John B Sanfilippo & Son Inc (JBSS) 2016 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. fourth quarterly fiscal 2016 year-end operating results conference call. My name is Sue and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded.

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

Thank you Sue. Good morning, everyone, and welcome to our 2016 fourth-quarter and fiscal year earnings conference call. Thank you for joining us today. Jeffrey Sanfilippo, our CEO, will provide additional remarks on our operating results for the current quarter and fiscal year later in the call.

Before we start, we want to alert everyone that we may make some forward-looking statements today. These statements are based on our current expectations, and involve certain risks and uncertainties that are inherent in our business. 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 you to refer to these filings to learn more about these risks and uncertainties.

I'll start the call by covering financial highlights for the 2016 fourth quarter and fiscal year. The current quarter sales increased by 4.6% to a record $231.5 million compared to net sales of $221.4 million for the fourth quarter of fiscal 2015. The increase in net sales in the quarterly comparison was due to a 10.4% increase in sales volume, which is defined as pounds sold to customers. The favorable impact upon net sales from the increase in sales volume was offset in part by a significant decline in selling prices, primarily for walnuts.

Volume increased in all distribution channels and increased for all major product types except pecans. The sales volume increased in the consumer channel was due in part to a 10.3% increase in sales volume with existing private brand customers. The increased sales volume for our branded products also contributed significantly to the volume increase in the consumer channel as follows. Fisher recipe nuts volume increased by 14.9%, mainly from increased sales of walnuts from the introduction of larger package sizes and from distribution gains with new customers. Fisher snack nuts and peanut butter volume increased by 28.9% mainly due to distribution gains with new and existing customers. Volume for our Orchard Valley Harvest and Sunshine Country produce brands combined increased by 136.6%, mainly from product line expansion and increased promotional and merchandising activities.

Partially offsetting these sales volume increases of branded products was a sales volume decrease for Fisher Nut Exactly clusters, due to reduced merchandising support from a key customer, and reduced in and out distribution opportunities in the club channel.

The sales volume increase in the contract packaging channel was primarily due to increased sales with existing customers. The sales volume increase in the commercial ingredients channel resulted from increased sales of peanut butter to existing food-service customers. The sales volume increase in the export channel came mainly from increased sales of bulk and shelled walnuts.

Fiscal 2016 net sales increased by 7.3% to a record $952.1 million, compared to fiscal 2015 net sales of $887.2 million. The increase in net sales in the yearly comparison was primarily due to a 6.6% increase in sales volume.

Sales volume increased in all distribution channels and sales volume increased for all major product types except almonds and pecans. The sales volume increase in the consumer channel was due primarily to significant increases in sales of our various branded products. The sales volume increase in the contract packaging channel was mainly due to increased sales with existing customers, which was generated in large part from new item introductions and increased promotional activity executed by our customers in this channel. The increase in sales volume in the commercial ingredients channel in the yearly comparison came mainly from increased sales of peanuts, peanut oil stock crushers and to other peanut shellers, which was driven by the fact that we are shelling more peanuts than we have in recent years. Also contributing to the volume increase in this channel were increased sales of cashew products to an existing customer. As was the case in the quarterly comparison, the sales volume increase in the export channel came primarily from increased sales of bulk and shelled walnuts.

The current fourth-quarter gross profit margin decreased to 14.5% of net sales from 15.5% for last year's fourth quarter. Gross profit decreased by approximately $700,000, or 2%. The decrease in gross profit and gross profit margin were primarily attributable to declines in gross profit margins on sales of peanuts due to increased processing costs associated with the lower quality 2015 peanut crop, and on sales of pecans, cashews and macadamia nuts as a result of higher acquisition costs.

Fiscal 2016 gross profit margin decreased to 14.4% of net sales from 14.9% for fiscal 2015. Gross profit increased by $5.4 million, or 4.1%, chiefly as a result of increased sales volume. The decrease in gross profit margin was due primarily to the decline in gross profit margin in sales of walnuts in our third quarter.

Total operating expenses increased by $600,000 for the fourth quarter while total operating expenses as a percentage of net sales was relatively unchanged. Total operating expenses increased by $6 million and total operating expenses as a percentage of net sales was relatively unchanged for the fiscal year comparison. For both comparisons, the increases in total operating expenses were mainly due to increases in compensation and employee benefit expenses.

Interest expense was $900,000 for the fourth quarter compared to $1.1 million in last year's fourth quarter, and interest expense for the current fiscal year fell to $3.5 million from $4 million in fiscal 2015. The declines in interest expense in both comparisons were primarily attributable to lower debt levels.

Turning to inventory, the total value of inventory on hand at the end of the current fiscal year decreased by $41.4 million, or almost 21%, compared to the value of inventories at the end of fiscal 2015. The decrease in the value of total inventory was primarily due to lower acquisition costs for almonds and lower quantities of finished goods and work in process inventories.

The weighted average cost per pound of raw nut and dried fruit input stocks at the end of fiscal 2016 decreased by 31.6% compared to the weighted average cost of those stocks at the end of 2015. This decrease was mainly attributable to lower acquisition costs for almonds and walnuts -- I'm sorry, yes, almonds and walnuts.

Mainly due to a decline in working capital of approximately $40 million and record net income, operating cash flow soared to a record $89.2 million in fiscal 2016. The record operating cash flow allowed us to pay two special dividends totaling $4.50 per share within roughly an eight-month period.

As has been the case in recent years, in October, our Board of Directors will again consider paying a special dividend in the second quarter of 2017. The payment of this December special dividend shall be primarily dependent upon forecasted borrowing availability levels and our revolving credit facility for the remainder of fiscal 2017.

And now Jeffrey Sanfilippo will provide additional comments on our performance for the current quarter and fiscal year. Jeffrey?

Thank you Mike. Good morning everyone. I want to congratulate our management team and all of our dedicated employees on achieving another consecutive year of record performance. Fiscal 2016 net sales were a record $952.1 million, a significant 7.3% improvement over fiscal 2015, driven primarily by a 6.6% sales volume increase. We gained new customers, expanded distribution of our products and increased market share with our brands.

We continue to grow Fisher and Orchard Valley Harvest significantly in respect to sales volume. Our consumer channel sales and marketing teams were very effective in executing our most important strategy, which is growing JBSS brands. Our Fisher brand remains the number one brand in recipe nuts domestically. We also experienced considerable growth in the produce category with our Orchard Valley Harvest and Sunshine Country brands due to new distribution gains.

The Company continues to return profits to stockholders and maximize stockholder value while growing our business. As Mike mentioned, record operating cash flow allowed us to pay two special dividends totaling $4.50 per share. In addition, our record $89.2 million of operating cash allowed us to reinvest over $15 million into the capital infrastructure of the Company, the most our 2007 facility consolidation project. I am proud of these results and I thank our team for their leadership in executing our strategic growth plans to build our brands and create value for our customers and our stockholders. These accomplishments resulted in a record $2.68 diluted earnings per share.

While it was a record year for the Company, we did face challenges. Our gross profit declined in our third and fourth quarters as a result of the factors Mike just mentioned. Our management team is keenly aware of the importance of margin expansion, and when the Company reports decreases in margins, as mentioned above, many investors may look back and still perceive JBSS as a commodity business, but we are not a commodity business. We continue to build our brands and transform our business and that of our customers with product, packaging, and processing innovation and shifting our volume to higher margin opportunities.

The management team took a hard look at our investments this past year. One area we focused on was the international growth segment of our strategic plan, and made the decision to reallocate resources to other channels of our business. We will continue our sales efforts in growing export markets but we will align ourselves with strategic partners in key countries such as China.

We considered alternatives to replace our export growth strategy and modified our strategic plan accordingly. For fiscal 2017, our resources will be devoted to three specific areas: first, expansion of national distribution of our Fisher and Orchard Valley Harvest branded products; second, expansion of our customer reach by entering into new distribution channels, launching differentiated products and investing in new businesses; and three, continued value-added growth of nonbranded business with our key existing customers.

Now we'll turn to category updates in the snack recipe and produce segment and review our branded performance during the fourth quarter and for the fiscal year-end. As always, the market information I will be referring to is IRI reported data, and today's report is for the period ending July 3, 2016. When I refer to Q4, I am referring to 14 weeks of the quarter ending July 3. References to changes in volume or price are versus the corresponding period one year ago.

We look at the category on IRI's total US definition, which includes food, drug, mass, Walmart, military and other outlets unless otherwise specified. And when we discuss pricing, we refer to average price per pound. The term "velocity" refers to the sales per point of distribution.

First, let me review some category dynamics. We saw an increase in dollar sales for the fiscal year and no change for the quarter. A slight decrease in pound volume occurred in both the fiscal year and the quarter. This is the result of generally higher retail net prices, which is impacting consumer purchase behavior.

The total nut category was flat in sales dollars and declined in pound volume by 2% in Q4. Overall, prices in Q4 increased 2% versus the prior year. Price increases on almonds and pecans by 6% and 5%, respectively, for the quarter versus Q4 last year resulted in a 7% pound sales decline for almonds and a 5% pound sales decline for pecans.

The story is similar when looking at the entire 2016 fiscal year. The net category increased 2% in sales dollars but decreased 2% in pound volume sales. Category pricing during the fiscal year increased 4% versus the prior year. Higher prices were most visible on almonds, which increased 13%, resulting in an 11% decline in pound volume. Walnuts were the only major nut type that decreased in price versus last year, decreasing by 5%, which resulted in a 2% increase in pound volume.

Now I'll talk about each category a little more in-depth, starting with recipe nuts. In Q4, the recipe nut category declined 13% in dollars and pound sales. Price increases on almonds of 20% and pecans of 6% drove negative pound sale trends of 40% for almonds and 10% for pecans.

The story for the fiscal year is similar. The recipe category for our 2016 fiscal year decreased 5% in dollar sales and 8% in pound sales. Pricing on almonds and pecans increased 22% and 3%, respectively, which drove a 30% decline on almond pound volume and flat pound volume on pecans.

Our Fisher brand had a very strong year and continues to gain momentum behind our marketing efforts and no preservatives messaging. Our brand equity efforts on Fisher helped the brand overcome category weakness and deliver growth in Q4 and on the year.

Fisher recipe nuts increased 5% in dollar sales and 6% in pound sales in the quarter versus last year. As a result, Fisher's share in the category increased 4.2 points versus last year. The growth was driven by an increase in distribution, which shows retailers are embracing the Fisher brand. For the first time, Fisher recipe nuts has an ACV distribution of over 50% at 54%.

For the entire fiscal year, Fisher recipe nuts increased 8% in dollars and 3% in pounds, resulting in the brand share increasing 2.6 points versus last year, which built on 2 point share point growth in fiscal 2015. With the brand share growth in fiscal 2016, Fisher is the number one brand in the recipe nut aisle in the multiple outlets that we track.

Now let me turn to the snack category. In Q4, the snack category increased 1% in dollars and declined 3% in pound sales versus last year, and average prices were up 4% led by cashews, which increased 5%. For the fiscal year, the snack category increased 4% in dollars and declined 2% in pounds versus last year.

Fisher snack decreased 18% in sales dollars and 13% in pound sales in Q4. The decline was driven by a decrease in pound velocity and merchandising declines at two key customers, but our overall shipment trends were positive in the quarterly comparison because they include customers that are not reported by IRI.

Fisher snack sales dollars and pound volume decreased in fiscal 2016 versus last year by 10% and 11%, respectively. The reasons for declines are similar to the Q4 results.

Fisher Nut Exactly was up significantly versus a year ago, but that was largely driven by the fact that we are lapping an introductory period. Fisher Nut Exactly has performed well at retailers that have supported the brand with merchandising. Moving forward, we expect results to soften due to the loss of one retail account.

As we described in prior earnings calls, we have gained distribution for both our Orchard Valley Harvest and Sunshine Country brands at a major retailer. As such, we look at our produce nut business as a combination of these two brands.

Our produce business had a strong fourth quarter, increasing 65% in dollar sales and 44% in pound sales. This strong performance was due to increased retailer acceptance of our brands, which resulted in a 43% increase in total points of distribution.

For the fiscal year, a similar story took place. Dollar sales grew 32% and pound sales increased 18%. Acceptance among retailers again was the key as total points of distribution increased 47%. We will continue to update you on the results of this transition in future calls.

In closing, I want to mention that, over the past 18 months, a group of dedicated employees led by our Director of Administration, Kelly Day, and our Director of Customer Solutions, Rosanne Christman, went through our Company archives, researched documents and spend hours interviewing past and current employees to capture the history of John B Sanfilippo & Son. As a result of their efforts, they created a museum in the lobby of our corporate headquarters. As all the information was gathered, 14 components were evident as the drivers of the Company's long history and success. First, our people.

From the beginning, the management team has have always invested in good people. From the early days of my grandparents to the incredible leaders managing JBSS today, a key factor in the Company's success is talented, passionate, engaged, dedicated people.

Second, our innovation and growth. The forward-thinking decisions and investments in vertical integration and processing and brands that the Company has made through the years are key to our ongoing success in our industry leadership and growth.

Our customers, products and brands. Through creative product and sales channel diversification, JBSS has led the way in providing value-added nut solutions to build brands and expand nut consumption. Our Company has a rich history of delivering value to customers and consumers across the globe and adapting our products and service as the markets grow and change.

And fourth, global source for nuts. The showpiece of the museum is a map of the world made up of different in-shell tree nuts and peanuts.

We are a global company buying and selling our products around the world. We will continue to invest in people, product and packaging innovation, brands, new product capabilities to diversify and differentiate our product portfolio. We will continue to grow our brands and provide value-added snack and recipe nut solutions for our customers and consumers.

I want to again thank and congratulate all of our employees for their commitment and hard work over the last year. And to our stockholders, I thank you for maintaining your trust and support. We appreciate your participation in the call and thank you for your interest in our Company.

I will now turn the call back over to Mike.

Thank you Jeff. At this time, we will open the call to questions from participants. Sue, can you please queue up the first question?

(Operator Instructions). Francesco Pellegrino, Sidoti.

Good morning guys. Thanks for taking my questions in advance. So I wanted to discuss with you, following the third quarter, this is a nice little rebound quarter setting yourself up for a nice fiscal 2017 it appears. The dynamics in the third quarter, I understand that your average blended selling price per pound due to the walnut issues clearing the previous year's walnut expensive harvest caused your average selling price per pound to decrease more than your average cost per pound did in the third quarter. I thought that was just a one-off in the third quarter, and I thought maybe, in the fourth quarter, you would be setting yourself up for the average blended selling price per pound decreasing less than the decrease in your cost per pound would. And although I calculated that your average blended selling price is down 5%, I saw your costs were down 4%. Could you maybe talk about the dynamics in the fourth quarter that might have sort of created that little bit of an awkward relationship? Because I thought you would have maybe been dragging your feet when reducing selling prices.

I'll take that. One of the interesting things that occurred in the fourth quarter was a shift in our volume towards peanuts, and that tends to bring down the weighted average selling price quite a bit.

Okay. So if you are bringing them -- if you are selling more peanuts, that should be weighted towards a significantly lower priced nut. I guess the way that I guess I'm balancing it right now, could this be a concern going forward that you're selling more peanut volume that has a lower gross profit per pound going forward when just thinking about where he volumes are going to be in fiscal 2017?

Not necessarily. We will take pound growth wherever we can get it as long as we don't lose pounds on the other significant contributors. I also want to remind everyone that we also had a shift in pounds towards lower priced walnuts compared to the third quarter and last year. So that also contributed to it too, as we predicted.

So the shift to lower price walnuts, the volume bump you got during the fourth quarter, obviously you're vertically integrated from walnuts, so you should see some nice margin expansion there. Could you just maybe talk about some of the pricing changes that occurred from the third quarter to the fourth quarter? Were you able to get price increases in the fourth quarter? Because I know that there was a lot of promotional activity during the third quarter, which significantly reduced your profitability. And just maybe in addition, where it was in the fourth quarter and maybe where you see it for fiscal 2017 as well?

And that's correct, we did -- we were aggressively promoting walnuts in our third quarter to move out our 2014 crop walnuts that were higher cost, as you mentioned. That was really more of a temporary measure just to get back into the 2015 crop. And of course, as a result of that, when we got into the fourth quarter, we did pare back our walnut promotional activity but also benefited from significantly lower cost walnuts.

I would note that we also took price increases on pecans that are reflecting in the -- that just started in the fourth quarter.

Okay. The pecan crop hasn't come in yet, so are you still short pecans?

Our position is balance on pecans. We are actually in a very good position. The industry overall we believe is fairly short going into new crop, but our position is balanced.

Okay. Maybe a question for Mike. So, I saw in the fourth-quarter balance sheet that the revolver is down to about $12 million. Could you maybe give us a little bit of commentary where the revolver stands so far in the first quarter? I would just think, with what 2017 is looking like, you might be able to pay the entire revolver off pretty quickly.

Historically, we generate cash from May through October. This year is no different. We continue to generate cash during this current first quarter, and as a consequence of that, we are already out of the revolver. And I can't remember the last time this has occurred, but I would guess it probably has not occurred in the last 10 years. But just as a result of significantly lower working capital levels, just as you saw in Q4, that's continuing into Q1.

It should be short-lived, a zero balance on your revolver though, right? But you could be putting a balance back on in Q3, if I'm correct.

Usually -- actually, usually, we start to borrow with a nut, primarily walnuts and pecans, typically in November.

Okay. So if the revolver stayed down now, it looks like you're going to get some sizable cash build. You mentioned before that the Company is still looking at another $2.50 special dividend for Q2 after paying out a $2.50 special dividend in Q1. You guys have been issuing these special dividends in 2Q fiscal 2013 when I think you started it at $1.00. You have been increasing it I think every year except for one year. At what point does the consistency of these special dividends maybe make you rethink your dividend policy and come out with something a little bit more consistent on a quarterly basis? Or what are some other uses of cash? Maybe you see paying down long-term debt as a priority. Or just what are your thoughts there?

Let me start with long-term debt. First of all, we only have about $30 million of long-term debt. Most of it falls in the tranche A and tranche B mortgage facilities. Both of those agreements have considerable prepayment penalties, so paying down that really doesn't make a lot of sense.

As Jeffrey mentioned before, we have ramped up our capital spending. I think we started that about three years ago. We will continue to have significantly above maintenance level CapEx in 2017, so that's still a priority.

We are always looking at acquisition opportunities. We've seen quite a few of those in 2016. They just didn't quite meet our criteria. But we are going to continue to look at that.

And then of course, again, depending on forecasted availability for fiscal 2017, in our late October meeting, we are going, as a board, going to again consider whether we should or can pay a special dividend in December.

So, no thought about maybe issuing -- approaching the board about a consistent quarterly dividend?

I don't know if we would do a quarterly dividend. I did actually, after speaking with investors recently who brought up a similar question -- one of the ideas that were suggested was to have a regular what we would characterize as, say, nominal dividend, something we can pay no matter what happens to nut costs or nut acquisition costs, and then supplement that with a special dividend when we can. So, that's an interesting idea, and certainly we will bring that to the board's attention and discuss that approach as a board.

The CapEx increase that you had just discussed, is that for investments in new product lines or just maintenance of existing product lines and the overall facility and the overall business?

This is Jeffrey. So the CapEx investments, a lot of it is infrastructure with the new Food Safety Modernization Act requirements, or FSMA. We've made a lot of investments across our plants to be compliant with the new regulations of segregation of raw and roasted product, different food quality and food safety parameters. So part of it is infrastructure. Some of it is investment in the brands as well, but I would say this big chunk of it this past year was infrastructure investments, and new capabilities. We added some packaging lines to support our continued growth in our brands.

Okay. I'll jump back into queue, but I've got some more questions, if anyone else has any.

[Tom Koch, Transkopf].

Good morning Jeffrey and Mike. I had a couple of questions. And by the way, great to see you guys continuing leaving everyone on their toes with these paragraphs of all these changes in volumes and prices and whatnot, and pretty fun watching the stock this morning trading down $2.00, now up $2.90. Kind of crazy.

So, can you guys talk a little bit about this pretty sharp decline in the weighted average cost for raw inventory and kind of what effect you would expect that to have on margins as we progress through the year?

As I mentioned before, Tom, the big driver on that was the weighted average cost of walnuts. Our acquisition cost declined it looks like by probably about 45%, and of course walnuts are big part of our inventory at the end of the fiscal year, so that was the big driver.

We have mentioned in previous calls, for both walnuts and almonds, a specific significant decline in acquisition costs will lead or have already led to significant declines in selling prices, and consequently a meaningful decline in net sales. We do expect to have margin expansion as a result of that, which will help us maintain our gross profit dollars. However, as we've said repeatedly, to be able to have a favorable comparison on the gross profit line, it's critical that we get significant increased volume, especially on those two commodities.

Yes. And so you guys have talked a lot before about, and we know seasonality plays into this, so coming into the walnuts season here now as far as selling, and I don't know if walnuts -- I guess almonds kind of follow that since the calendar I guess fourth quarter is always a strong quarter I guess for both. But anyway, what are you guys seeing or anticipating as far as volumes for the fall and from now through Christmas?

This is Jeffrey. We anticipate a very strong holiday season for recipe nuts specifically. You're going to be looking at walnut retail prices half of what you would find a typical pecan price to be this year, so we anticipate some substantial growth in our walnut business. We will be retailing a 32-ounce bag of walnuts similar to what we would be retailing a 16-ounce bag of pecans. So we expect to see maybe a little shift in volume consumption based on that. But we have got great distribution set up and lined up with our key customers, both from a display merchandising standpoint and also just distribution in general has expanded. So expectations are strong for a good Q going into Q3 and -- or Q1 and Q2.

Okay. And then kind of still trying to understand this margin issue. So as it pertains to almonds, so almonds had this significant price decline, both in acquisition costs and your selling costs, kind of over the last months, I guess going back to, what, November, December. How did that affect your margin in this last quarter? Was that a positive or a negative?

Yes, both walnuts contributed positively. Now, I want to make a distinction between walnuts and almonds. As you know, we are walnut sheller. When we move from one crop year to another, there is an abrupt change in the acquisition cost, which is essentially what we saw near the end of our third quarter. But in the case of almonds, because we are not a sheller, that ramps down much more gradually than what we saw with walnuts. So, though we had lower almond costs in our third quarter and then a little bit lower in the fourth quarter, we are not really all the way down to where the market is, at least as of near the end of the fourth quarter. We are really seeing that right now.

And that's I assume because you're still selling out of inventory that was at a higher cost?

It's just purchase contracts. We enter into purchase contracts with other almond shellers and we will buy forward as the prices come down and average down. But I would say that what we have -- what we will receive going forward are -- virtually everything we are buying now and receiving will be aligned with the current almond market.

Got it, okay, beautiful. So then the last thing on this gross margin, so you guys called out the effect of I guess higher processing costs in peanuts due to poor crop quality. So that was the major cause of the decline in the gross profit margin in this last quarter?

That's right. Now, keep in mind, we were only off by about $600,000 or $700,000 in the quarterly comparison. So when we talk about additional processing costs for peanuts, which were a major part of that number, again, we're talking about typically what are pretty small numbers.

Okay. But I mean you did call that out as the major effect. What I'm wondering is is that going to continue going forward, is that a one-time event?

We shell basically the tail end of the crop in the fourth quarter. We are actually done shelling peanuts. And when you're in a poor quality crop year, what you shell at the end is typically the worst quality and the most costly to process. So, we are done with that. We'll be receiving new crop peanuts here in probably about three weeks, and hopefully we will get a better crop and get back to normal on peanut processing costs.

Okay, great. And then I'll just go one last one. So you guys talked a lot about working capital. If prices in your products were to remain stable, which I know they won't, but let's just say if hypothetically, from where they are right now, would you anticipate that for fiscal 2017 in the whole for the entire year, you guys would be a user or generator or neutral as far as working capital?

We will continue to generate cash just really off the balance sheet, because we are going to have such a favorable cost comparison to the first two quarters of last year. Then, in the third quarter, we will be a user of cash as we always are. Then we will get into the fourth quarter, typically especially after April, then we tend to generate cash. So I think we will continue to have good cash flow in fiscal 2017, not as good as 2016, but still an above average year in that respect.

Okay. Because I mean, obviously, you threw off $89 million in cash from operations, which is huge. And that contributes -- that's partially because of EBITDA or profit and working capital combined. And so I'm just trying to again zero in on this working capital component. If prices were to remain flat, are you saying that working capital would be generally neutral and you would be generating your cash from basically cash flow?

Yes. In the second half of the year, if we apply your assumption, then our cash generation would come from the income statement, not the balance sheet.

Right. Okay, great. Thanks a lot guys. I really appreciate it.

Francesco Pellegrino.

Back again, I just wanted to touch on the subsequent event that guys have disclosed about the customer for almond butter that's about $90 million of business in fiscal 2016, or about 10% of your sales that's going to be moving towards a competitor. First off, shouldn't this really have been expected? Since you are not vertically integrated for almonds, went almond prices plummet like this, they would go towards a low cost producer. You're more of like a middleman for almonds. Is that a correct way of viewing this?

I wouldn't really call it the middleman. There's a lot of investment in the actual manufacturing of almond butter. The challenge that we have is, because they are a grower of almonds as well, they're vertically integrated further upstream than we are because we are not growers. They do have, in some cases, lower cost of goods from the raw material out of the field, so that was part of the competitive disadvantage that we had in that circumstance. But at the same time, we are not a grower, so we can buy from multiple growers, and we can average competitive prices across many suppliers. That was one of the competitive advantages we did provide to this specific account. But it's nothing that we expected; it was a surprise actually. We were the sole supplier at this point up until now, so strategically it could be that they are looking at just multiple suppliers. We are not really sure, but at this point, we just wanted to disclose that. It's a loss of business and we're going to focus now on building other almond butter customers. We are focused both in private brands as well as commercial ingredients, and we are looking at our branded business and how we can extend our portfolio to include almond butter.

But just looking at the lost business -- and I thought the way that you guys had placed it into the press release was very transparent because I think a lot of companies would have just said we are looking to call high-volume, low-margin business. Is it correct assume that, since it is in the commercial ingredients channel, that this is very low margin business?

That's correct. As I mentioned in the press release, it is significantly lower than our overall gross profit margin for fiscal 2016.

So if you're going to be losing $100 million in the commercial ingredients channel, and that business would probably start in like Q3 2017, you're going to be getting a product mix shift towards your consumer distribution channel, which granted you might just maintain gross profit dollars at the level where they are right now, but could your margins be going above 20% in fiscal 2017 just due to that loss of low-margin business, which is such a significant part of your revenue?

I would say, Francesco, it depends on how we make that business up, where it's made up. Obviously, we'll see a shift in our total volume percentage towards the consumer channel, which is typically higher margin. Our focus really is on rebuilding that almond butter distribution and some of that commercial ingredient business with higher volume opportunities, which can depend on where that volume is made up.

Okay. Just going back to the balance sheet, Mike had mentioned you guys had paid off your revolver. I have heard some rumors in the industry about a nut CP&G business that's shopping itself around.

When I look at just what you guys have done over the past five or 10 years building out your branded platform, just maybe -- I don't want to call it struggles for Fisher Nut Exactly, but that's still a brand in its relative infancy. Could you maybe talk about where you would like to bring maybe your leverage? Should I be thinking net debt to EBITDA? Because a majority of your cost of goods sold are commodities, so I don't know if necessarily looking at a normalized EBITDA level is the best way to think about the way you guys would maybe approach an acquisition or not. But where the balance sheet is right now, I think it gives you guys a lot of opportunity to maybe look around the space and continue to grow the business. I would just be interested -- and I feel as if, every quarter, I am just asking you about the M&A space, but it seems as if right now you might have the balance sheet to set you up really nicely to do something in fiscal 2017.

And that is true. We do have a balance sheet that would do just that, but we need to find the right opportunity. We've never had a history of doing acquisitions at high multiples unless we can identify realistic synergies and realistic growth opportunities. And as everyone knows, the multiples up there now are pretty high, even for small targets, as we see larger CPG companies dip their toes in those waters. So, if we do decide to do an acquisition, it's going to make financial sense and our assumptions are going to be realistic.

Perfect. Thanks again guys.

Thank you for your questions. I would now like to turn the call over to Mike Valentine for closing remarks.

Thank you Sue. Before we end the call today, I just want to remind everyone that we will be presenting at the Midwest Ideas Conference in Chicago on August 30, and we will be posting an updated investor presentation on our site that day in addition to filing that presentation on Form 8-K. Again, I want to thank everyone for all their interest or all your interest in JBSS. This concludes the call for our fourth-quarter and fiscal-year 2016 operating results.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Thank you for joining and have a very good day.