John B Sanfilippo & Son Inc (JBSS) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son, Inc. Second Quarter Fiscal 2018 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, CFO, Mr. Michael Valentine. Mr. Valentine, you may begin.

All right. Thank you, Daniel. Good morning, everyone, and welcome to our 2018 second quarter earnings conference call. Thank you for joining us today. On the call with me today is Jeffrey Sanfilippo, our CEO; and Jasper Sanfilippo, our COO.

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

Starting with the income statement. Net sales for the second quarter of fiscal 2018 increased by 3.9% to $259.1 million in comparison to net sales for last year's second quarter of $249.4 million. The increase in net sales was primarily attributable to increased sales of snack mix and trail mix products in our consumer distribution channel.

Sales volume increased by 0.9% as the 6.6% sales volume increase in the consumer distribution channel was offset in large part by a 14.5% decline in sales volume in the commercial ingredients channel. The sales volume decline in the commercial ingredients channel was due to the loss of an almond butter customer that occurred in the latter part of last year's second quarter. Sales volume increased in the consumer channel primarily from increased sales of private brand and Orchard Valley Harvest trail mixes and snack mixes. The sales volume decreased in the contract packaging distribution channel due to the acquisition of the Squirrel Brand business at the end of November of 2017.

Squirrel Brand sales volume for December in the current quarter were included in the consumer and commercial ingredients channel, while Squirrel Brand sales volume for December of last year was included in the contract packaging channel.

Fisher recipe nut volume increased by 3.4%, primarily due to distribution gains at new and existing customers, increased promotional activity and a product line extension for raw peanuts. The 55.6% increase in volume for Orchard Valley Harvest produce products resulted from new item introductions and distribution gains at new and existing customers. Fisher snack nut volume declined by 2.8% due to lower promotional activity.

Net sales for the first 2 quarters of the current year increased to $473.9 million from $471.7 million for the first 2 quarters of last year. And sales volume increased slightly in the year-to-date comparison.

Sales volume increased in the consumer channel by 4.4% and sales volume increased in the contract packaging channel by 5.7%. The volume increases in these 2 channels were offset in large part by decline in sales volume for bulk almond butter in the commercial ingredients channel as I mentioned before.

Sales volume increased in the consumer channel primarily from increased sales of private brand and Orchard Valley Harvest trail mixes and snack mixes. Sales volume increased in the contract packaging channel was driven by increased sales to an existing customer from new item introductions.

Second quarter gross profit decreased by $5.5 million. And gross profit margin, as a percentage of net sales, decreased to 14.6% from 17.4% for last year's second quarter. The decreases in gross profit and gross profit margin were mainly due to increased commodity acquisition costs for walnuts and pecans. We could not raise pecan and walnut selling prices to cover these acquisition cost increases due to prior holiday promotional pricing commitments that we made to support new Fisher recipe nut distribution.

Gross profit for the first 2 quarters of the current year decreased by $7.1 million. And gross profit margin, as a percentage of net sales, decreased to 15.3% from 16.9% for the same period last year. The decreases in gross profit and gross profit margin in the year-to-date comparison occurred primarily for the same reasons I cited in the quarterly comparison.

Total operating expenses for the current second quarter decreased to 9.1% of net sales from 9.3% for last year second quarter, and that was primarily due to a higher net sales base. Total operating expenses increased by $500,000 in the quarterly comparison. Total operating expenses for the second quarter of fiscal 2018 include $500,000 in transaction expenses and $300,000 in amortization expense associated with the acquisition of the Squirrel Brand business. These acquisition-related expenses, along with increases in shipping, broker commissions and advertising expenses, were largely offset by a decline in incentive compensation expense.

Total operating expenses for the current year-to-date period decreased to 8.7% of net sales from 9% of net sales for the first 2 quarters of last year. And total operating expenses declined by $1.4 million in the year-to-date comparison. The decrease in total operating expense, as a percentage of net sales and in terms of dollars, were primarily attributable to a decrease in incentive compensation expense.

Interest expense for the current second quarter was $800,000 compared to $600,000 for last year second quarter. And interest expense for the first 2 quarters of the current year increased to $1.6 million from $1.2 million for the first 2 quarters of last year. The increases in interest expense in both comparisons were attributable primarily to higher debt levels, which were mainly driven by new debt associated with the acquisition of the Squirrel Brand business.

The increases in the effective tax rates in the quarterly and year-to-date comparisons resulted primarily from the write-down of net deferred tax assets due to changes in the U.S. tax laws that were enacted during the current second quarter.

Now taking a look at inventory. The total value of our inventories on hand at the end of the current second quarter decreased by $13.8 million or 7.6% compared to the total value of inventory on hand at the second quarter of fiscal 2017. The decrease in the total value of inventories on hand was primarily driven by reduced quantities of inshell pecans.

The weighted average cost per pound of raw nut and dried fruit input stocks on hand at the end of the second quarter of fiscal 2018 decreased by 3.4% compared to the weighted average cost per pound of input stocks at the end of last year second quarter. The decrease in the average cost per pound of raw nut and dried fruit input stocks was mainly due to lower acquisition costs for pecans and a shift in mix from higher cost inshell pecans to lower cost peanuts.

I will now turn the call over to Jeffrey Sanfilippo, our CEO, who will provide additional comments on our operating results for the second quarter of fiscal 2018. Jeffrey?

Thank you, Mike. Good morning, everyone. It was a strong quarter for topline sales for the company, and we are encouraged by our significant sales growth in both branded and private brand products in our consumer distribution channel.

As I have mentioned on previous calls, the company is investing in our brands, and we had strong seasonal programs in place October through December. Our holiday promotional pricing commitments for Fisher recipe nuts were completed by the end of fiscal 2018 second quarter. The brand gained market share and had a very successful holiday season in spite of significant changes in shelf space at one of our major customers.

At retail, fisher recipe nut pound volume increased by 3% while the total category pound volume was unchanged in the quarterly comparison according to IRi market data. We believe that this promotional pricing program supported our goal of investing in our brands and will support new distribution gains as well as continued growth for the Fisher recipe nut brand in future quarters.

Following the conclusion of these holiday commitments, we have currently improve the alignment of our selling prices with our acquisition costs for walnuts and pecans.

Orchard Valley Harvest brand continues to grow significantly, and it is currently our second largest brand in respect to net sales. Orchard Valley Harvest performed well at retail this quarter with pound volume up by 61%, while the total produce category pound volume was unchanged in the quarterly comparison. The line extensions we executed in the past year, which include Omega-3 Mix, Antioxidant Mix have been extremely strong and driven brand growth. In addition, the launch of our OVH salad toppers is off to a great start with initial shipments beginning this fiscal year.

Fisher snack nut pound volume at retail declined by 17%, while the category grew 3%. We are committed to redefining our brand positioning and distribution for Fisher snack. The sales, marketing, R&D and operations teams have worked hard to build a new product platform.

We intend to focus on reversing this downward trend with the introduction of our new Oven Roasted Never Fried product line of Fisher snack nuts. Customer response to our offering has been very positive, and we are gaining new distribution. First orders will ship in our third quarter. The line includes an assortment of clean ingredient oven roasted nuts to differentiate the brand for consumers looking for healthier snacks in the nut category. In the past, our focus for Fisher snack has been in our core markets in the Midwest. We plan to roll out the Fisher oven roasted product line nationally in the coming quarters.

On previous calls, I've talked about investing in our expand consumer growth strategy. On November 30, 2017, we made an investment with the strategic acquisition of the Squirrel Brand business. The acquisition of Squirrel Brand should provide us with a strong platform to expand our consumer distribution channel and gain meaningful distribution in alternative retail channels. The Squirrel Brand business is one of the nation's leading suppliers of indulgent and premium roasted nuts and snack mixes under its Squirrel Brand and Southern Style Nuts brands.

Prior to the acquisition, Squirrel Brand was a customer in our contract packaging sales channel for 14 years. As a result of the acquisition, we expanded our customer base and branded product portfolio as well as increased our customer reach, especially into alternative distribution channels. We believe there are enormous opportunities to build these brands and make them a significant part of JBSS' snack growth in the future.

Volume growth across our channel -- all our channels is a major priority. As we expand our brand portfolio and reallocate resources and investments, we are positioned well to capture the shifts in consumer buying behavior.

In the consumer channel, priorities for the sales teams, remaining in the fiscal year, include executing the rollout of the new Fisher oven roast snack line, expanding Orchard Valley Harvest and Squirrel distribution in the club channel and continuing to gain new customers for Fisher recipe, in addition to focusing on our strategic private brand partners to grow their snack programs.

Priorities in the commercial ingredient division include replacing the volume lost by a significant almond butter customer last year. It is taking more time than anticipated, but the teams have strong programs they are pursuing. These include several new opportunities in food service, chain accounts and industrial. One area in the food service segment is noncommercial customers. We are pleased so far with the success of the Orchard Valley Harvest brand in the front of the house and, although, it is a small base, there are significant growth opportunities to expand sales and distribution.

Turning to category updates, I'm happy to share some of the category and brand results this past quarter. As always, the market information I'll be referring to is IRi report data and for today, it is for the period ending December 31, 2017. When I refer to Q2, I'm referring to 13 weeks of the quarter ending December 31. References to changes in volume or price are versus the corresponding period 1 year ago.

We look at the category and 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. Total nut category increased in sales dollars by 2% and pound volume by 1% in Q2. Overall, prices in Q2 increased 1% versus the prior year.

Pricing on cashews increased in Q2 by 8%. This pricing increase led to a 4% decline in pound volume for cashews. Prices decreased on pistachios and almonds by 12% and a 5%, respectively, versus last year and that resulted in a 30% pound sales increase for pistachios, a 4% pound sales increase for almonds. Prices on the other nut types were relatively flat versus last year.

Now I'll talk about each category in a little more depth, starting with the recipe nuts. In Q2, the recipe nut category declined 1% in dollar sales and was flat in pound volume. Even with the 3% decrease in walnut prices, pound sales declined 2% while pecans managed a 2% increase in pound sales, while prices were flat versus a year ago.

Almonds, a smaller portion of the recipe category, decreased 24% in pound sales due to a 7% increase in price. Consumers migrated to other parts of the store to purchase almonds as snack nuts -- snack almonds increased 14% in pound sales.

Our Fisher brand had mixed results in Q2. Fisher recipe nuts decreased 6% in dollar sales and increased 3% in pound sales for the quarter versus last year. As a result, Fisher pound share in the category increased 0.07 in pound share versus last year, while declining 1.3 points in dollar share. The pound growth was driven by an increase in retail distribution, which shows retailers continue to embrace the Fisher brand.

Fisher recipe nuts has an ACV distribution of 65%, which is an 8-point increase versus last year. With the brand share growth over the past few years, Fisher continues to be the #1 brand in the recipe aisle and MULOs recording outlets, whether measured in pound or dollar share.

Within the food grocery channel, Fisher recipe had a great season. Dollar sales increased 29% and pound sales increased 33% driven by a 12% increase in total points of distribution. The Fisher brand now has an ACV distribution of 68%, which is a 11-point increase from last year. This has led to a pound share of 23.3%, which is a 4.9-point increase versus last year. Looking at a longer time frame, the Fisher brand has grown impressively in the grocery channel over the last 5 years, adding 17.1 share points off a base of 6.2 share in Q2 of fiscal '13.

Now let me turn to the snack category. In Q2, the snack category increased in dollars and pound sales 3% and 1%, respectively. Fisher snack decreased 14% in sales dollars and 17% in pound volume in Q2. And the decrease was driven by a decrease in merchandising activity versus last year.

As I mentioned earlier, looking to the future, Fisher snack is introducing a new line of differentiated innovative items under the trademark Oven Roasted Never Fried. We believe we're the first major snack nut brand to launch a line of oven roasted products across such a broad range of snack nuts. The products taste great and have a clean ingredient line of just nuts and sea salt. Marketing will highlight the lack of added oil compared to traditional roasted nuts. This new line will start hitting the shelves in Q3 as I mentioned.

OVH, our produce nut brand, increased 56% in dollars and 61% in pounds at IRi reporting customers. Total points of distribution increased by 65% as more retailers are accepting more OVH items into their sets. We've continued to build the core business success by launching new products such as I mentioned, our Antioxidant Mix and our Heart Healthy Blend, both in multi-packs along with the line of salad toppers that have gained some early distribution. We'll keep you updated on the performance of this line in future calls.

Southern Style nuts become part of the JBSS family of brands with the acquisition of Squirrel Brand. We will continue to report -- we'll have this reporting for the brands in our future calls.

In closing. While we face competitive challenges every year that impact our company, we've proven our ability to manage through volatile markets quickly. It was a very busy second quarter as we invested in our brands and made an acquisition to execute our growth strategy of expanding consumer reach. While the company experienced gross profit and margin declines this quarter, our management team is keenly aware of the importance of growth and maintaining margin and expanding it where possible.

Selling prices and promotional deals were adjusted at the beginning of Q3 to align with procurement costs for raw materials. The management team and all our dedicated employees have a steadfast commitment to develop business opportunities that create shareholder value and provide relevant, profitable, value-added products and services to our customers and our consumers.

We appreciate your participation in the call and thank you for your interest in our company. I'll now turn the call back over to Mike.

All right. Thank you, Jeffrey. I will now turn the call over to open it up for questions. Daniel, can you please queue up the first question?

(Operator Instructions) And our first question comes from Francesco Pellegrino with Sidoti.

So I just want to jump in right now and just touch upon, I guess, some of the closing comments, Jeffrey, about -- it looks as if you are going ahead and you are raising selling prices. When I look at your consumer distribution channel, I'm -- at least the way I'm calculating it, I'm getting that pricing was down 4% for both private label and branded label sales. And when I just think about some of the pricing pressure, I know that you had addressed in your comments that you weren't able to get across or you weren't able to implement price increases year-over-year. But it seems as if prices might have actually been down, and I'm wondering -- look, I know, in the private label category, it's going to be weighed down by lower average selling prices for snack and trail mixes. So I understand that. But there seems that there might be some sort of product mix happening within the branded category for you guys that sort of dragged down prices. Then it could be something as simple as a change in the types of nuts you were selling, maybe OVH has a lower average selling price point, maybe you're selling more smaller bags than lower bag. So just trying to wrap my mind around what's happening with the product mix?

Sure. So overall, Francesco, in our consumer channel, our pricing was actually up $0.05 a pound. We did see a little bit of a shift in sales mix. I think Mike alluded to that as far as some of the cheaper products that we've launched, shifting from walnuts and pecans to peanut items that have a lower average per pound sale price. So that was part of the dynamic in the category. There was a lot of pressures. We've talked about this year on -- both competitive activity from other brands as well as the private brand pursuit of one of our large retail customers, which puts some pricing pressure as well on us.

Okay. I will go back and do that calculation, touch base with you guys again. Just jumping over to the Squirrel Brand. So on the last earnings call, you guys had outlined some -- like 4 initiatives that were going to help you offset loss Fisher recipe nut business. And I know, since you acquired the Squirrel Brand, those 4 items that you had outlined, they're really not that relevant anymore because getting volume growth in contract packaging, while you're shipping that out of contract packaging and bringing it up to your commercial and consumer distribution channels. My question for you is, what's the volume growth that you are expecting for the Squirrel Brand? And I guess, right now, ex the Squirrel Brand, what type of volume growth could we see for contract packaging?

First of all, we're still -- yes, so, Francesco, we've got great growth plans for Squirrel. We're shifting the volume from contract manufacturing, as you mentioned, to our commercial ingredients. So some of the customers that Squirrel Brand sold to before we acquired them would fit in with our commercial ingredient channel, that would be namely airlines and some of the chain accounts that they service. So part of those volume will go to commercial ingredient, and then the retailers, club stores that Squirrel Brand sold to before we brought them will be part of our consumer channel going forward. Strong growth plans in place. Squirrel Brand had a lot of opportunities before we acquired them that they've been working on or we've been working on with them through our contract manufacturing channel. So a lot of programs in place. They've got new distribution that just went on in Q3 ,which we will report on -- after we finish Q3 results.

Yes, go ahead.

And I was going to take contract packaging Francesco. So as we think about contract packaging ex Squirrel Brand, we expect to see meaningful volume growth going forward. It's primarily going to result from new item introductions by existing customers. Quite a few of those have already launched recently. So -- and they seem to be off to a good start.

Okay. Sticking with the Squirrel Brand. Relative to OVH, if it was on your financials in 2017, are we looking at a product that does about the same amount of revenue as OVH?

I think it would match OVH's revenue last year.

Right.

Right.

Okay. And when I think -- I see the Squirrel Brand in all the Starbucks here in New York. What percentage of stores -- of Starbucks stores has the Squirrel Brand penetrated? What type of volume growth we look at for that branded category? And then going forward, are you going to be -- I'm sorry that it's sort of a loaded question. Are you going to be including this in a fourth branded breakout? Or are you going to roll it into OV -- like Fisher snack?

We'll roll it out separately, Francesco. We think it's an important enough brand, and we are investing in the brand that we will separate it out from the other brands. So you'll see reporting on Fisher recipe, Fisher snack, OVH and then Squirrel, separately.

The only cautionary thing I would say about that is, we still have to get into Squirrel Brand's records and see if we can actually come up with the prior year's sales combined with our sales so that we have a meaningful comparison. So we've a lot of work to do there. Since it was only one month in Q2, it didn't make a lot of sense to make that comparison, but we'll certainly hope to get that on here in the next quarter or 2.

Okay. And last question before I jump back into queue. So when you did that acquisition, it looked as if there was something that you guys could have put in entirely on your revolver or you could have just taken out a bigger note. What was -- why did you put a portion on the revolver? Why do you do a portion through the seller financing? I would just think that the interest rates on your revolver would be lower than the note payable through the seller? Just a little bit of color there, and I'll jump back in queue.

Okay. I'll take that, Francesco. When we agreed with the seller, and this goes back probably into October, we weren't entirely sure what we are going to pay for pecans. So we wanted to make sure at that time that we had enough dry powder in the event that field prices for pecans and walnuts too were higher than what we would expect. So that was really more insurance for that. And then, of course, we are still committed to our regular dividend, we want to make sure that we have enough dry powder for that to pay in July.

(Operator Instructions) And our next question comes from Timothy Call with Capital Management Corporation.

Could you review how the new tax law affects you going forward? How much lower will your tax rate be? How much will that help you with your transitionary tax period since you have a fiscal year?

Sure. And because we're a June year-end, we started with a blended statutory -- federal statutory rate of 28%. And we will continue to use that blended rate for the remainder of the fiscal year. And then, going forward, we will reduce that down to 21% as we calculate our estimated -- our effective tax rate. So just to kind of put that into perspective, for this year, just focusing strictly on the statutory rates and ignoring temporary differences and discrete items, we're at about 32.3%. And we expect that to drop down to roughly about 25.3% for fiscal 2019. And again, those are just the statutory rates that we'll start with, and they don't include any impact with any temporary differences or discrete items.

And we do have a follow-up question from Francesco Pellegrino with Sidoti.

The couple of other things that I want to follow up on was your volume growth for the full year. When I think about it, as I said on the prior call, you had outlined some 4 initiatives. It looks as if, I guess, basically, the way things have changed since 1Q fiscal '18. Is it possible that 50% of your volume growth in the year will be coming from branded sales? I'm not sure how you want to look at it, whether you're going to be -- you want to look at it including Squirrel Brands or you want to look at it from an organic growth rate? But when I consider the fact that you've been able to essentially, like, right size the Fisher recipe headwind, Orchard Valley Harvest comes in with this really big quarter. You're then now going to be incorporating Squirrel Brand. It just seems that in excess of 50% of your volume growth could be coming from your branded category. However, we don't really get any insight into your broken-out volume sales. So if you could just give us a little color on that, I'd appreciate it?

Yes. So -- this is Jeffrey. So yes, we talked -- we focused on building our brands while maintaining the key strategic partners in our private brand portfolio. We do anticipate higher percent of our volume increase to come from our brands. We will be adding Squirrel into that brand piece of it. So you will see their numbers reported in our brand performance. Orchard Valley Harvest is off to a great fiscal year, not only in the quarter for Q2, but they've got a lot of new distribution gains that will start taking effect in Q3 and Q4, so anticipate strong growth to continue with Orchard Valley Harvest. And then Fisher recipe, the team has done a great job building our grocery distribution. We -- in spite of the challenges we had with the private brand on the shelf at one of our major customers, the team has done a great job expanding distribution nationally with Fisher recipe. So while we had a little bit of a headwind in Q2, and we'll continue some of that in Q3 and Q4, I'm confident that the team has done a great job expanding distribution to make up some of that volume. So we'll have the strong branded growth story at the end of fiscal '18. But that's not to say our private brand business, there's opportunities that we've been pursuing that we expect to hit possibly by the end of Q4 of this fiscal year. So we anticipate there's some upside opportunity on private brands as well.

And, I'll just -- let me finish that off, Francesco. I don't think it will actually be 50% and mainly because the increase in sales volume for private label trail mix is just so high. I mean, the new products that we've introduced for existing customers are just incredibly successful. So I don't think we'll actually get to that 50% mark.

Okay. When I look at the headwinds that you guys experienced for pecans and walnuts in the quarter for pricing. And I think, Jeffrey, you had said that by the summer price -- you'll have price increases implemented? What type of headwinds could I be looking at for the second half of 2018 as compared to the second half of fiscal 2017?

So Francesco, we've already taken price increases in January to align our acquisition costs with the increase in some of the commodity costs. So you'll start to see that reflected already in Q3. And then, we're just finishing up the harvest now on pecans so we don't have the final average yet on our pecan procurement costs. But we'll anticipate possibly on having some -- a little bit of changes there. But overall, our prices as of February are well aligned with acquisition costs at this point.

I'm sorry, then I thought you said there was something trickling from 2018 that was still going to be -- from 2Q 2018, it was still going to be trickling in into 3Q 2018 and 4Q 2018 that was still going to represent a headwind, I guess I got those confused. What was that again?

Yes. So headwinds will still be the private brand because we'll still be cycling against that lack of shelf space that we had in Q3 and 4 of fiscal 2017. That's more of a volume challenge headwind for us. But from a pricing margin headwind, we've overcome that going into Q3 and Q4.

Okay. But relatively speaking, as a percentage of total sales, your consumer distribution channel so for through the first half of 2018 is pretty much in line with what the first half of 2017 was. So it seems that evolving more toward the [CPNG] business end, maybe getting lower exposure to contract packaging that as you now have the Squirrel Brand. We discuss those dynamics before. It just seems that you are becoming more of a CPNG business.

Yes, that's correct. That's in the focus. Yes. Absolutely right.

I just wanted to see how you guys are executing on it. Perfect.

And our next question comes from Mitch Pinheiro with Costello Asset Management.

So I was curious, big picture. Are there any structural changes in your business? And if so, how does that compare to where your historical margins have been? You've have been pretty consistent sort of with the high single-digit EBITDA margin. And is there anything in the -- any change in the categories, any changes to your business from a 3- to 5-year perspective that's different that I should be aware of?

So from a competitive standpoint, well, first of all, retail consolidation, I guess, if you looked at the last 3 years, the major change that was -- impacted our company this year was the major private brand launch by one of our key retail customers in our Fisher recipe category. So that's a significant change that's been talked about for years, finally was executed this year. Competitive activity, we've had some private equity come into our space, purchased some of the other suppliers, not so much branded, but some of the other industrial food service, copackers, that's been -- put some competitive pressure on us as well. But we anticipate, as we've seen in the past, this has happened. We are able to overcome that once we align our pricing with our commodity costs. And that's why the focus has been on our -- building of our own brands so that we can mitigate that huge risk based on commodity cost changes and competitive activity in the marketplace.

So with -- but still, if you look at your brand investment and the sales mix change, maybe channel mix pressures, is there -- do you think that your historical margins are still a valid target for your business? Or do you think it's lower or higher over time?

Over time, I would say historically, they should be consistent. Q2 was a big investment quarter for us as we've talked about, not only because of the competitive activity taking place in the market, but also investing in new distribution with our brands. You've got to pay slotting in some cases, you've got to increase your trade spend to get that new distribution, and we saw some of that in our Q2.

Okay. And then as you look over the next 12 months, do you see any unusual cost items that we should be aware of? Forgetting about your normal -- the buying and selling of your broad range of nuts. Is there anything unusual there? And is there any change in capital expenditure needs for the coming year?

Mitch, this is Jeffrey. We don't expect to see any changes in our CapEx requirement. I think the only unknown cost that we would keep our eyes on would be transportation.

Okay. How big is transportation as a percentage in your cost of goods?

Outbound freight is actually in our selling expense.

Okay. Is it a significant piece?

What I think is that -- I think it amounts to something like $15 million annually, outbound freight cost.

Okay. That's helpful. And then capacity utilization, you know, is it -- where are you on that? Do you have plenty of room for expansion there?

We do on certain product lines. The product lines that we've had to invest in, in the last 3 years really is to support our stand up bag business and our portion control. We just completed several projects over Q1 and Q2 to increase that capacity. So obviously, as we gain new distribution, and new customers, we'll continue to watch that book. We don't have any capacity constraints that we foresee over the next few quarters.

And I am not showing any further questions at this time. I would now like to turn the call back over to Michael Valentine for any further remarks.

Okay. Thank you, Daniel. At this time, we'll end our earnings call for the second quarter of fiscal 2018. And again, we thank everyone for their interest in JBSS. Have a good day.

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