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Executives

Gerald B. Shreiber – Founder, Chairman, President and Chief Executive Officer

Dennis G. Moore – Chief Financial Officer, Principal Accounting Officer, Senior Vice President, Secretary, Treasurer and Director

Analysts

Akshay S. Jagdale – KeyBanc Capital Markets

Robert F. Costello – Costello Asset Management, Inc.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Garo Norian – Palisade Capital Management LLC

J&J Snack Foods Corp. (JJSF) F1Q13 Earnings Call January 29, 2013 10:00 AM ET

Operator

Welcome to the J&J Snack Foods’ First Quarter Earnings Conference Call. My name is Sandra, and I'll 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. Please note that this conference is being recorded.

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

Gerald B. Shreiber

Good morning, everybody and welcome to J&J Snack Foods conference call. With me today participating is Dennis Moore, our Senior Vice President and CFO; Bob Radano, our COO, Gerry Law, our Senior Vice President and Assistant to me, and Bob Pape, who is Senior Vice President of Sales covering both food service and retail, and Ted Shepherd, our CED.

I will begin with the customary obligatory statements. 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 statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operations. We had a good quarter pretty good quarter indeed. Net sales increased 11% for the quarter, excluding sales resulting from the acquisition of Kim & Scott’s Gourmet Pretzels in June, 2012, sales increased 10%.

For the quarter, our net earnings increased by 86% to $10.2 million or $0.54 a share from $5.5 million or $0.29 a share a year ago. Our EBITDA, for the past 12 months was $124.7 million, a record.

Food service, sales to food service customers increased 15% for the quarter. And 14% without the benefit of the Kim & Scott's recent acquisition. Soft pretzels one of our core products sales, were up 27% for the quarter, 23% without Kim & Scott's. The Italian ice and frozen juice bar and dessert sales decreased 4% for the quarter.

Churros sales were up 33% in the quarter and bakery sales were up 12%. Retail supermarkets and grocery sales of products to retail supermarkets were down less than 1% for the quarter. Adjusting for Kim & Scott's sales were down 2%. Soft pretzels sales however were up 5% for the quarter, 2% without Kim & Scott's. Unit volume of pretzel was up 6%, sales of our frozen juice and Italian ices were down 9% in the quarter on a case volume decrease of approximately 14%.

Handheld sales acquired about a year and a half ago in the ConAgra acquisition, in the quarter increased 7% to $6.3 million.

ICEE and frozen beverages, frozen beverage and related product sales were up 4% in the quarter. Beverage related sales were longer, we’re up almost 5%. Domestic gallon sales were up 2% in our base ICEE business in the quarter. Service revenue for others was up 3%.

Consolidated; gross profit as a percentage of sales in the quarter increased to 28.3% from 26.9% last year, that’s a 140 basis points improvement. The gross profit percentage increase this year resulted primarily from higher volume.

Ingredient and packaging costs in the quarter were relative; it’s the same as the year ago. We cannot project the impact of benefit of changes in ingredient and packaging cost going forward. However there has been a very significant increase in the market cost of flour and packaging costs, over the past nine months. Which we anticipate will result higher cost over the balance of our fiscal year.

Total operating expense as a percentage of sales dropped to 20.4% from 22% in last year’s quarter, mainly because of sales increases and carefully managed expenses.

Capital spending and cash flow. our cash and investment securities balance increased $5.8 million in the quarter to $186.2 million, also a record. We continue to look for acquisitions as a use of our cash. We invested $80 million in mutual funds and seek current income with an emphasis on maintaining low volatility and overall, moderate duration. Presently, we estimate an improved annual yield from these funds to be about 4%.

Our capital spending dropped to a more normalized $7.5 million in the quarter, but we continue to invest and plan efficiencies and growing our business. We are presently estimating capital spending for the year to be approximately $30 million or so. A cash dividend of $0.16 a share, an increase of 23% was declared by our Board of Directors and paid on December 27, 2012.

As we have previously stated, we look back 187,649 shares of our common stock at a cost of $10.8 million or approximately $57.60 a share over the period of July 25 to October 31.

On November 8, our Board authorized the purchase of an additional 500,000 shares.

Commentary, our sales growth of 10% this quarter before the benefit of acquisitions was very strong. sales of soft pretzels and food service were extremely strong and include new pretzel products, such as sticks and soft pretzel buns and rolls to casual dining restaurants.

Frozen juice bar and ICEE sales of food service were down as we were impacted by the elimination of the USDA School service program in this area of our business. We are still looking for traction in our handheld sales and food service, which sales were down 2%, but we remained very bullish on this category. Churros, also did exceptionally well as we began selling to a major fast food restaurant chain.

Unit sales of soft pretzels in our retail supermarket segment were modestly higher in the quarter, but frozen juice bar and ices had a significant drop in this slower season, and was partially due to the recent Hurricane Sandy in the winter. Handheld sales and retail supermarkets were up 7%, as we have begun to have positive results in the private label end of the business. In ICEE and frozen beverages, gallon sales were up modestly and service revenue to others was up 3% in the quarter as this area of our business continues to perform well.

Frozen beverages had a strong quarter through a combination of sales growth and expense management. Mexico continues to perform outstanding. This is the first December quarter for the IC business in which our frozen beverage business made a profit. So the benefit of expanding into managed service for others has been slowly, but surely been paying off.

Our estimated income tax rate was at 35.3% for the quarter compared to 37.5% last year. We are estimating a rate of about 36.5% to 37% in fiscal year 2013.

So to sum up, we had a good quarter and for the, now 41st consecutive year and 165 straight quarters, we’ve had revenue increases in each and every quarter. More recently at a faster pace, and we’re growing our business, and we appear to be operating, if not on also on most, our best days are yet to come and we hope you will stay with us.

Thank you for your continued interest. I’m turning it back.

Question-and-Answer Session

Operator

Are you ready for questions?

Gerald B. Shreiber

We surely are.

Operator

Thank you. we will now begin the question-and-answer session. (Operator Instructions) And our first question is from Akshay Jagdale. Please go ahead.

Akshay S. Jagdale – KeyBanc Capital Markets

Good morning

Gerald B. Shreiber

Good morning, Akshay.

Akshay S. Jagdale – KeyBanc Capital Markets

Good morning. First of all congratulations, I mean, I follow lot of companies, but a 10% organic growth number in this environment is truly impressive, so I think you should have these sales meetings every year, I’d be a proponent of that seems to if had a major impact. So, first off congrats.

Gerald B. Shreiber

Well, my people deserve most actually all the credit for this, so we do have something to be proud of and to throw about, but these sales meetings certainly help.

Akshay S. Jagdale – KeyBanc Capital Markets

Sure so in terms of the question, first question is really how sustainable is this growth, we’ve obviously we have seen, in some large chain restaurants, Pretzel Sticks, with the dipping sauce seems like a very good product, and sticking, it seem Churros had a large Mexican chain that are doing really well, and were called out by that company. It seems different than Funnel fries right, which I consider is like a one hit wonder that really didn’t worked out well beyond that first year so, in that context can you help us understand, how you think of this sort of acceleration in organic growth especially on Pretzels and Churros, I mean how sustainable, is it to you and you also mentioned at one point that, it is starting to hit on all cylinders, so perhaps you could see, could we see a higher growth number than 10% sometime this year.

Gerald B. Shreiber

Well easy now Akshay, I love horses and I ride horses, but every once in a while these are pleasure horses, as you know, I don’t want them go on too fast on me, and I don’t want the business, I mean if we can sustain this growth, and it’s not a guarantee, we’ll be very, very happy. Our business has matured over the years, we got good young talent complemented by our (inaudible), so we have more things in place to grow our business.

Funnel fries was an off shoot of couple other products, specifically for special customer, any how we may have more than that in the future, but what we’re seeing right now is growth of our soft pretzels products in fast food restaurant, and growth of our churros products both product lines, which our core products that have been main stage with us and all of a sudden, they’ve been traveling into the business segment. So, I remain bullish on the business, and particularly bullish on those two products.

I could not in good conscious predict a continued double-digit increase in our core products, but we’re going to do everything we can tomorrow and we like achieving over achieving.

Akshay S. Jagdale – KeyBanc Capital Markets

So, another way to ask the question is, fast food channel is that the right way to think about future growth prospects, I mean are you under penetrated in fast food, in the fast food channel as well as table cloth restaurants, in terms of churros and pretzels, I mean is that a good way to think about it. Like you’re under penetrated, you’ve made an effort and you think that that’s paying dividends, but there is probably still a significant runway to go alike multiply years of slow and steady growth, is that the good way to think about it?

Gerald B. Shreiber

I think it is, we were definitely under penetrated in a quick service restaurant and the casual dining restaurant, and at many conferences as a matter of fact, even at conference that, can you make itself. We spoke about and pointed to the tremendous potential that was out there, and we kind of updated on our targets, and our goals, and our achievements in these potentials, and now they are getting appear to be that we’re accelerating this, but – I am sorry

Akshay S. Jagdale – KeyBanc Capital Markets

Two last, two questions, I know you want to get along with the other guys, but one on retail supermarket it seem like a relatively weak quarter, especially from a profit standpoint. So that couponing was up a little bit, and sales were down maybe that seasonal, should we be worried about that? I mean, are you worried? Is that a trend for the remainder of the year or is it sort of a one-off performance. And the second question, and I’ll leave it there, would be on just cash usage. I mean you keep cumulating more cash. I think you put some money into mutual funds, I mean what is that tell us about the M&A opportunities, that you’re seeing out there?

Gerald B. Shreiber

Well. Let me answer the second part first, yes we’re accumulating cash, and that’s not a bad thing, I don’t mind the criticism on that and maybe Dennis and we got tired of earning 20 to 30 basis points and safe money markets, and we decided to clock some money if you will, in some not necessarily agency fund, but if we are earning 4% on something, and there is no long-term commitment in there, I think it’s a better use of our money.

As far as the supermarket end of the business, I think that our supermarket end of the business has properly been in the best shape than it’s ever been, but I don’t think the grocery unit themselves that the customers are in a best shape they ever been, but let me turn this over to Bob Pape, who is sitting right across me. Bob?

Robert Pape

Yeah. We don’t see this as an ongoing trend in our products for retail. I think we had a soft quarter as a result of some issues regarding the weather as well as the fact that we had situations with our customers where we got some promotional shifts, but I think that that will be accounted for as we move forth in the remainder of the year.

Akshay S. Jagdale – KeyBanc Capital Markets

Great, thank you. And congrats again, I’ll pass it on.

Gerald B. Shreiber

Thank you, Akshay.

Operator

Thank you. and the next question is from Robert Costello. Please go ahead.

Robert F. Costello – Costello Asset Management, Inc.

Hi, Gerry.

Gerald B. Shreiber

Hello, Bob, how are you?

Robert F. Costello – Costello Asset Management, Inc.

Good. You mentioned in the unit volume was up 6% in soft pretzels, and then you mentioned another number was 2%, could you explain the difference on your prepared remarks between the 2% and 6% number?

Gerald B. Shreiber

On retail?

Robert F. Costello – Costello Asset Management, Inc.

Yeah, exactly.

Gerald B. Shreiber

Grocery, specifically, soft pretzels were up 5% in the quarter.

Robert F. Costello – Costello Asset Management, Inc.

Right. Did you had mentioned, I think after you’re talking about retail, you spoke about a 2% number and a 6% number for soft pretzels, almost volume was 6% and the other was 2%?

Gerald B. Shreiber

Yeah volume was 6% and it was really a net of 2% without the benefit of the acquisition from Kim & Scott.

Robert F. Costello – Costello Asset Management, Inc.

Right. So with regard to that, what accounts for the difference in the 4% number besides the acquisitions, is that because your customers are buying product mix difference on the pretzels or what?

Dennis G. Moore

This is Dennis, the number we can say that 5% compared to 6%. So it’s not enough to…

Robert Francis Costello - Costello Asset Management, Inc.

I thought I heard too. All right. What about the tax rate Dennis, it’s one of the lowest rates you’ve had in the while, is there any specific reason or is that a trend that should be sustainable.

Dennis G. Moore

We said that 35 plus percent was in first quarter, we’re expecting the year to be between 36.5% to 37%. So…

Robert Francis Costello - Costello Asset Management, Inc.

Okay.

Dennis G. Moore

So however that kind of an awful lot lower than where we were last year.

Robert Francis Costello - Costello Asset Management, Inc.

Another question lastly on Churros, you’re into the fast food, what about the retail and what’s been the barriers or the obstacles to getting into that, because we’ve talked about it for a couple of years. Is it placement, I mean could you be a little more specific?

Dennis G. Moore

Sure, Bob. We did make an aborted attempt maybe about two years ago, right after the acquisition of California Churros and we weren’t happy with our preliminary results and what we saw. So we went back to the joint board, redesigned the packets, the case count made it more user-friendly, operator-friendly, and we’re looking to launch something perhaps in the next quarter here and we are hopeful that it will be successful, but perhaps for the next, over the next six months will be both point to some early results.

Robert Francis Costello - Costello Asset Management, Inc.

All right. Thank you very much.

Dennis G. Moore

Thank you, Bob.

Operator

Thank you. And the next question is from Brian Rafn. Please go ahead.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Good morning, Gerry.

Gerald B. Shreiber

Good morning, Brian. How are you?

Brian G. Rafn – Morgan Dempsey Capital Management LLC

I’m good, good. Give me a sense you guys talked a little bit about the frozen juice bars, and you guys have had the MINUTE MAID, Lemonade bars, Italian Ice’s, is that performance there over the last couple of quarters, a weather specific performance or are you looking at reformulations in recipes or flavorings or kind of what’s going on in the frozen juice bar section?

Gerald B. Shreiber

Well, are you talking particularly in the school food service side of it, I think maybe…

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Yeah. I’m talking, primarily yeah, supermarket primarily.

Gerald B. Shreiber

Well, and supermarket sales there is a combination of factors and one is the industry itself being sensitive to pricing, and we haven’t lost any share, but we’re sharing to share. We got people like Nestlé’s and Unilever, and Big Bob’s and ought to get lots of competition in there, but our overall share of the category has remained neutral to growing.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay, okay. What if you guys looked at the…

Gerald B. Shreiber

Service, I thought that’s what you were particularly referring to the USDA reformulations and nutritional restrictions, has put at least temporarily a little sealing on our sales of the year and it had a negative impact.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay. Is that a reformulation you guys are looking at similar to cookies and that type of thing or you’re putting more juice.

Gerald B. Shreiber

It’s a good comment by you, we’ve already done the reformulation. We made it a 100% juice, we took in out, we’ve taken out the other additive and sweeteners, and we meet or exceed all of the regimentation, all of the complaints issues. The kids are going to like it too, so that’s where we are.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay. Gerry, if you looked at your beverage side in total ICEE, SLUSH PUPPIE, and PARROT ICE, what’s kind of the sales size of that business on an annualized basis.

Gerald B. Shreiber

The ICEE group in total is doing over $200 million a year, and it is probably, I am sorry what…

Dennis G. Moore

The SLUSH PUPPIE and PARROT ICE would be less than 10% of the sales overall.

Gerald B. Shreiber

All right. So, it’s really an ICEE driven and generated business.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay. Okay. And what kind of numbers you guys think or what’s your sense of daily race, you guys have done a marvelous job in taking that in small brand up to $40 million, $50 million that

Gerald B. Shreiber

Maybe a little bit more this year, we have some nice things happening, and we’re not like, beginning to happening, we’re in the middle of the happenings, and we’re just a little bit reluctant and conservative in sharing up of that business well, that business has quadrupled, since we acquired it about six years ago.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay. Gerald, and I missed your opening comments, so what are you guys seeing on commodity price pressure, egg, shortening sugar, the gamut, what are you seeing on feedstocks.

Gerald B. Shreiber

Brian, while we’re looking all of the commodities flours up, from about a year ago, even though we are bought out or flour committed to flour about six to eight months ahead most of the other commodities, are somewhere between mutual to slightly up, should various down, protein is up, but I don’t think we’re going to have a, it’s not going to be like it was couple of years, ago, where commodities went crazy all at once, real quick just trying like to catch a monkey in the zoo.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Right, right, right. To your comments Gerry, when you talked about product for the table cloth, the casual dining, the fast food, are the product cycles in those type of restaurants longer or shorter than you would have say it in a normal product line, this might be in the supermarket grocery or a food service type thing. You got to be much more adapted keeping it new and fresh.

Gerald B. Shreiber

To begin with, we don’t and secondly we certainly believe that the product lines and there short life and what not, will be longer than our previous experience, which wasn’t very much experienced. So we’re looking at it and we’re experiencing it, and we’re very hopeful and optimistic about it going forward.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay. You said $30 million Gerry on CapEx, what component or maintenance in the where might that CapEx be going across the factory.

Gerald B. Shreiber

Dennis, how much of that would be maintenance fair amount of that is beverage drink machines for IC and…

Dennis G. Moore

Yeah, it depends on which (inaudible) maintenance normally on an ongoing basis, we’ll spend $10 million to $12 million to maintain our IT business, and then rest of that is maintenance, but it’s also in our plans, but it’s also improving the operations as well. So it’s maintenance plus, I guess we’d call.

Gerald B. Shreiber

Maintenance plus plant efficiencies.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Yeah. Okay, okay. And then I’d be remiss to ask the Hostess brands with Twinkies and that came up in the quarter, you guys have been certainly very, very selective on an acquisition basis, and very, very mature and measured. Was the Hostess brands just say staples was that a non-event for you guys or did you sniff around the margins that some product lines, I’m just curious?

Gerald B. Shreiber

Ultimately, Brian, we passed on it.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay, all right. Okay.

Gerald B. Shreiber

On things we do, and sometimes we’re also inspired on the things we don’t do.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Yeah, okay. All right. Right guys, thanks so much.

Gerald B. Shreiber

Thank you.

Operator

(Operator Instructions) And the next question is from Jonathan Feeney. Please go ahead.

Unidentified Analyst

Good morning, Gerry. This is Brian pitching in on for Jon this morning.

Gerald B. Shreiber

Hi, Brian.

Unidentified Analyst

Quick question for you, how do you see the prices, I know historically, you’ve had a little bit a lag on the pricing side, when you’ve seen commodities bump up, certainly the commodities won’t be a significant as they’ve been, as you’ve talked a few years ago and pricing looks solid at the moment, do you think you’ve got sufficient pricing in place to sort of offset the cost inflation?

Gerald B. Shreiber

It’s good point, good question. We believe so, we hope so. But we’ll just have to, right now we’re reasonably comfortable with the outlook on both sides of the business.

Unidentified Analyst

And then with respect to the handheld business, I apologize if I missed this or if you’ve talked about this, I know last quarter, maybe a quarter or two, you’ve been profitable, does that still remain the case, is that still trending upward, and any impact from the slightly down performance on the food service side?

Gerald B. Shreiber

To begin with, we’re improving our financial performance albeit slightly on almost every quarter, and we’re slightly ahead of what our targets and our projections were when we first acquired that business a year and a half ago. We remain very much bullish on that business and its ultimate contribution to our sales and earnings. Our private label end of the business, which is retail and grocery, was up about 7.5% for the quarter, we need to do a little more work in capturing, and in growing the food service end of the business, but there has been an increase emphasis on it, and we’re comfortable that we will be, we remain bullish on the business…

Unidentified Analyst

One other question, with that Hostess liquidation that we’re seeing here, have you and again, I apologize if I missed this, but have you talked at all about any near-term opportunity that you’ve had as a result of some of those brands going dark with respect to some of the categories where you might be competing a little bit with that? Can you see any volume out there?

Gerald B. Shreiber

Not really, to begin with that’s a heavy, well it’s heavy white bread, and heavy sweet category, and most of it’s door to door distribution, and that’s an area of the business that we know about, we watch, but it doesn’t, it’s not our sweet spot, if you will and it would be really a little bit more transformational than we would like. Keep in mind, one of the reasons for our success, we have our niches, we really well within, we are certainly cost efficient and there are barriers to entry to the product lines that we are the leader in and we want to continually improve our niches, but make sure that we don’t extend too far from what we’re good at.

Unidentified Analyst

Fair enough and finally, how do you think about your marketing spend, down a little bit this quarter, I think I said a nice ramp up last year, looking year-over-year, your marketing spend. How do you think about that and how do you sort of, what do you sort of benchmark it against if you will or what sort of goes into, what are you looking at when you make these investments maybe on the shorter and the longer basis?

Gerald B. Shreiber

Quite of it is we kind of like watch it and admire, as we go. We think that’s we’re pretty quick on our feet, I mentioned it before, we have some excellent marketing people, some young people, talented people that have joined us in the last couple of years, they’re learning the business, and part of their learning curve is going to be influencing the product sales in here, I think the fact that the spending was down a little bit in the quarter was perhaps an aberration, before I give them a pat on the back, let’s see what it looks like for the full year, but they continue to perform well and we will grow our business and we will spend in marketing, we’ll spend wisely, and when we do it, we’ll do it quickly.

Unidentified Analyst

Great. Thanks for your time. Congratulations again on the quarter.

Gerald B. Shreiber

Thank you.

Operator

Thank you. and the next question is from Garo Norian. Please go ahead.

Garo Norian – Palisade Capital Management LLC

Hi, I’m newer to following you guys, and I just want to see it, if I can understand a little better, on the food service side, the pretzels and the churros is the kind of growth that you guys look forward, kind of representative of retail demand or is there some kind of almost inventory fill that also gets captured in that, and kind of how long have you been, ramping up with these customers?

Gerald B. Shreiber

Let me answer your question. Can I have your name again?

Garo Norian – Palisade Capital Management LLC

Garo Norian.

Gerald B. Shreiber

Garo, Garo?

Garo Norian – Palisade Capital Management LLC

Yeah.

Gerald B. Shreiber

Thank you, Garo.

Garo Norian – Palisade Capital Management LLC

Yeah.

Gerald B. Shreiber

There is no real ramping up, I mean there may be a couple of months planning in there in introducing it and most of it is what we call, food service, which would be snack bars and restaurants and amusements and theme and theme parks and base ball, I mean it’s all across the country, which is about 70% to 80% of our business. So most of it is coming from that retail itself at a slower or in more modest improvement and we have been expanding our core products, which is pretzels and churros and our ICEE and frozen beverages over the years, and now like it appears that not only are they continuing to grow, but we’re getting traction for the next support levels.

So we’re pleased with the overall results of our business, but we also realize that it wasn’t all of sudden, this combines the wisdom experience of our decision-making process and our strategies for several years.

Garo Norian – Palisade Capital Management LLC

Okay. So it is not a dramatic influence from a couple of new customers?

Gerald B. Shreiber

No.

Garo Norian – Palisade Capital Management LLC

Thank you.

Gerald B. Shreiber

Thank you.

Operator

Thank you. We have a follow-up question from Brian Rafn. Please go ahead.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Yeah. Gerry, what’s the comment on your kind of dollar change sales in all the smaller items from the dollar chains, what’s going on business there?

Gerald B. Shreiber

Dennis, you want to comment? Dennis is across there. Our sales there, we continue to be a player in that, which is essentially a new category to us. We’ve been active in the business for the last couple of years, and we continue to grow and we look at it very, very carefully. Obviously, when skews or items are being sold for dollar and retail, you have to have the pricing margins that benefit not only the customer, the ultimate buyer, but also the chain and also ourselves. So occasionally from time-to-time, we have to manage and contribute to the overall efficiency of those margins. So it continues to stay in that sector.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay. On the ICEE side, Gerry, can you give me a sense on what the infield installation of machines are for you guys?

Gerald B. Shreiber

Our total installations?

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Yes.

Gerald B. Shreiber

It’s a total number of …

Dennis G. Moore

What you’ve seen that we own I believe it is roughly 38,000 machines or so on the beverage side.

Gerald B. Shreiber

Could you hear that, Brian?

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Yeah. I’ve got it, I’ve got it, I’ve got it. Give me a sense Gerry on the ICEE. Okay

Gerald B. Shreiber

We are adding to that number almost every quarter.

Brian G. Rafn - Morgan Dempsey Capital Management LLC

Okay. Okay. Okay. If you look at the ICEE side Gerry, how much influence is weather, hot weather the ICEE maybe in the cinema or movie channel with that number of blockbuster Hollywood production, how much external variability from that influences ICEE sales in any one-year.

Gerald B. Shreiber

So, obviously hot weather people drink more and they drink more and we’re going to sell more of our ICEE and frozen beverages. It’s true as you noted that the movies have been better recently and what does that mean for us overall, that means more sales of our products that we selling movies which include ICEE and pretzels and hopefully some churros.

What ICEE has done over in the past eight to ten years, it has balanced their business over the ICEE as a business would lose money in October, November, December January, February, March, April could be a swing month, and that would make all of its money’s through May through September.

Right now ICEE had its first profitable winter quarter, first quarter October to December ever so we have balanced that business, the variations in that business with our service business, with our managed service or others which is the business now which is in close to $50 million a year that we’re doing and managing the equipment and repairs service for others, so we have been able to balanced these little ways in variations of P&L performance.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Okay. Okay. When you look at ICEE and SLUSH PUPPIE and PARROT ICE, how from season-to-season Gerry, year-to-year, how much is flavoring reformulations important, I mean do you add or is it you certainly have your core, your standard flavors, but how much is that new reformulation impact that frozen beverage side?

Gerald B. Shreiber

We have it and it’s available and occasionally, every couple years a new flavor will hit like, like being a couple of years ago, we did something with Vanilla Coke and it had a nice run for a while. but we have a constant – we’re developing constant flavors on our drinks all the time and we mixed it up, it’s matter of fact that became a new flavor couple of years ago called mixed up where the customer can literally mix six, eight, nine different flavors and a large ICEE or SLUSH PUPPIE drink.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Good, good, good. Okay. At then just in closing to your, as you look out the M&A area, what’s your sense on pricing multiples of EBITDA? Is there more damaged goods, bankruptcies types, so give me a sense as to what you kind of see?

Gerald B. Shreiber

I don’t think it’s changed dramatically. there was a little bit of a rush or people in their mindset that they thought they’re going to rush to some deal closes last year in 2012, because of the pending tax laws, we still take a very careful, analytical evaluation approach to whatever we’re looking at it, we want to make sure that it fits, we want to make sure that we can integrate it, we want to make sure that we can provide resources and get resources out, and we’re not just going to make an acquisition for an acquisition sake. and so we are still carefully and very conservative in our analytical approach today.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Sounds good, Gerry, we have been shareholders for 16 years. you’ve done a superb job, keep it up.

Gerald B. Shreiber

Well, thank you very much. I have a good team that’s been supporting me and pumping the growth this thing of ours.

Brian G. Rafn – Morgan Dempsey Capital Management LLC

Thank you. Bye.

Gerald B. Shreiber

Thank you.

Operator

(Operator Instructions) And we do have a follow-up question from Akshay Jagdale. Please go ahead.

Akshay S. Jagdale – KeyBanc Capital Markets

Thanks for taking the follow-up. I’m sure you’re not surprised.

Dennis G. Moore

Akshay, people like you help make us better in there, because you hit on things that you’re right on.

Akshay S. Jagdale – KeyBanc Capital Markets

Thank you, that’s the big compliment. On gross margin, I have a couple of questions.

Dennis G. Moore

A couple.

Akshay S. Jagdale – KeyBanc Capital Markets

Yes. with soft pretzels and churros driving the growth and becoming a bigger part of the mix, shouldn’t gross margins do better than they did this quarter, I mean I know they were off, it was still a good performance, but I mean are these products, soft pretzels and churros higher margin than pretty much most of the other products?

Gerald B. Shreiber

They have been part of our core products for the long-term and as a result, yeah, we’re pretty efficient in the production and distribution of that.

Akshay S. Jagdale – KeyBanc Capital Markets

In other words, like can you help me with – there are couple of things this quarter that may be – aren’t going to continue for the reminder of the year or like investment and slotting or just inefficiencies when you’re starting to serve a new customer, things like that. I mean is there anything that’s not evident in the numbers, color wise that you could help us with that may have negatively impacted gross margin?

Gerald B. Shreiber

I don’t think so. Obviously, in certain parts of the business, we’re always faced with investment spending, be it equipment or be it retail slotting and we will continue to look at that at the same kind of pace that we have been, sometimes more so, sometimes not so much. Just like marketing, sometimes the seesaw may tip because we’re going to have an opportunity, perhaps the (inaudible) is in the third quarter this year and maybe would have spend some money in there, so that marketing spend may move the needle a bit. But again, we’re thinking not necessarily for today’s sale and today’s profit, but for tomorrow’s growth of future.

Akshay S. Jagdale – KeyBanc Capital Markets

And the reason I was asking that is because if you look at this quarter’s gross margin performance and let’s say compare it to couple of years prior when – you see, you’ve had a couple of years of inflation, right. So now that you’ve done some pricing through and commodities where not up in the quarter, I thought your base business excluding handhelds should have a similar margin structure like it did a couple of years ago. In theory, is anything wrong with thinking that way? I mean, are we still – did we lose a percentage points in the base business? Is this excluding the handout business, somehow? Is it the margin a little bit lower now than it used to be or not really?

Gerald B. Shreiber

Well, keep in mind, we went through an inflationary period, right which impacted our core products. But the cost structure of that for a while and no matter how we plan pricing or advance pricing, you never recover as quickly as what the impact in the gut comes from the price increase.

Akshay S. Jagdale – KeyBanc Capital Markets

Okay. And one last one, I was surprised and I hadn’t done this analysis before. So shame on me, but your bakery business and that’s everything in there right, improving, really has been driving a ton of growth in the company, right? So most – a lot of the growth in the company has been driven by the bakery business especially recently including this quarter and I believe that slightly lower margins of co-packing type of business?

Gerald B. Shreiber

That’s correct.

Akshay S. Jagdale – KeyBanc Capital Markets

Yeah, so how do you think of that, I mean in terms of you’ve spent some CapEx, right, in that arena over the last couple of years and that is starting to pay dividends. But help me understand because it’s a lower return business, but perhaps it’s more stable. So I’m trying to understand strategically why you think it’s a good investment to do co-packing as opposed to something else?

Gerald B. Shreiber

Well, some of our businesses are, if you’d look at any aggregate, you have to kind of look at them as part of a jigsaw puzzle. They’re complementary to each other, both bakery and food service in there. So suffice to say that the business has grown and it has contributed to EBITDA and it continues to grow and it continues to be an important and beneficial part of our business.

Akshay S. Jagdale – KeyBanc Capital Markets

Yeah and I don’t disagree. My point is perhaps there’s other investments where you could get a higher percentage of return. I don’t know if you think of it that way. But perhaps there wasn’t an option, right which is why you choose this as that current time.

Gerald B. Shreiber

If they are and they were – we’re not going to find a pretzel with every kind of business opportunity or a Churro or an (inaudible). But we continue to look for ways to grow our business, but making sure that we’re conservative in our thinking and discipline, but can’t take any risks.

Akshay S. Jagdale – KeyBanc Capital Markets

And last one, I promise; this is on M&A again. So there has been a pick up in M&A activity at least on the public side of things, so we can track really. And there has been a lot of spin-offs, split-offs; so lots of financial engineering I guess to derive growth. You don’t have to do that because you’ve organic growth that’s very solid. But what has kept you from using – I mean you have had a lot of fire power, right with the cash you’re accumulating now for a couple of years. So clearly financing is not a hurdle.

So the only two other hurdles could be finding a goof fit which is driven the flow of access available out there and/or the multiples at which these are selling. So can you help understand if it’s one or the other or the combination of both that has kept you on the sideline and not – you haven’t been able to find those?

Gerald B. Shreiber

Finding the right fit and quite frankly the evaluation of the business is as it relates to us which really means the multiples.

Akshay S. Jagdale – KeyBanc Capital Markets

And more recently, is it that the multiples translated because certainly we’re seeing that in this mid-cap publicly traded food company, the multiples have expanded. I wondered if you’ve seen that happen in terms the deals you’re looking at as well.

Gerald B. Shreiber

Well, sometimes when deals in there – we can make a deal or two in a year and sometimes it’s a couple of years until something happens. That doesn’t mean that we’re not constantly looking at opportunities and there are opportunities that we’re looking at. But as liberal as we want to be in growing the business, that’s exactly how conservative we’re going to be in investing and in spending our money in acquisitions. A lot of these big time acquisitions or a lot of these things that are done and that helped to scout a piece, I’ve seen too many that did not workout. And maybe I just want to make sure that one that doesn’t happen with us and two that the things that we do ready, fire, aim about that we have thought through carefully.

Akshay S. Jagdale – KeyBanc Capital Markets

Great, thank you, and thanks for taking all the questions.

Gerald B. Shreiber

Thanks, Akshay.

Operator

(Operator Instructions). And at this time, we have no further questions.

Gerald B. Shreiber

I want to thank everybody for participating in this quarter’s conference call and we look forward to having you all here in the next to quarter too. Thank you.

Operator

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

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