the fourth quarter of 2005 and the fourth quarter of 2006. Interest expense for the full fiscal year increased from $4 million to $6.5 million, mainly due to higher interest rates, as well as higher short- and long-term borrowings in the year-to-date period.

Primarily due to lower gross margins, the company reported a net loss of $7.3 million in the fourth quarter compared to net income of $3.5 million in the fourth quarter of last year. For the same reason, current year-to-date operating results fell from net income of $14.5 million for fiscal 2005 to a net loss of $14.4 million for fiscal 2006.

Turning to the balance sheet, we have recently amended our bank credit facility and note agreement in exchange for securing the debt with working capital and fixed assets. The amendments eliminate certain financial covenants that we were not in compliance with in fiscal 2006. Currently, we are in the process of evaluating whether we will comply with the quarterly minimum EBITDA covenants in the amended note agreement in fiscal 2007.

Total debt declined by $7.7 million over the last 12 months and by $18.4 million in the fourth quarter. Inventories on hand at yearend fell considerably from $218 million, one year ago, to $164 million at the end of the current fiscal year. Pounds of raw tree nuts and peanuts declined by 21.1%, or 19.5 million pounds. The value of finished goods on hand at yearend declined by approximately 30%, 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 and peanuts and macadamia nuts that were made in the fourth quarter.

Now, I will turn to Jeffrey Sanfilippo who will comment on distribution channel performance and also categories.

Okay. Thank you, Mike. Good morning, everyone. I'll discuss the company's sales and marketing efforts across all channels during the fourth quarter and summarize our year-end results. But, first, let me start by acknowledging that our fourth quarter numbers are disappointing to all of us on the management team at John B. Sanfilippo.

This has been a very challenging year for our company and for our industry overall. Coming off of record-high nut costs in the previous year, the industry saw the elasticity of nut demand as prices rose and consumption and usage of nuts as an ingredient declined. The declines occurred in spite of the continued promotional and marketing efforts of major nut brands and trade associations. But as we cycle out of high-valued inventories, we are optimistic about the procurement of lower cost crops in the future, new promotional opportunities, and new business that drives volume going forward.

Looking at our fourth quarter results, sales were $130.8 million compared to $144.1 million in fiscal 2005, a decline of $13.3 million, or 9.2%. After taking out the additional week from fiscal 2005 of $12.3 million, fourth quarter decline was $1 million. This decrease was driven by losses in pecan and almond volumes where we experienced, mainly in the industrial channel, several customers not repeating product promotions that used these type of nuts as a result of the higher costs.

Looking at the distribution channel for the fourth quarter, consumer channel nut sales declined 6.6% in dollars and 10.2% in pounds. Declines were driven by less promotional activity with retailers, a smaller gap in retail prices between national brands and private brands, and the loss of some product lines at two major accounts. Product type declines in the consumer channel mainly consisted of peanut butter and candy as we exited candy business as a major private brand customer.

Looking at the industrial sales for the quarter, they were down 25% versus 2005 as a result of lost business, commodity price deflation, and the market withdrawal on several grades of almonds. Pounds in the industrial channel decreased 24% to $12 million versus $15.8 million in Q4 2005.

Turning to the export channel, sales were actually ahead 13.5% in the quarter and they were up 41.8% in pounds. This increase in both pounds and dollars came from heavy shipment of walnuts into Asia and new retail business in Mexico. In addition, we sold off a large part of our remaining whole almond position and almond byproducts into the export market, some of which were at negative margins.

Looking at the year-end summary, fiscal 2006 net sales decreased slightly to $579.6 million from $581.7 million. Although higher prices passed onto customers and changes in our product mix sold generated an 11% increase in the weighted average selling price for all products shipped in fiscal '06, this increase was offset by a 10% decline in total pounds shipped to customers. It's important to know 10% of that 20% decline is a result of the extra week in fiscal 2005.

Closing out the year with a consumer channel, sales were down 2% in dollar volume and 13.1% in unit volume. Declines for the year were driven by less promotional activity at major customers, business losses at two major accounts, and overall flat consumption trends in both the snack and baking nut categories.

Turning to the category update, looking at snack category first. For the same time period our fiscal 2006, total snack nut sales have increased 3% in dollars, but decreased 1% in unit sales and 1.6% in pounds versus a year ago. The flat to slightly downward trend in pound sales can be attributed to the pricing increases seen in the marketplace and the softness of previous diet trends. However, when we look at the 13-week report, we have seen the annual downward trend start to turn around for the last quarter, where dollars are up 4.6%, units are up 2.1%, and pounds increased 3.1% in the snack category.

Looking at the Fisher brand overview for the prior 52 weeks in fiscal 2006, Fisher is up 14.3% in dollars, 7.7% in units, and 8.4% in pounds. This growth is driven by placement and strong sales in the northeast and west with new distribution. And also, the recent launch of Fisher Fusions and other new products will continue to spur this growth. Snack mixes were strong in all channels of distribution, and we expect this trend to continue. The Fisher Fusions that we launched in June of 2006 is a perfect addition to this mix, and based on the strong growth in the snack category, we will continue to pursue opportunities in this channel.

Private label, looking at the prior 13 weeks, is showing slight -- had slight decreases in sales, up 3% in dollars but down 3.3% in units. Overall, it was down 1.7% in pounds in the last 52 weeks. However, in the last 13 weeks, private label is up 4.6% in dollars, 0.5% in units, and 3.7% in pounds. And we're starting to see additional promotional activity with private brands.

Turning to the baking category, prior 52 weeks. Baking nut sales increased 9.7% in dollars, but decreased 0.5% in units, and 1.5% in pounds versus a year ago. The increase in dollars is mainly attributed to the past price increases taken in the category. We have seen average retail prices increase, which is a result of net commodity cost increases. Average retail prices are up $0.31 a unit, which equates to about a 9.6% increase in average retail prices for the fiscal year. In the past 13 weeks, baking nut sales have increased 3.3% in dollars, but decreased 2.6% in units and 4.1% in pounds, again due to price increases taken in the category. However, we anticipate a jump in sales in the fourth quarter as retailers begin to aggressively promote for the baking season.

Looking at Fisher brand in the baking category, prior 52 weeks, Fisher is up 58.9% in dollars, 36.8% in units, and 39.5% in pounds. This increase in sales in the last 13 weeks is up 80% in dollars, 69% in units, and 78% in pounds, mainly attributed to new distribution at retailers in the Midwest and on the East Coast.

Just some highlights of marketing activity this year in part of fiscal 2006. Hired a new public relations firm to help us with the new product launches that we have launched this year and anticipate launching in the coming years. Continue our promotion of sports marketing, as well as other marketing activities throughout the country. The Fisher Fusions snack mixes we launched in June of '06, that was seven snack mixes, was supported by trade initiatives, public relations initiatives, on-shelf promotions, and merchandising. We are launching a family-size Fisher Fusion mix, beginning this month. It will consist of three trail mixes in 20 to 32 ounce packages. We have launched our new holiday gift lines.

Going forward, we are in the process of looking at launching a new program of flavored pecans and almonds. As we see consumption growth in the almond category continues to rise, we have -- we will be pursuing opportunities with the almond market as far as launching new flavors of almonds, and with pecans as well. Also, in fiscal 2007 we will be launching what is called Fisher's Snack Natural. It's a product of healthy natural almonds, pecans, and walnuts that will begin hitting retail shelves in the coming months.

In closing, our company is fortunate to have smart, dedicated, hard-working employees across every department in our organization. We will stay focused on our strategies to pursue value-added sales opportunities across all our channels, we'll develop an innovative product line, we'll continue to grow our Fisher and private brand business, and continuously improve our manufacturing facilities to drive costs out of our operations. We're confident that these strategies will improve our performance, and we will regain unit volume across all channels going forward.

Okay, thank you, Jeff. At this time, that concludes the first part of our presentation, and we would gladly take questions from callers at this time.

[OPERATOR INSTRUCTIONS] And your first question is going to come from the line of Scott Van Winkle. Please proceed.

Hi, gentlemen. A few questions for you. First, on the current inventory level, and congratulations for bringing that down, what percentage of your inventory do you look at today as maybe being a little bit at risk because of the pricing? Not risk, but maybe you're not where you want to be on the pricing for some of these commodities.

I think - and this is Mike, Scott, I think with the exception of almonds, I think we're in a very good position on all of our inventories. I can't really put that in percentage terms, but as you know, and as we've said in the past, we believe that our almond inventory is going to take us into - well, initially, we thought it would take us into probably late November, but we now believe that it's probably more like end of October, and that's mainly because of some of the almonds that we sold into the export market during the quarter.

Okay, so just the almonds. And that number has come down from what we saw in the last quarter?

Yes, it has.

Okay. And any -- and my apology -- you gave a lot of numbers, so if I ask something you already said, I apologize.

Okay.

But can -- you gave us dollars sales, obviously we can see, reported in volumes and pounds. Can you adjust those numbers if you didn't have the extra week last year and give us -- you said most of the decline in units was due to the extra week, but can you give us an actual number or have you done that?

In the last week of fiscal 2006, we recorded approximately $12 million of net sales.

$12 million of the last week of fiscal '06?

Fiscal '05.

Fiscal '05, okay. So that extra week, last year, was $12 million of sales, and I could probably just do the math on per pound, and probably the average for the quarter, that kind of thing?

The pounds were roughly about 6 million pounds.

6 million pounds.

Maybe a little bit less.

Okay. So it looks like units are tracking down just a touch on a comparable basis. You're going to lose -- when do you start to lose your pricing, year-over-year? I mean, you're up 11%, I believe you said, pricing in the fourth quarter. When do you start to anniversary the last kind of big run up in pricing?

In consumer channel, obviously, we're trying to maintain prices and just increase promotional activity but we've cycled against a majority of our almond positions, we're just coming into new crop pecans now. Back to old pricing cycles begins late this month.

Okay, so if your volumes in units stay relatively flat, year-over-year, we would expect to see the sales growth start to flatten out.

Yes, that would be correct because we aren't going to cycle against higher prices versus a year ago in this first quarter.

Scott Van Winkle. Alright. So you're not going to have any pricing advantage to offset the lower units and it should be the same.

Right. It's all about unit volume now going forward.

Okay, and the comment I believe, Jeff, you made about -- or it might have been Mike -- about softer sales in the industrial side because of the high prices, is that picking up? Are your industrial customers starting to push away? Are we seeing that more now than we did, say, 6 or 12 months ago because of the long cycles for new product introductions? Just any current trend in that regard.

Scott, this is Bobby. I'll address that. The industrial customers have a lag time between new product development and the actual introduction between the time that we work with them on new products and the time it actually hits the shelf, and we saw the effect of the top prices really from the previous year and the first part of last year. There was a slowdown in the number of new products being introduced. As we all know, there's a shorter life on any new product on the shelf now than there used to be so these new product introductions are critical to all of our customers in order to maintain their shelf space.

We were part of eight new product introductions, last year, that amounted to about $7 million in annual sales. That's a little smaller than what we typically have had so we have seen the effect of the slowdown, mainly caused by high-priced nuts and the effect that they have on margins of any new product that include them.

The good news is we've seen a turnaround in the interest. We are beginning to see that reverse now that nut prices are forecasted to go down. We are seeing a lot of new products being developed as a result. We expect, going forward, that to reverse and we're going to see more normal new introductions, going forward.

The other effect that we had in fourth quarter is our customers contract their requirements for their anticipated needs for a year, typically, and we saw some slowdown in the pull-off on these contracts, which again reflects the slowdown in the sales as the result of the high commodity prices. The good news is those contracts are still in place at favorable prices so we'll get the benefit of that, going forward.

There's been some talk about some of the large retailers, like a Wal-Mart and others, trying to thin out their inventories. Obviously, they've got some weakness in a lot of consumer products, not traditionally food products, but other products. Have you seen any de-loading in your consumer channel amongst some of these retailers? Because I would assume that relative to a lot of the food products they sell, that some of these salty snacks and snack nuts have a little longer.

Hey, Scott. This is Jeff. We haven't seen what I would consider a de-loading. They're obviously trying to reduce the inventory that they keep in the store or at their warehouse distribution centers. So we're seeing a shorter lead time of orders to shipments, but I don't see an unloading or de-loading of distribution. If anything, we're going to see increased promotional activity from a lot of retailers as they are able to hit new price points that they know will drive consumption.

And any chatter out in the industry about some competitors looking at bringing down pricing the next six months or so because of some expected lower prices coming forward?

We haven't heard anything of price reductions at retail. I anticipate there will be more promotional activity but I've not heard price reductions yet.

And I assume it's a long lead time on doing promotions for like the Super Bowl and such. If I remember last year, it was kind of weak because of those high prices and you talked a little bit about that in your prepared remarks. Are you starting to see - and you mentioned pushing promotional activities - are you starting to see a little more interest in doing those maybe holiday promotions, Super Bowl promotions, this year than last year? Maybe get back on a normal cycle?

Right. Holiday promotions for this season are already booked. I mean, we'll have some spot opportunities for promotion in the consumer division, but you're right. Going forward, January for Easter promotions, the Super Bowl promotions, we're seeing more activity or more interest, knowing that they can drive by and hit better retail price points.

Okay, and Mike, a question for you. What level of volume do you need to get back to to offset that $4 million of unallocated manufacturing overhead?

I would say we probably need to see our volume go back about the 10% that we lost in fiscal '06.

So would it be fair to say that you have $40 million of fixed overhead on manufacturing quarterly? I'm just saying 10% change in a $4 million hit.

Yes, I would say that's probably a little heavy but you're probably in the ballpark.

Okay. And what level of capacity utilization are you currently?

We're at -- we're probably slight below -- slightly below a level that we like to be at, but comparing it in fiscal years, we're probably at about 2003 utilization right now.

Okay, and what happens when you get into the new facility in that same respect?

When we get into the new facility, we expect our capacity initially to ramp up. How much would you say, Jasper?

30%, 40%.

30% on the items that we've put equipment in. I think the company, overall, though, probably would be a lower number, wouldn't it?

Yes, I'd say 15% or 20%.

Right.

Okay, and the hit you took for changing your estimates of bulk inventories, did you say that that was kind of an offset of what had happened positively in '05?

Basically, we had a big positive benefit in '05 that we did not see in fiscal '06.

Did you remember what quarter that occurred in 2005?

That was fourth quarter.

Fourth quarter 2005.

Right.

Okay, and the sequential increase in administrative expenses from $2.9 million to $4.1, can you quantify what percentage of that, or how many dollars of that, was in retirement? Was it more in Q4 than Q3?

The retirement is roughly about $500,000.

Every quarter?

Yes.

Okay, and there's no change to that based on level of profitability?

Say that again, Scott.

Is that a fixed amount or is it dependent on levels of profitability?

No, it's primarily a fixed amount. It gets reset every year.

Okay. I guess that's all the questions I have. Thanks.

Okay, Scott. Thank you.

[OPERATOR INSTRUCTIONS] And your next question is going to come from the line of Steve Raineri. Please proceed.

Good morning.

Good morning, Steve.

Hey. In the release, you mentioned that the average cost per pound of [input] stocks declined by about 7% or so and I believe there was a similar number in Q3. So the change in this decline has been basically flat, and so I'm wondering what the implications are for future quarters. Should we expect to see that delta in the change increase or not?

Well, we're currently cycling out of the current crop year so you won't really see the big change until the end of the second quarter.

Okay, so you're saying we still have two more quarters to go?

Probably about a quarter and a half.

A quarter and a half.

Right, before we finish the crop year.

And if we were to cycle forward to that, what do you think that number looks like?

It's difficult to say what the overall change would be, but we do expect, for example, in the case of almonds, we expect procurement costs out in the field to go down 25%, 30%. Peanuts look like they're probably going to be down slightly, maybe 5%. Cashews are down pretty close to 20% versus where they were a year ago, so those are the kinds of numbers on the individuals. Pecans will be up probably about 10%.

Okay, and so, almonds as a percent of inventory are normally what?

Normally what, Steve?

Almonds as a percentage of total inventory are normally what?

Normally, as in dollar terms, normally less than where they are at the end of '06, that would be correct.

No, I'm saying as a percentage of the total mix, how much are almonds, typically, of your inventory?

Almonds, typically, at least as far as sales mix, they generally are running about -- this year, they're probably up to around 12%.

Okay.

And as a percentage of inventory, it's a very similar number. But I think if you look at past years, if my memory serves, I think almonds probably represented more like about 9% or 10% of our sales.

Okay, and at this point, the almond costs are still -- we're still using prior years so we're not seeing any drop at all. Is that --?

That's correct.

So is it unreasonable to think that if almonds dropped by 25% or 30% that we can get close to double-digit declines of more than 10%?

Declines in overall?

In overall costs, year-over-year, as we go to Q2?

That's difficult to say, Steve.

Well, I guess, we're all hoping that we have lower costs, and therefore, promotional activity will increase and so on and so forth, but I would imagine that needs to kind of filter its way through our inventories. And what it sounds like to me, you're not exactly saying that your costs are going to drop much more than they've already dropped.

No, that's not true at all. The 7% drop that we saw in fourth quarter versus fourth quarter of '05 represents declines especially in cashew costs, which we already are benefiting from. Where we'll see the big drop, and I don't know if it's 10% or 5% or 15% in the overall cost structure, is going to occur some time in the middle of the second quarter as we get out of this almond inventory position that we have and get into new crop almonds.

And just to put that into perspective, I think out in the field, last year, we were probably paying somewhere around $3.75 a pound. And, this year, the opening field prices are looking more like around $2.20 a pound. So at 10% of our inventory, you can see it's a pretty sizeable number but keep in mind that with pecan costs going up, there will be somewhat of an offset there, and pecans do represent a pretty sizeable portion of our inventory.

And what would that be normally?

I would, in dollar terms, I would say as a percentage of our input stocks, it's about 26%. And as a percentage of our pounds, it's probably somewhere in the neighborhood of about maybe 20%.

Okay, so that's sort of offsetting --

Right.

-- a decent amount of the almond benefit.

Right, but I do want to add on pecans. We've handled roughly about one third of the crop. We're the largest pecan sheller in the United States. And even when pecan costs go up, typically, we're able to maintain our profit per pound. We may not necessarily be able to maintain our gross margin percentage as a percentage of sales because you get to a certain point when you're selling at $5 a pound, you simply can't get the kind of percentage you normally get. But just because of the share that we have, we're generally able to maintain our profit per pound.

Okay, well, I guess not to beat a dead horse but we are all hoping for lower input costs and when I see it down 7% in Q3 and down 7% in Q4, the change, that delta is basically flat. So I'm kind of hoping for an increase in the rate of change.

Yes. You wouldn't see that until you roll into a new crop year.

Okay. Well, I -- hopefully, as we get there, that number does increase from the 7% number.

It's certainly looking that way.

Okay. Going to the EBITDA covenants --?

Okay.

I understand it's a quarterly target you have?

That's correct.

When you talk about potentially missing it, is it -- what, specifically, do you mean?

Well, right now, we're analyzing, we're comparing the forecast that we've made to what's occurred in the last two months and that's specifically the evaluation we're carrying out. And then from that point, we're going to determine whether we're going to be in violation of the first quarter covenant or not.

Okay, so that's -- so, number one is this next quarter coming up.

That's correct.

That's at risk, you're saying. And the target, from my understanding, is $1.5 million of EBITDA.

That is correct.

That's correct. Going up to 5.5 and 6.75 in 8.

Right.

Sort of how it goes. So, at this point, can you comment if -- it looks like you may miss Q1. Do you know about the others?

Well, first of all, I wouldn't say that it looks like we may miss Q1. The simple fact of the matter is that we've just closed August and we're going to do an analysis on August in July, put our September forecast against it, and basically crunch some numbers and see how we compare to the covenant. It's a very low covenant so I wouldn't, at this point, say that it's likely that we're going to breach that covenant.

What was D&A running at in the quarter that just passed?

It was about, depreciation and amortization, about 2.7.

About 2.7 million in the fourth quarter.

Okay. 2.7 million. Okay, so we would have been negative EBITDA of around $7.5 million or something like that.

Something like that. Correct.

Yes, okay. Okay, and CapEx for the quarter?

We'll disclose that -- we actually haven't disclosed that but it's substantially higher than it typically has been simply because we're buying a lot of new equipment for our new facility.

No, I appreciate that.

Yes.

Okay, so can we talk about, say, do you not want to say what it was?

No, I can't.

Okay. Do you have a forecast for the upcoming year?

We typically don't disclose that, Steve.

Okay. I mean --

I -- well, actually, I think you'll be able to figure it out in the K because we will disclose what we've spent on the project and I think we will disclose what we expect to spend on the facility consolidation project in fiscal '07 so you should see that in the K. And that basically makes up the bulk of our CapEx.

Okay. Given that we know where we need to closely monitor cash flow and the situation more so, perhaps, than earnings, it would be very helpful to have everything that we need to make sure that we at least can come up with a decent forecast.

Okay. I agree.

That's something I'm certainly concerned about at this point.

Okay.

And just on the selling expenses, I guess we've picked up on some -- relative to Q3, we've picked up on selling and administrative. And, certainly, those are not trends that I perceive to be favorable. And I'm just curious to your opinion why we've picked up so much and how we're going to get these numbers to back down to match the levels of gross profit.

Well, in respect to selling expense for the quarter, we're down slightly but you're right. As a percentage of sales, itself, some of these costs are big and that tends to -- when sales are down, that's going to raise the percentage. But mainly driving the increase in selling expenses is an increase in advertising expense, which I think when unit volume is down, I think that's a good investment to make.

On administrative expenses, really, administrative expenses are up in dollar terms a bit and that's primarily from the retirement plan that we put in place about a year ago.

Okay. In Q3, it was $2.9 million and this quarter, it's $4.1.

Well, that's a pretty typical increase from a Q3 to a Q4. Q3 is our lowest volume quarter so you're always going to see an up-tick there.

Even on the administrative side?

Yes, even on the administrative side.

Okay. Well, thanks a lot for your time.

Okay.

I appreciate it.

Alright.

Your next question comes from the line of [John Witcher]. Please proceed.

Yes, I just had a quick question on operating cash flow. I was curious if any of the declines in inventory flowed through to the cash flow statement.

Yes. That's going to be the primary driver of the increase in operating cash flow that will show for the fourth quarter.

And that number will come out, I assume, with the Q? You don't want to disclose it today?

I can't disclose that today but it will be in the K.

Okay. Thank you.

Okay.

Your next question comes from the line of [Arez Evixer]. Please proceed.

Yes, hi. My question actually has to do with, again, the covenants. It sounds that even before these two months and the extra information, the covenant was set pretty low in my calculation around resulting in probably about breakeven when it comes to earnings per share. And my question is why is it that low? What caused you to forecast it in that level? Or at least feel confident at that time at that level? And why is it that, now, at least for the first quarter, you feel somewhat less convinced about it?

Well, I wouldn't say we feel less convinced about it, but first, let me start by saying that when we structured the covenants with our lenders, everyone was aware of the fact that we still would be operating under the high-cost commodity cost structure in the first quarter that we have been operating, really, for almost two years now. And, consequently, we agreed to set that covenant at a low level. Excuse me.

I would also add that that covenant is set at a level that even a slightly negative loss, would still allow us to meet that covenant, simply because of depreciation expenses. It's probably going to run at roughly the same level it did in fiscal quarter of '04.

I see. And the second part of the question, why is it that given that the first two months and the information you have there that it's not assured that the first quarter covenants of $1.5 million of EBITDA will be met?

Okay. Well, first of all, we haven't really had a chance to analyze August yet. And keep in mind that the compliance with this covenant -- our audited opinion is reliant upon clients for this covenant, or at least believe that we will comply. And, consequently, we have put much more effort into making sure that we will comply or will not comply. Then, we may have been in other circumstances so that is why we're alerting our investors to the fact that we do have to do much more evaluation.

Okay, if that would be the case and then you get the opinion, does that trigger, automatically, a renegotiation in both on the notes and the revolver?

No, it does not.

Okay, because you did indicate that you will - because of the breach of the covenants, you need to dicuss at least the revolving, if it's my understanding. Or is it also the notes?

The covenant is actually in the notes. However, there is a cross default provision that would also trigger a default in the bank credit facility.

Okay, so it's not the opinion that it will trigger and in discussion will be more breached on the covenants?

That's my belief.

Okay. That was very helpful. Thank you so much.

Okay. Thank you.

Good luck.

Your next question is a follow up from the line of Scott Van Winkle. Please proceed.

Hey, Mike. If inventory is down 20% in pounds, which I think you said, for the fourth quarter compared to a year ago, and you expect inventory -- let's say you're going to plan it to be flat next year -- would I then assume that you'd have a 20% increase in capacity utilization next year versus this? Is that the simple math?

I'm not sure how you get from inventory to capacity utilization.

In other words, the two things that are driving your cash yields. What's driving your cash utilization is production, and production is being driven by your level of sales plus or minus changes in inventory. So if you're targeting to reduce your inventory, next year, or let's say keep it flat in pounds, shouldn't your production go up next year, pretty significantly, from this year? Because this year, you cut back in production to reduce your inventories. Correct?

Yes. You're absolutely right. With our finished goods down to the levels they are now, we would expect -- even if our sales were flat, we'd need to increase our produced pounds to get the finished goods back up.

Perfect. That's perfect.

Right.

And the other question -- you said your audit opinion depends upon you meeting these covenants. Am I to assume that you're like a going concern?

Yes, that's correct. I think that's what we said in our press release.

Okay. Thank you.

Okay.

Ladies and gentlemen, this does conclude the question-and-answer session. I'd like to turn the call back over to Mr. Mike Valentine.

Okay. That concludes today's earnings conference call for the fourth quarter and full-year fiscal 2006. We thank you for your time and interest in JBSS.

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