Gerry Shreiber - President, CEO Dennis Moore - CFO Jerry Law - Assistant and SVP Bob Pape - SVP, Sales.

Jon Andersen - William Blair & Co Francesco Pellegrino - Sidoti & Company Jonathan Feeney - Janney Montgomery Scott.

Welcome to the J&J Snack Foods Fourth Quarter Earnings Conference Call. My name is Christine and I will be the operator for today's call. 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. I will now turn the call over to Mr. Gerry Shreiber.

You may begin..

Good morning and thank you, Christine. I'm Gerry Shreiber President and CEO and J&J Snack Foods and with me today is Dennis Moore, our CFO; Jerry Law, Senior Vice President and Assistant to me; Teddy Shepherd, our CED; and Bob Radano, our COO.

Also joining us by telephone in Canada is Bob Pape, our Senior Vice President of Sales and just entering in the room is Steve Taylor, J&J's [ph] National Accounts Manager for Sales and Products to Restaurant and Casual Dining. Let me begin with the obligatory statement.

The forward-looking statements contained herein are subject to certain risk and uncertainties that could cause actual 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 statements to reflect events or circumstances that arise after the date hereof. Results of operations, net sales increased 2% for the quarter and 6% for the year.

Without the sales timing benefit from the acquisition of Philly Swirl, which was bought in May [technical difficulty] sales were up 5% for the year. For the quarter, our net earnings decreased by 4% to $19.8 million or $1.05 a share from $22.2 million or $1.18 a share a year ago.

For the year, our net earnings decreased by 2% to $70.2 million or $3.73 a share from $71.8 million or $3.82 a share last year.

And after tax investment loss of $2.3 million or $0.12 a share in the quarter compared to an after tax investment income $768,000 or $0.04 a share in the last year's quarter and an after tax investment loss of $516,000 or $0.03 a share in the year compared to an after tax investment income of $2.8 million or $0.15 per share last year.

What I really said, there that we didn't do well with our investments and as they continue to decline, we sold them off so that we would reduce our exposure. Our EBITDA, that's earnings before interest taxes depreciation and amortization for the past 12 months was $150.3 million again, a new record.

Sales to food service customers increased 2% for the quarter and 4% for the year. Soft Pretzel sales however were down 2% for the quarter, but up 3% for the year. Italian ice and frozen juice bar and dessert sales increased 2% for the quarter and 13% for the year. Churros sales were up 9% in the quarter and 1% for the year.

Excluding sales to one restaurant team was discontinued selling our churros in August 2014. Churros sales increased 15% for the quarter at the year. Bakery sales were up 3% in the quarter and 7% for the year. Retail super markets, sales of products to retail supermarkets were down 9% in the quarter and up 10% [ph] for the year.

Excluding the sales timing benefit of the Philly Swirl acquisition sales were up 1% for the year. So our pretzel sales were down 3% for the quarter, but up 3% for the year. Sales of frozen juice bars and Italian ices were down 5% in the quarter.

For the year, without the sales timing benefit of the Philly Swirl acquisition sales of frozen juice bars and Italian ice were up 6%. Handheld product sales were down 27% in the quarter and down 11% for the year. ICEE and frozen beverages and related products sales were up 10% in the quarter and 10% for the year.

Beverage related sales alone were up 10% in the quarter and up 7% for the year, with gallons that is drinks, up 8% in our base ICEE business in the quarter and 7% for the year. Managed service revenue for others was up 6% in the quarter and 10% for the year.

Consolidated, gross profit as a percentage of sales in the quarter decreased to 31.7% from 32.4% last year. For the year, decreased to 30.8% from 31.3%.

The gross profit percentage in this year's quarter compared to last year was impacted by higher trade spending in retail supermarkets and inventory reserve adjustments in our ICEE frozen beverages and they were helped by improved product sales.

Product sales mix in our food service along with a beginning of improvements in manufacturing efficiencies which have been a slight drag over the past several quarters. Total operating expense as a percentage of sales decreased to 18.8% of 19.5% for last year's quarter with the increase mainly attributable to efficiencies and lower distribution cost.

Capital spending and cash flow, our cash and investment securities balance increased $10.1 million to the quarter and $240 million as we continually generate cash and excess to our needs. We continue to look for acquisition as a use of our cash.

Our capital spending was $13.9 million in the quarter as we continually invest in plant efficiencies and growing our business. We are presently estimating capital spending for 2016 to be $40 million or so, a drop of about $10 million from this past year.

Our investments generated before tax income of $1.2 million this year down from $4.5 million last year, as sales of our mutual fund investments, generated a realized loss of $4.1 million this year.

Although, we recognized losses as we decreased our investments in mutual funds, our overall return on the funds has been positive, since we first made the investments in October 2012. And although, we're not happy, we incurred these losses this year. We're nevertheless satisfied with our overall return.

We have invested the proceeds from the sales of these funds into preferred stock and corporate bonds which we plan to hold to call dates for maturity. A cash dividend of $0.36 a share was declared by our Board of Directors and paid on October 2015.

During the quarter, we purchased and retired 52,154 shares of our common stock at a cost of $5.9 million or $113 a share. Commentary, sales of soft pretzels and food service weakened as the year progressed.

Sales to convenient stores continued to be strong during the quarter, but sales to schools and restaurant chains were significantly from a year ago. Frozen juice and ices and food service were up slightly, due entirely to sales of whole fruit, Frozen Organic Juice Tubes to one customer.

In-house sales and food service continue to decline down 3% in the quarter and 10% for the year. Churros sales continue to be very strong, aided by sales of OREO churros which were introduced about a year ago. Sales of soft pretzels in our retail supermarket segment were relatively flat on a volume basis for the year, but down 2% for the quarter.

Although, our core SuperPretzel product sales were relatively strong in the quarter offset by declines in two newer items, our SuperPretzel, Bavaria Pretzel Bread and SuperPretzel roll product. Frozen juice and ICEE's were flat on a volume basis. Italian ice with sales of Luigi's Italian ice and weakness in some of our other brands.

In-house sales, retail super market were down 27% in the quarter. Sales dropped to one customer accounted for more than half on the decrease and lower sales of PATIO Burritos. And ICEE and frozen beverages all facets of the business continue to perform well.

Our estimated income tax rate was [technical difficulty] for the quarter this year and 34.8% last year. For the year increased to 37.3% from 35.4%. The higher rate this quarter caused the losses of sales of our mutual fund investments and not tax deductible. We're estimating a rate of about 36% to 36.5% in fiscal year 2016.

I thank you for your continued interest and support and today and I will turn it back to listen audience questions or comment..

Thank you. We will now begin the question-and-answer session [Operator Instructions] our first question comes from Jon Andersen. Please go ahead..

Wanted to ask a little bit about your thoughts at this point on fiscal 2016 sales. Obviously, there's been slowing in a couple of areas of the business that have been important top line drivers that I'm thinking soft pretzel business to restaurants and schools more recently.

There is some commentary in the press release around sales I think up slightly quarter-to-date. So, can you help us, just think about balance of the next year and what you kind of have on tap, whether it's new products or initiatives in certain business and how does that kind of all come together to a top line outlook for the next 12 months..

John, we got a lot of irons in the fire. And some of these irons in the fire are beginning to smoking hot. So we're cautiously optimistic not only about 2016 and beyond. Although, it's true that some of the segments slowed for one reason or another.

It's not like we'd lost any kind of significant market share and it's not like there is anything happening transformational. We had a slow quarter and that's about all I can say it about it this time and we're looking forward to getting back to those mid single-digit growths, we're used to..

Okay, but given that you're not kind of, it sounds like at least in the present. You're now kind of at the mid single-digit run rate that we're all used to. What would allow that to change whether it be, new leading new customers in the restaurant segment improvement in the handheld business.

I guess, what are some of the initiatives can you comment on those, how long they might take to get some traction?.

A year ago we introduced this OREO churros, which is starting to get some traction, but more recently we were approved to enter it into retail super markets with them being prefilled. We are very excited about that and we're getting acceptances across the table. We're not going to be hitting those things till January.

Bob Pape, you're on the phone, Bob?.

I'm Gerry..

Maybe you could tell us, why you're so bullish on the OREO Churros and on the new Pillsbury licenses that we have..

Yes, two new licensing we gained and had managed of branded products that are known throughout the country, throughout the world. OREO is an icon brand for the industry and with the Churro products and a lot of, what the trends are as far as product management's go. I think that, those items will perform very well.

And Pillsbury certainly is a brand that's trusted by consumer and a large portion of American consumers have Pillsbury products in their homes. So through some many dessert products that we're doing at Pillsbury, we expect that to perform very well, as well and we've gotten very good initial responses..

Okay..

Bob, is the guy. He's really a conservative guy. He's Campbell-trained, he's been with us 15 years and he runs a good tight ship. But we're expecting improved sales in the super market as well as continued improvements with our convenient store business.

How do we get best food restaurants and some of the other service sales of soft product back on to that tyre track, we're working on a lot of things. And it's not like we've lost it, but like I said, we have a lot of irons in the fire and we're about ready bring them out and stoke them..

Okay, thanks. Just from a gross margin standpoint. The margin in the quarter and for the year, were bit lower than 2014 and I kind of get that you've been working through some, you're manufacturing efficiency issues and I guess maybe volumes in some of the higher margin businesses have also effected gross, but.

How should we think about margin structure in 2016, given that you did say we're at the front end here of better efficiencies in some of your manufacturing plans.

I mean, its 2016 setting up as year where we could see margin improvement, how are you seeing that right now?.

We believe so, Jon. All right, we believe so, the new lines that we've been installing for close to a year in one of our nearby facilities are essentially done. They're being turned on, they're being tested. But put it this way, we're not going to see any lower margins..

Okay, last one from me.

Where are you now in terms of the sale of some of the investments that have generated some of the losses today? Are you done with that now, do you have some additional work to do?.

I think, I'll move it to Dennis..

Yes, we have sold off almost all of the mutual fund investments we have, we still have an unrealized loss of over $800,000 but we don't anticipate that we would be recognizing that, any time soon and maybe if we do that overtime.

We have reinvested in our funds, in instruments where we would expect to eventually redeem them at par from early corporate bonds and some other things.

One of the problems that we had with the investments that we are getting at of, is that returns on them were front ended and unfortunately we - according to the way you have to treat them for carrying purposes you weren't able to recognize losses as we went along. So over the period of the three years that we were in these mutual funds.

We generated income of roughly $10 million and then, before tax and now we have taken the losses these past two quarters. But going forward, hopefully we're not going to have same kind of issue in terms of reporting losses..

Thanks guys, good luck..

Thank you. Our next question comes from Francesco Pellegrino. Please go ahead, sir..

Just wanted to hit on the operational inefficiencies you talked about a bit and the one thing that I noticed was your food service operating margins were up about, it looks like 210 basis points. I'm just wondering, when I start thinking about the story. Are these operational inefficiencies, can we link them more towards products in certain segments.

How should I really go about it, approaching just thought process and modeling out, the story into, I guess fiscal 2016..

Dennis?.

The operating, inefficiencies that we've discussed and the improvements will all basically be in the food service segment..

If they were in the food service segment, then why were your operating margins up in service then..

You mean, this last quarter?.

Yes..

Well first of all, the inefficiencies that we had were leaning. When we actually started to see improvement in those areas. But our distribution cost especially when you looked at our five segments were down in the food service segment, which was a major driver of the improvement, not mix.

Well one of the major drivers of the improvements in the food service segment margins in this quarter..

And then when we look at frozen beverage and retail super markets, was this also distribution cost as well, that contributed to the lower operating margins mostly?.

No, it was primarily that's the, the improvement was in the food service segment..

Okay, but then I noticed in the fourth quarter operating margins and frozen beverage were down 340 basis points and then in retail super market operating margins were down 460 basis points, year-over-year..

Well in our retail super market business, the issue that we had primarily was, we had lower sales in handhelds, which accounted for a drop of half of the sales in the quarter and also our trade spending that we've reported was higher than what we would hope, so that was the other driver of the downward numbers in that segment.

In terms of the other, in terms of the beverages food portion of it, it was we needed to reserve for some cost inventory during the quarter..

Okay, so increases in trade spending for retail and then increase in our parts inventory for the frozen beverage [indiscernible] results. Okay..

And both of those issues, are not issues that we expect that will move forward into the New Year..

Okay, that was helpful. You also mentioned in food service, you faced a bit about headwinds with some sales into schools were these due to menu changes.

Could you give us a little bit of color on those difficulties?.

It was combination of unrelated factors. There were changes in menu, last year we had a big, big selling. Big, big, buying and we still are facing strict restrictions on our core products soft pretzels in there, that they're being not allowed to be sold or restricted to the other product that we're selling there.

The whole wheat and the 51% whole grain in there, they're being accepted as far as an item, but the kids are not buying as many of them. There is big concerted effort by food service group, to look to sell our products the other avenues in the school system including the fund raising and the bands and the stadiums..

So if kids are sort of pushing back against their whole grain pretzel, what type of alternative would they have for purchases at schools, as I guess the only alternative I could see would may be bringing lunch which I don't think is a great alternative for majority..

Leafy spinach to carrots right then the school food service and the educational channel has been somewhat struggling with establishing criteria, some of them really rigid rules in there.

I think, it's too our credit that we've enabled to comply with most of this and we have a lot of products in place that do meet the standards and we've done everything nearly possible to improve the taste, so that the kids will not - the children will not only be eating a product that meets the new FDA guidelines but they'll be smiling and enjoying it too..

Okay, that was helpful. One thinking I know that you talked a bit about on the last conference call was just, where egg prices are, I know that you were able to push through price increases during the quarter.

Are you currently on the market for liquid egg products or have you locked yourself into some longer term price contracts for egg going forward?.

We're pretty much buying spot. Let me turn that to Jerry Law. But he's been struggling with the egg part..

We continue to buy spot, until we see that market [technical difficulty]..

Or close to normal..

Okay. Keeping with the egg category. Any feedback on how Mary B's is performing at retail? The new product your breakfast sandwich..

It's still too early, it's a good product. They can sort of be, it's not a major boost in the arm for handheld, [indiscernible] helping them. Product tastes great, looks good. We got Walmart and others in there that are going from test to beyond. So I think we'll have more to say on that on the next quarters to come..

All right and last question from me is. First, here in the North East, we've had some pretty good weather when I think about last year.

I think it actually liked snowed on Halloween, so we have warmer weather now, I think this would sort of allow you to have greater frozen beverage sales trickling into maybe your first quarter, what other products should we see perform well in the warmer weather index first quarter as compared to be maybe a year earlier? And if you want to talk about, maybe how it will be on sort of segments or products..

Francesco, we don't sell candy..

Right..

Right..

But obviously, our ICEE business which includes ICEE, Arctic Blast, Slush Puppie and Paradise. They benefit from warm weather, but they really benefit when school's around. So when school's around and they have children out in there, we get the benefit of not only weather but the kids being out there.

What helped us last year and throughout the year, what was the movie theatre business there were a lot of let's say exciting movies for children and adults in there and we got a good job. Our ICEE group has done a good job over the years, not only getting ICEE into the concession stand in the theatre which is no small task, but featuring in there.

So there are times even when the weather is chilling, snowy and rainy and we could see the benefit of ICEE sales in movie theatres..

Any other products that might have a better correlation to weather, outside of just maybe other events like stronger movie theatre performances.

Is there anything to really latch onto or am I just sort of grabbing at nothing?.

I think nothing that I could comment..

Okay, that's it for me. Thanks again guys..

Thank you. Our last question comes from Jonathan Feeney. Please go ahead..

Forgive me for asking a very granular question, but it's been critical to your business. When look at the communication you've given us about food service soft pretzels in chains. I'm trying to understand the timing, obviously it was a very tough fourth quarter.

I know they're very menu dependent item and you had a tremendous amount of success growing those, but the full try to that is, it's lumpy and one or two chains decided to not putting your pretzels on the menu, that has draconian implications for that.

So my first question would be like, where do you stand with that sort of menu placement and do you feel good about that chain store and just generally restaurant food service soft pretzel business next year..

Well, we feel good about the segment and again I got to go back and look at that segment five years ago, it was blank. Our people have done a great job getting our product out there, getting it tested. Making specialized product for the menu here. They do occasionally and this happens all the time, they will suffer from menu fatigue.

And as the results, sales will slip or they'll be discontinued and then they'll come back. But overall, we feel cautiously optimistic of this segment and we don't expect to have further declines..

That's helpful, thanks and on the handheld business. I mean this was, an interesting business you bought out of ConAgra. It's an interesting - had a lot of - pretty decent initial success with it.

It seems incredibly on trend from, you look at the proliferation of anything that's protein heavy and if it's convenience to takeaway channel, but seems like very on trend.

Why do you think, has that struggled and what's the kind of future for that handheld business because this is a significant percentage decline, this quarter in the face, we've seen some pretty good trends for that type of product in those channel..

Well you raised a good point. When we bought it. It was already spiralling down in sales and it's only been recently that we have made major R&D and product improvement efforts on there and we're seeing some of the first benefits of this in the past six months or so. This product it's going out under the label [technical difficulty] and biscuit melts.

We're hopeful of those product. We've also been doing, we've been private labelling some of - companies like Nutrisystem and others in there and these products will be hitting in January.

But you're right, we thought the product and that whole protein wrapped category was on trend and it allowed us to take our pretzel products and fit it into, this category. We're looking at others who're doing it well. We've also been shadowed to some degree by Nestle who has struggled with.

But we expect to make improvements in the handheld product range over the next year..

Last question, Gerry. About, you mentioned if you look at acquisition world and specifically. I think in that, related to that protein insight. I mean everything that's on fire, in the convenient store where it seems like you've had a lot of your success in the past.

It seems to be protein driven and it is and a lot of companies out there selling fried chicken or whatever it is, I mean. It was a particular, I mean how are you feeling about the acquisition environment right now and something in that sort of utilizing that ConAgra handheld insight, trying to address that trend.

Where would that be on your priority list?.

Jerry Law, I'm going to give this one to you..

We continue to adjust transit handheld with other products, with melt products, ICEE and innovate them and connect them with our new licenses [indiscernible] as well. But we continue to [technical difficulty].

Great, okay. Well, thank you very much guys..

Thank you. [Operator Instructions] we have no further questions at this time..

Well, I want to thank everybody for joining our quarter conference call. Although we had, in essence and okay quarter and we're not happy with the results and we're looking forward to improving next quarter and beyond. Thank you..

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