John B Sanfilippo & Son Inc (JBSS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 John B. Sanfilippo & Son earnings conference call. My name is Karma and I'll be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions). Later we will conduct a question-and-answer session. I would now like to turn to call the over to your host for today, Mr. Michael Valentine, CFO. Please proceed.

Okay, thank you, Karma. First we'd like to thank everyone for participating in our quarterly conference call for the fourth quarter and fiscal year ended June 30, 2011.

Before we start we want to alert everyone to the fact that 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 forms 10-K and 10-Q. We encourage everyone to refer to these filings to learn more about these risks and uncertainties that are inherent in our business.

Before starting with the income statement I want to remind everyone that when considering year-over-year comparisons that we will make in today's call, participants should note that the fourth quarter of fiscal 2011 and fiscal year 2011 were 13-week and 53-week periods respectively, while the fourth quarter of fiscal 2010 and fiscal year 2010 were 12-week and 52-week periods respectively.

Starting with the income statement, the current quarter net sales increased by 17.5% or $24.8 million to $166.4 million in comparison to net sales in the fourth quarter of fiscal 2010. The increase in net sales in the quarterly comparison came mainly from increased sales prices for all major product types which were implemented because of higher commodity acquisition costs. Sales volume increased by 0.5% in the quarterly comparison.

The increases in net sales and sales volume were driven largely by sales of products associated with our acquisition of Orchard Valley Harvest which we will refer to today as OVH. That acquisition occurred in May of 2010. OVH net sales were $12.3 million during the fourth quarter of fiscal 2011 compared to $4 million for the fourth quarter of fiscal 2010.

Sales volume increased in the consumer and contract packaging distribution channels as a result of increases in sales of OVH products and peanuts in these channels respectively. Excluding the sales of OVH products net sales would have increased by 12% and sales volume would have decreased by 3.2% in the quarterly comparison.

The increases in sales volume in these distribution channels were offset by sales volume declines for cashews, peanuts, pecans and walnuts in the industrial food service and export distribution channels. Fiscal 2011 net sales increased by $112.6 million or 20% to a record $674.2 million compared to fiscal 2010 net sales of $561.6 million.

The increase in net sales [in the] yearly comparison primarily resulted from price increases for all major product types and a sales volume increase of 3.8%. The increase in sales volume came primarily again from sales of OVH products in the consumer channel and sales of chocolate covered products and snack peanut products in the contract packaging channel.

OVH net sales were $52.3 million during fiscal 2011 compared to $4 million for fiscal 2010. Excluding sales of OVH products net sales would have increased by 11.5% and sales volume would have decreased by 2% in the fiscal year comparison.

The current fourth-quarter gross profit margin decreased to 15.9% of net sales from 17.4% for last year's fourth quarter. The decline in gross profit margin in the quarterly comparison occurred primarily because of increased acquisition costs for most of the commodities that we purchase. The increase in acquisition costs was partially offset by improved manufacturing efficiencies and cost reductions as well as increased prices.

Fiscal 2011 gross profit margin decreased to 12.5% of net sales from 16.9% in fiscal 2010. The decline in gross profit margin and in gross profit dollars in the fiscal year comparison occurred mainly because most price increases were not implemented until the third quarter of fiscal 2011 while the acquisition costs of most commodities that we purchase began to increase significantly in the second quarter.

Total operating expenses for the fourth quarter of fiscal 2011 remained unchanged at 13.2% of net sales compared to total operating expenses for the fourth quarter of fiscal 2010. Total operating expenses for the fourth quarter of fiscal 2011 were negatively impacted by a $5.7 million goodwill impairment charge. The goodwill, which is assigned to our single reporting unit, arose from the acquisition of OVH.

As a result of our annual impairment assessment performed in the fourth quarter of fiscal 2011, we concluded that the entire goodwill balance was impaired. The conclusion record of goodwill impairment charge was due to the significant decline in our market value and operating results in fiscal 2011 and those results were negatively impacted by challenging market conditions, especially high acquisition costs for raw materials.

Before considering goodwill impairment total operating expenses would have declined in dollar terms and as a percentage of net sales. This decrease in total operating expenses as a percentage of net sales resulted from a higher sales base and a $3 million decline in incentive compensation expense. The reduction in total operating expenses was partially offset by increased shipping expense caused by higher fuel costs.

Total operating expenses for fiscal year 2011, including the goodwill impairment, decreased to 11% of net sales from 11.6% of net sales for fiscal 2010. The decrease in total operating expenses as a percentage of net sales mainly resulted from a higher sales base and a $9 million decline in incentive compensation expense.

In addition to the impact of the goodwill impairment charge, this decline was offset in part by increases in expenses for shipping, base compensation, pending settlement of litigation, loss on disposal of certain OVH assets that arose as a result of our move of their former facility into one of our existing facilities in California, amortization of OVH intangible assets, an increase in the estimate of the OVH earn out payment and advertising.

Interest expense in the current fourth quarter increased to $1.7 million from $1.5 million for the fourth quarter of fiscal 2010 because of higher average short-term debt levels during the fourth quarter of fiscal 2011. Interest expense for the current year increased to $6.4 million from $5.7 million from fiscal 2010 also because of higher average short-term debt levels. Average short-term debt levels were higher in both the quarterly and yearly comparisons chiefly because of increased acquisition costs for most of the tree nuts that we purchase.

Income before income taxes decreased by $1.7 million to $2.5 million in the quarterly comparison, whereas income before income taxes excluding $5.7 million in goodwill impairment then increased by $3.9 million to $8.2 million in the quarterly comparison. Income before income taxes excluding goodwill impairment is not a GAAP measure and is not intended to replace income before income taxes which is a GAAP measure.

We urge participants to refer to our earnings release which appears on our website at JBSSinc.com in the Investor Relations section and is also included in our Form 8-K, which was filed yesterday, for a reconciliation of this non-GAAP measure to income before income taxes. And it also includes the reasons why we believe it is useful to consider this measure in evaluating our fourth-quarter operating results.

At this time I will now turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on the fiscal year and quarter.

Thank you, Mike; good morning, everyone. We achieved record net sales of $674.2 million in fiscal 2011, an increase of $112.6 million or over 20% over fiscal 2012. The record net sales in fiscal 2011 surpassed our previous record set in fiscal 2005 of $582 million. This top-line success was accomplished in spite of extraordinary commodity volatility, challenging economic conditions and increased competitive pressure from national brand and private brand companies.

Through a deliberate strategy of capital expenditures and complementary acquisitions we have built a vertically integrated nut processing operation with differentiated capabilities. This business model allows us to enhance product quality, maintain consistent supply and obtain competitive insight to respond quickly to changes in nut market dynamics.

Although we experienced downward trends in gross profit dollars and margins in fiscal 2011 as a result of unprecedented higher commodity costs, we closed out the year by improving profitability in our fourth quarter with gross profits up 7.3%.

We are not the same company we were in 2008 when faced with similar market volatility. Four key changes made by management over the past three years attributed to the Company's ability to manage through such difficult market dynamics.

First, the Company initiated cost containment initiatives throughout the organization. Every department in our organization continues to focus on reducing operating expenses. The fourth quarter benefited from cost reduction initiatives that were completed near the end of the third quarter by our manufacturing and production leaders.

For example, mainly as a result of efforts to reduce costs associated with down time and line changeovers, manufacturing efficiency improved by approximately 14% in the quarterly comparison. We successfully integrated all OVH activities with the rest of our business with the goal of achieving the greatest efficiencies possible in our third quarter. Going forward we expect to realize certain additional efficiencies through our integration efforts.

Second, the Company instilled stronger financial disciplines to manage pricing, spending and expenses. Management was successful in establishing financial discipline across departments to better manage spending.

For example, we spent $5.2 million in capital expenditures during fiscal 2011 compared to $8.5 million during fiscal 2010. We expect total capital expenditures for equipment upgrades, facility maintenance and food safety enhancements for fiscal 2012 to be approximately $8 million.

Pricing actions which were completed in the third quarter of fiscal 2011 resulted in prices and commodity acquisition costs that were more closely aligned during the fourth quarter of fiscal 2011, and consequently profitability improved significantly in the quarterly comparison considering goodwill impairment.

Our sales and marketing leaders work closely with our key partners to execute price increases while mitigating impact by providing solutions for downsizing, product reformulations and alternative promotional opportunities. We expect our prices and commodity acquisition cost to remain aligned in the first quarter of fiscal 2012 for all major nut types except for cashews.

Third, the Company's centralized procurement functions developed a demand planning team and worked hard to align commodity positions with sales and marketing volume. Our procurement and demand leaders did an excellent job maintaining a competitive commodity position while optimizing inventory levels.

Total inventories were $128.9 million at June 30, 2011, an increase of $14.6 million or 12.7% from the inventory balance at June of 2010. The increase is primarily due to significantly higher commodity costs. While the dollar value of inventories increased, the quantity on hand as measured in pounds actually decreased by 13.4% during fiscal 2011.

And fourth, the Company invested in people to execute our strategic plans to grow our brands, provide value added nut solutions and expand globally. We invested in expanding our research and development capabilities. The Company hired executives with brand building expertise from major CPG companies such as Kraft, PepsiCo and Hain Celestial, and we expanded our international and commercial ingredient divisions to focus on expanding sales to new customers, channels and countries.

Turning to sales performance for fiscal 2011, net sales in the consumer distribution channel increased by 25% in dollars and 7.5% in volume in fiscal 2011 compared to 2010. Private brand consumer sales volume increased by 8.2% in fiscal 2011 compared to 2010 due to the OVH business.

I want to comment that as we instilled financial disciplines in pricing and commodity management, there is a trade-off. We were not awarded some business at key customers as a result of significant competitor pricing from our peers.

Net sales in the commercial ingredient channel, which includes reported industrial and food-service sales, increased $19.3 million or 13.6%. Sales volume decrease 6% in fiscal 2011 compared to fiscal 2010. The sales volume decrease was primarily due to lower pecan and walnut sales mainly from a limited supply of pecans and walnuts available and lower peanut sales to other peanut processors. This volume was slightly offset by higher volume of peanut butter sales to food-service distributors.

Net sales in the export distribution channel decreased by 4% in dollars and 10.4% in volume in fiscal 2011. The decrease in sales volume was due primarily to lost business at a major export retail customer.

I'd like to comment on consumption and how the impact of higher -- and what the impact is of higher commodity costs in the snack, baking and produce categories. All the market information is reported through ACNielsen Homescan data ending through July 23. We look at the category on a four outlet basis which includes food, drug and mass plus Walmart and when we discuss pricing we are referring to average price per pound.

The total nut category experienced a softening in pound volume in Q4 though sales dollars increase due to higher prices. For the fourth quarter total pound volume was down 1% while sales revenue increased 6%.

Looking at it by major subcategory, snack nuts experienced growth in both revenue 7% and pounds up 2%. Value added snack nuts such as trail mixes and flavored nuts drove this growth and core nuts also increased versus a year ago. The growth has been driven by an increase in incremental sales which can be attributed to merchandising. Branded players drove the growth of snack nuts while private brands decreased 4% in revenue and 8% in pounds versus the last year.

The Fisher brand lost share nationally; however, the brand is starting to achieve positive results through the clear can initiative. JBSS launched a new clear can for our Fisher snack nuts at the beginning of this year. Strong integrated marketing support started in mid-February in a targeted set of customers within our high franchise. The message of the campaign, Freshness You Can See, aims to remind consumers about the high-quality products manufactured by Fisher.

Strong shopper marketing activities have been coordinated with our key retail partners in selected geographies to drive shoppers to the shelf. Early results have been positive and we plan to support the brand through the year and look forward to sharing more results in future calls.

The baking and culinary subcategories saw encouraging results this past quarter. Revenue was up 8% and pound sales increased 1%. Pricing has significantly affected baking nuts. Pricing has increased 7% versus the prior quarter after a 9% increase last quarter. Increases were particularly evident with walnuts and pecans which increased by 11% and 20% respectively.

Private brands posted double-digit increases in both revenue and pounds while branded players posted a 9% decline in pounds and a 2% increase in revenue. The growth of private brands within the baking section illustrates that consumers are still anxious about the economy and continue to view private brands as a viable alternative in the marketplace.

Produce subcategories saw the softest results within the total nut category. Revenue increased 1% and pound sales declined 10%. This is a continuation of the trends we started seeing last quarter. Produce nuts have taken the largest price increase of the three subcategories. Aggressive pricing has been reflected in pistachios, pecans, walnuts and cashews. Each one of these nut types increased in price by at least 8% versus last year and these four nut types generate over 50% in revenue within produce.

In closing, we face a number of challenges in the future, especially higher commodity costs including increased demand for pecans, almonds and cashews in China. The Financial Times has posted several articles recently about growing Chinese demand for food. Two that were specific to our industry had the following headlines.

There's one sector where China is sending jobs to the US and the article talked about agriculture and referenced almonds. And another article with the headline Prices Soar as China Goes Nuts for Cashews. We expect that acquisition cost for new crop tree nuts and peanuts will remain at levels that are significantly higher than historical average prices due to strong global demand and drought conditions in the US nut growing regions.

The implementation of additional price increases on cashew products and other nut products if necessary in fiscal 2012 will be largely dependent upon similar competitor actions. We will continue to focus on building profitable business to utilize the additional production capacity at our Elgin site that houses our primary manufacturing operations and corporate headquarters.

We will continue to concentrate on cost reduction initiatives throughout the entire organization in fiscal 2012 and we will stay focused on executing our strategic plan to grow brands, provide value added nut solutions and expand globally. We believe we have the roadmap to navigate our customers, our brands and our Company through this challenging environment.

We appreciate your participation in the call and thank you for your interest in our Company. At this time I would like to turn the call back over to Mike.

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

(Operator Instructions). Ben Axler, Spruce Point Capital.

Seems like most of your earnings came from your ability to control and cut costs. I mean, if you continue to see the competitive pressures you do in the market -- I mean, what further abilities do you have to cut your overall cost profile? Thank you.

The ability to cut cost is twofold. One, it's looking at our operations to streamline production capabilities, but it's not just cost that we're looking at; we're also looking at creating more value added product lines that we can demand or expect higher margins from. You can only cut cost to a certain extent and at some point you've got to look at other ways to improve margins.

I think there are still opportunities to reduce costs in our operations as we look at our manufacturing capabilities. We're looking at a SKU optimization across all of our product portfolio. We're looking at also product formulations to create some consistencies and efficiencies in our operations.

Okay, it's fair to say that most of the low hanging fruit in terms of cost cuts have been implemented?

Yes.

Okay, thank you very much.

Bruce Baughman, Franklin.

Good morning. Just in passing, the comments on the goodwill impairment seem to suggest that it wasn't an analysis based on Orchard Valley and its results so much as the price of the stock. Can you expand on that a little bit?

Sure, and that is correct. We report as a single operating segment with a single reporting unit, so consequently we assess goodwill at the total company level. And to put it simply, it's essentially a comparison of the value of our Company or the value of our assets versus our net book value. And we carry out that valuation through a market value approach and also through an income approach.

And essentially what triggered this was a steep decline in the stock price from the end of the third quarter to the end of the fourth quarter, we essentially lost roughly about $30 million in market cap and that caused us to have to do that assessment. And by the end of the year we were trading at roughly 50% of book value and there was just no way that we could close that gap through market valuation or through taking the income approach.

Okay, thanks. That's helpful. And there was also a comment that there was an increase in the estimate of the Orchard Valley earn out payment. So that would imply that the unit is doing well. Can you shed some more light on that, please?

Sure. The earn out was based on the Orchard Valley business hitting certain net retail sales targets and it exceeded those targets significantly.

Can you say anything about profitability in that unit?

We don't measure profitability specifically to that unit because all of our distribution channels draw from the same pile of resources including fixed assets, inventory, people. So it's difficult to come up with a level of profitability that would meet say external reporting standards. But I will say this, that, as you see from our results for the fiscal year, we saw a significant decline in profitability because of higher acquisition costs and OVH products were not immune to that.

Okay, thank you.

(Operator Instructions). Jeff Geygan, Milwaukee Private Wealth.

Good morning. With respect to your comments on OVH, are you bonusing based on revs or pounds sold?

When you -- did you say bonus?

Yes, or the incentive comp or payouts to --.

Oh, for the earn outs?

Yes.

Okay. No, that's based on net sales dollars.

So how -- given the inflated price or value of product, I would think that it might be in your interest to compensate based on pounds, not let the pricing affect [this guy's] payout.

Jeff, when we put the incentives together program -- when we put it together during the acquisition we anticipated higher commodity costs and higher prices in the incentive program in the thresholds. So it was built in.

I see, all right. Jeff, in your comments you suggest that your ability to price in 2012 will be somewhat contingent upon your competitors' actions. With that statement made, what is your expectation about your competitors' rationality and your ability then to try to cinch up your pricing a bit to maintain margin?

Fortunately we have seen some of the national brand competitors come into the market with price increases; one of the major baking nuts competitors did raise prices that go into effect this month. We saw some movement with the snack national competitor with price increases. And so what we -- so we do anticipate that -- we're already seeing it in the market place. The challenge will be if commodities continue to rise, especially cashews, if the competitors take an additional price increase based on that and the peanuts as well.

Thanks. Given the global supply/demand imbalance that appears to be occurring now and the lag time of bringing new materials into the marketplace, how will that affect how you think about your customer and rationalizing the limited amount of product that you ultimately have to sell?

Well, over the last couple years we talked about SKU optimization quite a few years ago. We also looked at customer rationalization focusing on key partners to really build our business, understanding what their demands are. And so we have a much better handle on understanding the volume needs of our major partners and we'll make sure from a procurement standpoint that we cover the needs that they have.

Then we've got much better visibility on what our demand plans are for our key partners and that will help us from a procurement standpoint. Even though we anticipate challenges with pricing if global demand continues, we're in a much better position visibly to see and anticipate what the demand is that we need to cover for.

Jeff, this is Mike. I would also add that our fastest growing product line is what we've described as snack mixes, which includes salty snack mixes in addition to fruit and nut mixes. And that's an area that we're going to focus on for growth because we can mix in other products that don't have the sort of commodity inflation that we're experiencing with nuts. And consumers have been very acceptable to those sorts of products.

All right. Is this a true statement, that you have the largest nut processing plant in the world?

We believe that we have the largest nut plant under one roof. There may be other nut processors that have more facilities under different roofs, but we believe our 1 million square foot operation in Elgin is the largest under one roof in the world.

So what does that imply in terms of your advantage in the marketplace to produce or process and sell as the low-cost guy?

Well, we built the facility to expand and for growth -- future growth. We built the facility and the size of it to be able to align operations so that we mitigate any kind of cost contamination and improve food safety going forward. And obviously we definitely have available capacity in this 1 million square foot operation and we're looking at ways to profitably drive volume through here.

Any regrets that you've got 1 million square feet under roof?

No regrets that we consolidated five or six buildings into one 1 million square-foot facility at all.

Glad to hear that. Last question. What would be the consequence or impact potentially for you if ConAgra is successful in acquiring Ralcorp as it relates to their nut business?

That's really hard to say, Jeff; I don't know if I could really comment on that. I think ConAgra is an excellent company, I think there was a lot of value and synergies with them and Ralcorp. But as far as the nut piece of it specifically, it's hard to say what the impact would be on us if they were to acquire Ralcorp.

Thank you, good luck.

Bruce Baughman, Franklin.

Yes, just to follow up a bit on this line of questioning and the opening remarks. With the globalization and the consolidation factors that are affecting pricing and certainly creating question marks around any company's position in this business, what can you -- how can you look out on the next five years, what do you see and what would you think in terms of the big picture the pathway would be to improving the Company's position in this global business.

Well, from a manufacturing standpoint I think we've got the technology, we have the capabilities to be the low-cost manufacturer when it comes to operations and manufacturing snack nut products and baking nut products. Globally really I think opportunities are created.

If you look at China, for example, with the huge population base, the growing middle class, the fact that China is the largest producer of peanuts and walnuts in the world and I believe pine nuts, it makes sense to look at taking our business model in the United States and putting it in somewhere like China where we could take our nut expertise, our manufacturing capabilities and expertise and put something there where we could supply the Chinese consumer base with similar products that we supply here.

So I see the global -- global demand is a challenge from a procurement standpoint. But if you look at history and nut supply and demand, it's just a matter of time that nut growers see the profit that others are making and they'll begin to plant more almond trees, pecan trees, they'll provide more cashews.

So I think long-term supply needs to catch up with demand and keep up with demand as it continues to grow. But if we look historically that's always been the case where supply has caught up with demand, and then prices come back to more normal levels.

Bruce, this is Mike. I also would like to add that being a sheller of peanuts, walnuts and pecans also, at least in the interim until supply catches up which could be five, maybe even as much as seven years off, gives us access to supply that our non-shelling competitors don't have.

It also gives us good crop intelligence during the growing season and we really do think that that will provide us an advantage -- maybe not necessarily on cost, but certainly on our ability to get the supply of raw materials that we need to supply our business. And that's going to be a big challenge for the industry, especially for those who don't shell going forward.

Is there -- do you need more volume through Elgin in order to maximize the value of that asset?

Well, certainly volume helps, but we want to get volume that's profitable. But I also want to remind everybody that our total depreciation is roughly about $14 million. So -- and only part of that really is attributable to the Elgin facility.

So absorbing that particular piece of overhead certainly is beneficial. But in the whole scheme of things it's really raw commodity costs which make up anywhere from 70% to 80% of our COGS that is really the critical item to keep an eye on.

Okay, thank you very much.

Ben Axler, Spruce Point Capital.

I'm sorry, I think I heard you mention that you lost some customers and/or didn't get some key customer wins. Can you elaborate on that, please?

This is Jeffrey. There were some competitive bids. Whenever commodity costs go up and suppliers either put a price increase through or bid timing just comes up, there's always the risk of gaining new business or losing business. And there were situations over the last year where at one point we were the incumbent and we lost business due to competitive pricing.

And there are other instances where we were not the incumbent, that we bid on business that we expected to win and we were unsuccessful in doing that. So, yes, there's definitely competitive pressures when commodity volatility occurs, both winning business and losing business. In this case in the last year we lost a couple significant pieces of business.

Yes, and this is Mike. And a lot of that was driven by the fact that we just feel like we had much better visibility in respect to where commodity acquisition costs would go during the fiscal year. And in those cases we're convinced that we did not get those wins or lost some customers simply because we were plugging in higher commodity cost assumptions than our competitors were. And as it turned out, had we been down at those levels we would have had significant negative margins on that business.

Thank you very much.

And we have no further questions at this time. I would now like to turn the call back over to Michael Valentine for closing remarks. Pardon the interruption, there is another question coming from the line of Jeff Geygan from Milwaukee Capital.

I appreciate it, just one follow-up here. Looking back over the last two years, in May of '09 you brought on Rob Sarlls as VP of Strategy Business Development, followed by a gentleman who -- from Hain Celestial as VP of Sales, followed by a fellow out at Kraft, a VP of Marketing, followed by an R&D/Product Innovation head, I think this guy was also out of Kraft, a gentleman out of Abbott Labs running your Food Safety, Microbiology, and then a follow out of Marsh [Mac] who's helping you with your operations.

Finished off in January of '11 with a new Board member, Miss Taaffe who also has some credible experience. Can you appraise for everyone on the call and the market in general the impact of the addition of these human resources to your organization and your anticipated longer-term return on investment, if you can?

Sure, this is Jeffrey. Thanks, Jeff, good question. As I mentioned, the four core things that we did over the last three years, the fourth one was to bring in key talent to expand our brand, that's one of our core strategies is to grow our Fisher brand, now that we've acquired OVH, to grow the OVH brand and to look at other opportunities to create or build brands across our sales channels.

So bringing on Chris Gardier from Hain Celestial to really improve, oversee, upgrade our whole consumer sales department has been a success. We've actually streamlined the sales department and reduced the headcount while at the same time I think getting better relationships and having a better presence in the market with our sales team.

We brought on Howard Brandeisky who came from Kraft Foods, responsible for our innovation and marketing department. He's done a great job rebuilding the Fisher brand. We launched the freshness can earlier this year; we're launching a new program in culinary nuts which you'll see in the market this fall. And so that's been successful.

Our Fisher brand, we've never had a strong branded presence and we've never done, I believe, a great job at growing our Fisher brand. And we brought branded people with branded experience from major CPG companies to help us and we're starting to see the results of those investments now.

I think the food safety piece is important, make sure that we control our products within our four walls as best as possible to prevent any kind of product recalls. And then the M&A piece, bringing Rob on with the OVH acquisition was a result of his efforts in sourcing opportunities that we could expand our product portfolio.

Our whole M&A strategy is to either acquire capabilities that we currently don't have, which is where OVH fit in, acquire companies where we can expand into a new channel. We were weak in produce, the OVH acquisition gave us access to that channel that we didn't have before. And now we're looking at M&A activities overseas in trying to build a presence potentially in places like China.

And in addition to the M&A piece, Rob now is leading the effort to not only integrate the OVH sales but expand the OVH sales and create a success out of that acquisition. So I'm confident that the investments we've made in people is the right one for our business, the right one for our customers. And it doesn't happen overnight; we don't see results within the next couple of months. But I think over a year, two years the investments are long-term and they will be successful for our Company.

Thanks for the added color on that.

And we have no further questions at this time. I would now like to turn the call back over to Michael Valentine for closing remarks.

Okay, Karma; thank you. At this time we'll end today's call and we'd like to thank everybody for their participation on the call and also their interest in JBS. Have a good day, thank you.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.