John B Sanfilippo & Son Inc (JBSS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 conference call. My name is Jill, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [OPERATOR INSTRUCTIONS] If at any time during the call you require assistance, please press star zero and an operator will be glad to assist you. I would now like to turn the call over to Mr. Mike Valentine, Chief Financial Officer. Please proceed, sir. Thank you, operator.

First, let me thank all participants for joining us in our quarterly conference call for the first quarter of fiscal 2007 for JBSS. With us today from the Company are Jeff Sanfilippo, CEO; Jasper Sanfilippo Jr., Executive Vice President of Operations; and Bill Pumperjack, Vice President of Finance.

We may make some forward-looking statements today, these statements are based on a recent expectations and involve risks and uncertainties. The factors that could negatively impact results are explained in our form 10-KA, which was filed recently in another SEC filings that we have made. We encourage you to refer to these filings to learn more about these risk factors. Starting with the restatement of our 2006 annual report.

As a result of certain errors made in the underlying assumptions in our financial forecast for the first quarter of fiscal 2007, which was relied upon in predicting future covenant compliance and determining long-term debt classification at year-end, we have restated the financial statement that appeared in our 2006 annual report to reclassify the long-term portion of the outstanding balance in our note agreement in the amount of $54.2 million to the current portion of long-term debt. Other significant items in the amended annual report are as follows. Due to the loss in the first quarter and results and uncertainty as to whether the Company would be in compliance with loan covenants over the next 12 months, the independent auditor reissued its opinion on the 2006 financial statements to include a going concern paragraph. We also recorded an impairment charge for good will in the amount of $1.24 million.

We established a valuation allowance of $500,000 for state income tax benefits for those states that do not allow carry backs due to the issuance of the going concern opinion. We recorded a charge of $538,000 for the consolidation of a VIE because the excess liabilities over assets and the VIE's books exceed the corresponding net amount on the Company's books. This amount was recaptured into income in the first quarter when the VIE's property was sold and the lease between it and the Company was terminated.

The last three items resulted in a $2.3 million increase to the net loss that was initially reported and all adjustments noted above were noncash items. The Company also reported four material weaknesses which are paraphrase from the 10-K as follows. We do not have effective controls to insure timely and complete communication within the organization. We do not have effective controls to insure complete and accurate assessment of good will impairment. We do not of effective controls over the account for lease transactions and we do not have sufficient resources in our accounting department to insure that GAAP was properly selected and applied and that filings were made in a timely manner.

All material weaknesses are in the process of being remediated. Additionally, we have already implemented our plan to continue as a going concern as evidenced by a recent announcement that we would no longer purchase almonds directly from almond growers, Jeff Sanfilippo, CEO, will also go into more depth on some of the steps we have taken to improve operating results.

In respect to the NASDAQ delisting, today we received a letter from NASDAQ informing us that our filing delinquency is considered cured and that the hearing is now considered moot. Turning to the first quarter income statement, quarterly net sales decreased by 3.5% to $133.8 million from $138.7 million in the first quarter of fiscal 2006. The decline in net sales was caused primarily by a 5.7% decline in volume.

In the consumer distribution channel and also lower average selling prices in the industrial export and food service distribution channels. The overall selling price per pound declined by 6.8% the first quarter of fiscal 2007, compared to those prices for the first quarter of fiscal 2006. The lower average selling prices were mainly as a result of the change in sales mix as volume increases were experienced in low-cost items such as unprocessed peanuts, in-shell walnuts and raw almonds. Sales in the industrial food service and consumer channels declined by 12%, 5%, and 2% respectively. Sales in the contract manufacturing and export channels increased by 8% and 6% respectively.

As a result of significant increases of pounds of walnuts and cashews shipped to customers, overall pounds shipped increased by 4% versus pounds shipped in the last year's first quarter. Pounds shipped increased in all channels except the consumer channel in the first quarter. First quarter gross profit margin declined to 4.3% from 9.6% a year ago as a percentage of net sales. The decline in gross profit margin came about as follows. Weighted average selling prices fell by 6.8% while cost per pound sold fell by 3.1%. This disparity in the decline and prices and costs occurred because we entered into new crop industrial contracts while still in possession, higher price sold crop inventories, especially in the case of almonds.

Both crop almonds have been completely sold as of the end of November. Walnut prices declined in the part because Fisher promotional activity that helped us secure new distribution in the quarter. [inaudible] prices fell mainly in the industrial and food service channels and favorable increase in the final walnut grower settlement that was agreed to in the third quarter of fiscal 2006 also led to nominal gross profit contribution from walnuts in the current quarter. Walnut prices and costs are expected to be more aligned for the current crop year.

Unfavorable shellout adjustments to estimated bulk start inventories of pecans and walnuts also contributed to the gross margin decline in the quarterly comparison. Lower net sales also led to lower gross profit in the quarterly comparison. Quarterly selling and administrative expenses as a percentage of net sales decreased to 8.7% from 9.6% in the first quarter of 2006. Operating expenses declined because of a gain of $3.0 million that was recorded from the sales of three Chicago-area facilities in July.

Selling expenses increased from 7.1% to 8.1% because of increased rate costs to ship products to customers and costs associated with the move of our distribution center to the new Elgin Facility. Quarterly and administrative expenses increased to 2.9% from 2.5% of net sales before considering the gain.

A full quarter of retirement plan expense drove the increase in administrative expenses as a retirement plan expense in last year's first quarter was only for one month. Higher short-term borrowing rates were the main cause of the 200,000 increase in interest expense in the quarterly comparison.

Looking at the balance sheet specifically inventory, inventories versus last year's first quarter decreased by $56 million or 28%. Declines and quantities of finished goods and walnut, cashew and almond input stocks on hand at the end of the first quarter exceeded increases in pounds -- pecans on hand. Total quantities of input stocks declined by about 9%. A significant decline in the average cost per pound of input stocks on hand further led to the decline in total inventory value.

With the exception of walnuts, cost per pound of all input stock items declined in the quarterly comparison. Now I will turn the call over to Jeff Sanfilippo who is joining us from our Selma, Texas, facility, to talk about trends in the category and other matters.

Thank you, Mike. The first quarter of 2007 results were disappointing for the Company. As Mike mentioned, net sales declined to 133.8 million, the decrease of 4.9 million or 3.5%. The decrease in net sales was caused primarily by unit volume declines in the consumer distribution channel and lower average selling prices in the industrial export and food distribution channels. Net sales in the consumer channel decreased 1.9% in dollars and 5.7% in pounds.

Private label sales volume decreased by 2.1% in the first quarter of fiscal 2007 compared to the first quarter of '06. These declines were mainly due to the loss of business and not recurring promotions of two major customers during the last half of fiscal 2006 and as well as the Company's decision to exit noncore private label product categories such as chocolate chips, coconut and candy.

These decreases were partially offset by increases in other major customers. Looking at the industrial channel, net sales decreased by 12.4% in dollars. However, there was an increase of 15.4% in terms of sales volume. Sales volume increase was due to sales of raw peanuts to other peanut processors that occurred in the first part of fiscal 2007.

Excluding these raw peanut sales, industrials sales volume would have decreased by 3.3% in the first quarter. Lower average selling prices attributed to the sales dollar decline, we also saw reduction in shipments in the quarter for high-priced nuts such as pecans, to some industrial customers who either changed formulas, were behind on contract pulls or did not repeat a promotion on one of their product which is used pecans.

Looking at the food service channel, net sales decreased by 4.6% in dollars. But increased 2.7% in terms of sales volume. The sales volume increase is due mainly to higher sales to customers in our airline channel.

The lower average selling prices for nuts such as almonds contributed to the decrease in net sales dollars. The contract packaging channel increased by 6.4% in dollars and 3.7% in volume in the first quarter of '07. This growth was primarily due to the launch of a new product line for an existing customer.

And we expect strong growth to continue in this channel as contract manufacturer customers pursue additional line extensions which include nuts. Turning to the export division, net sales increased by 8.3% in dollars and 32% in volume in the first quarter. This was due to heavy shipments of bulk almonds, pecans and in-shell walnuts into Europe and Asia, as well as some new retail distribution in South America and Asia.

Now, let's turn to the snack and baking nut category for updates. Based on Nielsen prior 52 weeks, snack category unit volume is flat with dollar sales up 3.3%. Dollar increases are mainly due to an increase of 3.5% of average retail prices. Fisher snack is up 4.6% in units and 6.8% in dollars. This is a result of new distribution in the west and the northeast. Looking at what's driving the dollar sales growth in the category, almonds and snack mixes continue to lead snack category growth. With almonds up in both dollars and units over 8% and snack mixes up 22%.

Our company is meeting strong consumer demand for almonds and snack mixes with our new line of Fisher Fusions. Our business manager continue to gain new distribution of this snack mix line as well as our new Fisher Bold Flavor almond and pecan lines. Turning to the baking category. Over the prior 52 weeks, sales increased 8.2% in dollars but were flat in unit volume.

Fisher sales in the baking category increased 40% in units and 55% in dollars as a result of new distribution gained earlier this year in the south and in the midwest. Although category growth is relatively flat in unit volume, prior 26 week volume shows signs of some growth. It's important to note that total company volume shipped is measured in pounds, increased 4% with significant increases in pounds of walnuts and cashews shipped to customers in the quarter. Pounds sold increased in all business channels except for consumer. An increase in unit volume sold is critical to achieving a recovery in our operating performance. The Company will continue to dedicate resources and invest in our core customers while pursuing opportunities across new customer segments.

At the same time, the Company is focused on profitable growth that will deliver better margins. As one of our action plans to improve margins, the Company is completing a thorough analysis of every product we manufacture to determine where and how we can continue to drive costs out of production. Our marketing department is reviewing margin requirements, skew rationalization and prices and our sales force will initiate price adjustments where necessary.

Our management team has initiated other action plans across all departments to reduce costs and improve margins as well as address our company's going concern status. Reduced manufacturing spending and costs associated with excess waste in Gustine Facility, Mike talked about the discontinuation of purchasing almonds directly from growers. There's other activities that are taking place in our California facilities, such as redesigning cleaning and processing to improve shell removal on walnuts, increase through-put volume to reduce labor hours in the facility, as well as new weight control initiatives across each facility in the Company.

We're also decentralizing our purchasing functions to reduce component outages as well as improved service levels. Sales and marketing will implement merchandising and marketing plans to increase unit sales and gross margin. Challenging year for our company as you all know. Even during these present challenges, we've remained focused on bringing the best possible service and products to our customers. Our sales, marketing and operation teams have everything they need to maintain and grow our customer relationships in business.

The Company is also remaining focused on moving into our new corporate head quarters in Elgin. We began distributing finished goods out of the new facility in July, and production began for roasting and packaging in September. The Company had its first quality assurance audit in the new facility just this last week by the American Institute of Baking and we received a superior rating. These strong results demonstrate our commitment to continuing our quality, continuing our business going forward to service our customers and now we will expedite the approval process to manufacture for major customers in our new plan immediately.

Prior to our disappointing operating results in the past four quarters, JBSS has had a consistent track record as a growing and profitable company. We expect to get beyond our current difficulties with the changes we have implemented.

In closing, the Company has adjusted our business practices to reduce our exposure to the fluctuating commodity price that hurt our business in 2006. They're also implementing more accurate projection models so we can better predict our market outlook. Management is confident we are making necessary decisions to improve our financial standing going forward. I would now like to pass the call back to Mike for his closing comments.

Okay. That wraps up management's statements. At this time, we'll open up the conference to questions and answers. Operator, would you please queue up the first question?

[OPERATORS INSTRUCTIONS] Ladies and gentlemen, if you wish to ask a question, please press star one. If your question has been answered or you wish to withdraw your question, press star two. Questions will be taken in the order received. Please stand by while we compile a list. Your first question comes from the line of Scott Van Winkle with Canaccord Adams, please proceed, sir.

Thanks, I going to go ahead and apologize to everybody in the queue behind me I have got a lot of questions.

Okay, Scott.

Mike, so, I've got a few questions and I want to focus on results and then going forward and kind of talk about financial position. So, if I look at the income statement, I think you said something but I apologize, I didn't catch it. Why were selling expenses up there on a sales decline year-over-year?

Okay. Primarily was because of increased freight costs and also because of the costs associated with moving our distribution center from here in Elk Grove Village out to the new facility.

Okay. And while we're talking about did new facility, and again if you said it, I apologize, I was trying to keep up, there was a lot of information. Where do you stand today in that consolidation project, percentage of completion kind of getting through it, or any big items that have been moved, not been moved? Do we have an idea?

Scott, I'll turn that question over to Jasper Jr.

Hi, Scott. Currently, we have the entire distribution center over there. We have 80% of our new production equipment online and running. We're currently working on getting the remaining 20% up and in production. And this week marks the first week where we're beginning to move our existing equipment out of our Elk Grove and Arlington Height Facility and into the new facility out in Elgin. I would say, Scott, we're 35%, 35 % to 40% done.

And relative to your original plans?

We're currently on schedule.

Okay. And the 80% of new equipment online of your production when complete, what percentage will be run by new equipment?

It's a tough one to guess. But I would say because of the high speed of our production lines, that should service about 25 to 35% of our production at least for those type of items which are cans and roasting.

So new equipment will be a quarter to a third of production when all done?

Correct.

Excellent. Okay. And in the quarter, you had a couple I guess back to Mike or Jeff, but how much of the consumer decline was driven by, I think there were a couple large customer losses? Was that what you indicated, Jeff, in your comments about some promotional program that is weren't repeated?

Correct. There was a combination, some promotional activity that was not repeated for Fisher programs, a couple of customers. Then it was a loss of a private label customer that occurred in the third quarter of 2006.

And the reason, third quarter 2006. The reason for the loss of that customer was just pricing?

Pricing, it was a combination of competitor had a value proposition that made sense for the customer to move business.

Have there been any customer who have maybe shifted volume elsewhere either because of the consolidation project or maybe concerns about the financial position?

No, there are not.

Okay. And have, has there been any increase in turnover in the last couple of quarters among, not line-level employees? Obviously you've got some changes with facility consolidation and people probably leaving, they're not going to be moving out to the new facility. But among senior people that you were planning to move to the new facility had there been an increase in the last couple of quarters in turnover?

No, there have not. There's not been any attrition with senior management as a result of the move to Elgin.

Okay. And what happens to, the Gustine, California plant that was doing almonds?

Correct.

What happens to that plant, less volume going through?

We're still going to continue to shell and process walnuts out of the Gustine Facility. We're still going to continue our roasting and packaging in the facility. We're still continue to pasture products with our new machine technology in the facility.

So nothing change 's with that asset?

No. We'll sell some of the equipment that was used exclusively for almond cleaning. But the majority of facility will be used as it currently is.

So, from now on, you're only buying almonds from a third party? Can you explain to me the logistics of how it changes with your new plant what the benefit is at the end of the day? Is its risk reduction?

It's mitigating risk. We're not taking positions of almond when is the crop is harvested and then have to sell them or be selling them in our industrial channel. There's been a shift in the whole almond industry over the last couple years where the margin for processors, as ourselves, have been squeezed by grower processors that have become more dynamic and invested in the processing technology themselves. They've got a cost advantage with almonds out of the field that we do not have. And, therefore, over the last couple years, we've realized there's not been substantial margins being made in the processing of almonds. So now we will buy directly from the grower processors and mitigate the risk of taking ownership of the almonds from the start of the crop, as well as reducing the cost we had in manufacturing those almonds.

Okay. And the advantage they have on buying in the field at the end of the day, they're not losing any purchasing power?

Well, their advantage is they're growers. They profit, they make a profit on the actual growing of the almonds. They got a cost advantage of the actual raw product itself.

Okay. Okay. You kind of benefit from that. You're not paying significantly higher prices at the end of the day?

Right.

On the inventory, Mike, you know, why wasn't the gross margin stronger? I think you thought it was going to be stronger this quarter. And as you ended the September quarter, how is your cost per pound of inventory relative to expectations, maybe relative to last year, maybe relative to selling prices?

Well, as far as the cost per pound of the ending inventory itself, it pretty much met expectations, Scott. Where we lost quite a bit of margin was on the revaluation of our old crop inventories as we transitioned from one crop year to another.

How is that performed? You take, you look at quality? Or do you just write it down to the current price?

We write it down actually to a weighted average cost f the market will support that in the case of almonds, we were able to do that, but not as much as a straight average would have dictated. Because the market was quite a bit lower than our costs. For the new crop.

Okay. And relative to your expectations, your expectations going in here, you kind of, I would assume you expect it's going to be back in balance between what you have in inventory and what your selling prices are going to be, or at least what you're forecasting they're going to be over the next 12 months?

Right. Based on the kind of selling prices that we see right now in the competitive landscape, everything looks like it's aligned. Of course, who is to say what's going to happen in the future with selling prices. But right now, I would say everythings aligned in the market.

And from your vantage point, are you expecting any more deterioration in selling prices?

Scott, I guess I'd have to turn that one over to Jeff. He's got a better feel for competitive landscape than I do.

Scott, one thing we are seeing is some strong competitive activity from some of the brands in the snack category with heavy promotional account a activity. So there could be some price pressure in the consumer channel on some product lines as a result of promotional activity from some competitors.

What about in your other channels of distribution? Industrial, things of that nature?

Industrial, pecans, for example, is just now being beginning to contract. We're still in the process of procuring our pecan needs for the year. We don't see any price pressure there, if anything that market might continue to rise. Almonds, the growth and consumption in almonds is still strong so we don't anticipate any big price deferential there. Walnuts, is the way the crop came in, we had actually see price increases going on in the walnut -- [inaudible]

Mike, I'm going to ask you a question, you probably don't have the number in front of you. But the inventory dollars at the end of the first quarter are roughly equivalent to what they were in the first quarter of 2005, are the pounds about the same?

I'm not sure. I don't have 2005.

Yes.

I'm sorry. It's probably just, it's got to be pretty close, Scott. Because a lot of prices that we're paying for new crop is similar to what they were two years ago.

Got it. Got it. And then, on the financial position side, do you have any other assets such as Selma that could you do a sale leaseback if necessary?

What we have, Gustine, the new Elgin site and North Carolina are all capable of being used to replace the notes if we need to.

There's a mortgage on the Elgin side, isn't there?

Yes, there is. But it's held by the current lenders. And if we need to replace the note holders, that would be the real estate we'd use.

Okay. And I think that exhausts my questions. Thanks.

All right, Scott.

And your next question comes from the line of David Rosen with SAC. Please proceed, sir.

Hey, guys. A bunch of questions. I guess first on the notes. I'm assuming the holders of the notes want you to increase the interest rate.

No. Actually, we refinanced back in I think it was July or June. And at that time, we had an increase in the interest rate. But right now, there's no request to change that rate.

So, so -- in all of your filings, there is a discussion about replacing them. Can you walk me through the, the scenario under which you actually would replace them?

Right now, we have a very favorable interest rate with the note holders at 5.67%. So unless the note holders came to us and said that they wanted to terminate the credit facility, we wouldn't, we probably wouldn't do it.

And I guess but right now, you are technically in default of that?

No, we're not, actually. All of our noncompliance with that agreement and the bank credit facility have been waived.

Okay. So they've actually agreed to waive for how long?

For this quarter.

Okay. Now, I'm assuming because, and I apologize if this, maybe I'm not understanding this properly. I'm assuming that that interest rate, because it is so favorable, and your financial condition has deteriorated, that, based on your credit profile, they would require, they may require, additional interest. Or they'd ultimately ask for a higher interest rate. Is that the scenario under which you would replace them?

Yes, that would be true. If the gap between our current interest rate and the market was close enough, then we probably would opt for conventional mortgage financing.

And what do you think conventional mortgage financing would deal for you guys?

I would imagine the rate would probably be as of a week or so go, somewhere around 6 1/4.

So 75 basic points higher.

But that's on $60 million. It's a big number in present value terms. Also, keep in mind we have a prepayment penalty.

Okay. Okay. And you did mention, you believe your existing lenders will allow you to use the Elgin facility as collateral for a new, a new note to replace the existing notes?

Yes. We do.

Okay. Will you have to compensate them for enabling you to take that away from them, that security away from them?

The remaining lender would be our bank, would be the banks who finance our working capital. There's adequate working capital to support that line of credit.

All right. I mean, I don't know much about it. I never talked to your banks or anything. But generally every time something gives something up, he gets something in return. Okay, fair enough. So there's sufficient assets to hopefully pay off the notes to the extent that they actually get accelerated?

That's correct.

Okay. On the, on the facility consolidation, how long will you have to be operating the two facilities?

Jasper, want to take that one?

Our current schedule is to get out of our main Elk Grove Facility by calendar year 2007 and we will move the two smaller facilities out in 2008.

So you're going to be running both the facilities through the end of this year and then you'll be able to operate just one?

Correct. Beginning of 2008 we'll be running three plants, the two main plants and the small one in Elgin.

Do you guys have any excess inventory that you can continue? You've Dunn a great job of using inventory in the last year or so. I think you're at 124 million. Is there an opportunity to reduce that even further?

Well, we're actually nearing the peak of our inventory. We're going into that period which usually starts right about now and ends in about March. So we're actually building inventories right now. What we're certainly working very hard at is not to have excess inventories as we have in the past. Consumption, as Jeff has mentioned, is still flat. Down on certain items. And this isn't a good time to have excess inventories.

Okay. So, assuming that you're able to maintain flat inventories, I mean, how -- maybe you can help give us some guidance in trying to understand. How much in losses could you guys incur before you would have true, a true liquidity problem? This whole language about growing concern is somewhat worrisome. So I guess liquidity is probably more of an issue now than probably it was when we spoke last year or two years or three years ago.

Well, it's against company policy to give guidance. I will say that at this time, we have plenty of assets to support the loans that we have. In fact, they're in excess of that. So I'll leave it at that, Dave.

I guess all I'm asking you is, I mean, this last quarter, you had negative EBITDA of call it 8 million or $9 million. Maybe more than that, maybe 10 or 11. If you maintained that without additional inventory to draw it down, that would be a cash outflow's perspectively in the orders of magnitude of at least that $40 million plus your CapEx and your interest. That's a lot of money. So I guess it would comfort investors to understand that that's not -- that that's just a hypothetical. That you're not going to record losses for the next year or so.

Well, David, I'm sorry, but we don't give guidance and I'm afraid I can't answer that question. But I will say this. As we discussed in some of Scott's questions, that inventory acquisition costs right now are very similar to where they were in 2004 and 2005 on most items. We would describe this as a normal cost structure. And also I would remind you that about 80% of our total cost of sales is roughly the cost of our nuts. So I'll let you take that but that's about as far as can I go.

Okay, thank you. Good luck, guys.

Thank you.

And your next question comes from the line of Jim Morey with [Biside] Analyst, please proceed.

Hi, Mike. Hi, Jim. Just a couple of quick questions. If I think about revenues as I go -- one of the things I think we might be missing or I might be missing is that you may be turning the corner here. One of the things that I'm trying to look at is revenues. And if I start thinking about revenues at about 580 to 570. Am I in some sort of ballpark that I can work with?

Well, Jim, that's also a difficult question for us to answer, too. And it's one of the reasons why we don't give guidance. As you've seen in the first quarter, we saw a sizable decline in selling prices, which we did expect. But we can't predict what will happen over the next three quarters in that respect. Hopefully they'll stabilize. And then with the unit volume increases, it's arguable that, we could have relatively flat sales. But if we don't maintain the unit volume increase or if selling prices go down even further, then I'm not so sure that flat sales is something that's attainable.

Okay. That's helpful. That's helpful.

Okay.

And your visibility, let me back up just a bit. In unit sales, you have seen an increase, right?

That's right, in the first quarter.

So at least part of the equation for the revenue side of this thing is improving.

Right.

Okay. And we know that cost to goods roughly 75%, 80% of your cost to goods numbers is the nuts. What kind of visibility do you have on nut prices? Isn't it pretty good?

Our visibility on nut prices is very good, especially at this time of the year. Because we're essentially buying almost a year's supply of many of the nuts that we process.

Okay. And when I look at some of the nut prices that have dropped, I mean, almonds, we used to be $4 and there's somewhere in the low 2s now. As I look through some of these nut prices, it seems to me that your cost of goods drop somewhere in the vicinity of 12 to maybe even 16%. And that's just my guess. So, am I seeing nut prices declining? Is that what you see, too?

Yes, that's exactly what we see. It varies from nut to nut. Jim and I couldn't tell you where the weighted average combination of it is. Just to give you some ideas, as you pointed out, almonds are down about almost, probably 80%. Cashews are down about probably about 15%, maybe even 20, at least the current market. Peanuts, were down at some point in time where everybody was buying by about 5% to 7%. And the list goes on and on. I think the only one that really hasn't changed is walnuts.

Okay. So, again, this is me thinking out loud. To think about something in the vicinity of a gross margin that might be close to 15%, or 14 or something in that range, it's doable, assuming the revenues are going to be okay. Because we're already seeing the cost of goods, which is the vast majority, or the price of nuts, is crime, which is the vast majority of the cost of goods.

That's right, Jim.

All right. Now, here's another thought. An SG&A, is it possible to hold SG&A below 10% of sales? I mean, is there a targets? I know you guys -- do you have a target on can you help me out how to think about SG&A as a percent of sales?

Jim, as far as spending goes, generally speaking, with the exception of some of these one offs like the mover, the distribution center, you don't see a lot of big changes. And selling in admin dollars, I think for the most part. I think if you'll go back through time, you'll see it kind of tracks that way. But where the percentage could start to get out of synch would be if the revenues come down.

Okay.

If we see sizable declines of selling prices where we dip below the 580 million mark to save $5.50. I think it's a good percentage that the rate would go up.

Right, so maybe a better way to look at it then is just looking at the dollars spent and then just keeping it more or less constant.

Right.

Okay. And, of course, you had some price increases with your freight. But are you seeing any benefit in freight now? Are freight charges coming down a bit?

Yes. We're starting to see some nice declines in the -- Jasper, I don't know. You might want to chime in there. How high did those surcharges guess last year?

You know, Mike, I don't have the number off the top of my head.

I do remember seeing something north of 20% on some of the fuel surcharges. And I know we're seeing surcharges now in the market that be significantly lower than that.

Okay. So, again, okay. I think that's good. I think I have a good handle there. And finally, when I look at your line item, okay, most of that's interest expense, right?

Yes. And that whole section.

Right, okay. And interest expense probably is going to go up a little bit isn't it somewhat seasonal?

Well, it always goes up in the third quarter. As our inventories peak. We'll also see it go up as we release more capitalized interest from the Elgin project. As we put more equipment and other parts of the building into service.

Okay, all right. But the magnitude, well, I don't know if you can help me out. Can you help me out with the magnitude there?

No, Jim, I can't.

All right. That's fine. That's fine. Shares outstanding, your share cut is probably not going to change much, is it?

No, I don't think so.

All right. Okay, you know, I think I'm good. Thanks, Mike.

Okay, Jim. Thanks.

And your next question comes from the line of Scott Van Winkle with Canaccord Analysts. Please proceed.

Just an easy follow-up. Is there any, on the retirement expense, is it fixed or is it related at all to income?

No. It's fixed and it's measured every year, based on expected retirement age, discount rates, that sort of thing.

Actuarial factors.

Okay. Thanks.

Okay.

And your next question comes from the line of Russ Silvestri with Skiritai Capital. Please proceed, sir.

It is Skiritai Capital. Two questions. In the comments, you mentioned that you used a weighted cost an the almonds. And I was wondering if you compared that to the current cost, what would it that be the discrepancy on a pound basis?

You're talking about the weighted average cost in the first quarter versus today?

Correct, yes.

It's significantly lower. I'm sorry, we haven't disclosed the difference. But call it significant.

Okay. And then, of the total inventory that I think you have one of dollars basis of 142 million, what% of that is almonds?

Almonds actually make up -- yes, they make up you a percentage that's pretty similar to the percentage of our sales mix.

So, enlighten me. Is that like --

I think almonds, last year, they were about 12%, but typically they're more like around 10%. But let me just say that just looking at the mix of all our input stocks, they're in sink with our sales mix.

And I guess if you looked at all your inventory accounting, do you use weighted average price, do you use that consistently?

Yes, we do.

Okay. And given the fact that the market prices have come down, would it be fair to say on the inventory on a weighted average basis, would be higher than the current market?

As of the end of the first quarter?

Yes.

It's definitely the case for almonds. Although then we reserved some of the items that we thought back to market going forward. So, outside of that, though, everything else was fine.

Okay. And if you look at the capitalized interest that's coming off, how much is remaining, that has yet to come onto the book, become current?

You know what? I don't know the numbers specifically. I know it's in the queue.

All right. We'll find it there. Good-bye. Thank you very much.

And your next question comes from the line of TJ [Laverty] with [Calcy] Capital, please proceed, sir.

Yes, hi, Mike. What is the EBITDA covenant for the quarter ended December the second quarter?

It's 5.5 million.

And being that we got less than two weeks to go and that, do you have any feeling as to being able to get waivers for this if you can't make that 5.5 million?

I have spoken with the lenders. Obviously, they're noncommittal. I think that my sense is, is that they know we're now in a new crop year. They do realize that we have been burdened with all Mondays for about two-thirds of this quarter. And I'm talking about the second quarter. But I think if they see improvement, my sense is that we'll get waivers. But there's no assurance that that would be the case, obviously.

Is there a chance that you'll be able to make this convenience or does it look like you'll break it at this point?

I can't answer it, TJ, right now.

It's too early? Okay. And the other question I have is relating to dealing with inventories, I guess on the almond side but perhaps you're looking at it throughout all your inputs. Mike, will you be able to be reduce your inventory sizes across the board so as not to use as much working capital on an annual basis, for example, cutting the need for inventories maybe 10% or 15%? Can you give me a flavor for being able to reduce working capital?

Sure. Exiting, or discontinuing purchasing almonds from growers will certainly free up a substantial amount of working capital. And depending on what their price is. And then we'll either use that excess working capital and again I'm talking about next crop here, to either pay down debt, short-term debt, or take advantage of opportunities with other nut products.

So, is that reduction of about 10% of inventories being that almonds is 10%? Is there something you could give me nor quantitive for that?

We typically buy anywhere 10 to almost 30 million-pounds of almonds. It fluctuates pretty wildly over the year. And of course you know the market price ranges between, typically between $1.75 and $2.75 in normal years. It could be as much as that. But as you know, we've cut back pretty dramatically on the almonds we purchased this year compared to last year.

Right. And in addition, will you be carrying inventory for a shorter period of time, being that you're buying almost processed almonds?

That's correct.

So inventory turns will decline?

Right. We literally go from essentially two turns a year to probably eight turns a year or even 10. Depending on how we purchase the almonds.

Okay. But you see turns increasing, then. Moving forward. And is, at this point, can you give me a degree of the increase in term turns you expect with the new purchasing?

Well, basically, we're going to go from buying what is essentially a one-year supply in the fall to buying our needs every month.

Okay. Thanks, Mike.

Okay. TJ.

And your next question comes from the line of Steve Raineri with Franklin Advisory Services. Please proceed, sir.

Hi. You mentioned that promotional activity has picked up. And I was wondering if you could put that into context and discuss the extent in which this promotional activity is eroding the benefit of oil prices for raw material.

This is Jeffrey, by the way. Promotional activity we are just seeing heavier promotional activity from some of the brands in the consumer channel at retail. So--

That's a meaningful part of the business.

Sorry? Correct.

So, can you -- it would be great to kind of get a better understanding of what exactly that meaning. And right now, are we seeing margins in the consumer channel actually flat? Or lower, or not seeing the benefit of lower raw material prices?

The margins in the consumer channel will be consistent. The promotional activity from the brands will effect the growth that we see in private label in our Fisher brand. But so you'll see sales volume drop. It's a promotional activity that continues to be strong. From a margin standpoint, unless we drop our prices as well, you won't see a margin erosion there.

Okay. So we're either going to lose business or have lower margins.

Correct. Or we'll have promotional activity as well and maintain, or the competitors, will stop the promotional activity.

But as it stands today, where do we stand?

If they continue with the promotional activity that they have then you'll see some decline in profit label growth.

So you're saying that these branded companies are taking the lower prices and actually using them as a leaver to get business?

They're gaining market share, correct.

That's from private label, Steve.

Correct.

Sure. Okay. But it is a very material amount. And I would have hoped that we could have, see margins expand. We're all hoping that we see gross margins expand.

Right, and we'll focus on higher margin business, do Fisher product launches that are value-added, won't compete with some of these promotional activity that were are seeing from competitors. We'll obviously we don't want to see any margin erosion so we're going to look at opportunities to grow profitable margin business.

Okay. And in light in the shift of the almond business, I'm not quite sure I understand how your margins would be in any better by buying from someone who already adds more value to it ahead of what you do. And you have to resell that.

Okay.

I'll take that, Jeff. The reason is, Steve, is as you know in the last two years or so, we've gone out and sold almonds. In some cases, before we've even bought almonds. And we have not had good margins in almonds, even two years ago. They were essentially nominal. What we're going to doing now is, we're going to take positions with other handlers, and then we're going to go out and sell those almonds or actually we may sell those almonds first. But either way, we're going to match up our cost and our sales much better this way and if we can't get a normal industrial gross margin, then we won't make the sale and we won't make the purchase. And there's no commitments.

And it's your opinion that you don't think you'd be at a competitive disadvantage by not offering?

We were at a competitive disadvantage last year, in the industrial channel. I'm probably several years before that, too. So we will continue to be at a competitive disadvantage in the industrial channel. By buying from our competitors, but we think that overall that that actually, if we don't make those sales, the Company will benefit from that.

Right now, we're building out the new facility, operating the old facilities. Can you quantify at all the cost that we're incurring right now to run all these securities at once? And how much do you think that will drop come the end of 2007, beginning of 2008?

Steve, we haven't disclosed that so I can't quantify it. But just the kind of give it to you directionally. When we complete calendar year 2007 and we're out of the major Elk Grove Facility, that's when I think we could state that we'll be out of the dilutive phase of the facility consolidation project. Okay.

So you're saying the costs would go down, obviously?

In 2008, once we're out of the major facility, then I think the bulk of the extra costs will go away.

Okay. And we're marketing the original site?

Yes, we are.

Is that correct?

Yes.

Can you just remind us, what's it on the market now and where do we stand in the process?

Have we disclosed the sales price, Mike? I'm not sure.

We can sell it for more than what we have with it. And just, why don't you talk about it about the timing as you're seeing it right now.

We have a letter of agreement for the sale of the original property. We anticipate going to contract in the next couple of weeks and then closing on the same of that facility in May or June of '07.

Okay. And the total cost on that facility now?

$6.8 million.

And the debt against that facility?

There's no debt on it. Okay. All right, guys. Thanks a lot. Okay, Steve.

And your final question comes from the line of David Rosen with SAC. Please proceed, sir.

Just a final question on the -- this almond issue that you stopped purchasing. I think you may have quantified this and maybe, I think I've forgotten it. Is it that you get a $30 million from working capital or is that a $30 million decline in sales?

It's probably going to be both. In a normal year, we've had basically no gross margin on almonds. So it stands to reason that they both should be roughly the same.

So when we talk about the 580 of sales this year, I should pro forma that to exclude $30 million so really like at a 550 to start out with?

Keep in mind that we have bought almonds from growers this year, not as much as in the past, but there is still almonds to sell. Where you are going to see the big change is in the 2007 crop year, which is next fall.

Okay. So this, you're going to actually, you should still have the vast majority of that $30 million for, through through when, through March?

Actually, for the remainder of this crop year. So call it through the end of next --

September? Okay.

Yes.

So that's a good number in theory until fiscal '08.

Right, now again, I want to stress that we have purchased fewer almonds then we have last year and probably the year before, too. So there will be some erosion there unless we replace that with almonds purchased from other handlers and sell them.

The other thing you did mention, you were talking about at least year-over-year, the decline in prices of the underlying nuts. And [inaudible] -- almonds was 80% decline. If you were to just pro forma your revenues just for assuming volumes for constant but just for the decline in the price of the nuts, I mean, I would get to a number that would be significantly lower than 580, would that be a fair statement? Or am I not think about that properly?

Don't forget the unit volume growth, too. You have to factor that in.

I'm just saying assuming flat volumes just for a moment.

Oh, okay.

I mean, you kind of made mention of the fact that pricing was on a blended basis, was it down 20%, 25%?

That was actually nut costs in the out in the field.

Right.

That number.

Okay. So, would it be a fair way of looking at that and extrapolating that 25%, so if I take your 580, I probably take, call it take $10 million off just for reduction in almond purchases, and then I take 75% of that, which gets me 430 and from that base, you have to grow your volumes?

From 430 million?

I'm just trying to figure out, how does that 25% blended reduction in price affect your sales? Your sales number?

Well, I think could you take that approach. It's not necessarily the way I would look at it. But, for starters, that makes as much sense as any other.

Okay. So I just take the change in the nut prices and then, and then from that base, whatever volume, if you can grow volume by 5% or 10%, then I just kind of add that on top?

Right.

Okay. All right, thank you very much, guys.

Okay.

There are no more questions at this time. I will now like to turn the call over to Mr.Valentine for closing remarks. Please proceed, sir.

Thank you, operator. Since there are no other questions, our Earnings Conference Call for the First Quarter of Fiscal 2007 has now ended. We thank you for your time and interest in JBSS.

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