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Executives

Linda B. Segre - Senior Vice President of Corporate Strategy & Communications

Brian J. Driscoll - Chief Executive Officer, President and Director

Michael Murphy - Acting Chief Financial Officer

Andrew Burke - Chief Marketing Officer and Executive Vice President

Analysts

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Heather L. Jones - BB&T Capital Markets, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Andrew Lazar - Barclays Capital, Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Diamond Foods (DMND) Nine Months 2012 Earnings Call November 14, 2012 5:00 PM ET

Operator

Good day, everyone, and welcome to the Diamond Food update call. Today's conference is being recorded. [Operator Instructions] At this time, it is my pleasure to turn the conference over to Linda Segre. Please go ahead.

Linda B. Segre

Thank you, Nicole. Good afternoon, and welcome to the Diamond Foods investor conference call and webcast to review our financial results for the first 3 quarters of fiscal 2012 and the results of our accounting restatement of fiscal years 2010 and 2011 and related quarters.

On today's call are President and CEO, Brian Driscoll; and interim CFO, Mike Murphy of AlixPartners. In addition, Mark Hare, our Senior Vice President of finance and Controller; and Andrew Burke, our Chief Marketing Officer, will also be available for Q&A at the end of our prepared remarks. [Operator Instructions]

Before we begin, please remember that during the course of this call, we will make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of Diamond Foods. In addition to the company's periodic, current and annual reports filed with the Securities and Exchange Commission please refer to the text of our press release for a discussion of the risks associated with such forward-looking statements.

Finally, please note that on today's call, we will refer to certain non-GAAP financial measures in which we exclude from our GAAP financial results certain items, including acquisition and integration, Audit Committee investigation, restatement, legal and related expenses. We will also refer to adjusted EBITDA on today's call for a calculation of this measure, please refer to our press release. We believe these non-GAAP measures will provide useful information for investors. Please refer to today's press release for a reconciliation of the non-GAAP performance measures to the GAAP financial results. Now, I'd like to turn the call over to Brian Driscoll, our President and Chief Executive Officer.

Brian J. Driscoll

Thank you, Linda, and good afternoon, everyone. I'll begin by conveying our thanks to investors, employees, growers and suppliers, as well as our customers for their patience during the Audit Committee investigation and restatement process. Diamond Foods has turned an important corner today. The restatement of our fiscal 2010 and 2011 results marks the end of a very thorough investigation and re-audit of our financials. Its impact is consistent with what was disclosed in February and represents the culmination of careful evaluation of our internal controls, policies and procedures.

During the restatement process, we identified material weaknesses in 3 areas. Control environment, walnut grower accounting and accounts payable timing recognition, which Mike Murphy will elaborate on during his remarks. As such, we've implemented numerous remediation steps to improve and institutionalize rigorous internal financial controls and oversight. We strengthened our board with the appointment of 5 new directors, and we will continue to add depth and new capabilities to our finance organization.

In addition, we have launched an extensive business improvement process focused on financial and operational visibility and performance. Taken together, these steps will be core to our corporate governance principles and serve as the foundation for Diamond Foods internal controls over financial reporting. In that spirit, we are very pleased to be returning our focus, our energy and our efforts to the future performance of our business.

I spent my first 6 months at Diamond, diving into our businesses, connecting with employees and key constituents and examining the most significant challenges we face. During this time, we have also been evaluating where we believe our greatest opportunities for future growth and shareholder value exist. And as a result of this continuing process, we have begun to take the critical and necessary steps to restore credibility and confidence in our company. With that as backdrop, I'll summarize my overarching impressions and the actions that we've begun to take.

First and foremost, the Diamond Foods portfolio of brands is impressive with potential for margin expansion and a more sustainable top-line growth profile over time. The brands compete in large and growing categories. They possess insulating competitive advantages and have strong consumer credentials. They also have the range to give us opportunities to compete in other complementary segments. These strengths -- these advantages can fuel our growth and expansion efforts once sufficiently exploited.

By contrast, we are faced with several difficult and important challenges, which require comprehensive and aggressive measures. Our margin profile has substantial room for improvement. We are highly leveraged and we have walnut supply challenges, issues with our Emerald brand and cost structure pressures.

In order to tackle these issues, we've moved quickly to launch a wide ranging set of initiatives with primary focus on cost-reduction, capacity rationalization and improved net price realization. We've also initiated a significant shift in the company's brand building focus to a more balanced and sustainable growth model. And while it won't come easily, we believe that our plans properly executed, hold the potential to improve the earnings and margin growth profile of this company over time from our fiscal 2012 year-to-date performance.

In this context, let me offer more texture about our brand portfolio and our operational performance. I'll start with our Pop Secret and Kettle brands, which provide an essential foundation for us to achieve our goal of becoming the industry's leading premium snacks and culinary nuts company. Pop Secret was our standout performer in the first 3 quarters of fiscal 2012. This brand has delivered both greater financial contribution and has grown its market share by 220 basis points versus a year ago. To build on this momentum, there remain many opportunities to enhance this performance, including improved net price realization, distribution growth and expansion and increased levels of innovation.

Moving on to Kettle, this extraordinary brand continues to have potential for top-line growth and margin expansion in both the U.S. and U.K. However, for Kettle U.S., the prior strategy to rapidly accelerate growth and mainstream penetration relied heavily on inefficient discounting. This approach to top-line growth was inconsistent with Kettle's premium positioning and was margin dilutive.

Let's take a step back for a moment. The fundamental underpinnings and origin of this brand are its natural, authentic and premium quality credentials. It's been a pioneer in the premium chip category and the brand continues to lead with the announcement last month of another important milestone. Kettle brand potato chips were the first potato chips in the U.S. to be certified non-GMO by the non-GMO project. This is a rigorous third-party certification and capitalizes on growing consumer interest. We have achieved this distinction across the majority of Kettle's offerings. We believe that this brand can grow, expand and maintain its inherent premium price positioning best by staying true to and investing into what it stands for. So as you may have sensed from my emphasis, we've already begun to refine our Kettle brand marketing strategy, which features more brand equity inspired activity and innovation with less discounting.

Along these lines, we have early data which provides some indication that an important element of our strategy is working. We've reduced our promotional spending on Kettle from last year and yet, in the most recent 12 weeks scanning period in U.S. grocery, Kettle grew its non-promoted sales 14.9% and gained 50 basis points of market share in non-promoted retail sales dollars.

In addition, we will continue to invest in innovation. Natural savory snacks, which span multiple segments, have been expanding at a 20% growth rate as consumers continue to look for better for you snacks with a great taste profile. This is an area where the Kettle brand promise could potentially play more broadly. This will take some time, but we believe the trademark is well-positioned to deliver value-added alternative.

In the U.K., our Kettle business has similar opportunities for improvement. We are faced with significant promotional pressures in the U.K. and have some opportunities to reduce costs in operations and supply chain. As we see the benefits of the cost-reduction efforts, we will invest behind the brand, as well as focus on product extension, innovation and distribution expansion. Just a couple of examples of the type of opportunities, we just launched Kettle Tortilla Chips into the U.K. market. And We're also expanding the presence of Kettle chips on the European continent, albeit on a small base.

Regarding our Emerald business, I'll begin with the fact that we have several difficult and important challenges to meet. The company's prior focus on driving growth through heavy promotional spending and SKU proliferation significantly impacted the financial contribution of the brand. The investments made in packaging and product innovation did not translate into premium price realization and the rapid volume build never achieved acceptable scale of economies. Therefore, we have made a significant shift in strategy and are confronting these issues with a number of measures which include a more streamlined and differentiated portfolio positioning, which leverages our more competitively advantaged offerings like Cocoa and Vanilla Roast Almonds, Sweet and Salty Mixed Nuts and 100-calorie packs. We believe that these offerings have meaningful market potential and can earn a price premium. We've also implemented a series of pricing actions and a more rigorous return on investment approach merchandising, and we will monitor closely to see how the brand performs at these new price points.

To align with our new brand strategy, we are cutting over 170 SKUs which, while representing less than 20% of the brand's revenue, comprised approximately 65% of the SKUs. This action contributed to the decision to close our Fishers, Indiana plant. In all, we have launched a critical reinvention effort designed to achieve a differentiated positioning for Emerald, improve net price realization and drive toward positive financial contribution. Our efforts are underway and is evidenced in recent Nielsen data. Our retail sales have begun to decline. While the brand is getting smaller, our goal is for Emerald to play an important and innovative role in the category. As part of our execution agenda, we will be measuring our progress on Emerald closely and we'll not hesitate to make required decisions commensurate with the financial contribution we should expect with any brand in our portfolio.

I'll turn now to our culinary business. The Diamond of California brand is the clear branded leader in the culinary segment with a share more than double the next branded competitor. Recently, we have given up market share to private label and price brands as we've increased our price to offset rising input costs. Similar to other brands, we are making investments in brand equity building with a new consumer campaign breaking this holiday season, which celebrates Diamond's 100-year history. We feel there is untapped potential to grow this category given the nutritional profile of nuts. So we will focus on innovation across both package and product with the goal of enabling consumers to integrate nuts into their everyday snack and culinary occasions.

In terms of walnut supply, crop deliveries last fall declined significantly, which substantially impacted our non-retail business and had the greatest negative impact on our overall financial results for the first 3 quarters of fiscal 2012. And while the decline in Walnut supply has not affected revenue in our retail branded product line, it has affected the non-retail business contribution and cash flow. Unfortunately, this walnut supply situation will not be remedied overnight. And despite significant efforts in the past 9 months, we do not expect to rebuild supply immediately and as such, we will not meet the volume threshold required to trigger the Oak Tree redemption feature. That said, we have redoubled our efforts to address our walnut supply issues by maintaining an open dialogue with our growers and acting on their feedback. And I'd like to personally thank all of the growers who invited me into their homes and onto their orchards and took the time to share their honest views about what Diamond needs to do to regain a leadership position in the walnut industry. Bill Tos, who joined Diamond's Board of Directors today, is one of these growers whose insights have been invaluable to us as we work to rebuild our supply position.

My final observation concerns our overall cost structure and executional capabilities. During my first 6 months here, we've undertaken a comprehensive review of our overhead structure and supply chain, and have identified, and are pursuing significant opportunities for cost reduction and operating efficiencies. For instance, on the sourcing initiative alone, we've targeted approximately $20 million of potential annual cost savings. As these savings materialize, we plan to invest a significant portion into innovation and brand building.

Concurrently, we have restructured our organization into category business teams in order to create greater cross functional focus on our brands and drive greater brand accountability and decision-making authority deeper into the organization. We believe that this approach will be empowering to our employees and can lead to enhanced levels of execution. We will be augmenting these teams with a newly created innovation group charged with identifying and developing a robust product innovation pipeline across our brand portfolio. On this subject, it is clear to me that our basic go-forward imperatives must include sharpening our brand strategies, improving our end market execution and renewing our focus on truly insulating advantage. What I hope I've conveyed in my remarks is this company's determination and capability to address the issues we face and proactively confront opportunities to improve our financial performance, while leveraging our strong and advantaged brand assets.

I want to come back and summarize my thoughts and our direction, but first, I'd like to hand this over to Mike Murphy, our interim CFO, to provide more detail on the restatement and financial performance in the first 3 quarters of fiscal '12. Mike?

Michael Murphy

Thank you, Brian, and good afternoon, everyone. I'm pleased to report that as of today, we have filed with the SEC 3 quarterly 10Q reports for fiscal 2012, as well as our restated 10-Ka for fiscal 2011 with the restated 2010 and 2000 financials in related quarters. We are currently working on finalizing the outlook for the fiscal 2012 10-K, which is delayed due to the substantial investigation and restatement efforts. I want to start by thanking the entire Accounting and Finance team for working so hard over the last several months to complete the restatement work, allowing us to get this matter behind the company. We are pleased to be turning our effort and attention to the future. I'm going to start by reviewing the restatement process and results, what we found and what changes we've made to strengthen the organization. I will then discuss our financial results for the first 3 quarters of fiscal 2012.

As you know in February, after a thorough investigation, we determined that certain payments to walnut growers had been incorrectly accounted for and restatement of fiscal years 2010 and 2011 and the related quarters was required. With this restatement, we underwent a new audit of 2010 and 2011 with a much lower materiality threshold across all of the company's accounts. The restatement resulted in a reduction of previously reported income before taxes of $39.5 million of fiscal 2011 and $17 million of fiscal 2010. These amounts are largely attributable to those restated walnut payments, as we described in our February filings and related press release.

On a non-GAAP basis, adjusted EBITDA for the restated fiscal 2011 was $111.5 million, compared to $146.2 million as previously reported and $68.2 million as restated in fiscal 2010 versus $89 -- $84.9 million as previously reported. Please refer to our filings for more detail on the restatement and comparisons of our restated and previously reported financials.

As a result of the Audit Committee investigation and the subsequent analysis and procedures performed, we identified material weaknesses in 3 areas: Control Environment, walnut grower accounting, and accounts payable timing recognition. Diamond has undertaken numerous steps to remediate these areas of material weakness, including such items as: Enhanced oversight and controls; leadership changes, a revised walnut cost estimation policy; enhanced documentation; oversight and monitoring of accounting policies related to walnut payments; and improved financial and operation reporting throughout the organization. A list of Diamond's remediation steps can be found in our filings.

To further improve our internal controls and financial reporting strength, Diamond has hired Mark Harris, our new Senior Vice President of Finance and Controller. Mark is an experienced executive who has spent 17 years in accounting. He has been on board about 6 months and we're pleased to have him on the team.

Now turning to our financial results in the first 3 quarters of fiscal 2012. Net sales were $757 million, up 3.5% over the same period of fiscal 2011. Snack sales overall were up 10%, particularly strong sales by Emerald and Pop Secret. Culinary sales were up 11%, primarily due to higher pricing as volume was down 1.2% on a year-over-year basis. International Non-retail sales were the largest drag to the top-line performance as they were down 47.7% compared to the same period of Fiscal 2011. This decrease was due to the walnut supply issue that Brian described earlier.

Gross margin declined to 18.1% for the 3 quarters of 2012 compared to 22.9% for the prior year period. Majority of this decline was due to the drop in walnut volume and the rapid and significant increase in walnut cost per pound. The decline in walnut deliveries last fall not only led to a sharp decline in Non-retail revenue, it also resulted in higher unit processing costs in the plant. The remainder of the decline in gross margin is due to a combination of lower snack net price realization from higher promotional spend, commodity cost increases in our snack portfolio, and higher processing cost primarily due to excess capacity on our nut and Kettle U.S. facilities.

SG&A increased significantly in the 3-quarter period. However, SG&A adjusted for certain costs, which are described in the presentation on our website, was $76 million compared to $71.6 million over the same period of 2011. This $4.4 million increase is primarily due to higher sales related expenses. The SG&A adjustments referred to and as detailed on the presentation in our website totaled $21 million and includes Audit Committee investigation restatement-related cost of $16.6 million.

In addition, acquisition and integration planning costs primarily associated with Pringles totaled $40.6 million in the first 3 quarters of fiscal 2012. Adjusted EBIT margins for the first 3 quarters of fiscal 2012, adjusted for cost as detailed in the presentation on our website, was 4.8% as it compare to 9.2% in the prior-year period. Nearly all the decline was due to the gross margin compression. The effective tax rate for the first 3 quarters of fiscal 2012 was negative 3.3% and was impacted by several item. We recognized a $5.6 million tax benefit in the first quarter due to the conclusion of a ruling with the U.K. tax authorities. In the third quarter, we recorded a $27.6 million valuation allowance against net deferred tax assets primarily from NOLs. This tax asset write-down is required by GAAP and is based on a rolling 12-quarter look back. Any reversal of this valuation allowance against earnings in future periods would result in an income tax benefit. Company had a net loss on a GAAP basis of $53.4 million for the first 3 quarters of fiscal 2012 compared to net income of $23.7 million in the prior-year period. Adjusted net income on a non-GAAP basis was $11.7 million compared to $34.7 million in the prior year. Earnings-per-share on a GAAP basis were negative $2.46 and on a non-GAAP basis were positive $0.53. Adjusted EBITDA for the first 3 quarters of fiscal 2012 were $58.9 million compared to $89.6 million in the prior year. CapEx in the first 3 quarters of fiscal 2012 totaled $40.6 million, which is primarily comprised of the Kettle Beloit and Norwich plant expansion and automation for Emerald Breakfast on the go!. Due to the underutilization of our Kettle U.S. and walnut facilities and the closure of our Fishers, Indiana plant, we expect CapEx to be much lower in the near-term.

During the fourth quarter of fiscal 2012, the company closed agreements to capitalize Diamond's balance sheet with an investment by Oak Tree. The Oak Tree investment consist of $225 million of newly issued senior notes and warrants to purchase approximately 4.4 million shares of Diamond common stock. As the warrants are accounted for as derivative liabilities, they are remeasured at fair value every reporting period. Any change in estimated fair value is recorded as income or expense. This accounting treatment may therefore cause income statement volatility in the future as the warrant valuation changes partly due to factors such as changes in the company's share price.

With respect our liquidity position after the Oak Tree investment. As of July 31, 2012, our cash and availability on our bank revolver was approximately $70 million and as of yesterday, it was approximately $75 million. In terms of our full year fiscal 2012 financials, today, we are providing preliminary ranges until the audit is complete. We expect that net sales will be in the range of $975 million to $980 million, with snack sales of $600 million to $605 million and culinary sales of $290 million to $295 million. We expect to finish fiscal 2012 with a gross margin of between 18% and 18.5% which is consistent with our performance in the first 3 quarters of this fiscal year. We expect adjusted EBITDA on a non-GAAP basis to be between $78 million and $81 million. And with that, I will turn it back to Brian.

Brian J. Driscoll

Thank you, Mike. I'd like to summarize and reinforce the observations I shared earlier before we take your questions. First, although the restatement process is behind us, the board and management will continue to reinforce an environment of strong disciplined, financial controls and oversight. Second, we believe that Diamond Foods has growth potential with an opportunity to become the leading premiums snacks and culinary nuts company. Our objective is to enable this by placing our full focus and energy on one, rebuilding walnut supply. We have a strategy and are making progress, but there's still much work to do. We are however, planning to have sufficient supply of walnuts this year to serve our market-leading brand and retail business.

Two, refining our approach to brand growth which will be focused on driving profitable, sustainable growth that leverages the strength of our brand equities with innovation and enhanced execution. Three, our Emerald brand health, which requires significant repair by exploiting the value of the brand, cutting costs and improving net price realization. And with respect to cost structure and operational effectiveness, we have several initiatives underway with a potential for significant cost savings over the next 2 to 3 years. I joined Diamond Foods because I believe in the company, its potential and especially our brands. But I want to be clear. We have a lot of hard work ahead. Fiscal '13 is a turnaround year for us and the team and I are committed to our goal of restoring profitable growth and are excited about the opportunities ahead. I also want to take a moment to thank Jack Gilbert and Rick Wolford for their service to Diamond's Board of Directors. Their knowledge and experience were invaluable to the company and we will miss them. As I mentioned previously, Bill Tos is one of the walnut growers I spent time with soon after I joined Diamond and his views have helped to shape Diamond's approach to rebuilding walnut supply. I look forward to having his guidance as we move forward. I want to close now with some comments about guidance for the future. We know you've been waiting patiently and we've been silent for a long time. However, as I've discussed, we're in the middle of a strategy change and have a large number of initiatives underway. As I gain visibility into the progress of this change, we will evaluate the appropriate time to provide guidance. As I mentioned earlier, I've been focused on meeting with growers, reshaping our brand and go-to-market approach, finding cost and productivity savings and mapping the right path forward. I've outlined for you our strategic direction and priorities. Our focus now is executing against a number of initiatives to restore profitable growth. We're working diligently on that and we'll provide updates on upcoming earnings calls. At this time, we will conclude our formal comments and open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And Our first question will come from Bill Chappell, SunTrust Robinson.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Again, it's been a while since we've had a call. So I just kind of want to maybe understand a little bit on the snack strategy and particularly on Kettle. I mean kind of going a year ago, it seemed like it was a great snack business with a walnut problem, but kind of the way you laid it out today seems like you felt like the snack business had some problems. I'm trying to understand particularly with Kettle, the genesis of Kettle -- the change in strategy and does that create -- I mean a year ago, you're in the process of building out a lot of capacity to get ready for this whole strategy. Does that create excess capacity and lower margins for that business for the near future?

Andrew Burke

Hey, Bill, it's Andrew. No, we haven't changed our outlook on Kettle. We feel great about the brand. Brian spoke about all the great equity components of the brand. His comments really speak to this shift of ours that looks at more sustainable growth model, a balanced, sustainable growth model. So what we're doing is we're looking across our businesses and identifying where there's places where we're growing top line or we're making spends that we don't think it's balanced and sustainable. The great thing about the Kettle brand, as you know, is that at its core, as Brian said, it's a premium, natural, authentic brand and it's been a premium in the chip category for years. The spending and the program that we did last year was a very broad program that was high-end discounting, high-end couponing that we felt subsidized current users and then brought the wrong households into the category and into our brand. So what our focus is going forward is what you'll see from us is you'll see us get much more targeted with that spend to make sure that we're bringing in the right households into the category and into the brand. So we have not lost any potential thoughts about the Kettle brand and how great the Kettle brand is going to be. He also spoke about innovation. And so that whole separate group that we're setting up in terms of that innovation category and a whole separate group that solely focused on building out our pipeline of new products, Kettle will be one of those brands that, that group spent a lot of time on. Because we think that the power of that equity that we can go broader rather than go out into new markets.

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And just a follow-up on the walnut business. Just trying to understand maybe more color and kind of what happened in terms -- and going back to your financing was kind of based on what I would assume a conservative assumptions about a certain amount of volume. Was it just you're just too late in trying to win back some of the growers or some of the growers just never coming back? Or how do you have confidence that it will eventually right itself?

Michael Murphy

Bill, it's Mike Murphy. 2 things. First, we run a very competitive process in terms of just capital raise. A lot of diligence involved in that. The one thing we had to do was to bring additional capital in the company to create some runway room, reduce our leverage with our existing bank groups, so the Oaktree Facility did that. The other advantage to the Oaktree facility was that it helped us message to the growers that the time we were going up there to sign up growers for this year's crop deliveries is that the walnut business was important to Diamond. So although the volume won't be there for the company, the company doesn't anticipate or reach the right volume that was the redemption trigger. It did send the right message how important that walnut businesses is, that would help the company a long way in those detailed meetings, one-on-ones with the growers about the future of the walnut business to Diamond.

Operator

Our next question will come from Heather Jones, BB&T Capital Markets.

Heather L. Jones - BB&T Capital Markets, Research Division

Quick question on the volumes number. It looks like the big volumes declines on the non-retail piece kicked in during Q2 of '12. Am I analyzing that correctly?

Michael Murphy

That's correct. So if you think about it for the company's business, that's generally -- usually the period in which the company is going out into that channel with a lot of its non-retail sales.

Heather L. Jones - BB&T Capital Markets, Research Division

And it looks like the volume numbers, given that prices have been higher, it looks like the volumes are down on a run-rate basis about 50%. Is that in the ballpark? And when you say that you're not going to make the trigger for the first 2 quarters of fiscal '13, is that because you don't think it will make it by those first 2 quarters or do you not anticipate much volume improvement period for fiscal '13?

Michael Murphy

Let's me -- let's break it out in 2 ways there. So in terms of the redemption feature, it's about walnut supply. And if you think about that's for this year's deliveries, which we are close to being final. Again with that trigger date, the measurement date was going to be at the end of the calendar year. So that's one level. If you think about in terms of availability of walnuts or supply, there's enough walnuts for the company to satisfy its retail channel where it has its brand, where it suffered in 2012 was not having enough supply to then sell the walnuts into the non-retail brand -- the non-retail channel.

Heather L. Jones - BB&T Capital Markets, Research Division

Right. And so you're not anticipating much relief going into crop year 2013?

Michael Murphy

That's correct.

Heather L. Jones - BB&T Capital Markets, Research Division

Okay. And then, just on the pricing outlook for nuts. Demand from an export perspective has been down. Production is up, but the carryforward inventories aren't up dramatically. So what are your thoughts on nut cost going into your fiscal '13?

Brian J. Driscoll

Heather the walnuts, you're right, which is overall supply as we move into this crop year is going to be up around 3.5%. 2 percentage points of that is driven by just crop yields being up which, as we've received the crop, as Mike said, it looks like that estimate is about right. At least that's what we feel at this time. The other percentage point in the half is due to the higher carry and coming into the year. In terms of -- so that's on the supply side. On the demand side, shipments through September and October, industry shipments are up about 10%. They had just come in. What's not yet known is that if you remember, last year was a late crop. And so potentially, the October shipments, which you could be seeing on a year-over-year basis is just the fact that we were able to get the products out the door faster. So demand is still up in the air. Supply, we know is bigger and we'll have to wait and see as we move through the season about where that sets out.

Heather L. Jones - BB&T Capital Markets, Research Division

So you all haven't put together an estimate yet of how much you expect cost to be up or down? For fiscal '13?

Brian J. Driscoll

We are putting together estimates and we've set up a pretty rigorous pricing policy that we revisit each quarter. It's made up of number of constituents within the company and a number of outside factors that we take into consideration like the shipments numbers that I talked about as well as some third-party factors that we assess. So that process continues to go on and we continue to look at that. So again, like I said, right now it looks like supply is up, demands a little bit stronger and that's what we'll have to just keep an eye as we kind of go forward.

Operator

We'll go next to Ed Aaron, RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Yes, I understand that you're not prepared to move to new segment reporting, but it's kind of hard to analyze that the company without kind of having better perspective on a profitability break down. At least between the snacks and the non snack businesses. And I know you can't go into a ton of detail, but can you give us some basis for understanding how profitable your snacks business is -- was for fiscal '12?

Michael Murphy

Mike Murphy. I understand the difficulty you face, but the company is not prepared to provide information at the brand or segment level right now. There's a lot of initiatives underway. We're going to come up with '12, we're going to come out with the first quarter Q. That's something Brian and the company will be evaluating, but just -- not something we're prepared to do today.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Okay. And then I guess one other question for me. As far as the debt is concerned, so you have the $225 million from the Oaktree financing, which we know what the cost of that is. Can you give us an update on what the cost of the remaining, outstanding debt is expected to be going forward?

Michael Murphy

Yes. So if you think about our revolver in term, it's LIBOR 4 of 1.25% rate, 5.5%. So think of the interest rate there of 6.75%.

Operator

We'll go next to Tim Ramey, D.A. Davidson.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Just a follow-up on Heather's question. She mentioned crop year '13 and I'd be surprised if you're actually making comments about crop year '13, but you agreed with her. So can you clarify that?

Brian J. Driscoll

Yes, Tim. You're right. It's crop '12.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Yes. Okay, so what we should think about is crop '12 volume was up 2% and your carry-on was up 1.5% so that's roughly in tons, what you have to work with. Am I understanding that correctly? Or were those comments relative to the industry?

Brian J. Driscoll

Those were industry comments.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Got you. Okay. Are you going to make available in your filings any kind of information about kind of what the tonnage actually look like in terms of your tonnage brought in to be handled?

Michael Murphy

No, we're not planning to do that. I don't think our competitors do that. And then in terms of Heather's comment, I think you're right about crop year '12, but I think she has also asked a question about our non-retail channel for '13.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Right. Yes.

Michael Murphy

Crop year '12 that inventory supply for the retail channel.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Got you. And then one of the questions that I had, it appeared that the Oaktree agreement really was all about absorbing the overheads in the Stockton facility. And I would guess, if we'd have the conversation 2 years ago or 3 years ago about gee, how profitable is the In-Shell business or the export business, the answer would have been not very. So to me, it seems like this is an issue of overhead absorption. You talked about cost controls going forward. It seems like there's two ways to skin this cat. One is to get more walnuts and one is to reduce the cost or the capacity of the Stockton facility. Am I thinking about that correctly?

Michael Murphy

You're correct. And I think the only thing we can say is that's probably across all the company's brands in terms of the cost structure and the initiatives that are underway. But in terms of your perspective on the walnut that's in stock, then that's correct. I didn't follow you though in your question about the Oaktree facility focused on overhead absorption though.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Well, I mean, the reason there was a 125 million ton -- pounds, sorry, target -- I mean, logically, the reason that existed there was to cover overheads and fill up the plant, I would guess.

Michael Murphy

Yes, that makes sense. I think the other part to it, for us, was also in negotiating that facility was we wanted something to send the right message to the growers, as well as the company, how important walnuts was to this company because we were going to be out, signing up growers because this restatement was going to be announced.

Operator

[Operator Instructions] We'll go next to Ken Zaslow.

Kenneth B. Zaslow - BMO Capital Markets U.S.

A couple of questions. One is in terms of 2013, it sounds like you guys are still saying that it still not exactly hasn't reached your base earnings levels. Is that what you're trying to tell us, 2013 is still trying to find your base-level earnings and 2012 is not representative of a starting point?

Brian J. Driscoll

Yes, I definitely would agree. '12 would not be a starting point for you. '13 is, as we've said, is more of a year of transitionary, restructuring year to get out of all these onetime costs, get to the normalized level for the walnut business, rebuild that in the brand. So that part, I agree with you.

Kenneth B. Zaslow - BMO Capital Markets U.S.

So we would see that 2013 could actually be lower than '12 on an operating basis?

Michael Murphy

Yes, that's correct. I would agree with that. But again, in terms of Brian's comment about providing guidance, I think the perspective -- there's a lot of initiatives underway. We need to see the visibility and traction of those. You talked about the one where there's good visibility on the sourcing procurement side. Once we see traction there, I think that's something Brian talked about in terms of them providing -- determining when it's appropriate to provide guidance.

Kenneth B. Zaslow - BMO Capital Markets U.S.

And Brian, I think the bigger question is in terms of next year, can you talk about like what type of buy-in you've gotten from the senior managers as well as the next level managers? And does there need to be a structural change in the team? And how do you think about that?

Brian J. Driscoll

Yes, that's a great question. This organization suffered through what I would characterize as a cultural trauma. And I have been quite impressed with the resolve and resiliency of the team throughout the company. And frankly, the focus here is restoring confidence in this company and getting this profile back to -- getting this profile more positive. I could tell you also that the restructure that we've already launched around category business teams, which is not unique in CPG, is quite unique at Diamond Foods. And so the degree of "ownership accountability," visibility and information flow will be improved by significant orders of magnitude. And so we're trying to create an ownership culture here that we believe will be empowering, and I believe we'll see some very positive signs from it.

Kenneth B. Zaslow - BMO Capital Markets U.S.

I guess what I'm trying to get is, look, you're taking the company in a very, very different direction. There was a much different direction in terms of what you were going to do with the Emerald brand and the Kettle brand. And now you're probably doing the right thing, it sounds like. But is there a buy-in? And do you have to get outside management to come in to kind of get into this strategy? Or are you satisfied with everybody in place?

Brian J. Driscoll

Well, of course, I mean, we're always assessing capabilities. And of course, there are always changes that can and will be made. But by and large, I'm quite comfortable with the buy-in. And frankly, I think the shift here is, frankly, I certainly don't believe that Kettle is a brand that cannot experience accelerated growth. I guess the difference is I want to do it in a way that potentially is margin accretive. I want to do it in a way that grows in a sustainable manner as opposed to discounting our way to distribution penetration and growth. And frankly, I think an approach on a brand like Kettle of discounting can denigrate the brand. And so I believe that the approach we're taking ultimately will, hopefully, and our plan is to experience an accelerated level of growth but with a better margin profile. As I mentioned earlier, the approach that has been taken was margin dilutive. With respect to Emerald, I think there's a critical core there that has potential. And while it certainly is getting smaller, my sense is -- my hope is that the approach we're taking will produce a more positive or a positive financial contribution going forward.

Operator

We'll move next to Thilo Wrede.

Thilo Wrede - Jefferies & Company, Inc., Research Division

I have a question about your covenants. Maybe you can give us a reminder where they stand right now, where the negotiation stand on those? And also, the question would be, do the covenants put any handcuffs, if you want, on what you can do in terms of promotions and marketing because you need to achieve certain margin or EBITDA levels?

Michael Murphy

Yes, there's no -- first off, the company is covenant-free till October 2013. So the idea was to create some runway room for the company to get through this restructuring and this initiative process for calendar year '13. And there's no restrictions in terms of dollar value over promotion or advertising, no.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Okay. And with the change positioning for Kettle or more focused positioning for Kettle, does that mean that the efforts to get Kettle more into the mainstream snack aisle in the grocery store, are those efforts abandoned now and you focus much more on the natural organic channel and such in the grocery store?

Andrew Burke

Thilo, I think what the focus going forward will be that we will be selective. We will grow the Kettle brand, and the product that it delivers is just a great value product that we're going to bring to new consumers. We're just going to be more selective about the markets and the customers that we expand into. And then in terms of the natural channel, we already have just a terrific position within the natural channel. The discussion before about potentially thinking about the Kettle brand and what surrounds the Kettle brand within the natural channel via innovation would be the other route that we would be going.

Thilo Wrede - Jefferies & Company, Inc., Research Division

So you think you can bring Kettle to new consumers by making it more expensive and limiting the kind of outlets it's sold in?

Andrew Burke

No, we've didn't say we were going to make it more expensive. The segments, in terms of the segments within natural, there is several natural salty segments that are adjacent to the potato chip category within the natural category that we think the Kettle brand trademark would play very well in. So we'll explore that and think about that. And in terms of being selective in the markets that we go to and the customers that we go to, we'll make sure that those -- that we're doing it the right way and we're getting the right households that are not discounting households but our households that are going to be with the brand and looking to pay a little extra money for a brand like Kettle.

Operator

We'll go next to Akshay Jagdale.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So first question, if you just look at the adjusted numbers that you've laid out, $68.2 million in '10 and somewhere around $80 million now projected for '12. You had an acquisition in the middle of a snack company. And if we just back out those numbers, it looks like to me, from everything that you've shared with us, that the margin impairment has been in the walnut business. So one, correct me if I'm wrong there because everything you've said about the Emerald brand in terms of margin dilutive strategy existed even 3 years ago, correct? It's not a "change" over the last year. So the change in EBITDA that we've seen, it looks like it has everything to do with the walnut business. Am I missing something there?

Brian J. Driscoll

I think we've said -- first, you're correct in terms of the majority of the change is related to the walnut margin. Another way to look at it is you think of the momentum continuity of payments for '11, you're correct. That $40 million net is kind of just the reduction of margins. Just matching the right costs to the right revenues and the right periods.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Okay. And so if that's the business that's impaired and there's 2 elements to it, one is increasing the price per pound and the other is just getting more pounds. It looks like the getting more pounds side of it is going to take longer than previously expected. Where are you -- first, am I understanding that correctly? And where are you on the pricing front for the pounds that you have? And how long, roughly, do you think it will take? And what will it take for you to get the pounds to a level that can restore in an acceptable level of profitability in that business?

Brian J. Driscoll

Let me answer the first part, and I'll let Andrew address the second part in terms of pounds. So I think you used the comment about that segment or the walnut business was impaired. I'd probably disagree with that in terms of the margins even that business still has even after putting the cost into the right periods. And then I think the other part to that, which I know it's hard to address though, is that when the company was going into the year, they didn't pull out the cost quick enough or react to that because they didn't have the visibility that they would lose so much supply going into the year. And then in terms of pounds, I'll let Andrew kind of address kind of the rebuilding, what's occurring there.

Andrew Burke

Yes. Just one other thing to follow on, which is the other way that we're looking at that we talked a lot about in our prepared remarks were taking expenses out. So as less volume has come in, when you think about where we produce our walnut business, as well as our Emerald business, it's in the Stockton and Fishers plant. We made the decision to consolidate the Fishers plant, close the Fishers plant and consolidate that into Stockton. So -- as well as a number of other initiatives in terms of efficiency and how we process products within the Stockton facility is ongoing. So that's the other way that you can come at getting this back. In terms of pounds, you're right. We are getting after pounds. It's a process. We have done a number of things. We've been out to the growers. We started with new contract terms. We were able to communicate our price for crop '11. We were able to establish a grower advisory board, which is a group of growers in the Central Valley that we kicked off in the fall, where they're going to help us and work with us in order to secure more pounds. It's just -- it's an ongoing constant dialogue that we're having. Diamond brings a lot of advantages. And actually, today is another big step in this, which is there's a bit of uncertainty with our grower community. And as we get and are able to go public and get current, that actually takes care of some of the concerns that growers have about doing business with us.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

That's helpful. And just one last one just on the capital structure, and I'll get back in line. Just the Oaktree debt, from what I understand, May 13 is when it's callable. And after that, it starts to get really expensive. So what are your plans in terms of refinancing? Can you comment on that? And this announcement today, I'm assuming, gets you further along in that process, but just help me understand...

Brian J. Driscoll

Yes, you're absolutely correct. It's step 1 in that process. We got a laser focus on that callable date. One, we have these initiatives underway. We're going to be -- we're already evaluating what our alternative is that we have in terms of the right capital structure with that May call date in mind.

Operator

And we'll go next to Eric Katzman.

Eric R. Katzman - Deutsche Bank AG, Research Division

I guess my question has to do with the snack side of the business. And there are certain, I guess, axioms within most categories. So obviously, in salty snacks, Frito-Lay, #1 player, they have very nice margins given their share, and they kind of create a margin umbrella for everybody else that competes in the category. And in salty snacks, that provides some very nice margin opportunity for your brand as well. But then in snack nuts, what we've learned, as Kraft has broken apart, Mondelez decided to not try to fix Planters, gave it to Kraft, and Kraft has kind of said, "Well, it's a business that now has a 9% operating margin." It probably used to be in the teens, but maybe it's private label or input cost or what. But I guess, Brian, how do we think about the #1 player in the category having a 9% margin and what kind of room that gives everybody else in the category in snack nuts?

Brian J. Driscoll

Well, actually, I think it's part of the reason why we're looking to identify and isolate those offerings that we have that we believe are truly insulating. What I mean by that, it's self-evident, but items that are difficult for competition to replicate. And so we believe that within the core of Emerald, we have some businesses that may enable us to achieve a pricing premium, and thus, provide for us a good margin. I'm not going to comment on what margin we're aspiring to, but suffice to say that the goal here would be to have a set of offerings that are unique in the segment, unique in the category and provide the opportunity to price accordingly.

Eric R. Katzman - Deutsche Bank AG, Research Division

So when we were tracking the company more closely, I felt that the Emerald offerings were differentiated and they gain share ultimately because consumers like the taste, not just because of this price issue. So the SKUs that you're looking to exit, it sounds like there was a lot of complexity there. But the SKUs that you're looking to exit, does that make that business profitable post the exit of the SKUs, which were creating the complexity and maybe, I don't know, using promotion or something or shelf allowances to get distribution?

Brian J. Driscoll

Well, there's a number of steps we're taking to take cost out of the system, to innovate in ways that will present us with the opportunity to boost our margin profile. And those steps are underway. And again, the goal, as I mentioned earlier, is for us to have a positive financial contribution on the brand.

Operator

We'll take a question from Tim Ramey.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

I believe the Audit Committee made a finding that there was no apparent fraud. Is that still a statement that the company stands by? Or is that up to interpretation by third parties?

Brian J. Driscoll

No. The Audit Committee, after the -- it was a pretty extensive, from my perspective, of being through this in different occasions in terms of the extensiveness and the detail of the investigation. But the Audit Committee concluded the evidence was insufficient. It was insufficient evidence to permit a finding of a -- that senior management had intent to mistake the financials. So that probably provides a little more clarity than what we came up before. But the position is the same.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

And so, I mean, the upshot of that was -- I mean, it's all ancient history now, but the accounting treatment had not changed, as I understand it. What was done in '10, '11 and '12 was the same as what was done in prior periods, but the issue came about because of the weakness in financial controls and what was being said at the district level to growers. Is that a fair kind of summary of the issue?

Michael Murphy

So '12 is different than '10 and '11. So let's just take kind of -- yes, I think a lot of confusion as to within the company and a lot of confusion with the growers in terms of what the payments -- what crop year those payments were for. End of the day, after the extensive investigation, was that the -- pretty clear, not appropriate matching of the costs with the revenues and not appropriate recognition of all the indicators of what cost should be for that period.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

But was it -- I mean, I assume it was, at the end of the day, timing differences, not lack of appropriate accruals. Is that correct?

Michael Murphy

A little bit -- well, there's 2 different issues there. In terms of timing, we used the words timing on the -- from cutoff issues. As we've said, there were another weakness in terms of how the company was just what I'll call normal cutoff of its accounts payable, expenses and liabilities. Some of that was -- obviously had a lot of things underway with the Pringles acquisition. That was one part of it, but that's dropping down of much lower materiality or other items in terms of cutoff. But I would characterize it more of the right cost in an accrual basis and how they are estimating those costs on a period-by-period basis and not when the payments were made but what the underlying costs should have been in the appropriate period.

Operator

And we'll take a follow-up question from Thilo Wrede.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Just one last question. Can you make the case to me why it is easier for you to go through all of these strategic changes and all the work that you're going through, why is it easier for you or better for you to do this as an independent company rather than as a part of a bigger company that can give you, maybe, a little bit more financial firepower or a little bit more backing?

Michael Murphy

I'll give you my perspective. Whether -- any company would need to go under these initiatives in terms of right execution, right visibility, management of SKUs, focus on net price realization. So all of those initiatives underway would be appropriate for wherever the company sits.

Brian J. Driscoll

It would be my view as well, that the steps we're taking are steps that any company would take, potentially, to address the issues that we're faced with.

Thilo Wrede - Jefferies & Company, Inc., Research Division

And I didn't mean to imply that you're taking steps that other companies wouldn't take. I actually think the plans that you've laid out, they make a lot of sense. My question is more it creates some financial strains on you, I could imagine, given debt levels limit -- it might limit what you can do or how quickly you can do things. So the question is more would it be easier to take these steps and do all these changes if you had a much more powerful financial backing, for example?

Brian J. Driscoll

I think that the opportunities we have in front of us, as you think about what we're doing on Kettle for instance, we're able to refine and change the approach because we've been spending too much on discounting to begin with. So to be able to pull some of that down and invest back in the business in different ways is available to us. I mentioned earlier also that our cost structure is too high, and we have substantial room for margin improvement. That exists. So we can get after that, whether or not we had greater financial backing than we have today. So all of the things we're approaching, we can do self-sufficiently.

Operator

And our next question will come from Andrew Lazar.

Andrew Lazar - Barclays Capital, Research Division

This question may be so much simplistic or naive, but you talked about how the great deal of the gross margin pressure has come from the non-retail piece of the business. Is that correct?

Michael Murphy

That's correct. For 2012, that's correct.

Andrew Lazar - Barclays Capital, Research Division

Right. So what I'm tried to get a sense of is what is it that keeps you in parts of the business like that, that just seem to ultimately detract from what you're, in theory, really trying to do, right, which is to create a faster-growth, higher-margin, more consistent, predictable snackfood company? Is it just fixed cost absorption issues? Are there some of these businesses that are just legacy businesses that -- originally, you said, "We want to send a message to the growers about how important our walnut business is." And by that, did you mean both the culinary and non-retail piece or -- I'm just trying to get a sense of why there are parts of this business that maybe you're still wed to that don't seem like you necessarily should be, unless I'm missing something really simple, and that could be.

Brian J. Driscoll

Yes, I do think that there are capacity utilization challenges that we have in our facility. I also believe, to the extent that we can better utilize that capacity, it reduces the entire cost profile for our branded business, our Diamond-branded business. But you would be correct. While we already have a very strong share in our retail-branded business, I do believe that there's further potential. And we are somewhat limited from exploiting that further potential because we don't have sufficient walnut supply. So clearly, getting more supply from our growers, we're not intending to suggest that the only ambition to that would be to improve the profile of our non-branded business. But it is, in fact, also to prove the profile and the growth trajectory of our branded retail business. So that answers your question.

Andrew Lazar - Barclays Capital, Research Division

Yes, that's helpful. And then a very big part of the snack story, of course, several years back was, and a very big part of the growth story of Diamond was, filling in all this white space from a distribution perspective. And I realize you're now going to go about that in a somewhat different way when it comes to items like Kettle and what have you. But is there a change though to the opportunity in terms of where that white space is or how much the magnitude of where that white space in distribution opportunity is and how quickly you can get at it? Or it's just getting at it differently in such a way that hopefully it's more profitable?

Brian J. Driscoll

I think it's primarily the latter versus the former. I think it's the way we get after it. I think the white space opportunity on Kettle, we believe, is significant. We don't have a great presence in our single-serve offerings, and we don't have great distribution in big parts of the country. The approach we want to take though is one that provides us with the potential of being more margin accretive and more true to what the brand stands for and not try to grow on an accelerated basis, relying on discounting to do it, because I don't think that's sustainable. The brand is just it's a great brand, and we think it could excel with the profile we've described. And I just want to follow-up on -- it's related to what you're asking. It was an earlier question as well in terms of mainstream. There are retailers that have developed natural sections. There are retailers that are natural retailers. And of course, there are retailers that, within their mainstream salty snack aisles, have segments within it, if you will, dedicated to premium chips like Kettle. And so we're basically saying we want to make sure that we're very surgical about where we play across those examples. And how we go about doing that, I think, will help define how quickly we can grow this.

Andrew Lazar - Barclays Capital, Research Division

Last quick thing, and it's related to that, and I'll pass it on. Sometimes when one would take away levels of discounting, even if it's the right thing to do for the brand and even if you explain it to retailers and they understand it, maybe sometimes there can be some disruptions in the brand as retailers either delist for a period of time or put you in a penalty box for a period of time. I'm just trying to get a sense of as you've kind of started to communicate this strategy to some of your key retail partners, had some of those things come to light as potential risks and from a sales perspective at least near term or not necessarily?

Brian J. Driscoll

Well, look, I mean, I certainly understand that dynamic. If you pull your discounting emphasis too abruptly, the impact could have potentially the kind of effect you just described. I think that there's a number of ways to do it. So it's not just the depth. It's also frequency. It's a combination of factors that we're looking at to affect that price realization. So I think that we're taking a very smart strategic approach to it. We're being very surgical and very prescriptive about it. But we are not planning to have kind of a knee-jerk, abrupt shift and do more harm than good. We think over time, and this is why it's going to take some time, we can begin to pull the needle out, if you will, and have our emphasis more on equity-inspired activity. And I think that's more sustainable.

Operator

Our next question will come from Bryan Spillane.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just 2 follow-ups. And I wasn't sure if you had said this before, forgive me. Just have you said anything about capital spending, what your capital spending rates are currently and just what the CapEx needs are going forward?

Michael Murphy

Yes. What we talked about was it had been 41. But what we talked about with some -- with the overcapacity we have, with the consolidation of Fishers on a go-forward basis, we don't think we'll have a lot of capital expenditures over the next year or 18 months. I think we'll have a little -- we'll see more clarity on that when we get to end of '12 and the first quarter there.

Andrew Burke

And those capital expenditures are potential to focus more on efficiency things than kind of expansion of capacity as we've done in the past.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And so -- and you've got enough capacity on Kettle, that means?

Brian J. Driscoll

Yes, we do.

Andrew Burke

We do.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. And then again, this may be just a very simple question, but just getting back to the question about the adjustment in costs that's, I guess, related to walnuts, so what we're saying is that it's a timing shift. But was the -- were the growers actually paid the right amount for the walnuts? Or were they not? I guess that was one thing that wasn't clear to me, is whether or not -- I understand the timing of recognition. But in general, end to end, were they actually paid what they were supposed to be paid?

Michael Murphy

Yes. I think what you're asking is, are there any additional costs that would be for 2010 and 2011, and the answer is no. So once you kind of push the cost back into the right period in terms of the payments, there's no additional liabilities in those 2 years.

Operator

We'll take a follow-up question from Akshay.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

I just want to go back to, I think, the comment, Michael, you made about when I said the walnuts business is impaired. I mean, can you just talk a little bit about -- I mean, if you make a $35 million, $40 million adjustment to that walnuts business, in my estimates, I mean, you're not making much money. I mean, what did you mean by it's not impaired? I mean, help us understand what's happening with the profitability there. I'm just trying to get a sense of where we are on the sort of walnut margin piece.

Brian J. Driscoll

I think -- and I'm using the word impaired. Generally, it would be the decline in what I'll call enterprise value for that. So it's more of a goodwill perspective there. Again, right now, we're not providing margins by segment or brand. But I think the one thing that's come very clear to the company through this process as we dug into each brand on a specific basis, how much cash flow and margins come out of the walnut business when the company has good visibility into that brand.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So let me ask a different question about this whole issue with the walnuts. I mean, clearly, what's happened, in my opinion, is you've lost share, right? You've lost a ton of share in terms of the volume issue, and the general contention would be that's because you didn't treat the farmers fairly by paying them a fair price. So to gain back share, I guess you would have to pay better than the market price. And it looks like a 50% year-over-year increase in cost per pound is higher than sort of the 30%, 40% increase in the overall walnut price. So are you -- is that the only way to gain back share? And am I understanding or interpreting the situation correctly? Is that you would -- would you agree that the main issue here is you did not pay the farmers fairly? Or is there something else going on?

Michael Murphy

Let me try that first, and then maybe Andrew can supplement it. First off, there were a lot of confusion, understanding the growers' confusion. Brian and I have met with a lot of the growers and understand why there was a loss of supply. But in terms of what the company is -- the one thing the company went out is that we're going to go out and raise this additional capital, show the growers we've got plenty of runway room here for Diamond to get through this issue, get the restatement behind us, and we've explained that to a lot of growers. This is our plan on the one-on-one discussion we've had with them. But in addition to that, Diamond's come back and said, "Let's give the growers more visibility as to how we pay and what our terms are." And so we've got good feedback in terms of the price we paid for last year's crop. It's not above market, but it's competitive. And then the other thing that I think that I got from being with the growers that confirmed is there's obviously a strong advantage for the walnut growers to have Diamond. These are one of the bigger players in this market to also have the only branded walnut brand out there as well. If you think -- because if you think of the perspective and the uncertainty of so much walnut supply going in shell over to Asia with the disruption of some of the -- if that occurred, and so there's some advantage of Diamond. We're not overpaying. We're just paying competitively. And we made our new terms more competitive in terms of the market, so then we've got some good traction and feedback from them.

Andrew Burke

Yes. The only thing I would add, and I think Mike summed it up really well there, which is I think it is more than price. I think it's about -- again, we talked about being current with our financials and them feeling like we are a good safe home for their walnuts. I mean, remember how this business works, which is they're delivering all their walnuts over at the end of the crop year, and then we're paying it out through the year. So there has to be a level of certainty and confidence in your supply partner. And so this is a big step in that direction. Like Mike said, we bring a lot of advantages at the grower level for the grower. And then the other thing that we've learned with our discussions with our growers is they really do take a larger view. It is about the industry and about more walnuts coming online and a need to continue to create markets and find home for this product. And they recognize and have discussions about the importance of Diamond in the industry because of the capacity that we bring because of the manufacturing capability that we bring and also for the things Mike talked about in terms of our #1 brand and developing markets. But it is a process. And so we're going through that process and making steps each month as we continue this dialogue back and forth with the grower.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

And just last one on snacks. So you had, I think, $600 million to $605 million in sales. Just directionally, Brian, in terms of strategies here, you're taking a step back, I guess, on Emerald, reducing the footprint roughly, I guess, 20%-ish. But you're doing that in a margin-accretive manner. So should we be think of sort of the base for snack sales to come down from where it is for '12? But then -- and the margins are going to move up for that business from that point on? Is that sort of directionally, at least, correct?

Brian J. Driscoll

Well, I certainly appreciate the question. But as I mentioned earlier, we're not going to be providing any guidance on that. But as we get greater visibility as to the traction we're getting with all of the initiatives I discussed, when I feel better about that visibility and that traction, I will be providing guidance from that.

Operator

That will conclude our question-and-answer session. I'll turn the call back over to Brian Driscoll for any additional or closing remarks.

Brian J. Driscoll

Thanks, Nicole. It's been a very productive 6 months here at Diamond. And I'd like to take the opportunity to once again publicly thank everyone who has worked so tirelessly to get us here. Today, we turned the corner. The restatement is behind us. We have a number of initiatives underway that we believe can create significant shareholder value, and we have great brands that form a strong platform from which to move forward. Thank you, everybody, for joining us today.

Operator

Thank you. Once again, that will conclude our call for today. Thank you all for your participation. You may now disconnect.

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Source: Diamond Foods Management Discusses Q3 2012 Results - Earnings Call Transcript
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