Welcome to the J&J Snack Foods third quarter earnings conference call. My name is Paulette, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Gerry Shreiber. You may begin.

Thank you, Paulette. And welcome, everybody. I want to begin with the forward-looking statements that preempt the conference call. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in these statements. You are 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 this date. With me today is Bob Radano, our Senior Vice President and COO; Gerry Law, who is our Senior Vice President and my Personal Assistant; Bob Pape, who is Senior Vice President in charge of Sales; Dennis Moore, who is our CFO; and Bo Powell, who is our Vice President of Sales, Food Service. Also on the phone in a remote location is Dan Fachner, F-A-C-H-N-E-R, President of our ICEE Group. All right. I will begin. Results of operations. Net sales increased 4% for the quarter and 9% for the 9 months. Excluding the first 12 months sales from Hill & Valley, which was acquired in January of 2017; and an ICEE distributor located in the Southeast, acquired in June of 2017; and Labriola Bakery, which was acquired last August 2017, sales increased approximately 2% for the quarter and 5% for the 9 months. For the quarter, our net earnings increased by 3% to $26.1 million, that's $1.39 a share, from $25.3 million or $1.34 a share a year ago. For the 9 months, our net earnings were $80.2 million or $4.27 a share, an increase of 46% from $54.8 million or $2.91 a share from a year ago. Our EBITDA for the past 12 months, that's earnings before interest, taxes, depreciation…

[Operator Instructions] And our first question comes from Michael Gallo.

Gerry, you spoke to being determined to improve your margins going forward. I think you mentioned some reduced trade spending in your prepared remarks. I know you've put through some pricing, although not in the retail channel. So I was wondering if you could elaborate more specifically on some of the things you're doing to improve your margins and when you think we should start to see kind of that inflection where you'll start lapping some of the higher distribution and other costs, and you'll have the combination of pricing or other initiatives that you think will help margin?

Well, we've already met with my senior management team, particularly in sales and retail. And we are going to be acting forthwith quickly and efficiently on pricing in addition to kicking ass, so to speak, in there. We have been a little bit slow for all the obvious reasons in passing on price increases. In the past year, 2 years, we've had major increases in all the benefits as well as some commodities. But we've been -- we are focused on increasing and getting our margin back to where we believe they should be, all the while maintaining good customer relationships.

And the other sort of costs and other initiatives. I know you've been consolidating facilities, moving some things around logistically. But could you update us also on some of the other initiatives in terms of just improving operation?

Well, we had several projects in our major plants to improve cost. And they appear to be right on schedule. And we're looking forward to getting the benefit of these costs beginning probably in first quarter of next year, which will be October, November, December, and continuing on.

Our next question comes from Akshay.

So let's start with the question that probably a lot of people have. So what are you doing differently on the margin side such that we have better results there? I mean, the sales growth, although it slowed a little bit sequentially, still pretty solid relative to what most other food companies are doing. So can you just help us understand what's going -- what are the initiatives that are underway internally to help the margin progress that are different from before? And why is it taking a bit of time to see those flow through in your P&L?

Well, I have both of my key confidants here: Gerry Law, who is my resistant and responsible for manufacturing; and Bob Pape. And we have been meeting on this over the last couple of days. Bob, take care to comment on what we're going to be doing with respect to pricing.

We have to -- as Gerry mentioned earlier, we have to move forward with price initiatives across the retail business and make sure that those are implemented as quickly as possible.

And when are we doing it?

Our timing would be for the first quarter.

Like, I think now -- effective the first quarter?

Yes.

Gerry, as far as manufacturing, the one project is done and?

Yes, and actually, we've completed a bunch of projects in the quarter. In New Jersey, we have another one coming up that [ Gerry going ] to be online in the first quarter where we're moving some manufacturing to the point of distribution from Texas up in New Jersey. It'll have a good effect. Our CI pipeline is strong, and we continue to have some pickups there, but -- which is different for us. And we've never had such a robust pipeline of projects going to reduce cost. But we have to get price, and we have to be aggressive with the price.

And so what we're really saying, Akshay -- this is Gerry again. [ I think we ] got comfortable, but we're going have to increase our basis of getting these things completed on time and efficiently so that we recapture at least some of the margin loss that we had over the past year or so.

And are you able to give us some order of magnitude on these cost-continuous improvement savings? And or any or -- I don't want to ask you to do something uncomfortable with, but maybe down the road, should we expect some sort of quantification on what those savings might be? Because it seems like it's a new initiative, which is good. A lot of other food companies have been doing that for a while. But is there like an annual number that you're targeting? And what's the basis for the magnitude of the savings that you're targeting?

There was an annual number that we were targeting, but as sometimes happens, we were a little bit soft on the annual number. And there was certainly room to improve that annual number. And we're hopeful that you will see this beginning at the conclusion of our first quarter next year, which would be in the October-December period. So be patient. We understand the business that we're in. And every once in a while, we don't fall, but we'll slip rung, and we get back up there real quickly.

Okay. And then just -- it somewhat related is the question on mix, right. So how are you -- are you thinking any differently on product mix? Because, obviously, product mix has been a negative margin driver, right, for a while now including some of the M&A that you've done. So are we thinking about that any differently now? And if so, how and how might that impact the margin trajectory?

We are committed to improving our margins. And we're going to do it on an increased emphasis both on sales pricing and certainly on costs, which are closer to being accomplished than not.

Okay. And one last one on M&A. So any updates there? I mean, obviously, valuations, public market coming, but I know you're very disciplined. But maybe the market might be okay with you spending a little bit more and buying something that's not a turnaround, right? Have you considered buying things that are not turnarounds at this stage of the company's life cycle?

Certainly, we have. But we're still committed and disciplined not to do anything that is fundamentally different than what we've accomplished and what we've done in the past. We look at things. Sometimes we consider them from first base all the way around to third, but we don't want to be thrown out at home, if you know what I mean.

Our next question comes from Jon Andersen.

My first question is on pricing and whether you're willing to talk a little bit more about parts of the business where you think pricing is more necessary and if there is any way to think about quantifying the magnitude of pricing you're going after and when we should start seeing that show up in the P&L?

Sure, Jon. Some of our pricing, particularly in the grocery retail supermarket, we've had no increases in the past 2 years. And we're looking at changing that in a disciplined way, well within that we maintain our market share, but we need -- we recognize we need to get margin back. And that process is in the making now. And I got 2 nods of the heads here from Bo and Gerry Law, who are both involved with this. Am I right, Gerry?

Yes.

And is there also pricing on the Food Service side of the business? And are these things that we expect to benefit fiscal '19 as opposed to the balance of the current year?

Well, you won't see it in the balance of the current year, which is fiscal '18; but you should expect it for fiscal '19, which begins this coming October.

Okay. Great. And then your sales have been really good the last 3, 4 quarters even with, as Akshay put it, a little bit of some sequential deceleration this quarter, I think, to about 2%, you said, organic. As you look forward, I mean, what are the biggest whitespace opportunities for you on the top line to continue to grow your business at a rate that, frankly, is in excess of most food companies? I mean, is it specific product categories where you have opportunities? Is it channels where there's a lot of whitespace? If you could talk about maybe some examples where you see the most opportunity over the next year or so? And if we should still be thinking about your business as a mid-single-digit top line grower?

Well, we're certainly thinking about it as a mid-single-digit top line and then plus whatever accretive value we will get from acquisitions. But Bob, why don't you comment, Bob Pape, on the whitespace that...

We still have a lot of room to grow as far as our product innovation and some of the retail channels that we have growth potential in. On the Food Service side, our chain restaurant business and our national account certainly are areas where we still feel there is a huge amount of potential. And then along the lines of our health care accounts, our convenient store channels, those are all areas where we feel that we have ample opportunity moving forward.

Just to add to Bob's comments on growth. The restaurant and casual dining group, which we got into about 5 or 6 years ago, it has been -- we've had a good year with it. But not only that, we've identified key markets and customers that we can continue with that growth 2019 and beyond. So we're looking for a lot of opportunities there across a broad spectrum of our products, soft pretzels of all kinds, filled churros, [indiscernible], all of it.

Excellent. And the last one from me is, if you could comment on what you're seeing from the distribution cost -- freight perspective distribution cost. I know it was called out in the press release, and I know everyone's been dealing with it in the industry, whether it be the supply-demand shortages, the electronic logging device initiative. But are you seeing any loosening in that market, any improvement? Or is this just something we think we're going to have to be grappling with for several quarters?

We're going to be grappling with it for several quarters. I read an interesting article yesterday that there is a shortage of 50,000 truckers, that's truck drivers currently. Now I don't know they get up to these numbers, all right? But we are focusing on our logistics, that would be trucking and warehousing, as a major task and challenge for us. And we -- I think it slowed a little bit or at least the increases aren't coming as fast they were 1 year ago. But it took us a solid 9 months to realize it that these increases are indeed being permanently secured with metal bolts to our cost. So the fact that we're going to be focusing on it and we can do certain things by shifting our sales by product to the plants that they're being produced, it'll help us in that. But we expect the cost challenges in logistics to be there for a while.

Our next question comes from Brian Rafn.

Let me ask you, Gerry, a little different question on the margins you guys are getting queried about. What are you seeing across your product lines relative to kind of the defense or resistance or price elasticity amongst consumers across different product lines? Where is it tougher to raise prices? And where might it be easier by product?

Well, we want to consider the consumer and the customer along all these lines. We think we have room in our core products, that would be pretzels and churros and perhaps even ICEE. Partly, it's due to brands. ICEE is fairly resilient because they're being compared to a higher beverage god, meaning the Cokes, the Pepsis, the Dr Peppers. But we always got to take into consideration the pricing and whether that's going to lose volume. Fortunately for us, we're in a pretty good position with all of our major brands and our products. So we want to take that into consideration. But at the same time, we expect to advance pricing more than we have in the past.

Okay. On that, when you're talking about advanced pricing, Gerry, are you talking about a quantitative price hike or are you talking more about may be reducing couponing or volume discounts?

We're talking about pricing.

Okay. Let me also ask you guys, you guys have been very, very resistant and adamant. What you're seeing amongst a lot of the packaged food companies, you see it even in the personal hygiene area, they play around with unit volumes. They play around with portion sizes, portions per container. You guys have always had that you're not making a smaller product volume-wise at a price. What are you looking for going forward? Are you going to stick with that?

We're going to stick to that. If anything, we've developed products that have a value to the customer or some kind of specialty pricing, be it a bigger pretzel, be it involved in a wheel, so we're not going to cut back the size by weight or ounce or count of our traditional 6-pack, 50 count, 100 count. We're going to increase their steps to market and market cascade.

All right. That's -- that, obviously, is very solid, Gerry. How about weather across the United States this summer. You do have leverage with heat and hot weather. How would you say the 2018 summer has played out across the U.S. for you guys? Is that a benefit, a headwind or neutral?

Well, it started a little bit cool, and then we've had some real good weather in the past 2 weeks or so. But we'd like to have the attitude that we're going to weather the storm no matter what the weather, and that's the approach that I'm sending to our people.

Okay. when you look at some of your newer acquisitions more recently, I'm thinking New York Pretzel or Philly Swirl, how has the performance been of the more recent acquisitions versus something may be back a little farther like Daddy Ray's?

Well, Daddy Ray's is a real solid performer now. Daddy Ray's was a small company, doing about $15 million, $16 million when we brought it 7 years ago. We'll now do $70 million out of that plant and that facility in there. So when I talk long term, we focus on major things for long. New York Pretzel was a natural for us because it fit in that corridor into New York and New England. And we're having -- it's been a few years since we acquired Philly Swirl, but it's having its best year ever.

Okay. Awesome. What are you seeing in the grocery area, Gerry, in the battle between national brands and private label? And are you seeing grocers come to you for more private label business?

It's about -- Bob Pape, why don't you reply to that?

Yes, for customers that we feel have a strategic partner with, we are trying to develop a balance of branded as well as private label offering...

But with the emphasis on branding.

Yes. And still understanding that we're -- we have a heritage as a branded company.

Okay. Let me ask you too. On the grocery side, you're seeing a lot more front-end display racks and that for single-service, quick-to-go lunches, and it might be premade sandwiches of that. Are you guys getting any concentration in those speed racks?

Really, not per se, although we've looked at a couple of opportunities. Keep in mind most of our items gone into grocery are frozen. And they -- so if they go into the deli. In there, they're going to need some hand prep.

Got you. Got you. Anything on the convenient store side, with benefits, the sales, more products, anything developing there?

Well, our convenient store business is growing nicely. And we've put a team -- identified a team that is concentrating on that. And we think there is plenty of room to move that needle for the future.

And then just one final one, Gerry, on kind of M&A. As you've gotten bigger, has your kind of strategic viewpoint on the size, the dollar sales -- you hear a lot of companies say it's the same due diligence, the same prep for us whether we buy a $10 million sales company versus a $50 million or $60 million. Are you still looking at all opportunities regardless the sales size?

Well, we're looking at the opportunities that we think that fit with us strategically and that something that we can add value to or incoming value. So we're looking at a broad range of potential acquisitions. But again, they've got to meet our criteria for not just immediate but for the long term.

Gerry, you get a -- do you get a lot of deals pitched to you guys? Or are you guys out kind of on your own radar looking at different potential acquisitions?

Well, we get a few deals pitched to us. And I -- just consider when they're coming at you and they're calling at you -- calling on you a couple of times a week, you got to look behind the numbers. You're going to look behind their claim of urgencies. So we reject way more than what we follow through on.

Our next question comes from Michael Gallo.

Just a quick follow-up. ICEE, very strong quarter. I know you've mentioned in the past that you're looking at some opportunities perhaps to expand that within quick-service restaurants. I was wondering if you can give us an update on that.

We'll be happy give you an update in the next quarter because we have several things happening now that may come into fruition come next calendar year.

And we're showing no further questions. I will now turn the call back to Gerry Shreiber for closing remarks.

All right. I will give you a moment. If there's any other questions, I'll be happy to address them, but I want to thank everybody for participating in our third quarter conference call. We look forward to doing this again 3 months from now. And we are certainly hopeful and confident that the total operations will be improved, and we believe in our long-term success for the benefit of our customers, our shareholders and our employees. That will never change.

And we do have a question online. Follow-up question from Brian Rafn.

Gerry, just one more on -- you've got a great problem with the major -- the massive size of your cash reserve, liquidity on your balance sheet. Are you going to stick kind of with the short-term corporates? And I'm going back just from the experience you guys had with some of those -- there were preferred stock or whatever that you were looking for a little higher yield. Are going to stay with the short-term money, the market-type stuff and the corporate securities?

We're comfortable with our yields with our cash investments. We're not comfortable or excited about the results of operation. That's where our focus is going to be on. But we're yielding, I think, a composite of 2.3, 2.2. We'll keep building cash or use the cash, but we're comfortable with that yield. All right. If there is no more questions, I can exit now.

We're showing no further questions.

Thank you. And I appreciate everybody's continued interest in us. I'm going to disengage.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating, and you may now disconnect.

Thank you.