Good morning. And welcome to the J&J Snack Foods Fourth Quarter Earnings Conference Call. My name is Cheryl and I will be your 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. [Operator Instructions] Please note that this conference call is being recorded. I will now turn the call over to Dennis Moore. Sir, you may begin.

This is Gerry Shreiber. Dennis Moore is here, but he's across the room giving Radano a kiss. But I can begin whenever you're ready. Cheryl?

Yes, I'm here sir.

Okay. This is Gerry Shreiber and I'm ready when you say go.

Okay. You're the main conference sir, you can begin.

Right. Good morning everyone and welcome to our fourth quarter conference. I am Gerry Shreiber and I will lead the discussion and then we'll turn it over to the people who are attending with me and they are in order; Bob Radano, who is our COO, Dennis Moore, our CFO; Bob Pape, our Senior Vice President of Sales; Jerry Law, Senior Vice President; Marjorie Roshkoff Shreiber who is our Head of Legal; and Bo Powell, who is our Sales Manager for our food service. I will now begin the call with following obligatory statements. The forward-looking statements containing herein are subject to certain risks and uncertainties that could cause actual results to differ 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 this date. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Results of operations net sales increased 4% for the quarter and increased 4% for the year. Operating income in our fourth quarter was $31.1 million for both years and increased 6% to $117 million for the year. Food service, sales to food service customers increased about 1% for the quarter. Sales of soft pretzels were down 4% and we had increase sales of funnel cake up 6%, churros up 7%, frozen novelties up 3% and bakery products up 4%, handheld sales were down. For the year, food service sales were up 2% with increase sales of soft pretzels, bakery products, funnel cake, frozen juice bars and churros. Handheld sales were down 19% for the year. Retail supermarkets which include grocery, sales of products to retail supermarket were up less than 1% for the quarter and down…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

I'm sorry. Can you repeat what you just said?

Standing for the question.

Okay.

Okay. Our first question comes from Jon Andersen. Jon, your line is now open.

Hello, Jon Andersen. How are you?

Hi, Gerry. I'm very good. How are you?

I'm good. Thank you.

Excellent. I hope everyone else around the table is good as well.

Everybody looks good including the two dogs I have here.

Well, it's been a good year for you and you have a lot to Crow about.

Yes. We do. And from my perspective, at least early in the year, it looks good for next year too.

Well, maybe that's a good place to start. Since, you had another successful year in '19, as you look ahead to 2020, what are some of your main priorities for 2020 at this point?

Well, we want to continue our growth and we're looking for solid mid percentage growth in our overall business and that will be hopefully augmented by some of our newer products that we're doing presently.

Okay. Do you, since you mentioned new products, how do you feel about the innovation pipeline, as it sits today relative to maybe the last year or two or, as good as better than?

Well, we're, hopefully, it's at least as good as, and perhaps a couple of points even better. But we continued to invest -- over invest in our manufacturing, which includes our R&D and we have multiple products in the pipeline that we plan on introducing, during the next -- in the next 12 months.

Okay.

Jerry Law?

Yes. We have a vast pipeline, pretzels or frozen desserts, funnel cakes, yes, we continue to add products across the C stores channel, healthcare channels, we've continued to see some growth in those areas. Let me pause for a second. A few years ago, I mentioned in these sessions, our plans to increase overall our presence in convenience store and convenience store markets. We've done that and we're continuing now. We think we have some momentum behind them to continue that for the next several years.

Good. Good. That's great to hear. Thinking about soft pretzels for a minute, it seemed like there was -- it was a little less strong in the quarter, not overly concerned about an individual quarter, but how do you think about the restaurant part of the business, your customer base because that's been a growth area for you for multiple years and I'm just wondering, you still see the kind of opportunity there for further product penetration or you feel like you've kind of tapped that now and need to look beyond the C stores, health care, other channels.

You'll recall that we entered that business about five or six years ago. We jumped out of the shoot and got to $50 million overall quickly. Then it had a couple of back to back year declines for no other reason than the consolidation that they were going through. But now it represents about $60 million overall in our revenue. And we have specific products and specific chains that we have plans to increase that for this year. So we're looking ahead the next certainly year or two in there with a good degree of confidence.

Excellent to hear. What's holding back margins at this point? Because I think, the top line has been strong and I always kind of thought that if you've got a certain amount of revenue growth that the margin -- gross margins would follow. I know you've been doing a lot of work in your supply chain. Do you feel like, your middle innings of that or are we now getting to a point where mid single digit growth can translate into higher margins as well?

Dennis, you wan to comment on that

Our margin for this year were impacted by a couple of factors. One being the higher sales of the lower margin ICEE machines. Overall, our margins in the balance of the business were higher. So that kind of, [distorts] [ph] the numbers somewhat. We also had some issues especially in our fourth quarter relating to new production for one of our customers. In our bakery business, we compacted our margin in the fourth quarter. So, I would say overall the margin profile is good. Margin profile was better this year, but was masked by those two issues, the our machine sales and the issues that we had in our fourth quarter in our bakery business.

And actually Jon has a little bit of explain. We had one large customer and it begins with an M, we got a big bunch of business from in our fourth quarter. Looking ahead for the next year or two, we will perform better with that business. But, we had some issues and just absorbing it all in to our couple of our Midwest plants.

Yes. Jon, that the projected business when it was much lower than what actually came in and it caused the disruption where we had -- we have built a line to take on the business and we were prepared. But when the business came in, it was much bigger. We had to spread it from two facilities that moved into four facilities and our ramp up curve was pretty steep on that one.

And Jon and I apologize, we [indiscernible], that sounds like a lame excuse. Picture a chicken with one leg, it is a lame excuse. We will do better.

I guess that's a high quality problem to have too much. Okay. Last one for me is, I think at one point over the years we've talked, someone mentioned, hey, if we built the cash and investment, pile that good exceeded $200 million, something like that, we'd really look at being more proactive and we're putting that cash to work, returning it to shareholders. I think you mentioned, your cash investment is now north of 340 million. So what's the thought process there?

Well, the thought process is to use that cash in the most efficient way that we can. And even though I am the largest shareholder, I am reluctant to redistribute this back to shareholders. But we are continually looking at acquisitions, some small, some big and the best use for that cash in my estimation is for acquisition.

Fair enough. Again, good year and something to crow about.

You got it.

Our next question comes from Debra. Your line is now open.

Hi. This is Debra Manche from Lakewood Capital. I just had a quick question. Gerry, a lot of your revenue growth this year was attributable to frozen beverage machine sales, which were above historical averages. Do you anticipate these levels are sustainable or would you expect the reversion next year to historical averages?

Dan Fachner who is President of our Frozen Beverage division, which includes ICEE and Dan is on -- he is on a remote, listen. Dan, do you want to comment for that? But let me just say this, [indiscernible] frozen beverage machines jump out in one quarter, it is almost a matte for strong revenue growth in succeeding quarters. Dan, why don't you take that question and then better reply.

Sure. Hi, Debra. Yes. Last year, 2019 was a great year for us at equipment sales. 2020, I think and expect to be also a good year, probably slightly down because one of our large customers in '19 won't be repurchasing. Equipment sales are somewhat cyclical. But I expect a good year in 2020 as well.

And they don't follow any kind of specific pattern equipment sales, but it does bring the promise of higher revenue from gallons for the next quarters.

Gallon, then service revenue.

Great. Thank you.

Our next question comes from David [indiscernible]. Your line is now open.

Good morning. I don't think we have, this is my first time with a pleasure. Congratulations on the strong year. Thank you. Just want to get into a couple of questions. One regarding on the Auntie Annie's a rollout, where you -- do you see it looked like there was some cannibalization of super pretzel. Are you seeing that across the board in most places? Was that expected? And was that a negative margin mix for you.

Jerry Law, you want to comment on that.

More analysis, we don't see cannibalization of super pretzel at all, the sales in the quarter as a result of some of our pricing in the quarter, we had increased our pricing, which reduced -- resulted in lower less promotions of our product. That's what we primarily attributed to is his name.

Great. That helps.

And this is Jerry again. Any edge was a formidable competitor for a number of years. We bought them and we were integrating it within our system and as we haven't past years have one other competitors in licenses. So, we expect our soft pretzel sales to continue to grow however modestly or strongly. And by doing these things that we did this year and for the past five or six years, it makes our overall business more bullish.

Got you. That makes sense. Thank you. When I look at your convenience distribution, I know we just discussed one of your opportunities for the future is a kind of wide space expansion. I see kind of like a 5% or 6% ACV, we use IRI here. Now, are you expecting, how high can that get and also are you expecting to increase your assortment convenience?

We are. And if you go into any of the national convenience stores and you look at that front, we had dreams of getting on that front counter eight and 10 years ago and now we're there. There's a big display case feature in rungs and rungs of pretzels. And I would suspect that 90% of the soft pretzel sales in convenience stores today are coming from us. We expect to increase that penetration around the country with all of its operators.

Yes. It seems like there's a lot of wide space. And my last question is regarding acquisitions. Just want to tackle that again. Where are you seeing valuations now and are they in line with where they were kind of last quarter? Have they backed up a little bit? And then in terms of food service and retail,

We look at growing our business always strategically but conservatively and given our major share -- a dominant share in there, these factor into our growth plans. I think pricing is a little bit relaxed than what it was two or three years ago. It's not quite what it was 10 years ago, but we continued to look for good space, not just wide space, good space for us in there and as we continue to grow our soft pretzel market.

Well, thank you for answering my questions and I will pass it on.

Thank you.

[Operator Instructions] At this time, I show no further questions in queue.

All right. Then let me conclude this conference. And again, it's a pleasure speaking with everybody and we look forward to many, many, many more quarters and years of solid growth. Thank you.

And thank you, ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.