Welcome to the J&J Snack Foods Second Quarter Earnings Conference Call. My name is Sylvia, 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. Gerry, you may begin.

Thank you, Sylvia. And good morning, everybody, and welcome to our second quarter conference call. I'm Gerry Shreiber. And with me in the room today is Bob Radano, our COO; Jerry Law, our Senior Vice President and assistant to me; Dennis Moore, our Chief Financial Officer; Marjorie Roshkoff, Vice President, Legal; and Bob Pape, Senior Vice President, Sales. Also with us is Bo Powell, Vice President of Food Service. And in a remote location in California is Dan Fachner, President of our ICEE Group. I will begin with the obligatory statement. 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 the date hereof. Well, we're pleased to announce that we had another good quarter. I'll give you the results of operations. Net sales increased 4% for the quarter and 3% for the six months. For the quarter, our net earnings increased by 14% to $20.4 million or $1.08 a share from $17.8 million or $0.95 a share a year ago. For the six months, our net earnings were $37.9 million, $2 a share, compared to $54.1 million, $2.88 a share, a year ago, but last year's first quarter included tax benefits from the income tax changes enacted in December 2017. Our operating income increased by 5% in both the quarter and the six months. Our EBITDA, that's earnings before interest, taxes, depreciation and amortization, for the past 12 months was $168 million. Food Service, sales were up 1% in the quarter…

[Operator Instructions] And our first question comes from Jon Andersen.

Good morning Jon, how are you?

I’m good. Good morning Gerry, how are you?

Great, thank you,

Excellent. Let's see. I wanted to start out with the Food Service business; and ask you a little bit about that the soft pretzel business grew, it looks like, in aggregate in Food Service but wasn't particularly strong in the quarter. I think you even mentioned that you may have had slightly lower sales to restaurants. And so I know this has been a big focus area for you and the company over the past several years, and you've seen strong growth soft pretzels again and in restaurants. Are you seeing a kind of a plateauing of that opportunity? Or is this something just kind of unique in the quarter? And how do you think about the restaurant opportunity within Food Service going forward?

Well, we identified the fast food and restaurant businesses about four years ago. And we really jumped off, flying high; and increased year after year. It kind of has stabilized the last six months or so, although we are still growing in that sector. And we're still very, very bullish on this sector going forward, but soft pretzels are not new to that segment anymore. They're in there, and now we have to figure and tickle ways to grow them each quarter.

Okay. But you don't see – was there kind of sometimes these different form factors, whether it be a type of bread or a pretzel as opposed to a traditional roll or appetizer? Have you seen any kind of shift away or any kind of broader trend that concerns you? Or...

As this product introduction and whatnot remains stabilized, we're looking for ways to grow that again and work with the few restaurant chains that are not selling soft pretzels yet. So again like I said, I'm very, very bullish on this segment long term.

Okay. All right. And then I think, last quarter, you had a big quarter in the bakery business. And I noticed the bakery business was flat this quarter. Wondering if you could talk a little bit about the dynamic there, what – maybe you're bumping up against some tough comparison that I can't quite remember. You may have had some co-packing business a year ago that came on. But if you could talk a little bit about that leveling out the baking business and why that happened and what to expect going forward.

Gerry Law?

Last time, we saw some slowdown in school cookies a little bit. We did roll over some co-packing opportunities that had launched last year. And we had a – another co-pack opportunity that moved into another quarter.

And as a matter of fact, Jerry and I were discussing just yesterday, looking ahead for the next three to six months, how we're going to handle all this volume which appears to be coming. So I don't notice or see any particular slowdown there.

Terrific. That's great to hear. The other one for me then is the soft pretzel business in supermarket was so strong at 7%. We're not seeing that kind of growth, generally speaking, in the supermarket, is this just you getting your – kind of your hands on Auntie Anne's and putting, I don't know, marketing or merchandising or product support behind it? Like what's going on there?

That has been increasing for us for some time, and now it's more pronounced. I think we have a good team out there in retail grocery and they're executing well. And we're hopeful that we can continue with similar gains for the rest of the year.

Okay. And you don't have anything to do at the retail side, right, the shops and snack bars...

A couple of them. We have one store that remains open that. No, no. We have nothing to do with Auntie Anne's. I'm sorry. I'm thinking of Bob. We're not involved in that at all. We bought the license for Auntie Anne's, which is a good brand, and that is for both Food Service and grocery. We have nothing to do with retail. But that's added.

Got it. Now Frozen Beverages, we've talked about these machine sales in the past. I know they are very difficult to predict. It's hard, impossible for us to predict. I'm guessing, fairly difficult for you to predict, but what happens when you have a big quarter like that? What's the end market situation that's going on?

We sell the machines. We collect the revenue from it. And then we try influence the buyers of the machine to use our brand, which could be ICEE or SLUSH PUPPIE or whatnot in there instead of going with the – one of the colas or something that they're creating from ground zero. So on the one side, we have the revenue. And on the other side, we have a challenge, how do we create that revenue into additional sales.

Are you seeing more of these machines using other syrups than you have in the past? Has that become a tougher thing to keep the beverage side of the business?

Dan, you're on the phone, why don't you comment on that?

Jon, I am not seeing anything new on that front at all. We've always had challenges in the business. And once you sell a machine and getting our products in there, and we're having great success with that, and it's no more challenging today than it's always been.

Okay. Last one for me. I'll get back in the queue. I think you mentioned – Gerry, you mentioned pricing coming on late in the quarter. What kind of pricing have you gotten in? Has it met your expectations? And should we expect that to make a bigger contribution in the second half of your fiscal year given timing?

Well, I'll answer the last part of the question, first, we'll expect that to have a bigger impact, particularly as we roll into the seasonal summer months. We got some pricing. It's never easy. And we've always been customer oriented, but the pricing is pretty much, in effect, across all product lines in Food Service and in retail. And we look forward to capitalizing on that.

Great. Thanks so much everybody. Appreciate it.

Thank you.

Our next question comes from Robert.

Right. This is Bob Costello.

Hi Bob, how are you?

Good. Distribution costs. You mentioned they are being down, whereas most people have had increases in distribution costs, especially since the beginning of the year where trucking rates popped. So how were you able to get the comparison to go down for you, unlike others?

It looks like we lapped it, Bob. As a matter of fact, when you were in Florida and you and I spoke when you were going around looking at our location there, that same day, I got, had a chance to look at our distribution costs, as because again it was very constraining to us. And it looks like they had plateaued and from this point on, it will not be as much as a burden in our earnings or in our assets at what it was.

Right. Other question. The movie business, up until last weekend, in the country was down 16%. Obviously, it's improved. What impact, if any – and what improvement might you see going forward with all the attendance?

Well, if we pack them in, in the movies, and particularly if it is kids or adults with a kid's mind oriented, we will do more business at the concessions. We have products in the concessions, both on the beverage side and on the snack and pretzel side, so we're hopeful. Even though they were down double digits, we're hopeful of filling in those pieces.

Right, right. What about overall the sports arenas that you, the business has been? And what is your expectation?

Well, here in Philadelphia, with the Phillies in first place, it's been good. And again, we're in most of the stadiums and arenas across the country. It's hockey season. It's basketball season. I have a tendency to root for a long series in there because, if they're open, they're playing, we move our couple of hundred cases at each and every location across the country. So we're having a good year with our leisure and theater business, and we expect that to continue.

All right. Last question. You mentioned your cash and securities. What's the maturity on those bonds that you have? What's the average?

Dennis, that's...

Yes. They – I think they all mature within three years from now. Most – and I guess about 70%, 80% or so in the next two years.

Right. Related to that. So if you add – do the math, you're sitting on about 10% of your stock price is in cash, right? Is there any talk of doing anything more than just acquisition with that? Or is that still your plan?

Well, we have the cash, and then – and we're looking at different possibilities of acquisitions. We're not going to let that money burn a whole in our packet, but it's nice to know that we have that in reserve. And it'll be – there's no doubt it'll be used. And we've made acquisitions in the past and we expect to make acquisitions in the future.

Right, but would you consider at all doing a special dividend at all or no?

Probably not because from a conservative viewpoint I think the best use of our cash is for acquisitions. And we have increased the dividend multiple times over the past 10 years. And we're now paying a healthy $2 a share, I believe. So as an investor, as a shareholder, you might look forward to future increases, but to pay a special dividend, I don't think so. That would be kind of self-serving, and that's not something that we've done in the past.

Thanks.

Thank you, Bob.

We have no further questions at this time.

Okay. I want to give them one more chance, Sylvia, a round, people to think.

[Operator Instructions]

All right, I want to thank everybody who listened in on the call and participated, and we look forward to doing this again with you next quarter. And be healthy, and we'll see you next time.

And we have a question from Chase West.

I'm sorry. From who?

Hey Gerry, sorry. Chase West, Consumer Edge. I apologize. Got in the queue late there, I just wanted to ask quickly, do you guys have clear line of sight to increasing your product contribution over the back half of the year?

We are constantly developing new products. In the development of new products, we're constantly introducing them to our business segments, whether they be schools, Food Service or grocery, but I can tell you that I know of at least a half a dozen projects that are moving along. How many of them will go into our business cycle in the next six months? It would be a guess. But we started out as a tiny soft pretzel company with revenues in the single digits of millions. And now we're over $1 billion, and a lot of that is new products. So we're constantly developing new products. So we're not horsing around with that.

Got it, and that's helpful. And just quickly, to touch on M&A. I know you said that's the main use of your cash. What are you seeing in terms of like pipeline for assets out there? Are there a bunch of assets available? And maybe how the multiples look relative to historical.

Well, there are some that are available. Multiples have been higher than when – in the past. And we're really careful not to bet a store for any of these, and so we will continue to do what's best for the company and what we think is best for the company. And we're constantly looking. And when we do decide to go, we have the cash. We have the reserves. We've got the team. And if we acquire something, we'll integrate it quickly so that we move on.

Great, thanks for the question. I will pass it on.

Thank you.

And our final question, from Jon Andersen.

I'm back.

Hello Jon.

I was going to ask, I want to ask a question about your supply chain because you've been doing a lot of work over the last 12 months or so, I think, to bring on some new capacity, move some production, with the intent of lowering your cost base and improving your gross margins. Can you give us a brief update on where you sit with the major projects elements of that? And are we through that now and should begin to see better margins going forward? Is there additional work to be done? That would be helpful.

Well, we have an opportunity and a chance to attack the margins because we've always had a flexible distribution system, but about a year or so ago, we shifted some production from some of the more regional plants. And we closed one plant that was kind of small in Pennsylvania. So there is opportunity for us to improve margins because of logistics and because of less product transfers. Gerry, do you have more to...

Yes. I mean, Jon, they're still coming. We still have a couple projects in the pipeline to come online, not as disruptive as a plant closure, but there's still – we have initiatives still ongoing that will come on throughout probably Q4 for us. We see some more improvement.

Jon, we've got 15[ph] plants, and all of them have certain strengths. And we're looking to take those strengths and add to the resources that we have.

Okay. How is the business trending in the fiscal third quarter? What are you seeing? Any difference during, the start of the third quarter relative to what you've seen during the first half of the year? Because during the first half of the year you had tough comparisons, right? You were growing 6%, 7% last year, at this time. The comparisons ease in the second half, I believe, a bit. And just again wondering if you're seeing any kind of a – just a continuation of how the business has been performing or some uptick or downtick and what that might be related to.

Well, we're in the third quarter now. A matter fact, we're pumped into it. We have two-thirds of the quarter to go. Generally speaking, these are the warmer-weather months. More people are outside visiting sports and leisure stadiums. And of course, we have the heat benefit, the warm weather benefit in our frozen novelty and our ICEE business. So we're looking forward to the third and the fourth quarter. And we expect to have and again a good third and fourth quarter; and another good year for, I think it's, the 48th year in row where we've had increased sales and earnings. We're kind of stubborn in that way. We're not going to let it go backwards.

And never a down earnings quarter, right?

I don't believe we've ever had a – I think we did a couple years ago, slightly, but we don't expect to have any.

Okay, thank you very much. Appreciate it.

Thank you Jon, we appreciate your support.

No further questions.

All right. Thank you, Sylvia. And I want to thank everybody that listened and participated on the call, and we look forward to doing it with you next quarter.

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