Welcome to the J&J Snack Foods fourth quarter earnings conference call. My name is Hilda, and I will be your operator for today. [Operator Instructions] Please note that this conference is being recorded. .

I will now turn the call over to Mr. Gerry Shreiber. You may begin. .

Thank you. Good morning, everyone. I will begin with the obligatory statements.

With me today as we present is Bob Radano, our Senior Vice President; Denny Moore, Dennis is our Senior Vice President in charge of finance and administration; Marjorie Roshkoff who handles our legal; and Bob Pape, Senior Vice President in charge of food service and retail sales.

Also remotely is Dan Fachner, who runs our beverage business, which includes ICEE and Arctic Blast and Slush Puppie; and Gerry Law who's also remote conducting meetings in the Midwest, and Gerry is our Senior Vice President and my personal assistant..

All right, here we go. 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. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after this date..

Results of operations. This year's fourth quarter had 13 weeks compared to last year's 14 weeks, and the year had 52 weeks this year compared to 53 last year. The additional week added about 8% to sales for the quarter last year and 2% for the full year. Net sales decreased 5% for the quarter and increased 5% for the year.

But without the extra week last year, sales increased 3% for the quarter and 7% for the year..

Excluding sales from Hill & Valley acquired in January 2017 and an ICEE distributor located in the Southeast acquired in June 2017 and Labriola Bakery, which was acquired in August of 2017 and the extra week in 2017, sales increased approximately 2% for the quarter and 4% for the year..

Our EBITDA, that's earnings before interest, taxes, depreciation and amortization, for the past 12 months was $165 million..

Food Service. Without the extra week in 2017 and without Hill & Valley and Labriola, sales were up 2% for the quarter and 4% for the year. All sales increases and decreases, I mentioned below, have been adjusted for the extra week last year. Sales to Food Service customers increased about 3% for the quarter.

Sales of soft pretzels, one of our core products, were up 20%; and funnel cake sales were up 9%. Sales of churros were roughly the same as a year ago. Sales of frozen novelties were down about 12%. And the handheld sales and bakeries -- handheld sales were down about 30% and bakery sales down 2%..

For the year, Food Service sales were up 9% and without Hill & Valley and Labriola were up 4%, with increased sales of soft pretzels up 18%, handhelds up 7%, bakery products up 8% and funnel cake up 10%. Sales of frozen juice bars and ices were down 12% for the year, and churros sales were about the same as the year ago..

Retail supermarkets and grocery. Sales of products to retail supermarkets were down about 1% for the quarter and up 3% for the year. Soft pretzel sales were down about 5% for the quarter as we missed a couple of previously planned promotion with major retailers.

They're up 6% for the year, and sales of frozen juice and Italian ices were up about 6% in the quarter and 6% for the year. Handheld sales were down for the quarter and down 14% for the year..

Frozen Beverages, which includes ICEE, Arctic Blast, Slush Puppie. Frozen beverage and related product sales were up 5% in the quarter and 5% for the year. Beverage-related sales alone were up 2% in the quarter and 7% for the year with gallon sales up 5% and 8% in our base ICEE business in the quarter and the year..

Service revenue for others was up a strong 10% and 8%. .

Consolidated. Gross profit as a percentage of sales in the quarter decreased to 30.35% from 30.80% last year, that's about 50 basis points, and decreased from 30.53% to 29.54% for the year. Gross profit margin continues to be impacted by generally higher costs throughout our businesses as well as by idle plant cost during production upgrades..

Major portion of these upgrades are going to be completed in quarter 1 2019. Operating income in our fourth quarter was impacted by the loss of 1 week compared to last year.

Other than the 1 less week and generally higher costs, the biggest impact on our fourth quarter operating income was higher distribution, which includes trucking and warehousing, higher distribution costs of about $2 million and increased freight spending of about $900,000 compared to plant in our Retail Supermarkets segment..

Total operating expense as a percentage of sales was 20% in the fourth quarter, up from last year's 19.2%. For the year, the percentage increased to 19.8% from 19.6%. The increase in both periods was primarily in our distribution costs due to higher shipping costs..

Capital spending and cash flow. Our cash and investment securities balance of $276 million was up $18 million from our June quarter and $35 million from a year ago. We continue to look for acquisitions as a use of our cash. $135 million of our investments are in corporate bonds with a yield to maturity of 2.6%..

Our capital spending was $17 million in the quarter as we continue to invest in plant efficiencies and growing our business. Our spending for the year was $12 million lower this year than last as several of the onetime manufacturing projects finished off this year..

A cash dividend of $0.45 a share was declared by our Board of Directors and paid on October 4. We did not buy back any shares of our stock during the quarter..

Commentary. Food Service soft pretzels continued to have strong sales growth in restaurants, movie theaters and throughout our customer base. And sales of our new Brauhaus Pretzel continues to be very encouraging. Funnel cake sales continued to do very well in schools.

Bakery sales were down modestly this quarter as some new co-pack business of a year ago did not repeat this year..

Handheld sales were down 30% for the quarter because of a dropoff in co-pack business. Frozen juice bars and ices sales were down 12% because of the loss of a promotion and distribution both in warehouse and club stores. Funnel cake sales to schools continued to grow, up about 30% for the quarter and 36% for the year.

Overall sales to restaurant chains have been very strong this year while sales to schools have been up modestly..

Soft pretzel sales in our Retail Supermarkets segment were down 5% in the quarter because of increased trade spending..

Frozen novelty sales were strong as we have rolled out a line of Sour Patch Kids ice pops. We are focused on reducing trade spending going forward..

Sales in our frozen beverage segment, that's ICEE, were up a strong 5% for the quarter. Service revenue was up 10% in the quarter as this business continues its solid and strong sales growth. And machine sales were up 17% or $603,000 in the quarter..

ICEE's operating income for the year was up $2.1 million or 8%. For reasons already mentioned, overall consolidated operating income in the quarter was down $5.8 million or roughly 16% from a year ago and down $7.3 million or 6% for the year.

As we have said previously, we will aggressively pursue price increases to offset the cost increases we expect to be continuing..

Lower federal income taxes this quarter benefited net income by about $0.09 a share, but higher New Jersey income taxes, a non-cash charge resulting from a July change in tax regulations, negatively impacted the quarter by about $0.07 a share. Going forward, we expect to have an effective tax rate of 26% to 27% for our fiscal year 2019..

Our company continues its solid growth, and we look forward to greeting you all again next quarter. Thank you for your continued interest..

Any questions, comments, I will field them now. .

[Operator Instructions] Our first question comes from Michael Gallo. .

So obviously, Gerry, you've had some time now to digest some of the opportunities in getting price realization through and also some of the things you're doing to improve efficiency. You also started to lap, obviously, the big distribution increase from last year. Do you think as you'll... .

To lap?.

Yes, to lap that.

Do you think starting in the first quarter, we could actually start to see positive gross margins year-over-year or will it take more to the second quarter for the combination of some of the things you're doing in pricing kind of become fully in effect?.

I think with the calendar change, the year, which would be our second quarter, you're more likely to reflect these improvements then. .

Okay. And can we think about kind of pricing across the 3 segments as kind of across the board? Or do you think you'll end up with stronger price realization in Food Service? I would suspect retail is perhaps a little harder to come by price [indiscernible]. .

Well, that may be true, but nobody throws a party when you come in with a -- even with a detailed explanation of higher cost and price increases. But we're well on our way. And we are hopefully optimistic that these will reflect as the calendar changes. .

Great. And then final question, Gerry. I think on prior calls you've talked about migrating perhaps ICEE towards restaurant chains or QSR. I think you said in the past you thought something could happen on that next year.

Any update on where any of that stands?.

Well, ICEE has continued its strong growth performance for several years now. The restaurant and fast food area is a continuing target. And we're working it. And generally, ICEE has an exceptional track record, and we expect that this will continue. .

The next question comes from Akshay Jagdale. .

This is actually Lubi sitting in for Akshay. Can I just ask a question on just the organic sales growth trends? It looks like at least on our numbers that the trend has been sort of weakening for a couple of quarters now. I know there's a lot of moving parts as to what's driving it.

But at a high level, can you just comment on some of the things that have been sort of a headwind towards organic sales growth? And any color you could provide on what things are looking like in your current quarter that you're in right now?.

Sure, Lubi. As a matter of fact, we have Gerry Law on the call. He's in a remote location where he's leading some meetings that will cover some of what you just asked. We had a couple of nice wins organically the past couple of years.

One of them was with the Sour Patch Kids developed, another is a special pretzel that somebody is selling for us, a major chain. And we gave them a limited exclusive, and they're doing a great job. But Gerry Law is responsible for our R&D and our new products.

So Gerry, do you want to comment on Lubi's question?.

Yes. Lubi, I think we still continue to see organic growth in our future. Our target is always that mid-single digit. We are going through our annual sales meetings right now to get a feel for that. And I think some of the headwinds for handhelds and bakery will start to be behind us in the coming quarters. .

Got you. And then on margins, right, so I know the last few quarters, you've seen some probably extraordinary inflation. And there's several reasons which we would probably consider to be more transitory in nature that have impacted the margins recently.

But even if I look at the longer-term trend going back a couple of years, it does seem like the margin profile has deteriorated somewhat.

I'm wondering, can you sort of comment on that? And do you think margins can get back to where we were 3 or 4 years ago? And what might it take to get margins moving in the right direction again?.

Let me make a comment before we throw this back to Gerry. For the longest time, our margins -- we were pecking at them like a -- to get them reduced. And we went through some inflationary adjustments with some of our raw materials and packaging and what not.

We hope the worst is behind us and these margin increases that we've been experiencing the last couple of years will also be behind us. To some degree it's like riding a horse, right? And you're never quite sure whether it's going to jump over to the next post or not. But we're watching it very carefully.

Gerry? Gerry Law, are you there?.

Yes. I'm here. Well, I think you covered it, Gerry. .

Okay. Then just one last question, if I may.

Just any comments on the -- how you guys are thinking about M&A now, what the environment looks like?.

We're always thinking about M&A. We've looked at a couple of things in the past quarter to past 6 months. And honestly, we rejected them because they weren't nearly as good a fit as to what was presented, and there were some issues in there.

And so there's been more of a concentration going forward on our base core business, which remains very, very good with 1 or 2 exceptions. And looking at these other acquisitions that present themselves to us, and you guys know by now that we look at these things fairly quickly with a mind towards integration in there.

And we're certainly not going to do anything reckless. But there's always a line of possible acquisitions that have to go through a significant vetting process with Gerry Law, with Dennis and others in there. But we've made acquisitions in the past. Chances are we'll be making them in the future. .

[Operator Instructions] The next question comes from Mr. Jon Andersen. .

You mentioned earlier, Gerry, that there are some things that you're still kind of working towards completion in the supply chain, and that those projects should probably come to fruition or completion by -- I'm not sure if you said the first quarter or the second quarter of fiscal '19.

But could you talk about what are the 1 or 2 or 3 most important projects to complete? And again, remind me the timing of those. .

We are good producers, efficient producers, but we can get better. There's a couple of projects that we are right in the middle of or in the advanced stage which will deal with reducing labor. Gerry Law, I'm going to throw this back to you. .

Jon, we have a couple of projects coming up online. I'd say the biggest one... .

Production management people just gone over these things in detail. .

But we have a line that is substantially complete in New Jersey that will move some production in our supply chain that we currently produce in Texas up into our Jersey distribution center to help us realize some freight savings. We're in the middle of getting those products approved and getting the line commercialized.

We expected to be online in the second quarter -- J&J's fiscal second quarter. That's a big initiative for us. And we've also been able -- we brought the 2 lines up Pennsauken for the churros and the funnel cake, and we have those startups behind us as well at this point. .

Your end markets, you get a heroic year with soft pretzels again, I think, with some good innovation and distribution expansion. You talk a little bit about the prospects for your restaurant segment.

As you look forward, do you still see as much white space there? Or is that kind of opportunity filling up? And then churros, I think, was flattish for the year. And churros is a business, which has been strong for you because it's kind of an on-trend product line.

What happened in churros this year? And what can you do to kind of get that back on a better growth path?.

Yes.

Bob Pape, what did happen with churros this year? I think I know, but why don't you explain to Jon Andersen?.

There were a few LTO programs with customers that did not repeat, but we're still very optimistic about the churro category. We are working actively now with many food service customers, whether they're QSRs or casual dining, to be able to implement programs with our products. And there's a variety of products that we can execute.

So we're still very confident that churros will continue to be a growth vehicle moving forward. .

Okay. And then on the restaurant channel where you are overall in terms of -- I know you've had great success over the past 3 to 5 years, really building that into a solid business.

How much more opportunity is there for you in that restaurant segment?.

Jon, we think that could possibly double over the next 5 years. And that would give it a compound rate of 16%, 17% a year. Now that would be in the absence of something dramatic happening like a serious recession or what not. But as we continue to develop products for this segment.

And some products are -- in a word, even they're falling in the soft pretzel category, but they're not twisted, they're not 3-looped in there. We're developing specialty products with the specialty restaurant chains. And we're having some success. Sonic, we developed a product for them. And this is one of our best out-of-the-gate performers.

We did over $10 million in our first year with them. And to put that into perspective, I was in business for, I guess, 4 years before I even touch a $10 million mark overall. And this was one product for one chain that is kind of an offshoot of a pretzel.

So as we get more experience with this and we get our talent -- is maturing, we expect that this will continue. .

Okay. Last one for me, maybe Dennis, if he's there. I think you mentioned that you've got almost $280 million of cash and investments now in the balance sheet. Putting M&A aside because I know you can't really talk about M&A, $280 million of cash, a good portion of that in corporate bonds yielding, I think, 2.5% you said.

Is there -- absent M&A, how do you think about use of that cash or return of cash to shareholders? Or do you just continue to let it build in the hopes that a big acquisition comes along?.

Well, and before Dennis answers, it is for a big acquisition. And I don't want anybody to think that we're going to suddenly distribute that as a -- but go ahead, Dennis, you can... .

Well, I think we're at a point now where we don't think that the amount of cash that we have would continue to increase. So I think we would consider upping the dividend rate, perhaps a little bit more than we have in the past several years.

But we're not going to have a special dividend or return a large amount of the cash all at once to shareholders. We also might up our stock buybacks as well to return some of the cash. But I think we pretty much are of the opinion that we should not be just continuing to have the cash increases. .

[Operator Instructions] At this moment, we show -- we have one other question from [ Chris Black ]. .

Just a quick question about transportation costs, and how do you think higher prices will be accepted by your customers in a slowing economy?.

Well, is the economy slowing? That's number one. And the transportation costs are going up, and we're passing these on as well as you would expect. But there's definitely a shortage of trucks and operators. And as a result, there's a focus on adding transportation, including drivers on that.

And these costs are being passed on rather quickly from the freight companies to the manufacturers, which include us. We have to digest it and look at it. One of the reasons we're doing some things production-wise, particularly with special products, is to get the product closer to its main markets.

So we're good at that, and we're going to be even more focused on that. But freight is a real cost, which includes the freight transportation and the drivers. And we're focusing on that to see how that we -- we can absorb what we can but pass on what should be passed on. .

And at this moment, we show no other questions in queue. .

Well, if we have no further questions, I guess, we can conclude this quarter's conference call. I want to thank everybody for participating and dialing in. We look forward to what will be our first quarter conference call for 2019. I hope you can all join us then, and we look forward to having you on board. Thank you. .

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

Thank you..