John B Sanfilippo & Son Inc (JBSS) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 John B. Sanfilippo and Son Earnings Conference Call. My name is Emanuel and I'll be your operator for today. (OPERATOR INSTRUCTIONS.) Now, I'd like to turn the call over to your host for today, Mr. Michael Valentine, Chief Financial Officer. Please proceed, sir.

Okay. Thank you, Operator. First, I'd like to thank everyone for participating in our quarterly earnings conference call for the second quarter of fiscal 2009. Before we start, we want to--we may make some forward looking statements today. These statements are based on our current expectations and involve certain risks and uncertainties. The factors that could negatively impact results are explained in the various SEC filings that we have made, including filings on Forms 10K and 10Q. We encourage you to refer to these filings to learn more about these risk factors.

Starting with the income statement, the current quarter net sales increased slightly from $177 million for the second quarter of fiscal 2008 to $177.8 million. Net sales increased in the food service and contract packaging distribution channels and decreased in the consumer, industrial, and export channels. Unit volumes sold, which is measured in pounds shipped to customers, decreased by 9.4% in the quarter. Unit volume sold increased in the food service and contract packaging channels and declined in the industrial, export, and consumer channels.

For the first two quarters of fiscal 2009, net sales increased from $309.8 million to $312.6 million. Net sales increased in the consumer, food service, and contract packaging channels and decreased in the industrial and export channels. For the first two quarters, compared to the same period last year, unit volume sold decreased by 10.2%. Unit volume sold increased in the contract packaging channel and declined in the industrial, export, and consumer channels. We also saw a very slight decline in the food service channel.

As a result of lower supplies, declines in unit volume sold of in shell walnuts in the export channel and raw peanuts in the industrial channel, which were primarily sold to other peanut shellers last year, primarily led to the overall decline in unit volume sold in the quarterly and year to date comparisons.

Second quarter gross profit margin increased to 13.8% from 13.2% of net sales in last year's second quarter. Year to date gross profit margin, again, as a percentage of net sales, increased to 12.4% from 11.3% for the first two quarters of fiscal 2008. The improvement in gross profit margin the quarterly and year to date periods came mainly from a significant decrease in expenses related to the facility consolidation project as all of the Elk Grove facilities have now been closed and all equipment has been moved into the new Elgin facility. Improvements in manufacturing efficiencies also contributed to the increase in gross profit margin in the quarterly and year to date comparisons.

Operating expenses as a percentage of net sales decreased from 9.4% in the second quarter of fiscal 2008 to 8.7% for the current second quarter. Operating expenses for the current year to date period decreased to 8.9% of net sales from 9.5% for the second quarter--for the first two quarters of fiscal 2008. The decline in operating expenses in both the quarterly and year to date comparisons was driven mainly by the non-recurrence of $1.4 million in restructuring expenses that were incurred in the second quarter of fiscal 2008.

Because of lower debt levels and lower short-term interest rates, interest expense in the current quarter decreased to $2.1 million from $2.6 million for last year's second quarter. For the same reason interest expense for the current year to date period declined to $4.2 million from $5.4 million for the first (inaudible) of fiscal 2008.

Taking a look at inventory, inventories at the end of the current quarter declined by approximately $18.4 million, or 12.5%, compared to inventories on hand at the end of the second quarter of fiscal 2008. Pounds of raw nuts on hand increased by about 3.8 million pounds, or 5.9%, from the second quarter of fiscal 2008. Primarily because of lower walnut acquisition costs the weighted average cost per pound of raw nut input stocks decreased by 9.3%.

Improved inventory management practices led to a decline in finished goods on hand of 26.5% in dollars and 33.4% in pounds, compared to finished goods on hand at the end of the second quarter of fiscal 2008. With respect to the recent recall of peanuts and peanut butter products, we want to alert the investment community that we manufacture all of the peanut butter that we sell and we have not purchased products from Peanut Corporation of America during the recall period. Peanuts, peanut butter, and all other products manufactured by us, currently are not subject to the Peanut Corporation of America recall. We do purchase products containing peanuts, such as candy, which are made by other manufacturers. Currently, none of those purchased items are subject to the recall. However, the list of recalled products continues to grow on a daily basis.

We will continue to monitor the list of recalled products on the--on both the FDA and CFIA websites and communicate regularly with our suppliers to determine whether any of the items that we purchase must be recalled. Since the recall was announced, I have received many calls from investors asking if we will benefit from the recall. Though it is possible that we may secure new peanut butter business as a result of the recall, investors should note that the recall could likely result in a temporary decline in overall peanut butter consumption.

In fiscal 2008, peanut butter sales accounted for 2.8% of our total net sales.

At this time, I'll turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on the quarter.

Thank you, Mike. Good morning, everyone. As I've mentioned on previous earnings calls, our management team and our employees continue to focus on two key priorities to drive value at John B. Sanfilippo and Son. Those priorities remain profitable buying growth and operational efficiencies. First, let me comment on profitable sales volume growth. On our call in October, I mentioned that our company had been awarded significant private brand business and we just began shipping the account this past week. The program consists of both snack and baking nuts. In addition to this business, we were recently awarded new private brand business at an existing customer who is expanding their snack nut program.

We currently estimate that these two pieces of new business combined will amount to as much as $50 million in additional sales for fiscal 2010. We anticipate that we will be shipping the full product lines to both of these customers by the end of the fourth quarter. As a result of difficult economic conditions, we are seeing indications that consumer preferences are shifting towards private brand products across food, drug, and mass channels.

In the snack nut category, according to AC Nielsen, private brand unit volume increased in the trailing three-month year-over-year comparison, while most branded products, including our Fischer brand, experienced declines in unit volume. For the last 13 weeks, unit sales of private label in the snack nut category increased 3.2% in the grocery channel, 15.2% in mass, and 19.6% in the drug channel. With our strength and expertise in private brand nut manufacturing and marketing, our investment in additional capacity and production capabilities in our Elgin facility, and our unwavering commitment to quality and food safety, we believe that JBSS is well positioned to pursue significant opportunities to satisfy changing consumer preferences in the nut category.

At the same time, we will focus efforts on our Fischer brand to gain placements and improve our market share. In the snack category, the Fischer brand witnessed a decrease of 5.7% in unit sales. This decrease is at a much lesser rate versus the six months and 12 months prior. In fact, whereas the Fischer brand maintained our market share this quarter, most major brands witnessed a slight decline in their reported market share.

In the baking category, Fischer dollar volume increased slightly 1.2% in units, but was down 6.3% in dollars. This unit decrease at a lesser--is at a lesser rate versus the past six months and past 12 months as well, so we're showing a slight recovery.

We continue to increase our promotional efforts to address the decline and are making good progress. In many markets, the Fischer brand is experiencing strong growth in snack and baking and is gaining market share.

Although we are confident in our capabilities and will aggressively pursue growth opportunities, especially in our consumer, food service, and export channels, we believe current economic conditions will be a challenge and could negatively impact nut consumption and usage. Our view of market data in the consumer channel shows a drop in total nut category dollar end unit sales as reported by AC Nielsen of 1.1% and 6.4%, respectively, as compared to the prior 52 weeks. The snack category is flat in dollar sales but down 5.9% in unit sales. The baking category is up 1.2% in dollars, yet down 6.3% in units. And the produce category, which is taking the hardest hit, is down 5.8% in dollars and 8% in units.

These trends are due to continued price increases as a result of higher commodity costs and erratic shift in consumer shopping behavior. Our Nielsen data is consistent with recent reports from IRI that state that the current economic landscape has driven the consumer to pantry stock, making less frequent shopping trips and shifting the channel that they shop in. And this has led to a shift from the grocery channel to the mass super center, drug, and club channels of distribution.

For example, a mass major--a major mass retailer as reported by IRI has seen up to 6% unit sales growth in the snack nut category in the past three months ending November 30, 2008.

Turning to our distribution channels, as Mike mentioned, total pounds shipped to customers decreased by 9.4% for the second quarter of fiscal 2009, compared to the second quarter of fiscal 2008. But while sales volume has declined for the first 26 weeks of fiscal '09 in all of our distribution channels except contract manufacturing, it is important to note that the decrease was most pronounced in our industrial channel and the industrial products sold through our export channel.

Net sales in the industrial channel decreased by 10.5% in dollars and 35.7% in sales volume. These results were primarily due to lower raw peanut sales to other peanut processors and oil processors, resulting in part from a planned reduction in peanuts shelled at our Bainbridge facility, a decrease in the availability of our supply of tree nuts for the industrial and export channels, a decrease in demand in the industrial channel for nuts as fewer new products with nuts as ingredients were developed. However, it is not all negative as we have seen food manufacturers renew their interest in walnuts and almonds recently as a result of more favorable commodity prices and several product lines that were discontinued due to higher prices two years ago are now being relaunched into the marketplace.

Net sales in the--in our export channel decreased by 10% in dollars and 22% in volume in the second quarter. The decrease in sales volume is mainly due to lower in shell walnut sales. Our consumer channel net sales decreased by .6% in dollars and 3.3% in volume. In the food service channel, net sales increased by 3.7%, as Mike mentioned, and 1.2% in volume. Lastly, our contract manufacturing distribution channel sales increased 46.2% in dollars and 20.5% in volume. The significant sales volume increase is due to increased business with a major contract manufacturing customer who launched several new snack products this year.

Our sales, marketing, and research and development departments continue to develop new value added products across all of our business channels and we launched 44 new products this past quarter, with the majority in our consumer, food service, and contract manufacturing channels. Our company continues to evaluate advertising, pricing, promotions, merchandising, product development, and product assortment, to ensure we are in line with shifting consumer and business priorities.

Look for some exciting things to come in our third quarter as we prepare to launch some new products that we believe will address the needs of the marketplace.

Our second priority as a company is to improve operational efficiencies. As Mike mentioned, improvements in manufacturing efficiencies contributed to the increasing gross profit margin in the quarterly and year to date comparisons. One of our key core values is continuous improvement and some of the highlights from our second quarter include efficiency related variances are down 29% in Q2 of '09 versus '08, total payroll and temp spending is down 3% year to date, finished goods inventories are down 26.5% for the quarter. These improvements were driven by a more static workforce, better training programs, improvements in machine designs at our facilities, the relocation of some production from our Gustine, California plant to Elgin, continued focus on inventory levels, and better reporting tools.

Now that the expenses related to the facility consolidation project are behind us, we will continue [improvements] in manufacturing efficiencies to drive costs down and improve our gross profit margin.

In closing, as we did in our first quarter of fiscal 2009, we improved operating results again for our second quarter, compared to the second quarter of fiscal '08. We are moving in the right direction and I am confident the initiatives we have executed over the past year and a half and the projects we are currently executing will continue to positively impact our financial performance.

There are many challenges ahead as consumer preferences shift and food retailers and food manufacturers respond to economic pressures and changing consumption dynamics, both in the U.S. and globally. In addition, as Mike mentioned, our industry in particular is struggling with the effects of the major product recall, which is sure to have a negative impact on peanut consumption and will surely mobilize efforts by regulatory agencies to improve food safety in the nut industry. The investments we made over the past three years in new production capabilities, research and development, and quality assurance programs have positioned our company to overcome these challenges.

We have a lot of work to do, but our priorities are clear - drive profitability, value added volume growth, and continued increased production efficiencies in our plants. We believe that with the strategies we have in place and through the hard work, commitment, and effort of all of our talented employees we are well positioned for the future. Management has worked hard to create a value driven culture within our company and we will continue to provide value for our customers, our stakeholders, and our shareholders.

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

At this time, we'll open the call to questions. Operator, would you please queue up the first question?

(OPERATOR INSTRUCTIONS.) And our first question will come from the line of Gregg Hillman with First Wilshire Securities. Please proceed.

Yes, good morning, gentlemen.

Good morning, Greg.

Congratulations on a good quarter. In terms of the recent price decreases on a variety of nuts, when will that affect you and what will be the order of magnitude of the effect?

Well, it's difficult to measure the order of magnitude because in quite a few cases we have yet to take positions given the direction the market is heading. But we do expect in many of the commodities to begin to take advantage of that in the latter part of our fourth quarter.

Okay. And then, what event--and then, so basically you'd say the price of nuts is down like 10 to 15% or something like that across the board or--?

--It varies from nut to nut. I think peanuts are much--are down much more than that or headed that way, cashews--I would say that would be the case--and walnuts would exceed that, too. I think pecans are pretty much flat. And almonds are also down probably more than 10 year over year.

Okay. And in looking forward to the third quarter, it's usually your weakest quarter. And do you think it's reasonable to expect for you to do something close to breakeven in the third quarter of this year when you don't have the same debt refinancing causes and some extraordinary causes, or do you actually expect to do better than breakeven?

Greg, as you know, we don't give guidance, and we regret that we can't answer your question.

Okay. Well, let me get back in the queue then.

Okay.

Thanks.

(OPERATOR INSTRUCTIONS.) And our next question will come from the line of Bruce Baughman with Franklin Templeton. Please proceed.

Good morning. Congratulations on a nice quarter.

Thank you.

Could you quantify the expected volume impact of the new private label contracts you highlighted that are related to $50 million in additional sales?

Are you talking in terms of unit volume?

Yes.

Yes. We expect--I'm not--I can't do the math because I don't have the actual average selling price, but it should be very similar to the company's overall average selling price per pound. So, for example, if you were to look at--look in the K for 2008 and divide sales into those pounds, you probably could do a pretty close estimate as to how many pounds this would be.

Okay, great. Thank you.

Okay.

And our next question is a follow up question and comes from the line of Gregg Hillman. Please proceed.

Yes. I--in terms of the impact from the recall for the Peanut Corporation of America, does that just affect peanuts--I mean, peanut butter itself, or does that affect kind of--is it going to affect peanut butter consumption or consumption of nuts in general?

Greg, I've actually been in pretty close contacts with the industry associations and other members of the peanut industry and the general belief is that it probably will have an impact on snack peanut products, too, although not to the extent it will on peanut butter.

Okay. And then, so if you do that 8.4%, I guess like the worst case scenario--you're still going to be selling peanut butter, so maybe your sales will go down 50% for your peanut butter sales or something like that. So there'll be some kind of impact, but it won't be greater than what the incremental business is that you're bringing on January 1.

Right. And again, I think as I mentioned, peanut butter sales only account for about 2.8% of our total sales.

Right.

So it is a pretty small part of our business.

Greg, this is Jeff. I would add to that although we do anticipate a decline in peanut butter consumption, it hasn't--the recall doesn't directly affect the retail traders, the no-recall of jars of peanut butter, but just the consumer perception is the part that we don't really know how that's going to impact. I will say though at the same time it has created some opportunities in our industrial channel as the Peanut Corporation of America provided a lot of industrial accounts with peanut butter and peanut paste and granulated peanuts. And we have seen some opportunities and have already been awarded some business as a result of their customers looking for an alternative supply.

Okay.

And that should offset some of the declines in the consumption we anticipate.

Okay, good. In terms of your new factory, how is your new factory configured so you don't have cost contamination? How can you avoid it? Why doesn't that happen in your new factory and it could happen in your old factory?

Greg, this is Jeff. What we did here is we segregated the plant between wild products and roasted products. And many of our roasted here we've actually had validated by an outside process facility to show that we've had 4 log or better reductions on bacterial (inaudible). And also, we've also segregated it by tree nut. So we have peanut only areas, shared areas, and then tree nut only areas. So that coupled with some of the mechanical air handling systems that we've put in, we really mitigated the potential for raw dust from raw peanuts or almonds to contaminate product that has been roasted.

Okay. So there's just one shared area where there conceivably could be cross contamination?

Well, the shared areas are where we would put mixed nuts together or mixes that contain peanuts or tree nuts. But in those areas we will not really have any raw product in there. So the raw nuts that we handle, for example, in baking nuts and what not, are in segregated [booms].

Okay. And then, the pension liability--well, I wanted to get into cash flow and also ask about when you discontinue the delivery for the drivers, is there some sort of union contract settlement thing? You remember that? There was like a charge--.

--Right--.

--Or something like that. What's the--is there--but then--and then you left open the possibility it could be bigger. Well, what's the status of that right now?

No, that's all been settled. We've reached agreement with the union and it actually came in a bit lower than what we had initially estimated.

You estimated like 1.4 and what did it come in at?

It was about 900,000, and--which we're paying over a period of time.

Does that mean you charged something back to earnings positively?

(Inaudible). In the first quarter we did that.

You did--already did that in the first quarter?

Right, that's correct.

Okay. And then, the other thing about the cash flow situation in the company, I noticed--well, just for the last fiscal year [about] accounts there was a big kind of swing in I think accounts payable and income taxes receivable/payable that was positive - the one you did whatever, the 26 million in operating cash flow for last fiscal year. And I think you did 20 million so far this year. And I was just wondering whether the 26 million in fiscal year last year whether that was a fluke due to some sort of swings in some of those items I just mentioned?

No. I think that's pretty much normal with the level of income that we reported last year. The--when you see a big change in payables for the 26-week period this year in that cash flow statement, that's primarily because of the lower walnut costs. So that drives that in this particular cash flow statement. Also, we did last year get a pretty sizeable income tax refund, too.

Speaking of taxes, can you just explain the tax situation going forward? It seems like your NOLs are dwindling down. Will you use up your NOLs pretty soon or can you comment on that? Are you there?

Thank you for your patience. Your conference call will resume shortly. Once again, thank you for your patience. Please stand by. I'd like to turn the call back to Gregg Hillman.

You there, Greg?

Yes, can you hear me okay?

Yes. Sorry about that. We didn't press any buttons. I'm not sure what happened.

Okay. I didn't either, but I was just starting I guess to ask you about taxes and NOLs. Are you going to use them up? And could you comment on that and any kind of tax rate going forward?

Okay. I'm going to turn that question over to [Herb Meyrose]. He's our Director of Financial Reporting and Taxation, and he can attempt to explain this complicated situation.

Thanks, Mike. Yes, Greg, it is somewhat complex. But right now, we have fully utilized any type of valuation allowance we've had on the federal side. So all that we have available to use up right now is the state valuation allowance, which is roughly $2 million. So conceptually, we have $2 million that we can reduce our income tax expense as reported in future periods. And it's very difficult, of course, especially in this climate to convince someone to--that the valuation allowance can be fully utilized. So after we have a few quarters I would say of positive earnings and demonstrate the ability that this would continue, we would reach that point where you would see the valuation allowance being fully released to the income. So that should benefit us some time in the future. I would expect right now, just since we don't have any federal left that our tax rate should appear pretty normal for the next few quarters. Even if we have positive earnings or negative, it should be roughly in that 30 to 35% range.

Yes. And also, let me just add on the [state and the wild] side, we actually have to--as each quarter is completed we have to look at each jurisdiction separately. It's quite possible that apportionment factors may change as we go forward and that may impact our ability to fully utilize a particular state's (inaudible).

And also, just to explain that, on the federal side we're able to carry back some of our two large loss years. And in the majority of the states we file in there was no ability to carry back. That's why we'll [wrap up] just the valuation allowance on the state side now.

Okay. And then, just to follow up with a question on marketing. If you're talking about shifts from grocery to the--into the other channel super centers (inaudible), could you--I mean, are you strong in those other channels and would that allow you to increase your real share in the marketplace? And the other question is these contracts with the private label stuff, the one that you lost to Rawl in June of '06, do you--is there a natural ebb and flow to these contracts that you should be expected to lose a big contract sometime soon when another bid comes up?

Hey, Greg. This is Jeff. I'll answer the question. First, on the mass channel, we do both private label and we have Fischer distribution in the mass channel. We have some items under development that are specifically for the mass channel, which is normally larger pack sizes. So, yes, there is--there are opportunities to increase market share, both for Fischer but also for private brands, and we are pursuing those. As far as the investment in the brand and seeing what's happening there, we have lost market share over the last couple of years. However, we do anticipate some opportunities where we're looking at our strategy for the brand and trying to figure out next steps for the brand, both in mass and in grocery.

And as far as the contract for private brands, we don't anticipate ever losing a contract. However, it's a very competitive industry. We believe that as long as we provide value, we are innovative, we provide safe, quality products, and that we keep up with the growth in private brands with our customers, we don't ever anticipate losing business, but obviously it's not always set in stone.

In the snack industry, I think there's a trend towards more healthier snacks. Even Frito-Lay is trying to come out with healthier snacks. I guess by definition peanuts--or nuts are healthier. But in maybe even your non, I don't know, peanut snacks or something, do you have any particular program to come out with snacks that are perceived as healthier for people or even perceived as providing them with more energy?

There's been a lot of growth in the trail mix section of the snack nut category where companies--Planters has done actually a very good job at launching a lot of new value added, healthy snacks. The health and wellness categories is growing in the U.S. and really globally. And so, they've done a great job at launching products there. We're looking at adding--in addition to that, you've got a lot of healthy dried fruit, such as cranberries, blueberries. So creating mixes that have other healthy snack products with them and expanding consumption and expanding growth within that section of the snack category. There's also an increase in products that you're adding more value to as far as phytochemicals or you're adding different health and wellness benefits to the nut products. So that's another area that's growing as well that's an opportunity.

Okay. And you have the capability to do that?

Yes.

Great. Thanks.

Okay, Greg. Thank you.

And our next question will come from the line of Bruce Baughman with Franklin and Templeton. Please proceed.

Thanks. You answered all my questions.

Okay, Bruce. Thank you.

And our next question will come from the line of Ravi with Sterne Agee. Please proceed.

Hi. Two questions. Could you just update on the progress you made in the quarter in signing up new customers and any potential (inaudible)?

Could you repeat that question, please?

Could you give us an update on any progress you made in signing up new customers in the quarter and any new potential ones that you may be working on?

Well, as far as what we've accomplished in the quarter, we did mention it in the press release. As far as significant win, that covers it. As far as opportunities in the future, business comes up for bid almost on a weekly basis, so there's plenty of opportunities out there in really all of the channels.

Did you lose any in the quarter?

No, we haven't lost anything significant in the quarter with the exception of the decline in raw peanut sales that we talked about.

And our next question will come from the line of [Greg Bennett] with Smith Barney. Please proceed.

Good morning.

Good morning, Greg.

Yes, I was wondering in the--in your third quarter, if we go back to the years back in 2004, 2005, those were years where you were profitable going through the third quarter. If I look at the third quarter of last year, your refinance (inaudible). I think there was a consulting fee from--I'm just trying to add this all up. But is there any reason--what would be a reason that we wouldn't see an improvement if we take out all of those extraordinary--and your interest expense I guess will be down by roughly 700,000 in this next quarter compared to a year ago. If we throw out--if somebody was looking into this quarter, are there any events that would prohibit you from becoming profitable during the quarter (inaudible) cost?

Well, Greg, I think the key is volume. Third quarters are profitable if the volume's good. If there's a decline in volume, that would be a risk. Our commodity position compared to where it was in the third quarter of last year could help us or hurt us. So those would probably be the two biggest risk factors.

Commodity--your pricing weekly or monthly for your raw material going down, correct?

In some cases that's true. In some cases we're locked in for the remainder of the crop year.

Which will go through the end of your fourth quarter? Is that--?

Yes. Crop years generally end in end of August, September.

And then, volume, it sounds to me like your run rate volume has already--you were successful in obtaining $50 million of--on an annualized basis run rate of new volume and that's ticking up each month as we go on, right?

Right.

So there'll be some benefit during this quarter of the new contracts that you've gotten?

Yes, it's just that it's difficult to measure how significant that will be, Greg. The ramp up really is primarily controlled by the customer as they transition from one supplier to another. So to predict at this point in time as to how significant that would be is just difficult for us to do.

Okay. So there's no--your CapEx looks like it's going to be 7 million for the whole year. You've already spent like 3.5 million. This is just maintenance CapEx, I take it.

That's right.

You don't have to spend money on anything special?

No, there's no major projects like for example that would increase capacity or get us into a new product line or anything like that.

Okay. You also announced that you may be coming out with some new and exciting product announcements this quarter between now and the end of March. Is that the way we should look at it?

Correct. And that will be both in private brand and under the Fischer brand.

Is that something that you--might be announced where we as shareholders may be able to pick up on or when I see that where you may announce something new, or is that something that we're just going to see in your next quarterly announcement?

We normally don't put anything out on the wire as far as new product launches, but we do have a PR firm that we work with on launches. But it's not something that we have done in the past as far as the wire, but we could.

What's--you must have an idea, if you go ahead with this, what would you think your annualized run rate would be for these new and exciting products, without telling us what they're going to be, but--?

It's really going to be depending on the base business that we have and the impact of the economy. So it should--if I had a crystal ball, I would tell you. But it's really difficult to determine at this time.

Well, let's have a low--why don't you give me a low end, and then--?

--How many items--how many items are we--?

--We're probably doing 30 items.

So it could be as many as 30 items, Greg, so--but we'll let you take it from there.

As many as 30 items?

Yes.

Okay. Thank you very much and thanks for a great quarter.

Okay. Thanks, Greg.

And at this time I show no more questions in queue. I'd like to turn the call back over to Michael Valentine. Pardon me. We have another question in the queue from the line of Peter Abrahanson. Please proceed.

Okay, thank you. Just a couple quick questions. The 10Q mentioned that there were some sales that had zero gross profit margins on them. I think it was related to pecans. Can you quantify what the level of sales were related to the zero margin?

Yes. At the end of the first quarter we took a--we established a contract reserve of approximately $3 million. And I believe that reserve now is down to roughly about $600,000. So in essence, virtually all of our pecan sales related to those contracts were at zero gross margin.

So if the pecan sales were--that wouldn't be--would that be all the pecan sales, the 20% of revenue?

No. It was just primarily industrial pecan sales on last year's--last crop year's industrial sales contracts.

Industrial pecan sales. Okay. So is the--well, I guess you don't really report the product mix by the distribution channel, although does that mix that's reported hold up kind of relatively constant across the channels?

No, it's--it will differ from channel to channel pretty significantly.

Okay. Well, I'll just take a swag at it I guess. I guess maybe some comment on the excess real estate, the--I guess the asset held for sale didn't sell. And then, is there any update on leasing the office space? And does that space have a warehouse or land capabilities with it?

The office space here does not have any warehouse space, no.

Okay. So that would have to be a dedicated office space user.

That's correct.

If you (inaudible) the original site that we purchased before we bought the site we're in today and we were under contract with the buyer up until December. And as a result of changing economic conditions, that deal fell through. So we have put the property back on the market and are working diligently to try to sell it. But it is still available.

Okay. Is that asset back in PP&E? Is that where it is or is it in rental real estate?

No, it's in PP&E.

Okay. And then, does the rental real estate or the rental investment property--is that the entire office building and headquarters or is that just an allocation to the--I guess the space that's vacant?

No, it's the entire office building. In addition, there's also some rental property in our Selma, Texas campus that's also included in that amount.

Okay. And then, is the vacant--is the vacant space at the office building--is there any--is that being marketed for lease?

It is. We've had a couple of new tenants. They've been pretty small though, but we'll take that. And we're actively marketing it and we'll take tenants as small as 10,000 to 20,000 square feet.

And we're working with [Colliers] as our agent marketing the building. One of the benefits we have is there's over 200,000 square feet. It's a large office building, which is rare for this area. So if we can find the right [user] that needs that amount of space, we're aggressively pursuing companies that might use that space.

Okay, thank you. Appreciate it.

Okay. Thank you.

And at this time, I show no more questions in queue. I'd like to turn the call back over to Michael Valentine.

Okay. Again, we thank everybody for participating in our call and also for their interest in JBSS. That concludes our call for the second quarter 2009 operating results. And we wish everyone a good day. Thank you.

And thank you for your participation in today's conference. This concludes our presentation. You may now disconnect.