Gerard Law - SVP Marjorie Roshkoff - In-House Counsel Dennis Moore - SVP, CFO, Treasurer, Secretary, Principal Accounting Officer & Director Daniel Fachner - President, ICEE Company Gerald Shreiber - Founder, Chairman, President & CEO.

Michael Gallo - CL King & Associates Jonathan Feeney - Consumer Edge Research Brian Rafn - Morgan Dempsey Capital Management Robert Costello - Costello Asset Management Francesco Pellegrino - Sidoti & Company Charles Carter - Ceredex Value Advisors Akshay Jagdale - Jefferies LLC.

Welcome to the J&J Snack Foods First Quarter Earnings Conference Call. My name is Maddie, and I will be your operator for today's call. [Operator Instructions]..

Great, okay. Good morning. This is Gerry Shreiber, and welcome to our first quarter conference call. With me today is Bob Radano, our COO; Dennis Moore, our Senior Vice President of Finance and CFO; Gerry Law, our Senior Vice President and my Special Assistant; and Marjorie Schreiber Roshkoff, what are you Marjorie? Marjorie is our....

In-house counsel..

In-house counsel. Let me 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 the forward-looking 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, that's today. 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, we had another good quarter. Net sales increased 18% for the quarter. Excluding sales from Hill & Valley acquired in January 2017, an ICEE distributor located in the Southeast acquired in the summer of 2017 and Labriola Bakery which was acquired in August of 2017, sales increased approximately 7% for the quarter.

Nevertheless, a healthy increase, notwithstanding the acquisitions which were later. Our EBITDA for the past 12 months once again set a record, $169.5 million. Food Service, without Hill & Valley and Labriola, sales were up 6% for the quarter. Sales to Food Service customers increased 21% for the quarter.

Our sales of 6% without Hill & Valley and Labriola was due to increased sales of soft pretzels, which were up 14%. Increased sales of handhelds, which were up 37% and increased sales of Churros and funnel cake. Sales of frozen juices and ices were down 4% for the quarter, and bakery sales, without Hill & Valley, were essentially flat.

Retail, grocery supermarkets. Sales of product to the grocery supermarkets were up 7% for the quarter. Soft pretzel sales alone were up 18% for the quarter. And sales of frozen juice and Italian ices were down 1%. Handheld sales were down 12% for the quarter. ICEE and frozen beverages, which of course includes Arctic Blast and Slush Puppie.

Frozen beverage and related product sales were up 12% in the quarter, 10% without the sales of the acquired ICEE distributor. Beverage-related sales alone were up 21% in the quarter, 19% without the acquired ICEE distributor, with gallon sales up a healthy 15% in our base ICEE business.

Service revenue for others, which has grown consistently and constantly, was up 5%. Consolidating, gross profit as a percentage of sales was 27.63% in the three-month period this year and 29.21% last year. About 20% of the gross profit percentage decrease in the quarter resulted from lower gross profit percentage of the Hill & Valley business.

The balance of the decrease was caused by higher costs for our payroll, insurances, inefficiencies in our recently acquired Labriola production facility, compounded somewhat by the integration of products previously manufactured at other facilities, product mix changes and significantly lower volume concentrated in specific facilities.

And also, shutdown costs of our Chambersburg, Pennsylvania production facility, which has now been consolidated and integrated into Labriola, and somewhat higher ingredients costs. We had no benefit of pricing to offset these higher costs in the quarter.

Operating income in our Food Service segment decreased from $17 million to $15,900,000 in the quarter, all for the reasons just outlined. Total operating expenses as a percentage of sales was 19.6% in the quarter, down a full point from last year's 20.6%.

The decrease was primarily related to lower media spending in our supermarket business and lower marketing expenses of the acquired Hill & Valley and Labriola business. Capital spending and cash flow. Our cash and investment securities balance of $243 million was up $2 million from our September year-end.

We continue to look for acquisitions as a use of our cash. $125 million of our investments are in corporate bonds with a yield to maturity of 2.2%. Our capital spending was $15 million in the quarter as we continue to invest in plant, efficiencies and growing our business.

One of the investments in growing our business I just did a tour of about a half an hour ago, and it is online, in time and going to be increase in the capacity of our churro production by almost 300% when done.

We estimate our spending for the year to be about $50 million as several onetime manufacturing projects have been or will shortly be completed. A cash dividend of $0.45 a share was declared by our Board of Directors and paid on January 4, 2018. This represent a 7.1% increase in the dividend.

We did not buyback any shares of our stock during the quarter. Commentary, sales of our Food Service products improved this quarter with significant increased sales of soft pretzels in restaurants and movie theaters, funnel cakes in schools and handhelds to a handful of customers.

Bakery sales, without Hill & Valley were essentially flat this quarter as sales to private label businesses leveled off and sales to schools were down in the quarter. Sales of our new Brauhaus pretzel have been very encouraging.

Handheld sales were up a healthy 37% for the quarter as we have had strong increases to a handful of customers, both existing and new. Hill & Valley sales, which was acquired about a year ago, were $55 million in its first full year with us with $2 million of operating income.

Soft pretzel sales in our grocery and supermarket segment were up a strong 18% for the quarter, primarily because of continued increase of sales and the recently licensed Auntie Anne's pretzels.

Operating income was up very strong, $1.5 million, because of the increased soft pretzel sales and because we reduced media spending and couponing, primarily related to Oreo Churros and Pillsbury dessert products. These products have not performed as well as we had projected.

Sales in our frozen beverage segment were up a very strong 10% for the quarter, banking off the benefit of sales of the acquired ICEE distributor. Service revenue was up 5% for the quarter as this business continues its sales growth. Machine sales were down 10% in the quarter, although it may follow no significant guides.

Operating income was up a very strong $1.5 million due to increased beverage sales growth. Overall, consolidated operating income in the quarter increased $1.9 million from a year ago. We have reported an overall income tax benefit this quarter due to the remeasurement of deferred tax liabilities based on a lower federal tax rate of 21%.

On a going forward basis, we expect an effective tax rate of 28% to 29% for the last three quarters fiscal year 2018 and 26% to 27% for our fiscal year 2019. We continue to invest in the long term for the business with both efficiencies in the plants and new products and R&D.

I want to thank you for your continued interest, and now turn this back to our audience at large..

[Operator Instructions]. We do have a question on the line from Michael Gallo..

I was wondering, Gerry, or perhaps, Dennis, if you can dimensionalize some of the various issues you highlighted in terms of the gross margin? I know you mentioned some of them were addressed.

But between Labriola, Chambersburg ingredient costs, what's worked out or not worked out? And what are your plans for pricing in 2018?.

Well, the plant in Chambersburg was part of an acquisition that dates back perhaps seven years ago and that has worked well for us. We decided to close the plant because it wasn't -- we needed more efficiency and capacity. So we closed it very recently, took care of the required closing costs, both with employees and utilities and whatnot.

And we moved its products, both to Pennsauken and to our Chicago facility, which are much more efficient. We took a little short-term hit for some long-term gains, and we project that these will work out well..

How much was the cost that kind of ran through for Chambersburg?.

It's about $700,000 between Chambersburg and Labriola for onetime costs, integrating them, getting them up and running and for the most part over the [indiscernible]..

Okay, that's helpful. And then just the plan for pricing. I know you've had, obviously, a number of increases, freight and alike, obviously, industry-wide issues.

But what are your plans for pricing going forward?.

So far, we've absorbed most if not all of the cost increases, but the plan is to -- almost beginning with the effective date coming in February and March that we will pass these on appropriately..

And our next question comes from Francesco Pellegrino. We can just go on to our next question. So next we have Jonathan Feeney..

Two questions this morning. First, did I just hear you right in your remarks that you're expanding churro production 300 -- capacity, sorry, not production, capacity 300%? And if so, is that related to some known business wins you have? And I have one other after that..

It's related to the known growth we've experienced over the past five years. And as we continue to introduce products and look at our costs, we look at new technology, both in existing equipment and some equipment that we've developed.

And this was a planned project that goes back somewhat a year ago?.

About a year and it's primarily -- we increased the capacity through new technology, but the lines that we were rolling were essentially out of capacity. So when we built new, we increased our capacity for the future..

I got you. That's helpful. Actually two more, if I might. On the handhelds business, maybe this is more of a philosophical question but, I mean, you have exponentially expanded the sales of this business.

And according to your disclosures, you're not even -- it doesn't even appear you're close to the capacity utilization you got in those two -- the capacity you got in those two facilities in 2011.

I'm wondering, how is it you went about -- is it private label that's driving that business? And how is it that you went about selling and distributing products that are essentially the same and you're doing in a quarter almost what the former owners were doing in a year.

How is it you're so good at finding that demand, Gerry?.

I don't know if we're so good, but we've been driving our sales team. And Bob Pape is on this call. He's in Minnesota remotely. But we make a good product and we're constantly -- our R&D efforts over the last five years has improved exponentially too. And part of it is the rallying, hey, look at what we can do. Can you do it this year? We can do this.

So then we got to send out the message and we hit on a few things. Now it's a product that is not quite a core product, but all the things that we do to make a core product, including some technology like twisters in there, we're trying to see if we can complement these handhelds.

And that's a business, if you remember, we acquired along with a couple of efficient plants from ConAgra about six years ago. And we've been kind of like, I might say, goosing ourselves, why can't we do better? And it's starting to bear fruit in Food Service. And we'll let Bob Pape comment later on, on some of the issues we had in grocery.

But we're pleased with some parts of that business and we're dedicated to continuing to increase..

Any comment on what role private label growth played in that?.

Significantly, because we'd a couple of big hits in the past two years..

Co-manufactured more so than private label and....

And it gets down to it that -- and I've said this before, we're in niches. We are real good producers and part of that has spread. Part of that reputation has spread..

That's really helpful. And finally, just a kind of maybe a field question for you, Gerry. You sold a lot more -- your same-store sales of soft pretzels were very significant to date. I'm wondering if you could parse that between how much of that is your distribution gains? You got new customers.

And how much of that is just like-for-like sales in places like theaters that are economically sensitive? I'm wondering when you look at your business today, pretzels specifically, and the business more broadly, how much of this is just the economy doing really, really well in these kind of Food Service volumes being very, very strong as opposed to distribution wins or something specific to J&J Snack Foods?.

Well, it's part and partial to everything you just said. Our theater business was strong this quarter, just like it was weak a year ago. Good movies help, but also improved distribution and marketing aids help. Our new product that we, I guess, developed about nine months ago, Brauhaus, that's done well in the field.

And now we're trying to complement that with our other soft pretzel extensions. And we think it's very helpful. All the while, we've got to content with things like the economy. Suddenly, one of our larger customers decided to shut 10% of its stores, which will affect our beverage business, and to some degree, our soft pretzel business.

But our people are equal to the test and they're constantly being driven and challenged. And so far, I'm both pleased and proud that it's working out..

Our next question comes from Brian Rafn..

Question for Dennis. What are you guys seeing on the commodity inflation side? Eggs, whole wheat, sugar, shortening.

What are you seeing kind of maybe the next year out?.

Well, we're not seeing any kind of lower pricing like we did two years ago. But let me give it to Dennis, who studies this on a more direct basis..

Well, essentially what Gerry says is correct and we are seeing some mild inflation in the areas that you mentioned. So we would expect to have some impact -- well, we had some impact this quarter and we would expect to have continuing impact going forward..

Yes, if you're seeing kind of a trough or value, does that force you guys to do any forward buying or stockpiling? Or is it just the delta changes and that the magnitude isn't enough to do that?.

We generally would buyout in advance six months to a year on many of our larger ingredient costs -- our ingredients and sometimes a little bit longer depending. But yes, we tend to try to take advantage of depth in the market as they happen..

Yes. Got you. Dennis, and everyone is going to be diving all over this tax with the Tax Act. For you guys going forward, I think Gerry said that you're looking at kind of a 26% to 27% next year run rate versus the statutory roughly 21%.

What's the spread for you guys?.

I'm not sure what the question is, but we pay two taxes. We pay federal taxes and we pay state taxes. Our state taxes....

Okay. All right. So it's just the state. All right, okay. I just wanted color on that.

And then, the CapEx, you said $50 million, where is that kind of being spread around?.

It would be roughly half and half between our frozen beverages business and our Food Service business..

Is that square footage or just machinery?.

It's really machinery. We are not building any new plants. And we've taken a look at all of our plant capacity and we closed one plant, which was in the plans in the offing and we don't plan to close any others..

Okay. Gerry, you made a comment, Hill & Valley, I think at $55 million. I think you bought it. The run rate was about $45 million in sales. Nice $10 million incremental.

Was that all organic to Hill & Valley or were you loading other products or recipes in there?.

It was all organic..

All organic. Okay..

The management at the Hill & Valley and they have stayed on. And we're pleased with that..

Okay. Okay. When you look at your purchase of Labriola, you added a new -- I think, it says in your notes, prebaked breads and rolls and soft pretzels.

Are these distinguishly different recipes than what you guys have? And do you bring other products into that and look at Labriola is just the geographic manufacturing staging area or is it really new recipes, new flavors, new product lines?.

Labriola was a good producer of specialty soft pretzels and breads. We looked at it perhaps some five or six years ago and we were part of the auction. We didn't get it. It went to others, including some private equity people, perhaps for 30% more than we thought it was worth.

Turned out, five years later, they put it up for sale and we looked at it again. And we wound up acquiring it for less than what we had offered five or six years ago. And then our challenge is, how do we make it better. It was put under Gerry Law's group.

And ultimately, after a 60 or 90 day study, we decided to shift production from a plant in Pennsylvania that we closed, and also from Oregon. So we will benefit probably in quarter three and four of this year with all the moves that we made..

Okay.

So would you also bring product or recipes or the type of things that Labriola maybe -- had unique to their business? Would you also move that to your other factories or you keep that underneath their footprint?.

Still looking at the possibilities. In fact, I mentioned before, we haven't built any new plants in several years and we're looking to maximize the efficiencies at our larger facilities, including Pennsauken, and now Labriola's included in that..

Got it. I'll just ask one more and get in line.

Any developments in the C stores, the convenience stores, the dollar stores, any product launches or any thing?.

All of our products are now being introduced and generally reviewed in the C store industry, and that's been part for growth..

And our next question comes from Robert Costello..

Gerry, Kroger, sale of the stores that they talked about, is that a benefit or does it hurt you?.

I'm sorry. I didn't hear the question..

The sale that Kroger is putting up, their C Stores up for sale. They have like 800 stores..

You said the customer is closing 10% of their stores..

I'm sorry. Bob, I understand what you asked. All right? And I'm trying -- I said a customer is closing 10% of its stores. I didn't....

No. I'm not talking about that.

I'm saying, the sale of Kroger stores, would that be a benefit to you in the future that you could get new business? Or is that someone that you already sell to right now?.

We're selling....

With ICEE and whatnot..

We're selling to Kroger C Stores now. And after it all shakes out, I don't know who's going to buy it or when it's going to close. But we will be on -- as close to being on top of that..

Okay.

The profitability you mentioned in your speech on the baking business, Labriola, you said quarter three or quarter four, you should see the benefits of the restructuring?.

That would be our quarter three or quarter four, which would run from April through September. Keep in mind, we just acquired Labriola in August. So it was September till October we started to make year-end plans in there. And I got a little bit of cushion in that.

But suffice to say, the benefits of distribution and integration and of production efficiencies will come in the second half of the year..

Great.

So when you're done with the changes, do you expect it to be your -- the average of the group or better? What are your goals for what you're doing?.

We expect it to be more in line with the benefits that we're getting out of the bigger production facilities, including Pennsauken and Vernon, which would be a strong improvement for them..

Last question. You mentioned the gallon increase at ICEE.

Could you be a little more specific ex the acquisition, what's driving it?.

We got a good team with good management and they're driven to grow that business every year. And you know what? When you look at ICEE, not just its recent history but its long-term history, it gets better and better and better..

And we do have Francesco on the line again..

Jumping right in. I wanted to ask you a question about the frozen beverage segment. Because if you get this nice performance in the first quarter, not really sure what the read-through is for the rest of the year. Because it's rather lumpy business, depending upon when beverage machine sales happen. When gallon sales occur.

There's no real way to extrapolate that data going forward.

And I guess, just looking at the segment from a longer time frame, is this a segment that can sort of return to operating margins in the low double digits, like it was five years ago?.

Well, I'm going defer the answer to Dan Fachner who runs that group for us. And Dan is on the other line remotely in ICEE's home base in Ontario. Dan, you want to tackle that? I think you guys have met before when we were racing through New York..

I think we did too. I am actually remote in -- at an airport. And so hopefully, the connection is good. But our future -- I think, this year looks really bright. The first quarter was strong, some of that driven by the theater industry. And the theater industry had a good first quarter.

I think last year was an off year for them and this year will be a strong here. And I expect our year to follow that trend..

So, Dan, are you talking about a rebound in maybe the customer base? Or I would have thought that as you acquire more ICEE franchisees, that the platform to sort of leverage the existing business model would create greater operational synergies or greater operating leverage to sort of drive improved operating margins?.

It does improve our margin somewhat. But our business -- we have branches all across the country. And so as you buy one of those operating branches, you're able to consolidate some of that, but you still need all that service and delivery personnel to be able to make the program work.

And so there's not as probably as much infrastructure consolidation as you might think. It's good for us as we buy the other ICEE distributors. It helps our licensing piece of our business to be able to grow and grow in those areas. But there's not as much profit consolidation as you might think..

It's kind of a question of moving other cows out of the pasture and consolidating them, but there are efficiencies. And sometimes we want to be careful we don't get raw bone deep in the efficiencies that it affects our service or other distribution..

Got it. Okay. Gerry, could you go over that churro manufacturing efficiencies increasing utilization by 300%.

Were you visiting Bellmawr, Colton or Vernon, when you were seeing this first off?.

Well, we put a new line in here in Pennsauken, but combination of effects of our production increase came from our experience with Colton, Bellmawr and Vernon..

My question for you then is, why would you be adding another churro line in Pennsauken if you have your Colton and Vernon manufacturing facilities currently operating each below 50%?.

Well, I don't know if they're below 50% in churros, but we added because we looked at our long-term sales projections. We looked at our -- and we've been making churros here for 15 or 20 years, but this is improved technology, improved production equipment.

And we kind of projected out -- and don't quote me on this, but if we project out that our overall churro business is going to grow, in essence, perhaps double over the next five or six years, but there'll be lower cost..

Francesco, the new lines that we're putting in, we've improved our efficiencies. We'll have a lower cost. The products are coming out of our Bellmawr plant into Pennsauken..

And it's going to be less distribution cost in the future..

And the capacity comment you had, that's across the whole plant. Not necessarily lines inside of a plant -- the churro line..

Okay.

But isn't Colton just churros?.

Yes..

Okay.

And that operates under a 50% utilization?.

No..

Not this..

Okay. I thought that's what the 10-K said, but I won't split hairs on that.

So then based upon what you're doing with the new churro line, is this a bullish read-through for what's going to be happening with churros over the next four to eight quarters?.

Well, give us a couple of....

If you only got 1% churro growth in the current quarter?.

Only in this quarter. And part of that was due to capacities and it's trying to avoid excess logistics..

Yes, and our East Coast line was at capacity. We put a line in to reduce our cost and improve our efficiencies. And that resulted in something that had much more capacity than we currently need. But we're always building for the future..

Okay. I guess, just sticking with Gerry Law for a minute. Just bigger picture, right now, 1/3 of your existing manufacturing facilities operate with a utilization rate below 50%. 80% of your manufacturing facilities operate with utilization rates below 70%.

Gerry Schreiber just said on the call that you guys aren't really looking to consolidate any more existing facilities. But besides just getting greater volume into these underutilized facilities, it just seems as if you guys have a great opportunity, potentially, to sort of consolidate facilities to drive greater manufacturing leverage.

And it just seems as if that's not a route you guys are going to generally take. So outside of that, how do we get greater leverage outside of volume growth from these facilities, given all the CapEx spending that has occurred over the past few years improved....

The CapEx spending -- some of the capacity growth that we have. We build lines. We don't build it for today's production. We build it for what we're going to need five or seven years down the road as well. So we don't have to continue to invest. And this past quarter, we closed Chambersburg, as we look at our capacities.

And we were comfortable with the capacity we have. Anything beyond about 80% is tough to manage from a scheduling perspective..

We still have to run the lines and manage the lines. You still have to get them a day off and a weekend for worship or for family. And so it becomes a balance..

It totally make sense, because as I understand the inquisitive nature of your business, how you drive revenue growth, earnings growth through acquisitions, make these types of tasks or reviews of these facilities even harder as when you acquire a business, you acquire their manufacturing facility.

So it's sort of just magnifies the underutilization for certain facilities. So it just seems as if it's an ongoing or perpetual task that you need to do. I don't think it's easy by any means, but....

You're right on all points in there. But sometimes we acquire companies or plants or facilities because of great product extensions. But once in a while, they are dogs. And when I say they're dogs, they're dogs compared to our modern state of technology.

And we want to either improve them like we've done with some or close them like we did in a plant in California some seven or eight years ago, and like we recently did in Chambersburg. All of these plants and the people thereof contributed to us.

We take great pains when we see some of the talent that we have at these facilities to extend them at another plant instead of just shutting it down. And Chambersburg is a great example of that. That's an old industrial area. The plant had been turned over three or four times before we acquired it about eight or nine years ago.

It served a useful and healthy purpose for us. And we moved the products into existing facilities, where we won't lose any efficiencies. And we are kind of placing the people, so that they have a continuous job growth with us..

Okay. We have another question on the line from Charlie Carter..

Just a couple quick ones. So I saw a press release yesterday that Sonic Drive-in is going to do a limited time offer of pretzels.

Can you speak to whether that's your product?.

Well, if you asked me that question last week, I would probably have to say, no comment, but since you're asking me today, I could tell you that, that is a product that we developed with them. We ran some trials two months ago. We attacked some issues. And I'm both pleased and proud to say that it was Gerry Law and his group.

That is our product, and I think they're doing commercialization of that and enter the stores like today, yesterday. And according to projections, there's not ours, it will play a significant part in our next quarter's business. And we got there, production wise and efficiency wise and in quality wise, at a record-breaking pace..

That's great.

And then the store closures you mentioned, that's a prominent club store operator?.

You're exactly right. And I don't want to tell you who it is, but their name begins with an S..

And we do have Brian Rafn on the line again..

Yes, Gerry, you talked a little about Labriola and Hill & Valley. Give us just maybe a snapshot kind of some of the acquisitions that you had in the past. New York Pretzel, Kim & Scott's, Daddy Ray's, Philly Swirl.

How are these doing?.

They're all doing well. They're all contributing to our sales and our future. New York Pretzel was an institution. They were around for 70 years. They were big when we were just getting started. We went through many at war with them.

And when I say, many at war -- and ultimately, we acquired them about five years ago and retained the elder statesmen there, Ronnie Orfinger who is -- that's his life. He gets in there at five in the morning. He doesn't leave till the afternoon. He runs that plant like it was his own.

And he's a valuable part of the integration and we continue to benefit from that. That gave us a stronger position in that New York corridor.

You mentioned a couple of other plants in there?.

Yes, Daddy Ray's, Philly Swirl, Kim & Scott's, anything on them?.

Daddy Ray's, Gerry Law and I visited them about seven years ago because they were involved in making fig and fruit bars. And maybe it was eight years ago, but we were making fig bars for Paul Newman, may he rest in peace. It was a very small business. And we heard about this little company that was in outside of St.

Louis in a small town named Moscow Mills. We visited with them after being stopped at the door for about 45 minutes to an hour. They invited us in. That was about a $15 million company. We made a quick deal with a handshake and we acquired it, which included some valuable real estate right next door, industrial use.

And its sales have grown from about $15 million, $16 million, Dennis?.

Yes..

To where it's now pushing $70 million this year. It's a different part of the business. It doesn't quite have the overall margins that we have perhaps, with some of our other products. But it's contributed nicely..

All right.

Your mic's still open?.

Yes. You're still up....

Yes. Okay. Let me ask you, Gerry, you guys talked about R&D and you're always developing new flavors and recipes and that.

Is that domiciled at each plant and at the culture of each one of your acquisitions? Or is that more of a centralized R&D effort coming out of Pennsauken?.

I'm going to give that to Gerry Law because what we had originally in Pennsauken has now grown where it feeds -- we're like the centralized location, but we have feeder plants all over.

So Gerry?.

The plants all have R&D locally. That allows us to be fast-to-market and products are readily commercial. And so that is where it's going to stay out in the field where we could be quick and agile..

Yes.

When you look at something that might be a local flavor and your local seasoning, can you migrate that across the country or is it really kind of a regional or local?.

We do both. Sometimes we can get it across the country, but the rest of the country's got to like the stuff do..

Yes. Yes. Okay. Let me ask with Amazon taking on Whole Foods and some of these chaotic things going on in the grocery store.

As you see consolidations, how has that effected shelf space and imports, the ability to bring in new products? How disruptive is that, what's going on in the grocery industry?.

We haven't seen much of that in our business as far..

But we're in the process of looking at how we can improve our e-commerce thoughts, so that we're able to provide the answers or at least both to ourselves and to our customer base..

Okay. I'll just ask, in the past you guys have done some kind of co-branding, co-licensing, like Barq's Root Beer and you had the Minute Maid lemonade.

What's going on in that whole side? Is that an area of your business that is diminished or is that something you're focusing on? Or how are those kind of cobranded deals going? You had the Oreo, Pillsbury, the churro thing, just kind of May be comment..

Continue to look at licensing as a way to extend our operations and leverage our capabilities. We just signed on for Sour Patch and the acceptance has been pretty good so far, the preliminary acceptance. And this is a frozen novelty that we're going to be manufacturing..

Let me, I ask you one more and I'll get off. What are you guys from the standpoint -- you bought the business for $70,000 out of bankruptcy eons ago.

What is your total pretzel -- do you guys have a measurement in volume or pounds? What is J&J do on an annual basis in total pretzels?.

About 22% of our total sales, which is $1,100,000,000 comes from pretzels. And I want to correct you, the price I paid for that business in September of 1971 was $72,100. .

This is Akshay. So Gerry, I wanted to talk a little bit about the sales growth. Obviously, outstanding performance. I think it was 7% organic growth if I did my math correctly. So the sales meetings that you have every now and then to rally the troops seem to be working.

Is that fair and can you give us a little more color on the soft pretzel growth? It looks like the Brauhaus, am I saying that right? That might be the new product that's sort of driving that, if I'm reading it correctly? But just a little more color on the top line trend and then I have a couple of follow-ups..

Well, pretzel growth was greatly improved in the past year. Brauhaus was part of that. But just like years ago, we made pretzels only under the SUPERPRETZEL brand, and then we added a Bavarian brand. And then we added Bakers Best through acquisition. But overall, pretzel growth has been pretty good.

And we're going to continue to not push the limits but build the mountains for that product, so that we can continue to be the captain of that industry. Churro growth has also come the same way. And let us not forget ICEE. ICEE was approximately a, Dennis, what $12 million, $13 million business when we required it in 1987.

It's now running at $250 million-plus..

Right. So I guess, what I'm trying to get at is how sustainable is this growth? So 20% obviously, it wouldn't be prudent to model 20% growth for the rest of the year even. But can you give us a sense -- I mean, it tends to be a little choppy with the channels and the customers that you have.

But how sustainable is this sort of strong double-digit growth, in your opinion, on soft pretzels?.

Well, we were really projecting organic growth of mid-single digits, all right? And every once in a while, there'll be an acquisition possibility. Some years there have been as many as two or three, some years none. This past year, we did a couple of small ones that fit in nicely.

So I could tell you that every effort from every senior manager complemented by the marketing and sales growth are continually quarter-by-quarter, month-by-month, working directly to that. And when we have these meetings and we would set these goals and review them, we're not horsing around.

We're generally working towards whatever we can do to continue to grow this company..

Okay. And then just on profitability, so quite a different story than top line. So maybe you need to have annual or semiannual or every two-year operational meeting going forward, but what's going on--.

I don't want to -- Akshay that we're having meeting after meeting. They get the message and our profitability has grown significantly over the years. There are still some gaps that we can improve that and we're going to continue to work on that..

Yes, what I'm specifically referring to is, in the last -- each of the last four quarters, the profitability has been -- has not been great, especially relative to what's been going on, on the top line where things are accelerating. And ever since I've followed your company, I mean, that has never been an issue until recently, right, profitability.

So can you take a step back and maybe give us a sense as to how you're thinking about it? Is this something structural that needs to change more broadly with some deeper sort of measures on cost? Or is it just some transitory issues? I mean, I know you've discussed some moving product from one plant to another.

But you've got some issues with volume in bakery. There's some mix issues overall in your product portfolio that are hampering margins related to acquisitions.

So can you just take a step back and long-term view, why is it that the last four quarters have shown unusual trend on profitability that we've never seen before? And what does that mean going forward?.

Well, part of that has been product mix. And you're right part, part of it was a shifting of logistics in here. But it's something that we have targeted for multiple efforts and projects for the next year..

And Akshay, I mean, you'll see that's part of the reason we stepped up our CapEx. Last year was to focus on improving our margins and efficiencies. Getting these projects online take some effort when they come up and we expect them shortly to start giving us some growth here.

But it's been a focus on the gross margin to be able to try to improve it through operational efficiencies and synergies between the plants..

And it goes all the way through sales and allowances as we maintain our commitment to our customers and -- without the benefit of high price increases..

I mean, last year we had no price. There was no price in the mix. This year we're working harder to take price and be effective on the street and we announced our price increase and we're moving forward..

Okay. Just one last one. More broadly on capital allocation, maybe one for Dennis here.

With the change in, obviously, the tax legislation here and the tax rate going down, how are you thinking more broadly about sort of returns on capital and how that informs your capital allocation decisions? I mean, I'm assuming the returns on everything related to cash have gone up because of this, but can you give us a sense of how you're thinking outside of acquisitions?.

Well, the primary use of our cash -- we believe the best use of our cash would be acquisitions. Keep in mind, and even though it doesn't take away, we also have a rather -- we're looking to keep our employees and we're looking to expand their benefit for themselves and their families.

We don't have to come out with an annual dollar or a $1,000 bonus to the employees because of the tax benefit. I've read and I -- bemused that a lot of the bigger companies are rewarding their employees with either a raise or a onetime payment.

We do that all the time, all right? Our employees are getting fairly paid and they have incentive goals, which would also increase their annual compensation. So we've done all these things consistently without having to have a major reorg and whatnot.

And along the way, we started a dividend that we've now increased over a 10-year period some 42 times -- we paid it some 42 times. But there is no disregard to continuous profitability as we grow sales..

And I know, I said the last one, but just one last one. I promise. M&A, so why has it taken this long -- I mean, it's been a while since you did like a sizable deal, I guess, that's how I put it. But can you -- I know you're looking hard. You're always looking hard.

And obviously, you passed on probably a lot of things, but we're starting to see activity pick up a little bit -- are you starting to see that? And are expectations on multiples coming in? And is that really what's kept you on the sidelines because I'm sure you see a fair amount of opportunities and you just didn't find the right price, right? But am I explaining that correctly?.

It's not that the right price didn't -- it's not always a matter of the right price. Sometimes it's a matter of the right fit. And like I said, if you look at our history, really look at it, we've made as many as two, three acquisitions in a year and then we went several years without any thing.

Labriola is something that we have to fix, but it's in the right product category for us. Soft pretzels that does specially baked goods. And over the years, we found a lot of these kind of companies and we fit them.

Now I'm not going to do and we're not going to do anything that's going to be transformational, and particularly, that we don't have a lot of good, sharp, solid experience. In my opinion, that would be reckless.

And even though Dennis Moore, Gerry law and Dan Fachner are all part of our acquisition team, we want to make sure that we stay within the guidelines of what we've stood for, for the past multiple decades, quality product, niche products that we can lead, if not dominate the category and become an efficient producer.

That sets well for not only acquiring the company, but for continuing its growth..

And our next question comes from Charlie Carter..

Yes. Just a quick one that ducktails off that last one. So I'd seen an article about Paul Newman Foundation being potentially forced to sell itself because of attacks they just couldn't afford to absorb. And you mentioned earlier just having done some contract manufacturing for them.

And I think, in a meeting with you, you'd mentioned also doing their cookies at one point. So I didn't know if that, a, represented an acquisition opportunity for you or b, if it's something that might be a little too big or pricey if you might lose material amount of business if it went to someone else..

Let me plead ignorance here.

Where are you calling from, New York or Connecticut?.

I'm actually in Florida..

Okay. I'm not aware of that. And when you say them having to sell, -- I'm not every of that. But we produce four under a license, so we're contributing to that foundation..

And the last question that I'm showing is Brian Rafn again..

Yes, Gerry, just a couple more. When you guys talk about efficiency in manufacturing, are you talking about line speed? Are you talking about the capacity to move more volume of product in a specific time frame? Give me your definition of efficiency.

What is that you're looking for? Is it just cost?.

Well, it's cost and quality and it's expandable whereas some of our plants are modern from top to bottom, all right? Some of them were older plants that we have improved over time..

Okay. And then, relative to the M&A side, certainly you guys have been very judicious, Gerry. You're probably the best guy in M&A in the whole package food area.

Are you guys looking at in your funnel or are you looking at dozens of deals a year or hundreds of deals, how big is that universe?.

Well, it's not hundreds, but it's probably somewhere between double digits and multiple teens. We look at some 25, 20 dips [ph]. Some of them are small, but just to look at. Some of them we wind up spending a little more time on and then we want to see the product, then we want to see the facility.

Then we want to see what kind of talent that they have, that they can complement us or we can complement them..

Yes.

Do you have a specific preference between a turnaround restructure or something like a Daddy Ray's where you take a concept very small, very local and expand it regional, nationally, where you can really grow as you did ICEE?.

We would do both. I mean, we look for something that's small, that we can grow and we look for growth, but we look for things that we can inject our culture and [indiscernible] around readily and improve..

And I'm not showing any further questions..

Well, I want to thank everybody that was on the call for participating. And I look forward to talking to you all again next quarter. I'm going to sign-off..

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