John B Sanfilippo & Son Inc (JBSS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Fourth Quarter and Fiscal 2017 Year-End Operating Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Michael Valentine, Chief Financial Officer. Sir, you may begin.

Thank you, Geronimo. Good morning, everyone, and welcome to our 2017 Fourth Quarter and Fiscal Year-end Earnings Conference Call. Thank you for joining us today.

On the call with me today are Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO.

Before we start, we want to alert participants 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 the risks and uncertainties that are inherent in our business.

I'll start the call by covering financial highlights for the 2017 fourth quarter and fiscal year. The current fourth quarter net sales decreased by 12.9% to $201.6 million compared to net sales of $231.5 million in the fourth quarter of 2016. The decrease in net sales in the quarterly comparison was primarily due to a 9% decrease in sales volume. Most of the sales volume decline was attributable to the additional week in the prior year's fourth quarter.

Sales volume decreased in both the commercial ingredients and consumer distribution channels. However, those declines were partially offset by an increase in volume in the contract packaging distribution channel. The sales volume decrease in the consumer channel was mainly due to a decline in sales of Fisher recipe nuts, which was offset in part by increased sales of private brand trail mixes.

Before considering the impact on sales volume from the additional week in last year's fourth quarter, sales volume for our branded products in the consumer channel changed as follows: Fisher recipe nut sales volume decreased by 19.5%, mainly due to ongoing inventory reduction initiatives at one customer. Fisher snack nut volume was relatively unchanged as volume declines for inshell peanuts at one customer were offset by volume growth in other Fisher snack nut items. Orchard Valley Harvest and Sunshine Country produce brands increased by 6.3%, which was driven by a 13.1% increase in sales volume for our Orchard Valley Harvest brand. The Orchard Valley Harvest volume increase resulted from increasing the unit count in our multipack items and also distribution gains with new and existing customers.

The sales volume increase in the contract packaging channel was primarily due to distribution gains and product line expansions implemented by several of our existing customers.

The sales volume decrease in the commercial ingredients channel was mainly due to the loss of a bulk almond butter customer in the second quarter of fiscal 2017. The decline in sales of bulk walnuts also contributed to the sales volume decline in the commercial ingredients channel. The decline in bulk walnuts sales occurred because we did not have excess walnut inventories available for sale, as was the case in last year's fourth quarter.

Fiscal 2017 net sales decreased by 11.1% to $846.6 million compared to fiscal 2016 net sales of $952.1 million. The decrease in net sales in the yearly comparison was primarily due to a 7.6% decrease in the weighted average sales price per pound, which resulted from lower selling prices for almonds and walnuts. A 3.7% decrease in sales volume also contributed to the decline in net sales.

Approximately half of the sales volume decline in the year-to-date comparison was attributable to the additional week in last year's fourth quarter. The remaining sales volume decline occurred in the commercial ingredients channel due to the reasons we cited in the quarterly comparison. Sales volume increased slightly in the consumer channel due to increased sales of Fisher recipe nuts and Orchard Valley Harvest produce products. The sales volume increase in the contract packaging channel also occurred for the same reasons we cited in the quarterly comparison.

The current fourth quarter gross profit margin increased to 16.7% of net sales from 14.5% for last year's fourth quarter. Gross profit was relatively unchanged at $33.6 million. The 220 basis point increase in gross profit margin was due primarily to lower acquisition cost for almonds.

Fiscal 2017 gross profit margin increased to 16.8% of net sales from 14.4% for fiscal 2016. Gross profit increased by 3.2% to $141.9 million. The increases in gross profit and gross profit margin were also primarily due to lower acquisition cost for almonds as well as improved alignment of selling prices and acquisition cost for pecans and walnuts.

Total operating expenses increased by $800,000 and total operating expenses as a percentage of net sales increased to 10.9% from 9.2% in the quarterly comparison. The increase in operating expenses as a percentage of net sales was primarily due to a lower net sales base. The increase in total operating expense dollars was driven by 2 litigation settlements that occurred in the current fourth quarter, one favorable and one unfavorable, and these settlements resulted in a net expense of approximately $800,000. Total operating expenses decreased by $2.6 million and total operating expenses as a percentage of net sales increased to 9.9% from 9% last year. The increase in total operating expenses as a percentage of net sales also resulted from a lower net sales base in the year-to-date comparison. The decrease in operating expenses was driven by reductions in compensation, broker commission, product sampling and advertising expenses. The decrease in operating expenses was partially offset by increased shipping expenses and the litigation settlements we mentioned earlier.

Interest expense declined to $800,000 for the fourth quarter of fiscal '17 from $900,000 in last year's fourth quarter and interest expense for the current fiscal year fell to $2.9 million from $3.5 million in fiscal 2016. The declines in interest expense in both comparisons were primarily attributable to lower debt levels.

As a result of the above, net income decreased by 7.6% to $6.7 million in the quarterly comparison and net income for fiscal 2017 increased by 18.8% to a record $36.1 million.

Taking a look at inventory. Total value of our inventories on hand at the end of the fiscal year increased by $25.8 million or 16.5% compared to the total value of inventories at the end of fiscal 2016. The increase in total value of inventories was primarily due to higher quantities of pecans, walnuts and peanuts in addition to higher acquisition costs for pecans and peanuts. Additionally, increases in the quantities of finished goods and work-in-process inventories contributed to the increase in total inventory value. The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of the current fourth quarter increased by 5.5% compared to the weighted average cost of input stocks at the end of last year's fourth quarter. This increase was mainly attributable to higher acquisition costs for peanuts and all major tree nuts except almonds.

And now, I'll turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on the performance for the current quarter and fiscal year. Jeff?

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.

As Mike mentioned, gross profit reached a record $141.9 million, net income reached a record $36.1 million and earnings per share reached a record $3.17 in fiscal 2017, very strong performance when considering net sales only reached $846.6 million this year due to price deflation and lower sales volume. The management team continued to focus on margin enhancement initiatives such as pursuing more value-added product sales and supply chain cost savings with continuous improvement projects throughout our facilities.

For the quarter, we equaled last year's fourth quarter gross profit due to significant growth for private brand trail mixes, continued growth for our Orchard Valley Harvest brand and another strong quarter in contract packaging.

It's important to call out for the quarter and the fiscal year-end the strong results of our Fisher and Orchard Valley Harvest brands relative to category dynamics. Now, we'll cover this when we review category updates.

We executed on our strategic plan during fiscal 2017 by expanding our distribution and product offerings for our Fisher recipe nuts and Orchard Valley Harvest produce nuts and by expanding distribution of peanuts and trail mixes to contract packaging customers.

In the first quarter of fiscal 2018, we paid an annual dividend of $0.50 per share and a special dividend of $2 per share, the first dividends after adoption of our new dividend policy. These most recent dividend payments marked the sixth consecutive year that we have paid dividends to our stockholders. We were very pleased to return cash to our stockholders earlier in the fiscal year through these dividends. Going forward, it is our intention for the Board of Directors to consider the payment of dividends and their amount in the first quarter rather than around the time of our annual meeting.

While it was a record year for the company, we did face challenges. In addition to the extra week Mike noted earlier, our volume declined due to the loss of a significant commercial ingredient customer, as we've talked about throughout the year. And there were other headwinds with 2 major private brand customers changing elements of their snack nut programs that negatively impacted sales volume. But our sales, marketing, R&D and operation teams worked hard to make up these negative volume trends and developed new business with other customers and in other channels. While we still cycle against some volume losses from the prior year, we have strong growth plans in place for fiscal 2018.

I mentioned last year on this call that our management team is keenly aware of the importance of margin expansion, and we demonstrated that this past year. While the industry experienced volatile nut market prices and some margin erosion, we actually enhanced margins. This is a testament to our procurement team working with operations, sales, marketing and finance to better align our pricing with inventory positions and focus on what matters most: to provide value and service to our customers and consumers. We continue to build our brands and transform our business and that of our customers with product, packaging and process innovation.

Last year at this time, I discussed the change in our growth strategy. We shifted some resources from our international expansion plans to focus on expanding our consumer reach by entering new distribution channels, launching differentiated products and investing in new businesses. We were successful in executing new programs toward the end of fiscal 2017 that have started shipping in the first quarter of 2018. Examples are the new vending items and e-commerce for Fisher. We are pursuing club store distribution for Orchard Valley Harvest brand. The commercial ingredient channel has gained new distribution with several noncommercial accounts. The contract manufacturing division has done a great job expanding products with several key customers in this channel.

Turning to category updates. I'm happy to share some of the brand results with you, both for the quarter and also for the fiscal year. As always, the market information I'll be referring to is IRI reported data and this call covers the period ending July 2, 2017. When I refer to Q4, I'm referring to 13 weeks of the quarter ending July 2. References to changes in volume or price are versus the corresponding period one year ago. We look at the category under IRI's total U.S. definition, which includes food, drug, mass, Walmart, military and other outlets, unless otherwise specified. And when we discuss pricing, we are referring to average price per pound. Breakouts of the recipe, snack and produce nut categories are based on our custom definitions developed in conjunction with IRI. And 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 quarter and no change for the fiscal year. A slight increase in pound volume occurred in both the fiscal year and the quarter. The total nut category increased sales dollars and pound volume by 1% in the fourth quarter. Overall prices in the fourth quarter were flat versus the prior year. For the quarter, prices decreased in pistachios, walnuts and almonds by 13%, 11% and 10% respectively versus last year, and that resulted in a 28% pound sales increase for pistachios, 9% pound increase for walnuts and an 8% pound increase for almonds.

Looking at the entire 2017 fiscal year, the nut category was flat in dollar sales and increased 1% in pound sales volume. Category pricing during the fiscal year decreased 1% versus the prior year. Price changes were most visible on walnuts, pistachios and almonds, which decreased 16%, 8% and 7%, respectively, and drove increases of 7% on walnuts, 23% on pistachio volume and 5% on almond volume. Pecans increased in price versus last year by 6%, which resulted in a 4% decrease in pound volume.

Now I'll talk about each category in a little more depth, starting with recipe nuts. In Q4, the recipe nut category increased 1% in dollars and 8% in pounds. A 12% decrease in walnut prices and an 11% decrease in almond prices drove an 11% increase in pound volume for walnuts and a 5% increase in almond volume. For the fiscal year, the recipe category struggled. The category decreased 9% in dollar sales and 4% in pound sales. Pricing on pecans increased by 8%, resulting in pound volume decline of 9%. Even with the price decrease of 3% with almonds, pound sales still decreased 17%. We attribute this to consumers migrating to other parts of the store to purchase almonds. A significant price decrease on walnuts of 18% versus a year ago and pound volume gains on walnuts of 7% did not make up the underperformance of pecans and almonds in the category.

Our Fisher brand had a very strong year and continues to gain momentum behind our marketing and sales efforts. Our brand equity efforts on Fisher helped the brand deliver growth in Q4 and on the year. Fisher recipe nuts increased 8% in dollar sales and 12% in pound sales for the quarter versus last year. As a result, Fisher's share in the category increased 0.9 versus last year. The growth was driven by an increase in distribution, which shows retailers are embracing the Fisher brand. Fisher recipe nuts have an ACV now of 59%.

Fisher recipe nut's channel sales volume was down 19.5% in the quarter (inaudible) retail consumption due to ongoing inventory reduction initiatives at one customer, as Mike mentioned earlier. For the entire fiscal year, Fisher recipe nut dollar sales increased 9% and 13% in pound volume, resulting in the brand share increasing 4 points versus last year. This increase builds on a 2.6% share point growth in fiscal '16. With the brand share growth over the past few years, Fisher continues to be the #1 brand in the recipe aisle in the All Outlet MULO measurements.

Now let me turn to the snack category. In Q4, the snack category decreased 2% in dollars and 1% in pounds. For the fiscal year, the snack category decreased 2% in dollars and declined 1% in pounds versus last year. Fisher snack increased 5% in dollar sales and 11% in pound volume in Q4. The increase was driven by an increase pound velocity and an increase in ACV at a major account. Fisher snack sales dollars decreased 3% in fiscal '17 versus last year while pound volume increased by 9%. Pricing for Fisher snack decreased, which increased pound volume sales and depressed dollar sales, which was mainly due to a shift in product mix from tree nuts to more Fisher peanut sales.

Turning to the produce category. In Q4, our produce business, comprised of Orchard Valley Harvest and Sunshine Country, increased 6% in dollar sales and 5% in pound sales. This performance was due to increased retailer acceptance of our brands, which resulted in a 16% growth rate in total points of distribution.

For the fiscal year, a similar story took place. Dollar sales grew 32% and pound sales increased 34%. Acceptance among retailers again was a key, as total distribution points increased 16%.

Orchard Valley Harvest business had a strong Q4 sales, increasing 13% in dollars and increasing 8% in pound sales. Our distribution increased 14%, as we have continued to build the core business distribution by launching new products such as our Omega-3 and dark chocolate-covered fruits, both in multipacks.

For the fiscal year, a similar story took place. Dollar sales grew 52% and pound sales increased 55%. The growth was driven by an increase in distribution of 12% and velocity increase of 34% as we continue to upsize our business in the marketplace.

Sunshine Country, our other brand in the produce section, did not perform as well as Orchard Valley Harvest for Q4, declining 7% in dollars and 1% in pounds. The brand declined in sales as we were lapping aggressive merchandising last year at a key customer.

For the fiscal year, dollar sales grew 5% and pound sales increased 10%, and this growth was driven by an increase in distribution of 28%.

In closing, I am proud of our fiscal 2017 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 $3.17 earnings per share, and our strong financial position allowed us to pay 2 special cash dividends with a combined total of $56.5 million.

It is already the second period into fiscal 2018 and our management team and every one of our employees is focused on what matters most. Each department knows the major focus is volume growth this year, and we will achieve this by continuing to invest in people, product, package innovation and new production capabilities to diversify and differentiate our portfolio, grow our brands and provide value-added snack, produce and recipe nut solutions for our customers and consumers.

I want to again thank and congratulate all 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 in JBSS. 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.

All right. Thank you, Jeff.

At this time, we will open the call to questions. Operator, please queue up the first question.

(Operator Instructions) Our first question comes from the line of Francesco Pellegrino of Sidoti & Company.

So the top line looked really good, and then it looked like it was paired really well with some strong -- I know the number is down 9%, and I was hoping just to get a little bit of color on that. If I back out the almond butter business from the year-ago period and the extra week, do I really get like volume up 3% to 4%?

Yes, that would be correct.

Okay. I guess when you guys reported your third quarter a couple of months ago, it was a really strong third quarter. And I maybe think that the sell side -- it was a little bit of a head fake for us because margins were so strong. I don't know if you can maybe comment on the relative strength of this fourth quarter or just how impressive the third quarter really was? Sometimes when I think about the business, I try to understand how -- just how seasonally weak the third quarter is. And I guess there's not much of a -- as much of a sequential read-through as I would have thought. And just maybe a little bit of commentary would be helpful about that.

Okay. Well, you are correct; we certainly had a great third quarter in respect to gross margin, certainly -- probably the best we ever had for a quarter like that. And typically we do see margin increase from Q3 to Q4.

I think the reason why we flattened out there primarily is attributable to a shift in volume towards our contract packaging channel, where we typically have different margins compared to what we would get, say, for example, consumer products.

Okay. So the shift in contract packaging -- historically on these calls you've given us the percent change in branded and private label volume sales. You don't happen to have those, do you?

No, I don't.

Okay. I was backing into, just given some of the information in the 10-K, that it looked as if branded consumer dollar sales were down about $12 million year-over-year. And I suspect the majority of that is due to the customer issue and the elevated inventories that they're looking to reduce that you called out in the press release for Fisher, pecan and walnut inventories. Can you just help us quantify how much of this $12 million decrease is attributable to this one customer?

It's significant. We couldn't give you a specific percentage, but I would it's definitely a majority of that volume.

Okay. The only reason why I ask is because the -- your Fisher recipe nut shipment change, I guess the change in volumes shipped being down 20%, I mean, JBSS at retail, the recipe nuts, were up 12%, and that's a volume number. And I'm wondering, and you might have given this to us, was there any significant discounting with this one retailer to sort of get off the elevated inventory that they had, that they maybe had some significant price discounting at retail that sort of pushed a little bit more volume that sort of inflated that number? And I do realize that your performance at retail always exceeds the category. So it was just a general question and not as much of me suspecting something.

Sure. Yes, there was no change in our -- we didn't discount that inventory that was at the retailer at all for this year. Really the big gap is between consumption numbers and what we shipped during the year. So there was such a huge buildup in inventory at the retailer that really throughout this whole Q3 and Q4 they've been fighting against the inventory that they've had that we shipped them back in, say, November, December.

Okay. I guess I get -- I understand why the gross margin wasn't as lucrative as I thought it could have been, given the product mix shift away from branded towards maybe private label and contract packaging. It looks like branded dollar sales represented 28% of the consumer channel, which was down from about 35% a year ago.

And I guess my question to you is, if we just stay on these industry metric and sort of peg them against your shipment numbers, I know you're saying that you expect this inventory issue at this one customer to be resolved at the end of the first quarter, but your decline in shipment pounds for the recipe nut category was down significantly even though retail holds at the category level and for Fisher performed really well. And I'm just wondering if maybe inventory channels are setting you guys up for maybe this problem to be resolved sooner rather than later at this customer and also for a really strong first quarter?

Yes, it's very possible, Francesco. We're just starting to see orders come in now for the new holiday season. It's already August, end of August. And it's a little bit earlier than anticipated. So it's possible that the inventory levels are much lower and that we should -- we're confident that we're going to see a strong holiday season. It's going to be a matter of timing of when that takes place. We believe the inventory levels that have been at retail have been depleted for the most part.

Okay. And just one more question before I jump back in the queue, but I have some follow-up questions about inventory. The timing of the special dividend, historically you guys have made the announcement, I think, during the -- either the first or the second quarter that you announce it and then it's paid out?

Yes. So typically we've done it at our shareholders' meeting in October, or end of October, beginning of November when we have our stockholders' meeting. So the goal now is to have that discussion with the Board of Directors in Q1 of the year and then have it announced earlier than waiting until the stockholders' meeting in October.

And that's for the special dividend.

Yes. So it just seems as if there's some higher level of risk that's being taken into that type of decision, because if you received volume product in the second quarter and you pay it off in the third quarter, you're sort of making a forecast on where you expect your inventory levels to be before you're -- before you even start receiving product. And if you just waited a couple more quarters, it just seems as if you could significantly take out a large portion of risk to the business model and the timing of the special dividend.

That is true, Francesco. However, we're at the point now where we have so much availability on our line where we can afford to move that special dividend timing up.

Our next question comes from the line of Mitch Pinheiro of Costello Asset Management.

I had a couple. You've given out before exact your price per pound, or I guess you've showed entire presentations that, since 2011, prices have been up quite substantially. Where does that number stand in fiscal '17? Would you have that number based on the IRI numbers? Or did you give that? I mean, it was $6.07 per pound in fiscal '16. So I'm wondering where that ended so far for you this year?

Which -- I think -- are you talking Fisher recipe? Fisher snack?

Retail prices. It's in general in the nut category.

Yes. So...

I guess it's broad, broad-based, I guess this is.

Yes. Total category is -- current year is $6.02. So it's down actually -- total category is down $0.07 a pound.

Okay. And I guess what I -- okay, that was what -- so the category being flattish in the measured channels, are you seeing unmeasured channels take share? I would think that nuts should see a nice steady increase but it's kind of flattish this year. So any thoughts on that?

Sure. So we do see some shift to retailers that do not report into IRI. So there's some shift that we're noticing there. Some of the dollar store channel, some of the lower discount retailers, we're seeing some shift there. Club stores still do well. There's a little bit of a shift from grocery to club. And then the e-commerce factor, which is difficult to measure as well.

When you measure your -- when you talk about your measured channel share, how different are some of these alternative channels, your share, how different?

Our JBS share in some of these channels? Is that the question?

Yes.

So we're actually relatively small in alternative channels. That's one of our focus with our strategy to expand consumer reach, is to enter the dollar store channel, where we're very -- we have limited distribution. E-commerce, I mentioned on the call that we're expanding our efforts in e-commerce. Club store channel, another area we're not that strong yet, but we're making inroads there. So a lot of opportunity in the alternative channels and really following where consumption is shifting. That's one of our key focuses for growth.

And is there a geographic opportunity? I mean, obviously I'm here on the East Coast and I don't see Fisher as much as I think I ought to. Can you talk about that little bit?

So the East Coast side, I'll be the first to admit, it's always been a challenging market for us. It's a very expensive market to get into. But you will start seeing Fisher recipe nuts on the East Coast. We've got some new distribution. There's some significant retailers we still have not tapped into on the East Coast that we're working on. And so a huge opportunity on the East Coast for us, in recipe and also snack. Very little distribution on the snack side with Fisher, but you will start seeing Orchard Valley Harvest as well on the East Coast with some new distribution gains.

And does it -- so is it -- I mean, obviously the economics work fine in the other parts of the country. Is it that onerous of a margin hit to expand? I think it would -- wouldn't it be beneficial to the overall brand presence to have more distribution in the east?

Sure, sure. I mean, we're focused on it. There's some challenges. There's retailers that have contractual obligations with some of our competitors that have been a challenge to get new distribution. We're overcoming some of that now. But it is an expensive market. Some of the slotting that we've come up against is pretty severe in some cases. So we've just been very, very conservative as far as our investments there. But now that we've got such a strong brand success story with both Fisher recipe and Orchard Valley Harvest, much more willing to make some of those investments.

Okay. And just another question. As you look at '18, I mean -- and thank you for your -- the detail is very nice. I appreciate your transparency. But is the -- how do you see -- what's the sort of the narrative here for fiscal '18 with regard to how the walnut and almond crops are looking and where you think pricing generally is going to head? Can you give us a little -- a sense for that, at least for the part that you can see, maybe the first half of the year? And understanding that you're lapping the almond butter issue, so it would be very helpful to hear a little bit about just some soft narrative on that.

Okay. Mitch, I'll take that. This is Mike. In respect to almonds, we're projecting almond prices that are pretty similar to where they opened up last year. We're looking at another record crop. Shipments are strong on almonds, both domestically and export, but I think they're pretty much in balance, and consequently right now we'd say that they'd be relatively unchanged.

Walnuts are -- even though we're going to get another record crop, actually a huge crop on walnuts, we think -- we don't really see potential for acquisition cost decreases there yet, again, because exports on inshell walnuts have just been incredible over the last 12 months.

Then on pecans, we have a -- finally are going to see what could be a 300 million pound crop here in the U.S., which indicates to us that there's possible cost decreases there. However, there are some issues in Mexico with drought there, and if it's severe, then that may offset the pound gain on pecans and we may see flat prices on pecans.

Okay. Very helpful. And then again, I said last question, but some of these margin -- I mean, I know on a percentage margin things move around, just based on -- it's more of a volume picture than it is anything else. But with the cost savings that you talk about, obviously if you can get some volume growth in the right mix margin should continue to inch higher. I mean, is that -- do you see any issues with that in '18?

Well, I'll take this one. Then you can follow up, Jeff. Of course, for margin, it's critical that our volume gains occur in the nuts that we shell. So if we can get Fisher recipe back on track with volume gains, especially in walnuts and pecans, then that can really help boost our margins. Same with peanuts. Again, because we shell all 3 nuts, we have a lower cost structure than most in the marketplace have, so that will be critical in giving that margin growth.

And I would just add that we're working a lot more operational efficiency initiatives for cost savings to the supply chain. So we're focused on that. The focus on value-added products and our brand has been critical, too. And so shifting some of that lower margin business to more branded value-add is another focus.

The big wild card, though, is some of the huge fluctuations in pricing for crops. We've done much better. I think we're -- we've done a great job this past year with managing that from a pricing standpoint and aligning our cost, but that's just the one wild card we don't see yet, is what's going to happen with the crop prices coming up.

Our next question comes from the line of Stefan Mykytiuk of ACK Asset Management.

Stefan Mykytiuk from ACK. Just a few things. One, I guess the strength in private label, I know earlier in the year you had had some weakness in -- with some customers in private label, where they shifted the product around in the store, changed labels, things like that. Is the -- was the strength in this quarter, was that at those same customers; i.e., are those customers kind of improving their merchandising on the private label side? Or were these new customers?

Yes, so some of the customers that were struggling have done some positive changes. So we saw some of the impact in Q4 on those shifts. So I'd say probably the significant part of it is from changes they've made, but some of it is new business or expanded business with current customers. So it was a combination. But significantly, the ones that needed to turn around are turning around.

Got it. Okay. So that -- those are kind of normalizing? That was my question.

Yes, correct.

Okay. And then on just -- Mike, normally -- you talked about strength in the contract manufacturing volumes and as for some of the mix shift in gross margin, but I was little surprised your selling expenses were up year-over-year, which I would have thought, with higher volume in contract manufacturing, that typically there's not much selling. So can you just explain why the selling expenses were up?

I think the main driver there was freight expense compared to last year, which is probably driven by higher gas -- or diesel prices than we saw 12 months ago.

Okay. All right. But it wasn't -- was there any -- was the private label -- the strength in private label driving any of that? Do you have to do any kind of marketing or selling expense or in-store signage and stuff around the private label?

No, not for that business. Not at all.

Okay. So it was just overall freight was higher because of fuel prices?

Right.

Okay. Got it. And then based on what you were seeing -- you're seeing on nut price, does it feel like nut -- a year ago we were talking about nut prices coming down dramatically. The outlook you just gave was for kind of stable prices going forward, if I got that correct. So what does that imply? Last year you had a huge drawdown of working capital, and this year you ended the year a little higher and inventory was a little higher. So have we seen -- is working capital kind of a push go forward? Or what's your outlook there?

Right, it does react to acquisition cost. So right now we're calling acquisition cost relatively flat, which means working capital should mirror that.

Got it. So maybe earnings, free cash flow -- we didn't talk about your CapEx expectations for the year, but should we think about free cash flow kind of being equal to net income now?

Yes, we're not predicting any significant increases in capital expenditures.

Okay. What was it for the year?

I think we ended up at about 10 -- a little over $10 million.

Okay. And is fiscal '18 kind of pegged around the same?

It will be a little bit more, but it won't be significantly higher, just based on our CapEx investment plan that we currently have.

(Operator Instructions) We have a follow-up from the line of Francesco Pellegrino of Sidoti & Company.

All right, guys. So I just wanted to dig a little bit deeper into inventory and see what like the read-through is for fiscal 2018. If I remember, this time last year, on the fiscal 2016 call, the story line was, I guess as Stefan had pointed out, lower nut prices was going to drive higher volume sales at retail. However, that just like didn't really materialize, just due to some like specific issues with customers, whether it was the lost almond butter business or what ended up being the elevated inventory levels at this one customer. And historically you've given us the pound volume change in inventory and I noticed we didn't get that this year. Do you have it in millions of pounds?

I want to say that our raw input stocks were up about 7 million pounds.

Okay. That just seems like a lot right now.

About half -- one of the things we undertook in fiscal '17 was to basically slow down the pace of shelling walnuts and pecans. So as a consequence of that, we have more inshell inventory compared to shelled inventory. So roughly about half of that increased pounds really is attributable to the shell of walnuts and pecans, as they run roughly 50% meat, 50% shell. We did that -- we took that measure to improve the freshness of both pecans and walnuts. So when I say our input stocks are up 7 million pounds, if you compared that to last year on a shelled basis, it's really up more like 3 million to 3.5 million pounds.

Okay. Okay. That seems a little bit more reasonable. But if we dig a little bit deeper into it, in the press release you guys call out that inventory -- you're sitting on higher levels of almond inventory volumes. You're not vertically integrated for almond. So are you being opportunistic? Are you making a directional bet on the almond market right now? You still haven't even fully lapped the lost almond butter business, so just to see that being up, even though you had known about losing it during the fourth quarter of last year, that you'd be losing it 2 quarters ahead, it just seems like you could be potentially sitting on a lot of almonds.

No, actually, our almond volume is rising. We saw signs of that in June and we're anticipating that to be sustainable with just new almond business that we've acquired. So that's why the almond inventories are up.

Okay. And I guess the other issue with the inventory, maybe not so much an issue, but you highlighted higher acquisition costs for pecans and peanuts, peanuts that you're vertically integrated for. And when I just think, historically speaking, at least, during periods of time of high nut prices for nuts that you're vertically integrated for, you might not get the margin expansion, but you're going to get higher gross profit per pound on those nuts. Is it correct to think that, for specific nuts, since you're vertically integrated for pecans and peanuts, that this could sort of help on the -- I wouldn't think on the gross margin -- well, on the gross margin line for each product category, not collectively, I guess?

That is true. Let's talk about it more in terms of gross profit as opposed to gross margin. When we do have higher nut markets, we tend to see higher gross profit dollars per pound on the nuts we shell. But the critical thing is that those markets stay up.

I am not showing any further questions at this time.

I would now like to pass the call back to Mr. Michael Valentine for any closing statements.

Thank you, Geronimo.

Before we end the call, please note that we will be presenting at the Sidoti & Company Fall 2017 Conference in New York on September 28. We will be posting an updated investor presentation on our site that day, so please keep an eye out for that.

Otherwise, again, thank you, everyone, for your interest in JBSS. And this concludes the call for our Fourth Quarter Fiscal 2017 Operating Results.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.