John B. Sanfilippo & Son, Inc. (JBSS) Q4 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the John B. Sanfilippo & Son Inc. Fourth Quarterly and Fiscal 2016 Year-End Operating Results Conference Call. My name is Sue and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] As a reminder, this conference is being recorded. And now, I would like to turn the call over to Mike Valentine, Chief Financial Officer. Please proceed, sir.

Thank you, Sue. Good morning, everyone, and welcome to our 2016 fourth quarter and fiscal year earnings conference call. Thank you for joining us today. Jeffrey Sanfilippo, our CEO will provide additional remarks on our operating results for the current quarter and fiscal year later in the call. Before we start, we want to alert everyone that we may make some forward-looking statements today. These statements are based on our current expectations and involve certain risks and uncertainties that are inherent in our business. The factors that could negatively impact results are explained in the various SEC filings that we have made, including Forms 10-K and 10-Q. We encourage you to refer to these filings to learn more about these risks and uncertainties. I’ll start the call by covering financial highlights for the 2016 fourth quarter and fiscal year. The current quarter net sales increased by 4.6% to a record $231.5 million, compared to net sales of $221.4 million for the fourth quarter of fiscal 2015. The increase in net sales in the quarterly comparison was due to a 10.4% increase in sales volume, which is defined as pounds sold to customers. The favorable impact upon net sales from the increase in sales volume was offset in part by a significant decline in selling prices, primarily for walnuts. Volume increased in all distribution channels and increased for all major product types, except pecans. The sales volume increase in the consumer channel was due in part to a 10.3% increase in sales volume with existing private brand customers. Increased sales volume for our branded products also contributed significantly for the volume increase in the consumer channel as follows: Fisher recipe nuts volume increased by 14.9%, mainly from increased sales of walnuts from the introduction of larger package sizes and from distribution gains with new customers. Fisher snack nuts and peanut butter volume increased by 28.9%, mainly due to distribution gains with new and existing customers. Volume for our Orchard Valley Harvest and Sunshine Country produce brands combined increased by 136.6%, mainly from product line expansion and increased promotional and merchandising activities. Partially offsetting these sales volume increases of branded products was the sales volume decrease for Fisher Nut Exactly clusters due to reduced merchandising support from a key customer and reduced in and out distribution opportunities in the club channel. The sales volume increase in the contract packaging channel was primarily due to increased sales with existing customers. The sales volume increase in the commercial ingredients channel resulted from increased sales of peanut butter to existing food service customers. The sales volume increase in the export channel came mainly from increased sales of bulk inshell walnuts. Fiscal 2016 net sales increased by 7.3% to a record $952.1 million compared to fiscal 2015 net sales of $887.2 million. The increase in net sales in the yearly comparison was primarily due to a 6.6% increase in sales volume. Sales volume increased in all distribution channels, and sales volume increased for all major product types, except almonds and pecans. The sales volume increase in the consumer channel was due primarily to significant increases in sales of our various branded products. The sales volume increase in the contract packaging channel was mainly due to increased sales with existing customers, which was generated in large part from new item introductions and increased promotional activity executed by our customers in this channel. The increase in sales volume in the commercial ingredients channel for the year – in the yearly comparison came mainly from increased sales of peanuts, peanut oil stock crushers, and to other peanut shellers, which was driven by the fact that we are shelling more peanuts than we have in recent years. Also contributing to the volume increase in this channel were increased sales of cashew products to an existing customer. As was the case in the quarterly comparison, the sales volume increase in the export channel came primarily from increased sales of bulk inshell walnuts. The current fourth quarter gross profit margin decreased to 14.5% of net sales from 15.5% in the last year’s fourth quarter. Gross profit decreased by approximately $700,000, or 2%. The decrease in gross profit and gross profit margin were primarily attributable to declines in gross profit margins on sales of peanuts due to increased processing costs associated with the lower quality of the 2015 peanut crop and on sales of pecans, cashews, and macadamia nuts as a result of higher acquisition costs. Fiscal 2016 gross profit margin decreased to 14.4% of net sales from 14.9% for fiscal 2015. Gross profit increased by $5.4 million, or 4.1%, particularly as a result of increased sales volume. The decrease in gross profit margin was due primarily to the decline in gross profit margin on sales of walnuts in our third quarter. Total operating expenses increased by $600,000 for the fourth quarter, while total operating expenses, as a percentage of net sales, was relatively unchanged. Total operating expenses increased by $6 million, and total operating expenses, as a percentage of net sales was relatively unchanged for the fiscal year comparison. For both comparisons, the increases in total operating expenses were mainly due to increases in compensation and employee benefit expenses. Interest expense was $900,000 for the fourth quarter, compared to $1.1 million in last year’s fourth quarter. And interest expense for the current fiscal year fell to $3.5 million from $4 million in fiscal 2015. The declines in interest expense in both comparisons were primarily attributable to lower debt levels. Turning to inventory. The total value of inventory on hand at the end of the current fiscal year decreased by $41.4 million, or almost 21%, compared to the value of the inventories at the end of fiscal 2015. The decrease in the value of total inventory was primarily due to lower acquisition costs for almonds and lower quantities of finished goods and work-in-process inventories. The weighted average cost per pound of raw nut and dried fruit input stocks at the end of fiscal 2016 decreased by 31.6%, compared to the weighted average cost of those stocks at the end of fiscal 2015. This decrease was mainly attributable to lower acquisition costs for almonds and walnut, I’m sorry, yes, almonds and walnuts. Mainly due to a decline in working capital of approximately $40 million and record net income, operating cash flow soared to a record $89.2 million in fiscal 2016. The record operating cash flow allowed us to pay two special dividends totaling $4.50 per share within roughly an eight-month period. As has been the case in recent years, in October, our Board of Directors will again consider paying a special dividend in the second quarter of 2017. The payment of this December special dividend shall be primarily dependent upon forecasted borrowing availability levels and our revolving credit facility through the remainder of fiscal 2017. And now Jeffrey Sanfilippo will provide additional comments on our performance for the current quarter and fiscal year. Jefferey?

Thank you, Mike. Good morning, everyone. I want to congratulate our management team and all of our dedicated employees on achieving another consecutive year of record performance. Fiscal 2016 net sales were a record $952.1 million, a significant 7.3% improvement over fiscal 2015, driven primarily by a 6.6% sales volume increase. We gained new customers, expanded distribution of our products, and increased market share with our brands. We continue to grow Fisher and Orchard Valley Harvest significantly in respect to sales volume. Our consumer channel sales and marketing teams were very effective in executing our most important strategy, which is growing JBSS brands. Our Fisher brand remains a number one brand in recipe peanuts domestically. We also experienced considerable growth in the produce category with our Orchard Valley Harvest and Sunshine Country brands due to new distribution gains. The company continues to return profits to stockholders and maximize stockholder value, while growing our business. As Mike mentioned, record operating cash flow allowed us to pay two special dividends, totaling $4.50 per share. In addition, our record $89.2 million of operating cash allowed us to reinvest over $15 million into the capital infrastructure of the company, the most since our 2007 facility consolidation project. I’m proud of these results and I thank our team for their leadership in executing our strategic growth plans to build our brands and create value for our customers and our stockholders. These accomplishments resulted in a record $2.68 diluted earnings per share. While it was a record year for the company, we did face challenges. Our gross profit declined in our third and fourth quarters, as a result of the factors Mike just mentioned. Our management team is keenly aware of the importance of margin expansion. And when the company reports decreases in margins, as mentioned above, many investors may look back and still perceive JBSS as a commodity business, but we are not a commodity business. We continue to build our brands and transform our business and that of our customers with product, packaging and processing innovation, and shifting our volume to higher margin opportunities. The management team took a hard look at our investments this past year. One area of – we focused on was the international growth segment of our strategic plan and made the decision to reallocate resources to other channels of our business. We’ll continue our sales efforts in growing export markets, but we will align ourselves with strategic partners in key countries, such as China. We considered alternatives to replace our export growth strategy and modified our strategic plan accordingly. For fiscal 2017, our resources will be devoted to three specific areas. First, expansion of national distribution of our Fisher and Orchard Valley Harvest branded products. Second, expansion of our customer reach by entering into new distribution channels, launching differentiated products, and investing in new businesses. And three, continued value-added growth of non-branded business with our key existing customers. Now, I’ll turn to category updates in the snack, recipe, and produce segment and review our branded performance during the fourth quarter and for the fiscal year end. As always, the market information I’ll be referring to is IRI reported data, and today’s report is for the period ending July 3, 2016. When I refer to Q4, I’m referring to 14 weeks of the quarter ending July 3. References to changes in volume or price are versus the corresponding period one-year ago. We look at the category in IRI’s total U.S. definition, which includes food, drug, mass, Wal-Mart, military and other outlets, unless otherwise specified. And we – when we discuss pricing, we refer to average price per pound. The term velocity refers to the sales per point of distribution. First, let me review some category dynamics. We saw an increase in dollar sales for the fiscal year and no change for the quarter, a slight decrease in pound volume occurred in both the fiscal year and the quarter. This is the result of generally higher retail nut prices, which is impacting consumer purchase behavior. The total nut category was flat in sales dollars and declined in pound volume by 2% in Q4. Overall, prices in Q4 increased 2% versus the prior year. Price increases on almonds and pecans by 6% and 5%, respectively, for the quarter versus Q4 last year, resulted in a 7% pound sales decline for almonds and a 5% pounds sales decline for pecans. The story is similar when looking at the entire 2016 fiscal year. The nut category increased 2% in sales dollars, but decreased 2% in pound volume sales. Category pricing during the fiscal year increased 4% versus the prior year. Higher prices were most visible on almonds, which increased 13%, resulting in a 11% decline in pound volume. Walnuts were the only major nut type that decreased in price versus last year, decreasing by 5%, which resulted in a 2% increase in pound volume. Now, I’ll talk about each category a little more in depth, starting with recipe nuts. In Q4, the recipe nut category declined 13% in dollars and pound sales. Price increases in almonds of 20% and pecans of 6% drove negative pound sales trends of 40% for almonds and 10% for pecans. The story for the fiscal year is similar. The recipe category for our 2016 fiscal year decreased 5% in dollar sales and 8% in pound sales. Pricing in almonds and pecans increased 22% and 3%, respectively, which drove a 30% decline on almond pound volume and flat pound volume on pecans. Our Fisher brand had a very strong year and continues to gain momentum behind our marketing efforts and no preservatives messaging. Our brand equity efforts on Fisher helped the brand overcome category weakness and delivered growth in Q4 and on the year. Fisher recipe nuts increased 5% in dollar sales and 6% in pound sales in the quarter versus last year. As a result, Fisher share in the category increased 4.2 points versus last year. The growth was driven by an increase in distribution, which shows retailers are embracing the Fisher brand. For the first time, Fisher recipe nuts has an ACV distribution of over 50% at 54%. For the entire fiscal year, Fisher recipe nuts increased 8% in dollars and 3% in pounds, resulting in the brand share increasing 2.6 points versus last year, which built on a two-point share point growth in fiscal 2015. With the brand circles in fiscal 2016, Fisher is the number one brand in the recipe nut isle in the multiple outlets that we track. Now, let me turn to the snack category. In Q4, the snack category increased 1% in dollars and declined 3% in pound sales versus last year. And average prices were up 4% led by cash used, which increased 5%. For the fiscal year, the snack category increased 4% in dollars and declined 2% in pounds versus last year. Fisher’s snack decreased 18% in sales dollars and 13% in pound sales in Q4. The decline was driven by a decrease in pound velocity and merchandising declines at two key customers. But our overall shipment trends were positive in the quarterly comparison, this include customers that are not reported by IRI. Fisher’s snack sales dollars and pound volume decreased in fiscal 2016 versus last year by 10% and a 11%, respectively. The reasons for declines are similar to the Q4 results. Fisher Nut Exactly was up significantly versus a year ago, but that was largely driven by the fact that we are lapping an introductory period. Fisher Nut Exactly has performed well at retailers that have supported the brand with merchandising. Moving forward, we expect results to soften due to the loss of one retail account. As we described in prior earnings calls, we have gained distribution for both our Orchard Valley Harvest and Sunshine Country brands at a major retailer. As such, we look at our produce nut business as a combination of these two brands. Our produce business had a strong fourth quarter, increasing 65% in dollar sales and 44% in pound sales. This strong performance was due to increased retail acceptance of our brands, which resulted in a 43% increase in total points of distribution. For the fiscal year, a similar story took place. Dollar sales grew 32% and pound sales increased 18%. Acceptance among retailers again was a key as total points of distribution increased 47%. We’ll continue to update you on the results of this transition in future calls. In closing, I want to mention that over the past 18 months, a group of dedicated employees led by our Director of Administration, Kelly Day, and our Director of Customer Solutions, Roseanne Christman went through our company archives, research documents, and spent hours interviewing past and current employees to capture the history of John B. Sanfilippo & Son. As a result of their efforts, we created a museum in the lobby of our corporate headquarters. As all the information was gathered, four key components were evident, as the drivers of the company’s long history and success. First, our people. From the beginning, the management teams have always invested in good people. From the early days of my grandparents to the incredible leaders managing JBSS today, the key factor in the company’s success is talented, passionate, engaged, dedicated people. Second, our innovation in growth. The forward thinking decisions in investments and vertical integration and processing and brands that the company has made through the years are key to our ongoing success in our industry leadership and growth. Our customers products and brands to create new products and sales channel diversification, JBSS has led the way in providing value-added nut solutions to build brands and expand nut consumption. Our company has a rich history of delivering value to customers and consumers across the globe and adapting our products and services the markets grow and change. And fourth, global source for nuts. The showpiece of the –for the museum is a map of the world, made up of different inshell tree nuts and peanuts. We are a global company buying and selling our products around the world. We will continue to invest in people, product and packaging innovation, brands, new product capabilities to diversify and differentiate our product portfolio. We’ll continue to grow our brands and provide value-added snack and recipe nut solutions for customers and consumers. I want to again thank and congratulate all of our employees for their commitment and hard work over the last year, and to our stockholders, I thank you for maintaining your trust and support. We appreciate your participation in the call and thank you for your interest in our company. I will now turn the call back over to Mike.

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

Thank you. [Operator Instructions] Pleas standby for your first question. Your first question comes from the line of Francesco Pellegrino with Sidoti and Company. Please go ahead.

Good morning, guys. Thanks for taking my question in advance.

Good morning.

Hey, Francesco.

Hey. So I wanted to discuss with you following the third quarter. This is a nice little rebound quarter setting you up – yourself up for a nice fiscal 2017. It appears, the dynamics in the third quarter, I understand that your average blended selling price per pound due to the walnut issue is clearing the previous year’s walnut expense of harvest, because your average selling price per pound did decrease more than your average cost per pound did in the third quarter. I thought that was just a one-off in the third quarter. And I thought maybe in the fourth quarter, you’d be setting yourself up for the average blended selling price per pound decreasing less than the decrease in your cost per pound would. And although, I calculated that your average blended selling price was down 5%. I saw your costs were down 4%. Can you maybe just talk about the dynamics in the fourth quarter that might have sort of created that little bit of an awkward relationship, because I thought you would have maybe been dragging your feet by reducing selling prices?

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

So okay. So if you bring them – if you’re selling more peanuts through, that should be weighted towards a significantly lower price, not that, I guess, the way that I guess I’m balancing it right now. Could this be a concern going forward that you’re selling a lot more peanut volume that has a lower gross profit per pound going forward when just thinking about where your volumes are going to be in fiscal 2017?

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

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

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

And I would add that we also took price increases on pecans that are reflecting in the – that just started in the fourth quarter.

Okay. So pecans crop hasn’t come in yet, right? So are you still short of pecans?

So our position is balanced on pecans. We’re actually in a very good position that the industry overall, we believe is fairly short going into new crop, but our position is balanced.

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

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

It should be short-lived as you are well-balanced on your revolver, is that right? But you could be putting a balance back on – in Q3, if I am correct?

Yes, usually, actually – usually, we start to borrow for the nut, primarily walnuts and pecans, typically in November.

Okay. So if the revolver is paid down now, it looks like you’re going to get some sizable cash filled. You mentioned before that the company is still looking at another $3.50 special dividend for Q2 after looking at a $2.50 special dividend in Q1. You guys have been issuing the special dividends in Q2 of fiscal 2013, when I think you started it at $1, you’ve been increasing it, I think every year except for one year. At what point does the consistency of the special dividend maybe maintained? Rethink your dividend policy and come out with something a little bit more consistent on a quarterly basis, or what are some other uses of cash, maybe you see paying down long-term debt as a priority, or this – what are your thoughts there?

Okay, let me start with long-term debt. First of all, we only have about $30 million of long-term debt. Most of it is – falls in a Tranche A and Tranche B mortgage facilities. Those – both of those agreements have considerable prepayment penalties. So paying down that really doesn’t make a lot of sense. As Jeffrey mentioned before, we have ramped up our capital spending. I think we started that about three years ago. We’ll continue to have significantly above maintenance level CapEx in 2017. So that’s still a priority. We’re always looking at acquisition opportunities. We’ve seen quite a few of those in 2016. They just didn’t quite meet our criteria. But we’re going to continue to look at that. And then of course, again depending on forecast or availability for fiscal 2017 in our late October meeting, we’re going – as a Board going to again consider whether we should or can pay a special dividend in December.

So no thought about maybe issuing – approaching the Board about a consisting quarterly dividend?

Well, I don’t know if we would do a quarterly dividend. I did actually – I’m speaking with investors recently, who have brought up a similar questions. One of the ideas that were suggested was to have a regular – what I – what we would characterize and say a nominal dividend, something we can pay no matter what happens to nut costs or nut acquisition costs, and then supplement that with a special dividend or – yes, special dividend when we can. So that’s an interesting idea, and certainly, we’ll bring that to the Board’s attention and discuss that approach as a Board.

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

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

Okay. I’ll jump back in the queue. But I got some more question, if anyone else’s has any.

Okay.

Thank you. And your next question comes from the line of Tom Koch of Trancoso. Please go ahead.

Hi, good morning, Jeffrey and Mike. How are you?

Good morning. Good.

Good morning, Tom.

I had a couple of questions. And by the way, great to see you guys continuing leaving everyone on their toes with these paragraphs of all these changes in volumes and prices and whatnot. And pretty fun watching the stock this morning trading down two bucks now up 290 kind of crazy. So can you guys talk a little bit about this pretty sharp decline in the weighted average cost per raw inventory and kind of what affect you would expect that have on margins as we progress through the year?

Hey, Well, as I mentioned before, Tom, the big driver on that was weighted average cost of walnuts. Our acquisition cost declined, looks like by probably about 45%, and of course, walnuts are big part of our inventory at the end of fiscal year. So that was the big driver. And as we have mentioned in previous calls and for both walnuts and almonds, specific significant decline in acquisition cost will lead or have already led to significant declines in selling prices and consequently meaningful decline in net sales. We do expect to have margin plus expansion as result of that, which will help us maintain our gross profit dollars. However, as we said repeatedly to be able to have a favorable comparison on the gross profit line. It’s critical that we get a significant increase volume, especially on those two commodities.

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

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

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

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

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

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

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

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

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

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

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

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

Okay, because I mean, obviously, it’s rough $89 million in cash from operations, which is huge, and that’s contributes – that’s partially because of EBITDA or profit and working capital combined. And so I’m just trying to again zeroing on this working capital component if prices were to remain flat. Are you saying that working capital would be generally neutral and you would be generating your cash from basically cash flow?

That’s – yes, in the second-half of the year, if we apply your assumption then our cash generation would come from the income statement, not the balance sheet.

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

Thanks, Tom.

Thanks.

Thank you. And your next question comes from the line of Francesco Pellegrino. Please go ahead.

All right. Back again just want to touch on the subsequent event that you guys have disclosed about the customer for almond butter that’s about $90 million of business in fiscal 2016, or about 10% of your sales that’s going to be moving towards the competitor. But first option this have really have been expected since you’re not vertically integrated for almond, when almond prices plummet like this, they would go towards the low-cost producer, you’re more like a middleman for almond, is that a correct way of viewing this?

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

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

Yes, that’s correct. As I mentioned in the press release, Francesco, it’s significantly lower than our overall gross profit margin for fiscal 2016.

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

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

Okay. Just going back to the balance sheet, Mike had mentioned that you guys had paid off your revolver, I’ve heard some rumors in the industry about a nut TPNG business that that shopping itself around. When I look at this what you guys have done over the past five or 10 years building out your branded platform just maybe, I don’t want to call it struggles for Fisher Nut Exactly, but that’s still a brand in its relative infancy. Could you just maybe talk about where you’d like to bring maybe your leverage, should I be thinking net-debt-to-EBITDA, because your – a majority of your cost of goods sold are commodities. But I don’t know if necessarily looking at a normalized EBITDA level is the best way to think about the way you guys were – maybe approaching acquisition or not. But – where the balance sheet is right now, I think it gives you guys a lot of opportunities to maybe look around the space and continue to grow the business. And I would just be interested in and I feel as every quarter I’m just asking you about the M&A space, but it seems as it’s right now you might have the balance sheet that set you up really nicely to do something in fiscal 2017?

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

Perfect. Thanks again, guys.

Thanks, Francesco.

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

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

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