John B. Sanfilippo & Son, Inc. (JBSS) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son First Quarter Fiscal 2015 Operation Results Conference Call. My name is Lacey and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today, Mike Valentine, Chief Financial Officer. Please proceed, sir.

Thank you, Lacey. Good morning, everyone, and welcome to our 2015 First quarter earnings conference call. Thank you for joining us today. On the call with me is Jeffrey Sanfilippo, our CEO; Jasper Sanfilippo, our COO; and Bobby Tankersley, our Senior Vice President of Commodity -- Procurement and Commodity Risk. Before we start, we want to remind everyone 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 [indiscernible] business. Starting with financial results. Net sales for the first quarter of fiscal 2015 increased by 16% to $205 million, in comparison to net sales for the first quarter of last year of $176.7 million. Selling prices were higher for most major nut types due to higher commodity acquisition costs. Sales volume also contributed to the increase in net sales. Sales volume is defined as pounds sold to customers, and sales volume increased by 7.1% in the quarterly comparison. Sales volume increased in the consumer and export distribution channels, and sales volume increased for all major nut types except pecans. The sales volume increase in the consumer distribution channel came mainly from significant increases in private brand snack nut and trail mix products, also significant increases in sales of Fisher recipe and snack nut products contributed to the sales volume increase in the quarterly comparison. The sales volume increase in the export distribution channel was due primarily to increased sales of private brand and Fisher snack nuts. The sales -- and sales volume declined in contract packaging distribution channel, which was mostly attributable to a former customer discontinuing a seasonal item. The decline in sales volume in the commercial ingredient distribution channel was attributable to lower pecan sales, which primarily resulted from a major customer discontinuing a promotional item that contained pecans. First quarter gross profit increased by $1.3 million, while gross profit margin decreased to 15% of net sales from 16.6% for last year's first quarter. The increase in gross profit was mainly attributable to increased sales volume, and the decrease in gross profit margin was due to higher acquisition costs for certain grades of pecans and almonds. The increased acquisition costs for these nuts occurred because volume increases we have experienced for these nuts over the last four quarters depleted our favorable purchase coverage sooner than we anticipated. Consequently, we had to cover this shortfall with more expensive pecans and almonds during the first quarter due to higher market prices. I'd like to take a moment to remind investors that acquisition costs and selling prices typically reset for new crop in our second quarter and third quarter once harvest is completed. First quarter 2015 total operating expenses increased to $18.7 million, in comparison to $17 million for the first quarter of fiscal 2014. As a percentage of net sales, total operating expenses decreased to 9.1% from 9.6% for the first quarter of 2014. The increase in total operating expenses in the quarterly comparison was primarily attributable to increases in shipping expense, due to increased sales volume, and increased compensation expense. Interest expense in the current first quarter declined by $100,000 in comparison to interest expense for the first quarter of last year. The reduction in interest expense was due to a reduction in short-term and long-term debt levels. As a result of improved cash flow over the last 4 quarters, total debt fell by 16.4% or $11.4 million compared to total debt at the end of the first quarter of last year. The $1.4 million increase in net rental and miscellaneous expense was attributable to expense associated with the repairs to the exterior of the office building located on our Elgin, Illinois campus. We expect to incur additional expense in the second quarter of fiscal 2015 of approximately $400,000 to complete this project. The total value of inventories on hand at the end of the current first quarter increased by $13.4 million or 8.5%, compared to the total value of inventory on hand at the end of the first quarter of last year. The increase in the total value of inventories was attributable primarily to increased commodity acquisition costs for all major nut types except cashews. The weighted average cost per pound of raw nut input stocks on hand at the end of the first quarter of fiscal 2015 increased by 7.7% over the weighted average cost at the end of the first quarter of last year. Net income was $5.9 million or $0.53 per share, basic and diluted, for the first quarter of fiscal 2015, compared to $6.8 million or $0.62 per share and $0.61 per share, diluted, for the first quarter of 2014. The majority of the decline in net income in the quarterly comparison was attributable to the expenses associated with our Elgin office building repair projects. At this time, I will now turn the call over to Jeffrey Sanfilippo, our CEO, who will provide further comments on our operating results for the first quarter of fiscal 2015.

Thank you, Mike. Good morning, everyone. It was a record first quarter in top line net sales for the company reaching $205 million, a 16% increase over our net sales of $176.7 million for the first quarter of fiscal 2014. As I have discussed on many previous earnings calls, the management team has remained focused on transforming the company from an industrial commodity manufacturer into a strong value [indiscernible] and branded sales and marketing organization. So I was happy to see the title of an article distributed about JBSS by a market analyst recently. It simply said: JBSS, John B. Sanfilippo & Son, Transformed CPG Company. We were also just recognized in Forbes top 100 list of America's Best Small Companies. JBSS is ranked number 77. And while we still have a great deal of work to do, the changes we have made within the company the past few years have been the right ones for our business, with strong top line growth and strong earnings. Global demand for nut consumption is increasing, and JBSS is positioned well to benefit from health-conscious consumers increasing their nut purchases. Sales volume measured as pounds sold to customers increased 4.1 million pounds or 7.1%, compared to the first quarter of fiscal 2014. As Mike mentioned, gross profit increased by $1.3 million. However, our gross profit margin, as a percent of net sales, decreased to 15% for the first quarter of fiscal 2015, compared to 16.6% for the first quarter of fiscal 2014. As a result of significantly higher-than-anticipated volume, our inventory positions were not completely aligned with our selling prices for some nut types, especially almonds. While we've taken price increases on several nut types this year, we are initiating another almond increase in November and have plans for further increases in Q3. There continues to be great interest in the snack and ingredient nut sector this year with more high-profile deals gathering attention. And as I mentioned before, while our company does look at acquisition opportunities and strategic partnerships to drive profitable growth, we will continue to focus on our strategic plans with the following long-term goals: Growing our Fisher and Orchard Valley Harvest brands into leading nut brands by focusing on consumers, demanding quality nuts and the snacking recipe and produce categories; expanding globally and building our company into a leading international branded and private brand snack nut company; and providing integrated nut solutions to create value and grow nonbranded business at existing key customers in each distribution channel. Turning to a brief sales review by JBS channel. In the consumer channel, net sales increased by 28.4% in dollars and 18.7% in sales volume in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. Private brand consumer sales volume increased 18.5%, primarily due to a significant increase in sales of snack nut and trail mix products at 2 significant customers. Fisher recipe nut sales volume and snack nut sales volume increased 16.9% and 30%, respectively, primarily as a result of increased sales to a significant customer in each of these categories. In the commercial ingredient channel, net sales decreased by 4.1% in dollars and 8% in sales volume in the first quarter of fiscal 2015, compared to the first quarter of fiscal 2014. The sales volume decrease is primarily attributed to lower pecan sales, which, as Mike mentioned, resulted from a major customer discontinuing or not repeating a promotional item that contained pecans. In this channel, we also took a hard look at low-volume customers and our product portfolio, and reduced some of the complexity to optimize our resources and focus on providing more value to our key partners in food service. In the international channel, distribution increased -- sales distribution increased by 9.4% in dollars and 16.7% in sales volume. This was primarily due to increased sales of private brand and Fisher snack nuts. Fisher sales increased by 26% in dollars and 32% in pounds, driven by growth in Asia, outside of China, and improved activity in Latin America. In the contract packaging channel, sales increased by 10.2% in dollars, yet sales volume decreased 4.7% in the first quarter of fiscal 2015, compared to the first quarter of fiscal 2014. And as Mike mentioned, the decrease in sales volume is mostly attributable to a former customer not repeating a seasonal item that we manufactured for them. Now let's look at consumption trends in the snack, recipe and produce categories. All the market information is reported through IRI data September 28, 2014. And when I refer to Q1, I'm referring to 13 weeks of the quarter ending September 28. References to changes in volume or price are versus the corresponding period 1 year ago. We look at the category on 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. The total nut category increased 6% in both pound volume and sales dollars in Q1. Overall, prices in Q1 were flat versus the prior year. Almonds and pistachios experienced the largest price increase versus last year. Pistachios and almonds increased 11% and 10%, respectively, versus Q1 last year and that resulted in an 8% pound sales decline for pistachios and 2% pound sales decline for almonds. Those price increases were offset by price declines in mixed nuts and peanuts. We continue to see upward pressure on almond commodity cost driven by the California drought and the resulting impact on supply. There is still uncertainty around the size of the 2014 crop, and many believe that severe drought will have an even bigger impact on their 2015 crop. [indiscernible] Fisher snack and Fisher recipe grew in their respective categories, and Orchard Valley Harvest gained traction with -- in the produce section of the store. Overall, Fisher brand gained 0.1% share of the total category. This follows full share -- full year share growth in each of the last 2 fiscal years. The snack nut category had a successful Q1, increasing 12% in pound volume sales and 8% in dollar sales. Pound growth came across most major nut types due to declines in average prices on peanuts, cashews and mixed nuts. Though over all category almond sales declined, they increased 5% in pound volume in the snack category despite a 7% increase in prices, as consumers shifted from the recipe and produce categories where almond sales declined. The Fisher snack nut business had a strong quarter as reported by IRI, increasing in volume and dollar sales versus Q1 last year, up 29% and 15% respectively. The growth was fueled by a 13% increase in non-promoted sales, a 56% increase in promoted volume, which led to an 84% increase in velocity, which is pound sales per point of distribution. The recipe category increased 1% in pound volume and grew 7% in dollar sales versus last year. Dollar sales increases were driven by higher prices of 6% on average. As already mentioned, recipe almonds declined 6% in pound volume sales as prices jumped 14%. As already mentioned, it looks like consumers responded to the almond price increase in recipe nuts by switching their purchases to the snack aisle. Walnut prices also increased versus last year. Fisher recipe continues to gain momentum behind the strategy of growing distribution, increasing merchandising activity and building equity. Both Fisher recipe nut pound volume and sales dollars grew as measured by IRI, increasing by 15% and 9%, respectively, in Q1 versus last year. Factors driving this growth included an increase of 10% in non-promoted volume, a 5% increase in total points of distribution and a 3% increase in velocity. An increase in non-promoted volume suggests that the Fisher equity-based messaging is working. The Fisher brand continued its sponsorship of the Food Network and celebrity chef, Alex Guarnaschelli. The program included branded vignettes on the Food Network, print advertising in Food Network Magazine and other publications, as well as a fully integrated social media effort. Our Fisher brand has been growing consumption for 34 straight quad weeks in pound volume sales as measured by IRI. Turning to the produce category, it declined in pound volume 4% and increased in dollar sales by 1%. The decline in volume was driven by pistachios, which decreased 8%, and almonds, which decreased 21% in pounds versus last year, driven by higher prices. Our Orchard Valley Harvest brand is picking up momentum with increased distribution and velocity. This momentum is driven by the brand's successful Grab & Go minis, and the expansion of the line to include multipacks of Grab & Go items. These items are providing shoppers and the health-conscious consumer in the produce section of the store a differentiated choice. Our Orchard Valley Harvest brand increased 52% dollar sales and increased 103% in pound sales. Total points of distribution for OVH increased 43% and non-promoted volume increased 83% versus last year. In closing, JBSS is evolving into a consumer products company, as demonstrated by the strong Fisher and OVH brand results this quarter. We have seen acquisition costs for domestic tree nuts and peanuts increase in the 2014 crop year, which falls into our current 2015 fiscal year. In spite of strong commodity costs, our company performed well. Overall, our strategies are working well and we intend to stay the course. I'm optimistic about our ability to grow our brands, expand in emerging international markets and create value for key global food retailers, manufacturers and distributors. And I'm very excited about the pipeline of projects and new product introductions we are testing and will launch in the near future. The management team remains focused on consistent execution of our corporate plans to create shareholder value. And each of our employees is focused on improving quality and service, enhancing operational efficiencies and reducing costs throughout the supply chain to create value for our customers. 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.

Okay. Thank you, Jeff. At this time, we will open the call to questions. Lacey, can you please queue up the first question.

[Operator Instructions] And our first question will come from the line of Francesco Pellegrino with Sidoti & Company. Francesco Pellegrino - Sidoti & Company, Inc.: Given Diamond Foods' most recent reported quarter, in which they said, a significantly higher acquisition cost associated with walnut. I believe they stated walnut costs increased 20% year-over-year for their fourth quarter, which caused their gross margin to decrease 810 basis points [indiscernible] basis points. You sort of have discussed to great extent issues with almonds and pecans. I'm just not hearing that walnut pricing pressure was really that great of the factor for you guys during the quarter. What was it that really allowed you guys to sort of reduce your exposure to downward pressure for walnut pricing? Were you able to pass on prices more efficiently to retailers sooner than some of your competitors? What's your take on just your exposure to walnut prices going forward?

Sure. Francesco, this is Jeffrey. So we actually were a little more proactive than some of our competitors in taking price increases on walnuts earlier in the year as we saw the demand grow and we saw cost increases. Earlier in the year, we took advantage of taking our price increases up a little bit more dramatically and sooner than some of our competitors. So we didn't see as much as pressure on walnuts as a nut type on our gross margin. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. Okay, I appreciate that. And given the inventory issues you've experienced during the first quarter, you've discussed it ad nauseam about the pecan and almond inventory depletion, in which the primary harvest occurred about 9 to 11 months earlier. Do you see the company getting a little bit more aggressive in purchasing higher volume of inventory for these nuts given the relatively strong consumer demand as demonstrated by the increase in volume sales?

Sure. As we talked about, we saw an unexpected growth in demand for pecans and almonds, specifically almonds, we saw price increases as I mentioned on the call. We were expecting a little bit of a flattening of demand for almonds, and in some cases, we did not see that. So our procurement team is looking heavily at increasing our almond position, same with our pecans. Pecans are just being harvested now, in-shell pecans. We are in the process of just starting our buying of new crop. And as we look at the demand growth, we're continuing to better align our inventory positions with that demand. Francesco Pellegrino - Sidoti & Company, Inc.: All right. I know this is something that eventually gets released with the 10-Q, but is there a way you have on hand the sales by product type amongst the 5 different nuts just to see what a breakout would be for the quarter?

That will be in the Q. Francesco Pellegrino - Sidoti & Company, Inc.: All right. Given the fact that margin decreased, can you elaborate a little bit more on what the plan is for the almond price increases that you're going to be doing in November ending Q3? Is this basically factoring in that you have fully seen what the almond harvest is currently expected to be? And that it's going to be more favorable than you anticipated or less favorable.

Francesco, we'll let Bobby Tankersley field that question. Francesco Pellegrino - Sidoti & Company, Inc.: Okay.

Francesco, at this stage, I don't know that anybody has a clear visibility of what the final almond harvest is going to be. Clearly, we know where the market is today and the degree to which prices are going to be held going forward, at least to a degree. So we have to be kind of careful in that regard and we probably won't know the final answer on that for a few more months. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. Are you going to be able to squeeze more margin out from these price increases? Or is there going to be more downward pressure on margins for almond prices?

Yes, I would say -- this Jeffrey again, that our -- the price increases that we've got in place for November and that we're just bidding for Q3 will be aligned better with what we know our acquisition costs to be between now and Q3 -- and into Q3. Francesco Pellegrino - Sidoti & Company, Inc.: Okay, great. I know one of the things that you guys have really focused on over the past couple of years has been reducing your exposure to some of the fixed contract pricing in the commercial ingredients channel. And I know that you mentioned the decline in sales volume in the commercial ingredients line for the quarter was from a major customer. Given the fact that this was a major customer, was this a customer that had contracts that were fixed?

No. They were not fixed contracts. That was just a seasonal item that this major restaurant chain launched last year that they didn't repeat this year, they chose to choose something different for their seasonal item. So -- but it wasn't a contracted item at that time. There's a little more flexibility on -- with some of the customers in the commercial ingredient channel volume [ph]. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. Just a quick question on the -- that facility expense of $1.4 million. I'm assuming it was expensed because it didn't extend the building's useful life?

Yes. It -- the reason why we expensed it is it did not add value to the building nor did it extend its useful life. So consequently, we had to expense that. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. I know this was a rather impressive facility built about 8 to 10 years ago. Any significant expenses coming due over the next couple of years, besides the additional $400,000 in Q2 fiscal 2015?

No, as far as significant building repair expenses, we don't anticipate anything over the next 4 quarters. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. I guess moving internationally, I know one of the stated goals of the company has been to double revenue from its base in fiscal 2013 from $34 million to approximately $70 million by fiscal 2016. Given some of the items that are happening on the international stage with trade embargoes with Russia and some traded restrictions with China, do you currently feel that this goal to double sales might be too conservative, too aggressive or just in line?

I think, obviously, there are some headwinds against us as far as some of the embargoes and some of the activity happening overseas. But the world is a big place and I think aside from the challenges in some of the markets, there are still opportunities in other areas. So that doubling of the sales is still a realistic expectation. Again, it may come from different parts of the world, but still believe it is realistic. The global demand for nuts is just continuing to grow and we're focused and committed to making the best of that increase in demand. And we're positioning ourselves well to do that. Really, it's last couple years has been building the infrastructure to pursue global international sales, and we're positioned well to do that. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. I guess, just sticking with the international theme. One of the things that I noticed that didn't really impact your current quarter and didn't really seem to be that big of a factor was cashew prices. I know the harvest has already occurred and this isn't something that you going to have to worry about until 2 or 3 quarters from now. But given everything that's happening with the drought out in Brazil, you have Ebola popping out in West Africa, 2 major regions for cashew production. Has -- do you see these prices increasing significantly? Or do you think this is a cost you're going to have under control going forward?

Francesco, this is Mike. First the Northern Hemisphere where most of the cashews are produced, that crop year typically starts in May and ends in April. So we're already well through the Northern Hemisphere crop year and have significant coverage almost through the end of the current crop year, which would be roughly about March. So the market has gone up very significantly, but fortunately, we have coverage to avoid that. But we do have some concerns about the next crop year, which will start next summer, not only because of Ebola, but other factors, too, like removal of trees in Vietnam, increased demand in India. So all those have kind of combined to raise the current market and also the forward market for cashews. Francesco Pellegrino - Sidoti & Company, Inc.: Since you cited that the current market prices are increasing, but it seems as if you already have a significant inventory on hand of cashews, will you be implementing price increases for cashews over the next couple of quarters like you will with almonds?

No, we will not. We share our coverage positions with our major customers. We have assured them that we are in a position, really, through the end of March where we can insulate them from what's occurred in the cashew market. Francesco Pellegrino - Sidoti & Company, Inc.: All right. And I guess, jumping around to another nut. Basically, with corn prices and cotton prices being where they are today, I think some people could make the case that a floor is going to be reached relatively soon and you might have some producers of corn and cotton exit the industry and look to grow other products. Is there any insight you could potentially give us in regards to some cotton producers changing over to peanut production or any fundamental changes you're currently seeing in the industry right now? Or is it just too early to really see anything as the corn harvest hasn’t finished yet?

Well, with the kind of prices we're seeing with corn, significantly below $4 a bushel, and cotton in the low 60s. Those are very low prices. Our peanut farmers also grow cotton and/or corn, and they will shift their acreage to the most favorable commodity. So if these low prices hold for those 2 commodities, we expect to see increased peanut acreage planted next spring. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. Jeffrey, this might be a question you want to tackle. But I noticed during the third quarter conference call, you discussed a new product, the Fisher Nut Exactly line. It was more of a product trial run, nothing that you really had jumped fully onboard with. You wanted to see how consumers really reacted to the product. I noticed that it sort of disappeared in the fourth quarter conference call, there weren't any references to it. Is it fair to assume that, that line's been scrapped? I know it wasn't anything major.

No. Not at all. Yes, thanks for the question. The Nut Exactly program, we did some testing in Q3. We -- it took a while to get some consumer feedback and results since that point. We've taken that feedback, revitalized the product line and are actually in the process of relaunching -- not relaunching, but taking the feedback, reformulating some of the products, expanding the portfolio. And at this point, we are out offering it to retailers. So you will hear more about that product on the Q2 call. Francesco Pellegrino - Sidoti & Company, Inc.: When you say offering it to more retailers, more outside of a trial?

When we -- yes. When we originally launched, it was a trial with one specific retailer just to get consumer feedback. Now that we've gotten that feedback. We've taken it, we've adjusted some of the formulas, we've expanded the actual products that we're offering. And now, we are taking that product line and that brand and then offering it to multiple retailers. Francesco Pellegrino - Sidoti & Company, Inc.: With the -- please go ahead.

Also Francesco, I'm going to have Jasper Jr. just update participants on where we are in installing the line to make that product.

Sure. Francesco, we are currently installing that line. We have many [indiscernible] in the next several weeks to finalize installation. We expect that line to be fully operational by first week of December. And then as Jeff said, we are offering those products out to retailers and we plan on running that production on this new line. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. I know you said you're going to give us a little bit more insight during the second quarter conference call, but I guess right now, would you still consider it a product trial run amongst retailers?

Yes. I would say at this point, once -- now that we're offering it, and we've gotten the feedback from the initial test run, it's a full branded product launch. Francesco Pellegrino - Sidoti & Company, Inc.: Can you give us any insight to the number of retailers that will be offering the product?

Not yet. You'll hear that in Q2. Francesco Pellegrino - Sidoti & Company, Inc.: Okay, okay. Could you give us anything on the feedback you've received? Were they significant revamps to the product?

Not significant, no. I mean there were some feedback on just almond flavor, almond content in the product line, but it was all very positive. Francesco Pellegrino - Sidoti & Company, Inc.: So I assume that there aren't going to be many changes and that the product was received rather favorably?

Correct. Francesco Pellegrino - Sidoti & Company, Inc.: Okay, okay. And I guess, just a housekeeping thing. Given the amendments to your recent credit facility in the most recent 8-K filing, I noticed that the terms now allow you to issue up to 2 special dividends, not to exceed $25 million, is that correct?

That's correct, yes. Francesco Pellegrino - Sidoti & Company, Inc.: Can you give us a little insight in regards to what the board takes into consideration to arrive at what the special dividend is going to be amongst the 2 and maybe what the timing differences will be in regards to when -- if they are authorized that -- and shareholders can expect to receive it? And how much they could expect to receive based upon like the operations of the company?

Okay. Over the last 2 years, as you know, we've paid 2 special dividends. The primary factor there in deciding whether to do it or not was cash flow and availability on our credit facility. And of course, going forward, now that we do not have that restriction in that credit facility, it'll be a conversation that we'll have with our board more frequently, since we don't have to go to our lenders for approval. Francesco Pellegrino - Sidoti & Company, Inc.: Is it something that's based on, like, return on equity? What really goes into the decision-making of how much of a special dividend will be authorized? Any insight or that's just up to the board?

No. It's all about our forecasted cash flow for a given fiscal year and the amount of borrowing availability we have on our credit facility. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. With that being said, given -- I know it's only a small sample size, could this be the start of potentially maybe like a fixed rate variable dividend on an annual basis? Are you moving maybe towards that direction, returning more consistent shareholder value in the forms of dividends?

Well, let me put it this way. Now that, that restriction or that covenant has been listed from our credit facility, it puts the board in a position to talk about that, where before it really didn't make sense to talk about a dividend policy. So the door is open in that respect now. Francesco Pellegrino - Sidoti & Company, Inc.: Okay. And just my last question. Given some of the recent M&A activity within the industry, for example, you had Archer Daniels Midland acquire Specialty Commodities last week for about $170 million. Although financial disclosures weren't really given, I've noticed that takeout prices have been anywhere between 1x to 1.3x sales. You guys currently trade at 0.5x sales. With this special dividend, why are you guys considering a special dividend and not maybe a share repurchase program, given the argument that you guys are trading at a relatively -- are trading relatively undervalued compared to where your peers are being taken out?

Well, first let me say that, that restriction in our credit facility that I talked about before also allows us to do a combination of dividends and/or stock buybacks. So that now becomes an option, too. Philosophically, we've been reluctant to consider stock buybacks. We believe that to lessen the amount of float out there, which currently is a little over 8 million shares, would do more harm than good, especially in respect to volume. We base that on what we experienced prior to 2004 before we did our third offering. Back then, our public float was about 6 million shares. Many of our larger shareholders tend to hold their positions in our company, which lessens the public float even further. So to reduce the public float, we believe under those circumstances would have an unfavorable impact on volume; and consequently, an unfavorable impact on the price for out stock.

And our next question comes from the line of Tom Cott [ph] with TranCostco [ph] Partners.

I was wondering -- you made a couple comments regarding the strategy and that the strategy is working well and you're happy with the growth, obviously, that's quite phenomenal. So in the summary, when I look at this kind of appears to me revenues up very nicely, operating income not so much. And just wondering if you can broaden the discussion a little bit about the margins. Gross profit margins and operating income margins [indiscernible] down in both kind of rising price environment and even last quarter, 1 year ago, this same quarter, margins were down because of lower pricing. So I'm trying to figure out how you get out of this flat-to-down margin environment?

Okay. Well, first thing to note is that roughly about 85% of our total cost of sales is the cost of the raw materials that we buy. So our margins are definitely impacted by changing commodity costs in both directions. Second thing to note, we've said this on numerous calls, when we do price increases at these high commodity cost levels, we don't design those increases to maintain gross margin percentage. If we did, we would be uncompetitive, and further, our products would be so expensive that consumers wouldn't buy it. So as we think about price increases in this high market price environment, we design those increases to improve gross profit dollars as opposed to holding gross profit margin or improving gross profit margin.

And I would add, Tom, this is Jeffrey, that our focus is around becoming more of a branded company, moving away from the industrial contracted fixed prices. And we've done a great job at shifting that business, that sales focus. But the margin, as Mike mentioned, because of the 85% of cost of goods is in the raw material, we also need to look at optimizing our product portfolio. When we talk about the Nut Exactly product launch, that is a nut component, but it includes other things that are less volatile from a pricing cost standpoint. And so we're focused on shifting not only our customer base from industrial, but also our product portfolio. So that's an area where we're focused on to improve gross margin as well.

Okay. So if we're in this environment of rising prices -- rising input prices right now, I mean, is it fair to say we can assume that over the next, whatever you want to call it, quarters or years here your goal is to be -- continue to grow the top line, but we should not expect that there's going to be room for improvement either in the gross margin or the operating income margin? Because I thought that as you guys increased volumes, you've got excess capacity at your facilities, so you should be receiving some efficiencies and benefits from that to potentially offset other negative factors. So how should we be thinking about that going forward?

Okay. Well, let's go back to gross margins. There are benefits from increased volume, of course, but compared to the increases in commodity costs that gets diminished pretty quickly. In respect to the operating margins, certainly increased volume on the top line will tend to lower total operating expense as a percentage of net sales, just as we saw in this first quarter, so we can get some of an offset there against what occurs on the gross margin line. But again, the magnitude of the increase in raw material costs tends to dwarf all other areas.

So are you kind of like gas stations then, when the price of oil starts to go the other way, you basically don't drop your pricing to your customers as quickly and you benefit on that side?

Let me put it this way. Our customers have a lot of visibility to our raw material costs that just is a development that's occurred in our industry, because it is so volatile. So as fast as we move on increasing prices, we move at the same speed when we decrease prices, just as a matter of fairness for our customers.

Right, right. Okay. All right, great. I want to -- so on -- there's no cash flow statement that I have seen yet, can you talk a little bit about cash flows? I mean, it looks like, based on operating income, that your cash flow is pretty much more or less flattish with where it was last quarter, last year. And I'm just also trying to tie in with inventories. Inventories are down from where they were a year ago -- I mean, up from where they were a year ago, but down from where they were in June. You're coming into the biggest season here. How do you feel that your positioned with inventories and the effect that will have on your margins coming into your biggest period?

Well, first of all, in respect to cash flow for the first quarter, you're going to see a significant change quarter-over-quarter, mainly because of the increase in payables and the decrease in inventory. This will be a good example. And I've said this many times before that our balance sheet, especially in a particular quarter, can have a dramatic impact on our operating cash flow, and you'll see that in our cash flow statement when we file the Q. The other thing on inventory is, again, inventory -- you can't just look at the whole number. We have to think in terms of specific grades and specific nuts. So we have good positions in terms of carryover on certain grades and we have unfavorable positions on others in respect to carryover, as we mentioned, with certain grades of pecans and almonds. So it is somewhat of a mixed bag there.

I guess where I'm going is, are you continuing to see yourselves in a short position?

No, we're -- as I mentioned earlier in the call, everything resets in Q2 as harvest comes in. Commodity costs reset, selling prices begin to reset, quantities reset. It really is a complete startover. So anything you see in respect to commodity costs and selling prices and inventory quantities in Q1 does not necessary translate into Q2, 3 and 4.

Okay. And I promise this will be my last question. Do you guys have -- last year, I noticed you guys had a filing with your earnings, and the next day, there was a filing about the dividends. You guys have a board meeting later today where you're going to be talking about this?

We have a board meeting scheduled for the 28th and 29th. And I'm not going to comment on what agenda items we're going to discuss at the board meeting.

[Operator Instructions] And our next question comes from the line of Chip Saye with AWH Capital.

This is a question probably for Bobby, but can Bobby -- can you talk about the walnut harvest and how it's coming in? I know there was a record crop expected, I think it's 5 40, 5 45, something like that. Can you just comment on that if you can?

Sure. We're probably 2/3 into the walnut harvest. The largest single variety is the last variety harvested, that's the Chandlers. The early varieties seem to have come in pretty much in line with the estimate. We won't know whether that's going to hold true all the way through or not. At this stage, it's still an estimate, but we haven't seen anything that would cause us to believe that the actual crop is going to be significantly different one way or the other.

Okay. So walnuts are not as affected as -- with the drought as almonds, correct?

Well, I'm not sure you can make that broad of statement. Walnuts are slightly less impacted because of the areas in which they're planted, they're concentrated more up north where water is available to a little better extent. But they are just as much impacted if they were in the same growing region, you're going to see the same type of results where you have poorly developed nuts. And we are seeing the benefit of increased acreage that's finally coming through. So this year's crop looks to be pretty much in line with the estimate.

Okay. And if it's in line with estimate and we've seen -- I've seen -- talked to some folks about pricing coming in at $5.20. Chandler is $5.20, $5.30. Is that still what you're hearing? And if so, what is -- how does that compare to, say, last year's price?

I'm not sure how that exactly matches last year's price right now. Competition for raw material in the field for the export market is actually at levels that are higher than last year. I'm not sure how the meat market is going to develop, it's still ways to go. But raw material cost in the field has actually been higher than last year, and opening prices are still developing.

Okay. And how much higher are those export prices than a year ago? Is it 10% more or anything like that? Or do you have any comment? [ph]

It's kind of hard to put a real hard number on it because it's a market that moves over time. So anything you say is kind of like trying to take a snapshot of a moving market. But opening prices for in-shell was probably somewhere between 5% to 10% higher than last year to the export trade. Now whether those prices will hold as the crop comes in, we'll just have to see.

Okay. Yes, and the reason I was asking is the first question -- caller asked about -- commented on the Diamond Foods having to take an adjustment because maybe they were slow to raise prices or didn't anticipate the prices coming in. I just wondered -- I was thinking possibly with a larger crop, you would get a lower price this year, but so far that hasn't been the case, I guess.

Well, it's yet to be determined, it's really going to be dictated by how strong the export demand remains for the rest of the year.

Okay. When should we know more about that? Should we -- probably 6 weeks or so? Or is it further out than that?

It's a long -- longer time frame than that.

Longer. Harvest should be finished in 6 weeks or so, is that right?

We should have pretty close to final crop numbers by the end of November.

Okay. All right. This is the question maybe back to Mike. Are you guys doing your promotion with the Karo Syrup for the third year in a row, I think it is? Is that in the works?

This is Jeffrey. Actually, it is. It's a great promotion, yes, for the holidays between -- for pecan and Karo Syrup and our Fisher brand. Very successful.

[indiscernible] questions in queue. I would like to turn the conference back to Mike Valentine for any closing comments.

Okay. Lacey, thank you. Again, we want to thank everybody for their interest in JBSS, and this concludes the call for our first quarter of fiscal 2015 operating results.

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day, everyone.