Welcome to the J&J Snack Foods First Quarter Earnings Conference Call. My name is Gilda and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. Now I’ll like to turn the meeting over to Mr. Gerry Shreiber. You may begin.

Good morning everyone and welcome to J&J Snack Foods second quarter conference call. I’m Gerry Shreiber, and with me today is Dennis Moore, our Chief Financial Officer; Bob Radano, our Senior Vice President and COO; Jerry Law, our Senior Vice President of Marketing and Personal Assistant to me; and Bob Pape, Senior Vice President of Sales. Let me begin with the obligatory statement. The forward-looking statements contained herein are subject to certain risk and uncertainties that could cause results to differ materially from those projected in the forward-looking statements. You're cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Results of operations, we had a good quarter. Net sales increased 5% for the quarter. For the quarter our net earnings increased by 11% to $12.5 million or $0.66 a share from a $11.3 million or $0.60 a share from a year-ago. Our EBITDA, earnings before interest, taxes, depreciation and amortization for the past 12 months was $152.1 million, another record. Food service. Sales to food service customers increased 2% for the quarter, large part -- due in large part to increased sales of in-house of 19%, Churros up 7%, Bakery up 3%, and Funnel Cakes up an amazing 58%. Soft Pretzel sales were down 5% for the quarter, with sales down primarily to warehouse club stores and restaurant chains as they battle through issues of menu fatigue. Retail super markets. Sales of products to retail supermarkets were down 5% for the quarter. Soft Pretzel sales were down 5% for the quarter and sales of frozen juice bars and Italian ices were down 1% in the quarter.…

Thank you. [Operator Instructions] We have a question from Francesco Pellegrino.

Hey, good morning guys.

Good morning, Francesco.

How is everything?

Everything is good and getting good.

Talking about things that could potentially be getting better, one of the things I want to ask you about is -- you talked about the performance of soft serve pretzels in food service. You attributed it to menu fatigue. I know you’ve reformulated your soft serve pretzels to be whole-grain. Just playing devil’s advocate, here, you say menu fatigue, maybe you can give me your definition of menu fatigue? And maybe you could also convince me how this might not be a structural change in menus, and maybe consumers demanding a healthier type of product? Especially when I see the struggles of soft serve pretzels in regards to your sale to the food service segment for schools.

Well, let me take the last part first. Schools we were under pressure to change the formulation to comply with a new standard of nutrition. Those changes left a gap in sales and we had to change -- we had to meet different regulations that probably caused some disruption in feeding. Now we’re pleased to say that we meet all these regulations and we’re the preferred soft pretzel product in schools by far. With respect to fast food restaurants and it’s just a matter of -- we all remember three years ago, when everybody was putting a hamburger roll or a pretzel roll on the menu. And as we -- and we all enjoyed the benefit of this emphasis in sales. Well, sometimes it wears out. And then sometimes it comes back. And then sometimes we take those products in there and we change them a little bit to just make them a little bit more appealing to the restaurants whether its whoever it is and they put them back on there again. We think we’re in that intermediate place right now and we’re going to benefit the rest of this year. Steve you’re here. There is half a dozen …

Given though the intermediary days that you are in right now, does it necessarily make sense for this quarter to be the quarter that you cut marketing expenses? I would have thought maybe you would have tried to push that a little bit more to sort of get through this intermediary stage and its menu fatigue.

Sometimes you hit intermediary and there is not a big eye telling you that. So we’re looking at our marketing spend for the rest of the year, because we’re not going to starve any of our products, particularly our core products.

Okay. The lost customer in the handheld business for retail supermarket, could you just give us a little bit of color for that? Are they going to a competitor, is this business that you could potentially win back?

Well, let’s not say who it is, but let me turn this over to Bob -- the Bob Pape who is responsible for that. Bob?

Yes, I mean, we had some softness in the first quarter …

Customer -- who is …

The customer who is one that we manufacture a corporate brand or private label for and had some softness in their promotional support. We anticipate that we will start to regain some of that as the year moves on.

Gerry, you got to be happy with how the handheld business is doing in food service. Obviously, it looks like mixed results, given what happened in retail. Are you ready to call a bottom yet in the frozen handheld business?

One quarter, right. Behind that one quarter is one year to two years of effort. We are certainly not ready to relax. We are on -- we finally got something that we could move with water scooter. We want to turn that scooter into a bicycle, that bicycle into a horse, that horse into a car, so a year from now, if this thing is growing like that, we will feel that we had bottomed out.

When I just look at the performance of the segment, like in the fourth quarter of 2014, handheld sales were flat. Looks like you could have called a bottom there and then, I mean, it was just quarter after quarter, sales down 14%, then 8%, 3%, and then 15%, and now we are flat again. I don’t really hear much conviction on your part in saying this is the bottom; could there still be some particular weakness for the product line?

We hope not. And as a matter of fact, there is some reasons for us to have some enthusiasm, perhaps subdued. We’ve a major customer now that we’ve been dealing with for almost two years and we’ve a backlog of products that we’re making for them out of one of our handheld plants, its going to last in the early spring. And we’re thinking, we’re cautiously optimistic that we will be able to use this as a platform for others in the industry.

Okay. Just two more questions. Could you give us a little bit of color or maybe about your penetration into the breakfast category? How Mary B’S has done? Any updates on that?

Not yet. It’s still early. We got one customer. We got several hundred stores. They love the product, all right. But now we’ve got a pull against a consumer and of course you know who the one customer is in there, they’re going through some issues of their own, so we got to work a little bit harder, and maybe do a little bit more marketing in there, so we don’t get crossed -- I don’t mean crossed, so that we don’t get squeezed in any kind of store resizing.

And then the last question for you, and I know you guys don’t really have a rhyme or reason to explain it, but the performance of the frozen beverage segment, I know it’s something that’s lumpy. It’s something that can be considered cyclical. Gallons have been up as your sales of beverage machines have been up, quite significantly. And I know in Q2 2015 -- hey Gerry, why are sales of beverage machines up 70%? Hey, we can’t explain it. Q3, hey it’s up 40%. Hey, we can’t explain it. Q4, up 20%. Hey we can’t explain it. Q1, it just seems that if it’s the type of thing that -- are we just in this really good stretch and at any point in time you can fall off or is there a little bit more insight into your end customer, and how much longer you could sort of ride this beverage machine turnover, going forward? Any read throughs you’re getting from end-market customers, anything new with these machines? Why have sales been so impressive?

Well, to begin with the buyers or the lesser use [ph] of these machines are in our fast growing c-store businesses, which we remarked on a couple of occasions that we’ve targeted that for growth. In addition, that ICEE continues to perform well. Dan Faster has put together a terrific group of people there and they’re, I mean, they bleed ICEE red and blue everyday and they’re putting these machines sometimes selling them, sometimes loaning them, sometimes leasing them, and if anybody ever been to the movies in the past year or so, you’re going to see multiple ICEE or beverage machines at all of the movies and same thing in a c-store. I don’t think it follows any particular rhyme or reason when sales machines have increased, but obviously when you get machine out there and these are new locations in there, we’ve a more than a good chance to increase beverage sales. But along the way, there is also the possibility that some of these stores merchandises will be cutting back. We’ve seen that with Sears. We are hearing another one minor with Kmart. So, I mean, things look have been terrific for ICEE for the past couple of years. We are hopeful they will continue, but again there are challenges out there too that we’re wary of, because we’re wary of, we’re working real hard to deal with them or circumvent them.

Everything you said makes sense. I really appreciate the time, guys. Thanks again.

The next question comes from Akshay Jagdale. Please go ahead.

Good morning.

Good morning, Akshay.

How are you?

I’m good. How are you?

I’m doing well. I’m doing well. Thanks for asking. So, can we start with M&A? I know you’re very patient, maybe investors and myself not as much. But you’ve, obviously, have a good situation with your balance sheet and the cash that you’re building up. But can you just help us understand the environment out there, what you’re seeing, why perhaps it’s taking some time for you to maybe pull the trigger on another deal?

We are very risk [technical difficulty]. We’ve looked at some things out there that have ranged from okay to really good. I might have mentioned before, there is a couple of things that certainly passed our spittle in there, that we’re looking at and for one reason or the other they changed. We continue to look, but I’m not going to make an acquisition just for acquisition sake, particularly if it’s something that might be a little bit more transformational than what we’d like. But in saying that, we’ve made multiple acquisitions in the past. Sometimes they’re very small, but a lot more meaningful than the size of the company, such as New York Pretzel, such as California Churro. So we have a variety of these things. We work on them. People like Jerry Law, and myself and Dennis, there is not a week goes by that we’re not planting some seeds. Sometimes the seeds grow quickly, sometimes they die in the ground, but we’re not going to take $200 million or $300 million in there and send it out there and hopeful like some people will do just looking at financial spreads.

Okay. And …

Be patient. Rome wasn’t, and for that matter was India, it wasn’t built in a day.

They are still building India.

I know they’re. Unbelievable. You’re going to be, if you’re not already, the third largest economy in the world. Is that right?

That sounds right. I’ll take that any day. So anyway, moving on to just your organic growth prospects, you’ve had some success on licensing deals with the OREO Churro and now with Pillsbury. You probably are incurring some slotting fees on the retail side this quarter. What should we -- I mean, can you just give us a ballpark estimate of what these licensing products -- licensed products, specifically, Pillsbury and OREO Churros, what’s the opportunity this year and over the next couple of years? Are we talking, you know, $1 million to $5 million, $5 million to $10 million? I mean, just give us some sense of what you think the opportunity for those products is?

There is two aspects of licensing. First of all, we’ve been licensing our ICEE name and SLUSH PUPPIE, and that has performed very, very well. This past year it was close to a $1 million. Another part of licensing, we’ve a Minute Maid license in that relationship which we were able to pull out of the tree some 15 years ago now continues on every year. We just renewed that for a long-term. We hope that we pay OREO, Mont Elise, and Pillsbury a lot of money. Right now we’re estimating sales on an annualized basis of about $7 million.

Okay. And $7 million would be for both those products in retail grocery?

First year.

First year. And then you’ve started today, now or this quarter?

January, once.

Okay, perfect. That’s useful. And obviously we will be able to track those in the AC Nielsen there. So that’s helpful. And can you just take a step back here on soft pretzels, you had a really good run on restaurants, went from 0 to 50 million sort of run rate business started to decline a little bit I think last year.

It wasn’t just soft pretzels. It was sales to fast food restaurants and dining establishments. Most of that was soft pretzel, but it also included some of the other products including Churros and others, funnel cake.

Thanks for correcting me on that. So you’ve take -- sort of the growth rate has taken a step back and I remember, a year-ago or some time prior to that when we were having a conversation, you had mentioned there is still plenty of room in the long-term you could see that channel being at least a $100 million opportunity, right. Have your view there changed and what do we have to do to get that channel back to growing?

As my view changed? Yes, my view has changed, because one, the industry has changed a bit and every time you see any of them promoting a wheat sesame roll or something other than a pretzel roll, it takes its toll. My view has changed, I think when we built a nice platform of business and we’re going to have to massage this and change this, we’ve increased our R&D efforts and our people in there and we make regular visits to our customers in there, so that we can see what they need or what they think they need, so that we can work with them from inception up to head.

Okay. And just what do you -- what is it going to take to get the pretzel business overall growing again? I mean, you’ve got some weakness, obviously on the retail side, you’re lapping the discontinuation of a product in 2Q, but the food service soft pretzel weakness that was probably the most disappointing number this quarter for me. So can you just give us a sense as to what maybe new products or distribution opportunities there are that you see near-term?

--:

That sounds exciting, and -- but that’s a funnel cake product, not pretzels?

Yes, but it started with that because we are the pretzel people, and they get -- and well they don’t want to sell pretzels because everybody else is. But what can you do here? And so, it became a funnel cake and now we have some projections from them that are going right through the spring, as a matter of fact we’re looking at our resources to make sure we can. And then all of a sudden they want, hey the pretzel you were selling to A, B, C or you were selling to Jughead’s Café. Can we have that too in a different size in there, and now we’ve got a commitment from pretzels.

Perfect. And just one last one, I know you talked about handhelds a bit. I mean your sales were still down every so slightly when you include both the retail and food service together. What -- instead of talking about whether it’s bottom or not, you’ve made -- you had made some changes there. Can you just give us a recap of where we stand in terms of, who’s managing the business or what is -- what are you -- what actions are you talking to grow the sales base. I mean the big struggle was that the branded player had been really focused way too much on promotions, which is making that hard for you guys. So the way to get out of that obviously is to innovate yourself. So can you just …

[Indiscernible] Jerry Law is sitting right here and we knew -- we knew that we had to spend some money on marketing, and we knew that we had to create or lease a brand or license a brand, and that’s what we’re doing. The Pillsbury is the start of it, and here’s a joke. I gave Jerry Law a blank check to create some products and he spent it all, but not really. We have some new products coming out. We are cautiously optimistic. We don’t like to look at the shade of failure. I won't call this failure yet, but obviously it’s clear it hasn’t done as well as I had hoped or everybody in this room had hoped. We think they were gaining some traction. And the Mary B’s sandwiches which were in Walmart, it’s still early yet, but we think that that will create at least some substance of success that we can build on.

Okay. I’ll pass it on. Thank you.

Thank you.

Your next question comes from Brian Rafn. Please go ahead.

Good morning, Gerry.

Good morning, Brian. How are you?

I’m good, and snowy in Milwaukee. So we’re good. Let me ask you Gerry, you talked about kind of a solid profit quarter. What -- it maybe more of a question for, Dennis. What are you guys seeing in a world of commodity deflation? What are you guys seeing on some of your different ingredients, flour and sugar and coco and shortening and butter in that. What's the trend? What's kind of the trajectory?

This is Dennis. We obviously have a varied bunch of commodities that we buy and there are ups and there are downs. And there are areas where there are specific issues that cause some commodities to go up which may offset a lot of what is generally down. So, we’re not looking at anything right now with any significance one way or the other.

Okay. Dennis, you guys doing -- do you do any stock piling or forward buying at all or are you just pretty much spot buyers?

Now we forward buy on a number of our ingredients, flour, sugars, coco, chocolate and it tends to be from six months to a year depending on what we see and what we send into market.

Okay, okay. Let me ask you, Gerry. You mentioned a little bit, you called it gap in sales, the Obama’s came in and everybody wanted to sell broccoli on a stick, the kids don’t like it. As you move now into the kind of the end of that administration, you guys have reformulated more healthy snacks. Have you recovered say over five to eight years? Have you recovered your sales or you’re still trying to get back to neutral?

Pape, you want to?

Yes, our sales in school food service have been growing and …

But we’re still not back to where we were some five or six years ago.

Yes. We are.

Yes. We are.

And really it revolved around modifying the products to comply and making them taste good, so kids come back and buy them again.

Okay. Maybe talk a little bit about, you’re talking about CapEx guidance is $35 million to $40 million. Maybe talk a little bit about Belmar, where do you see that CapEx flowing?

Well, Belmar is essentially done although we may have to put in a line for some of the new products that we’re getting commitments on. But we said $40 million in CapEx should be more than adequate.

Okay. Yes, you talked -- certainly some competitive pressures in the grocery chain and the frozen juice bars in that, many years ago, Gerry you said that there was a threshold with mom, that if you get over $3 or so in unit -- in retail price it really limits units. Is it a sense of just competitive offerings? Is it an issue of flavor reformulations? What's kinds of been the headwind there?

It’s a combination of all of that Brian. It’s the pricing. There was a magic, the number that you didn’t want to go over. Moms were reading labels and even though the children want this item and that item, and there’s a lot of competition in the frozen anomalies. Even though Luigi's is the number on seller and that, number one in Italian ice throughout the country with a huge share. There are Nestle, there’s Unilever everybody else has something similar.

Okay. Again fabulous job on the ICEE, the SLUSH PUPPIE, PARADISE you guys have been absolutely superb. Is that primarily just driven by more penetration, you talked about the cinemas, a lot of the cinemas have gone from a central kiosk to more self service and so, there’s probably some more ability to do that; or is it just innovative flavor reformulations? Is it just specifically primarily on new infield unit machine installations?

It’s a combination of both, Brian. We have more locations in more theaters where they have these counters spread out mean, but also few years back, we developed a process where we call it mix it up, where somebody can go to a station and picture the colors of the rainbow, and they used to get a cherry ICEE, they used to get a rasp -- a blue rasp or another kind of ICEE, now they can push a button and get a mix and not be getting red, white, blue, green, and its fun for the kids. And if they do it enough, it’s going to be fun for us.

Yes. Now on something like that you see that certainly with the sodas too where you get kids blending 10 different soda flavors together. On those mix up machines; are you seeing those -- the penetration of those displaced some of your old single serve flavors?

We’re seeing some of that, but we’re also putting in little placements of machines that so that they can use our offerings to mix it up.

Okay.

Coke has come out with a new freestyle that’s been around I guess three or four years now that they’re getting -- they’re putting these out more and more in both fast food restaurants and now I notice convenient stores.

Okay. Talk a bit about the -- obviously ICEE is the 800 pound gorilla there. Paradise, SLUSH PUPPIE, I think in the past SLUSH PUPPIE was a little more of a kind of a cart that you bring to baseball games and football games and stuff, is that still gets niche or is, there are free standing machines for SLUSH PUPPIE too?

And still its niche. Although we are developing or Dan is in the process of developing some interesting international opportunities that would include SLUSH PUPPIE. And of course SLUSH PUPPIE has been one our hero’s in licensing, putting it in pouches and getting them into retail stores. We have a supplier in the south that has been producing this product, and we’re earning a nice royalty on it.

Yes. Super. Let me ask you on mergers and acquisitions, Gerry. You’ve been just the master in package food. As you look out for J&J Snack Foods here in 2016, have you made any philosophical changes? You started J&J from a bankrupt pretzel company. Are bankruptcies and restructurings different from say just buying a company that maybe undercapitalized, limited size, local kind of regional that just doesn’t have your distribution channel. Is there a different mix that you looked for going forward or are you still open to both kind of acquisition targets?

Open to both. But keep in mind if I buy something small that has a lot of other little gaps, it needs a lot of fixing ups in there, but I’d much rather today buy something in there that is well oiled and running that we could apply our resources too and we can benefit from them as well as both.

Okay. Then how are you seeing pricing multiples of EBITDA, its still …

High -- it’s high.

Yes. From your experience Gerry, if we with this anemic or bomb economy, if this airliner goes down and we are in a recession; does that open up more opportunities for you or you see sellers hesitant to sell in a trough?

From your mouth to Gods ears.

Okay. All right, Gerry. Thank you much.

Respect our president and I think everybody should too, but perhaps there’ll be more opportunities coming along.

All right. Thank you.

Your next question comes from Wayne Archibald [ph]. Please go ahead.

Yes. Good morning. Just from funnel cake is up 56%, could you elaborate on that how sustainable is that? How penetrated are you in the market? Pretty significant increase.

Well we’re not -- this is Gerry, and Wayne I don’t know if I’ve met you or whatnot, but funnel cakes has been in our portfolio product for a number of years. And like Churros where in the early 80s nobody knew what it was? Where it was? How it [indiscernible] whatnot, and now its growing at a rapid clip. Maybe, just maybe funnel cakes will be the Churros of the 20s if you know what I mean.

So you’ve got low visibility into that, its like catching lightening in a bottle here?

Well, its not exactly lightening in a bottle, but maybe its catching lightening in a barrel, because we do have -- we do have a major chain that is going to be rolling out funnel cake, different size, but we can do different sizes. This major chain we’ll be running out, we’ll be rolling out funnel cake and we can be the beneficiary of that six months from now.

So that will be -- you’ll see some that this year in calendar ’16?

Probably third quarter, certainly fourth quarter for us.

And just on the balance sheet, I mean if you can't continue -- if you can't find acquisitions you’ll just continue to hoard cash and just build up your cash balance basically?

That’s the worst thing in the world though, as if -- and we have been increasing the dividend every year.

Well, I mean you’re earnings next to zero on the cash, that’s the only -- only concern I have as a shareholder.

Unfortunately you’re right.

But clearly you don’t want to overpay for other entities as well.

I agree.

Great. Thank you.

Thank you.

We have one last question, it comes from Mark Williams.

Hello, Mark.

Good morning. This is Mark Williams with Athlos Research. How are you guys?

Okay. Good. I know the company, and I guess, I don’t know if we met but good morning to you.

I don’t think -- yes. I don’t think we have and good morning. My question is, sort of related to the cost outlook. And just more broadly as it relates to gross margin, I mean all food companies really are having this trouble with gross margin. But given the benign cost environment, you guys had some pretty solid price in food service, some really strong sales leverage nicely this quarter. You’re kind of -- you’re exposed to more macro sensitive channels. I would have expected a better quarter on gross margin. So, by my estimate the declines are for two-thirds over the last five years, and it seems like retail supermarkets have underperformed at the same time. So is it -- do you think it’s a mix issue within that segment? Is it a category traffic [indiscernible] or is it something else related to the retail supermarkets that I haven’t touched on yet that you see is fixable?

We see retail supermarkets the traffic in in-store has been often in the same store [ph] for several years now, and it’s an uphill battle trying to bring any new product in here and get growth in that category.

But being, would you see it as a new risk. Has that had an impact on gross margin in that segment or is it more of a mix issues. How would you diagnose the gross margin?

This is Dennis. In terms of first quarter of gross profit margin, a lot of it, it’s been relatively the same compared to last year, had to do primarily with mix.

Okay. And can you turnaround the retail supermarket margin without -- or gross margin without handhelds or [multiple speakers].

Yes, this is Dennis. I’m not sure what you’re comparing the retail gross margin to in terms if you’re thinking that it is deteriorated. I mean, down if you look at it compared to couple of years ago it is down significantly in the quarter while few years ago we did not own Philly Swirl which is a very seasonal product with sales in the third and fourth quarter and moves the significant amount of money in the first quarter.

Okay. That’s helpful. Okay, I appreciate it. Thanks very much.

Are there anymore question from the listening audience?

We have one other question, it’s from Brian Rafn.

Yes, Gerry. Talk a little bit about some of the dollar chain store. I think you talked a little bit about getting some penetration for some ICEE. How is actually that the different products, the bakery and all the assortments, that was a fairly strong category several years back. Kind of where are you on that c-store and dollar store area?

Well we made some progress there, and of course the dollar stores themselves there were some hits of consolidation in there, and that kind of slowed us down too. One of the other issues with dollar stores apart from ICEE is that, some of our packaged products whether it be, fig bars or cookies in there, its hard to ever get a price initiative without reducing the pack size, so there is more than the regular obstacles there in selling through the dollar stores.

Yes, you guys have always maintained your value. Everybody is shrinking product except you guys. So you guys provide a really good price quality value, so quantity value. So hats off to you. Let me ask you in the supermarket chain, how -- is there a future with all of the development of the Whole Foods and Wild Oats and some of these organic. Is there a market or penetration for your products into that area like you up change the ingredients for the school service, is there a market there or you’re already in those?

Bob, you want to answer that?

Yes, I think we’re approaching it cautiously. Organics obviously you’re still in a growth pattern and we’re trying to figure what product spent, and we’ll put them into play in the Whole Foods in the world. We do have few products in Whole Foods under their brand, and we’ll continue to look at what opportunities we have.

And isn’t the fig bars going into [indiscernible] the Trader Joe's?

Trader Joe's

Trader Joe's, okay.

Is that -- you guys have -- is that a little bit more of a private label deal versus your own brand?

Yes.

Yes.

Okay. All right, guys. Thanks.

Thank you. Take care.

And we’re showing no further questions at this moment.

I want to thank everybody for joining us on the call, and we look forward to talking to you again and having another successful year. Thank you.

Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.