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Edited Transcript of JJSF earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q3 2019 J & J Snack Foods Corp Earnings Call

PENNSAUKEN Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of J & J Snack Foods Corp earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gerald B. Shreiber

J & J Snack Foods Corp. - Founder, Chairman, President & CEO

* Gerard G. Law

J & J Snack Foods Corp. - Senior VP & Assistant to the President

* Robert J. Pape

J & J Snack Foods Corp. - SVP of Sales

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Conference Call Participants

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* Chase West

Consumer Edge Research, LLC - Analyst

* Jon Robert Andersen

William Blair & Company L.L.C., Research Division - Partner

* Robert Francis Costello

Costello Asset Management, Inc. - President and Chief Compliance Officer

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Presentation

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Operator [1]

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Welcome to the J&J Snack Foods Third Quarter Earnings Conference Call. My name is Ellen, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I would now like to turn the call over to Gerry Shreiber. Sir, you may begin.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [2]

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Thank you, Ellen, and good morning, everybody, and welcome to the J&J Snack Foods third quarter conference call.

I'll 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 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, a very good quarter. Net sales increased 7% for the quarter and 4% for the 9 months. For the quarter, our net earnings increased by 18% to $30.9 million or $1.63 a share from $26.1 million or $1.39 a share from a year ago.

For the 9 months, our net earnings were $68.8 million, $3.64 a share, compared to $80.2 million or $4.27 a share a year ago, as last year's first quarter included tax benefits from the income tax changes enacted in December 2017.

Our operating income increased by 12% in the quarter and 8% in the 9 months. Our EBITDA, earnings before interest, taxes, depreciation and amortization, for the past 12 months was $175 million, a new record.

Foodservice. Sales were up 4% for the quarter and 3% for the 9 months. Our sales increase of 4% for the quarter was due to increased sales of soft pretzels, up 4%; churros, up 13%; funnel cake, up 10%; frozen juice bars and ices, up 8%; and bakery sales, up 2%.

Sales of handhelds were down. Our sales increase of 4% for the 9 months was due to increased sales of soft pretzels, up 2%; churros, up 7%; funnel cake, up 19%; and frozen juice bars and ices, up 3%. In addition, bakery sales were up 3%.

Retail Supermarkets and groceries. Sales of products to Retail Supermarkets were down 5% for the quarter and 2% for the 9 months. Soft pretzel sales were essentially unchanged for the quarter and up 1% for the 9 months. And sales of juice bars and Italian ices were down 8% for the quarter and 3% for the 9 months. Handheld sales were up 3% for the quarter and down 7% for the 9 months.

Frozen beverages, which includes ICEE, ARCTIC BLAST and SLUSH PUPPIE. Frozen beverage and related product sales were up 20% in the quarter and 13% in the 9 months. Beverage-related sales alone were up 16% in the quarter and up 6% for the 9 months. Gallon sales were up 2% in the quarter. Service revenue, this is our fast-growing service revenue for others, was up 14% in the quarter and 7% for the 9 months. Sales of beverage machines and related revenue were up $5.0 million for the quarter and $13.7 million for the 9 months on higher sales to 3 customers.

Consolidated. Gross profit as a percentage of sales was 31.02% in the 3-month period this year and 30.85% last year. So you could see we're trending up. The increase resulted primarily because of increased sales, including pricing and improvement in production efficiencies.

Total operating expense as a percentage of sales was 19.1% in the quarter, down from last year's 19.5%. The increase was primarily due to lower freight rates and modestly higher increased selling and marketing expenses over a higher sales base.

Other income includes a $2 million payment received from a customer due to a cancellation of a production under a co-manufacturing agreement.

Capital spending and cash flow. Our cash and investment securities balance of $314 million, was up $27 million from our April balance. We continue to look for acquisitions as a use of our cash. $137 million of our investments are in corporate bonds, with a yield to maturity of about 2.9%. Our capital spending was $16 million in the quarter as we continue to invest in plant efficiencies and growing our business. We estimate our spending for the year to be about $60 million.

A cash dividend of $0.50 a share was declared by our Board of Directors and paid on July 3, 2019. We did not buy back any shares of our stock during the quarter.

Some other commentary. Sales of our Food Service products increased across the board, except for handhelds. Sales of pretzels were especially strong to convenience store chains. Frozen sales were up 13%, with sales up across the board. Frozen juice bars and ICEE sales were up in club stores and in the value chains.

Operating income in our Food Service segment increased from $19.7 million to $21.1 million, primarily because of increased volume, lower freight rates and pricing.

Soft pretzels in our Retail Supermarket segment were flat for the quarter, but sales of frozen juice bars and ices was down as volume was impacted by our price increases.

Operating income was up 14% for the quarter to $3.7 million, benefiting from lower freight rates, marketing spending and some increase in pricing.

Frozen beverages operating income benefited from a 72% increase in machine sales revenue and a 14% increase in service revenue. Overall, sales benefited by increased sales to a distributor, which did not really benefit our bottom line, but which added 5 percentage points to this segment's sales increase, from 15% to 20%. Our investment income included $118,000 of unrealized losses this quarter and $385,000 of unrealized losses for the 9 months. Our effective tax rate was 28.1% this quarter, in line with our anticipated rate of 27.5% to 28% going forward.

I want to thank everybody for your continued interest. And now, I will turn it back to you as we entertain your questions and comments.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [2]

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Ellen, I want to apologize. I have several people here with me on this conference call. And they are in no specific order, but Jerry Law, our Senior Vice President; Bob Pape, our Vice President of Sales; Dennis Moore, our Senior Vice President of Accounting and Administration; Bob Radano, our COO; Bo Powell, our Vice President of Sales of Food Service; and Marjorie Roshkoff, who is in charge of Legal and HR.

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Operator [3]

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And we do have a question. It comes from Jon Anderson.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [4]

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I want to compliment you on your good research by picking us up a couple of years ago and staying with us.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [5]

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You continue to deliver, so kudos to you and kudos the team and congratulations on another terrific quarter. One of the questions I had was related to pricing. You mentioned pricing several times in the prepared comments, and I'm just wondering -- it sounds like you've made a more concerted effort to implement pricing of late, and can you talk a little bit about that? Is that true where you're seeing the pricing opportunities? And what kind of consumer response or any pushback have you experienced in the market?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [6]

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Well, every strategy, particularly in pricing, is followed by a reverse strategy. We did increase pricing across the board approximately a couple of percent early on in this -- early on in January. And we got most of it through. There are some delays in there, but we think we are still very, very economical for the consumer, and more than economical against any competition, whether they are in our sector or alongside of us.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [7]

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Great. And in your Food Service business, you had particular strengths in churros, for example. I'm wondering if you can talk a little bit about what's driving the double-digit growth there?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [8]

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Across-the-board, Jon, a few years ago when we started talking about churros, people would say, "What is it? Cheerios? Churrios?" Now everybody seems to know what a churro is and more and more customers and accounts are clamoring for the product. So we've experienced continuous growth with that product. And now we are in the double-digit growth across major chains and others.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [9]

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So that's not a kind of for 1 or 2 customer thing? That's a broad-based across Food Service, you're seeing strength?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [10]

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Across-the-board.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [11]

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Okay. You mentioned a couple of channels recently as maybe focused channels where you felt your portfolio is maybe underrepresented, at least in certain areas, I think. Convenience stores is one. I think Restaurants has been an ongoing effort for you. Can you talk a little bit about or somebody talk a little bit about the efforts within like the convenience channel and maybe some successes? And also kind of where you stand relative to your longer-term goals with restaurants?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [12]

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Well, you just did, right? We made significant inroads with C stores. We've added a little bit of staff, maybe 2 years ago to that, and their total concentration is to further develop C stores. And for some time, we've had -- we've addressed the fast food and restaurant group and we had a couple of back-to-back great years there. And then one year it slipped off by about 10%, but I'm happy to say that we recovered that. Bob Pape is here. Bob, do you want to talk about that and how we are doing well?

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Robert J. Pape, J & J Snack Foods Corp. - SVP of Sales [13]

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Yes. Again, the focus of the chain and national accounts -- chain and national accounts continue to be a focus and we are optimistic about our opportunities within the channel moving forward.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [14]

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Well, and we're not really just horsing around in this. We had focused on this and we are moving on all fronts.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [15]

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Okay. There was some disclosure around the cancellation of a co-packing agreement. There was a payment in the quarter that you received, but could you describe how that impacts or maybe flows through the financials moving forward, presumably you take a hit to revenue from that, and just thinking about how we model that?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [16]

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Well, the biggest loss for us -- my biggest concern was -- we had high hopes for this and we were doing it for a co-packer. We had some protective clauses in there. And they had to cancel and we had to trigger a clause and we reaped -- we benefited there.

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Gerard G. Law, J & J Snack Foods Corp. - Senior VP & Assistant to the President [17]

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Jon, this is Jerry Law. The revenue from that is already -- we've already lapsed it. So this is a reimbursement for capital outlay.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [18]

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And we have the equipment.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [19]

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Okay. So that's in the base and you have -- and you end up with the equipment as well. Okay. Helpful. I guess, last thing -- I think the $314 million balance cash and investments is the highest since at least I've been covering the company.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [20]

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I think you write it in your recent note as a fortress, right?

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [21]

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Yes. I think that's right.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [22]

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(inaudible)

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [23]

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So what are we going to -- what are the plans for the fortress, I guess?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [24]

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To use it properly for the business, including primarily for acquisitions and perhaps some other developments.

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Gerard G. Law, J & J Snack Foods Corp. - Senior VP & Assistant to the President [25]

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Jon, this is Jerry Law again. We really stepped up our vision into looking to larger deal capital projects. And if we can't find something to purchase, we're going to increase our spend in the business to improve ourselves.

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Operator [26]

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(Operator Instructions) Our next question is from Robert Costello.

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Robert Francis Costello, Costello Asset Management, Inc. - President and Chief Compliance Officer [27]

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A question on your manufacturing. You talked about your capital spend, is there any plans for any closures redeployment? Could you just give an update on what your plans are little more specifically with the capital spend?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [28]

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Well, I'm going to turn it over to Jerry Law, but we did close one undersized plant in Pennsylvania and we've added to a couple of our businesses that are strategically located in the Midwest. They already were good producers, but now they added volume to pick up some favoritism in distribution.

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Gerard G. Law, J & J Snack Foods Corp. - Senior VP & Assistant to the President [29]

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We continue to look at these larger projects that we have, 2 that are in the pipeline to come along within the next 12 months. And we continue to look for other large-scale projects to make us more efficient.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [30]

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And, Bob, and if you go back and look at things, what Jerry Law does and I do and Dennis, they work. When we take on a project and we're going to add so much production efficiency and so much estimated savings, whether it be labor or whatnot and when we review 6 months to 9 months later, they are working. So we're kind of pleased and proud of that.

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Robert Francis Costello, Costello Asset Management, Inc. - President and Chief Compliance Officer [31]

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Right. Another question. What's it cost today to get a bakery up to running, capital wise like a large-scale one you need, is this $50 million or more?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [32]

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Bob, $40 million at the outset I would say. So if we were going -- and -- right now we're reaping the benefits of some of the things we did years ago, strategically. We carried a couple plants to ours by acquisition in the Midwest. And we invested in them gradually, but surely. Now all hell has broken loose, and that's good hell. We got -- all hell has broken loose and these plants are busy and they're churning out volume, and -- so we think we're in good shape. We continue to provide investment and expansion into a few of the plants. But right now we've increased not only our throughput, but these plants are operating at a higher capacity.

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Robert Francis Costello, Costello Asset Management, Inc. - President and Chief Compliance Officer [33]

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And this time last year, it wasn't as warm as it's been, correct? That would be a fair case?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [34]

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You know what. I will live with that to the weatherman. Our ICEE business, which is a warm-weather indicator, has certainly performed well this quarter, and we probably going to have another good quarter here in our fourth quarter.

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Operator [35]

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The next question is from Chase West.

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Chase West, Consumer Edge Research, LLC - Analyst [36]

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So just quickly want to touch on M&A and the environment. Are there assets out there you guys are seeing? Or how valuations are trending these days?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [37]

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We've had a unique history of being able to find little dusty pellets in there and polishing them up. As you are aware, these assets have sometimes they become overpriced and sometimes it is grossly overpriced. But we have enough faith and confidence in our abilities to find these pieces that maybe look dusty and coalish, like coal, and see how they fit in with us and what we could do with them. I would say that it's not nearly as lucrative as it was perhaps 5, 6 years ago, but nevertheless, we're looking at specialty things.

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Chase West, Consumer Edge Research, LLC - Analyst [38]

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That's helpful. Thanks for the color. And then my second question on innovation. Looking out over this, call it, the next 12 to 24 months, could we expect new product contributions to accelerate from current levels? Or just how should we think about innovation going forward?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [39]

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Well, I'm going to give it to Jerry Law, who is in charge of -- in addition to his other responsibilities, he is in charge of R&D, which is in a separate facility here in New Jersey. But we have a full-time staff of 5 or 6 people in there that are constantly working on new products.

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Gerard G. Law, J & J Snack Foods Corp. - Senior VP & Assistant to the President [40]

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Yes. We have a staff around the company that works on new products. And the new product that is in the disclosure doesn't really reflect all the new items because it doesn't show product line expansion or new flavors or those kind of growth. So it is little bit muted.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [41]

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You might to mention the new products that's being distributed across the board now by that one convenient store chain.

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Gerard G. Law, J & J Snack Foods Corp. - Senior VP & Assistant to the President [42]

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You just mentioned it.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [43]

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No I didn't tell him who it was. If you guys get a chance, all of you, stop in at your favorite convenience store, particularly 7-Eleven, and ask them what is new from their partners in development? We have a product in there that is sensational with a couple of S's, but it's only been there about 2 months but we are getting real good ripples from it.

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Operator [44]

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And I'm showing no further questions at this time.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [45]

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All right. I want to thank everybody for participating in our third quarter conference call. We had a good quarter. We're very ,very proud of what we've done. And we're going to do it again and again and again. Thank you very much.

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Operator [46]

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