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Edited Transcript of JJSF earnings conference call or presentation 8-Nov-19 3:00pm GMT

Q4 2019 J & J Snack Foods Corp Earnings Call

PENNSAUKEN Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of J & J Snack Foods Corp earnings conference call or presentation Friday, November 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Fachner

J & J Snack Foods Corp. - President of ICEE Company

* Dennis G. Moore

J & J Snack Foods Corp. - Senior VP, CFO, Treasurer & Director

* 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

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Conference Call Participants

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* David Mandel

Consumer Edge Research, LLC - Research Associate

* Debra Manche;Lakewood Capital;Analyst

* Jon Robert Andersen

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

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Presentation

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Operator [1]

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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. (Operator Instructions) Please note that this conference call is being recorded. I would now turn the call over to Dennis Moore. 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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This is Gerry Shreiber. Dennis Moore is here, but he's across the room. 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 Food Service. I will now begin the call with the following obligatory statements. The forward-looking statements contained 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% in 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 increased 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 increased 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 Supermarkets were up less than 1% for the quarter and down 1% for the year. We saw pretzel sales were down 4% for the quarter and 0.5% for the year. Sales of frozen juice bars and Italian Ices were up 4% in the quarter and down 1% for the year.

Handheld sales were down 24% for the quarter and down 12% for the year. ICEE and Frozen Beverages, which include ARCTIC BLAST and SLUSH PUPPIE. Frozen Beverage and related product sales were up 13% in the quarter and 13% for the year.

Beverage-related sales alone were up 9% in the quarter and 7% for the year, with gallon sales up 5% and 8% in our base ICEE business. Service revenue for others was up 10% and 8%.

Machine revenues was up a sharp 41% for the quarter and 60% for the year.

Consolidated. Gross profit as a percentage of sales in the quarter decreased to 29.8% from 30.3% last year and was 29.5% this year and 29.5% last year for the year as the benefits improved -- of improved operations at several of our manufacturing facilities and some modest increased pricing were offset by increases in lower margin sales of machines in our ICEE and Frozen Beverage segment and increases of lower margin sales of bakery and bakery products in our Food Service segment.

Operating income in our fourth quarter was $31.1 million for both years and increased 6% to $117 million for the year. Our EBITDA, that's earnings before interest, taxes, depreciation and amortization, for the past 12 months was $165 million. Total operating expense as a percentage of sales was 19.8% in the fourth quarter, down slightly from last year's 20.0%.

For the year, the percentage decreased to 19.7% from 19.8% of a year ago.

Capital spending and cash flow. Our cash and investment securities balance of $343 million was up $29 million from our June quarter and $67 million from a year ago.

We continue to look for acquisitions as a use of our cash. $128 million of our investments are in corporate bonds with a yield to maturity of 2.8%. Our capital spending was $15 million in the quarter as we continue to invest in plant efficiencies and growing our business.

Our spending for the year was $57 million, $3 million less than last year. A cash dividend of $0.50 a share was declared by our Board of Directors and paid on October 3, 2019. We did not buy any shares of our stock during this quarter. We did not buy back any shares of our stock this quarter.

Other points and commentary. Food Service's soft pretzels continued its recent strong sales growth in convenience store chains, but sales to restaurant chains have been down slightly. Churros sales continue to be strong in warehouse club stores and across the board. Funnel cake sales continues to do well in schools, bakery sales were up this quarter as we had significantly higher sales to one customer. Hand sales -- handheld sales were down 23% for the quarter because of a drop-off in the co-pack business and sales to restaurants chains. Frozen juice bars and ICEE sales were up in the quarter and the year due to increased warehouse club store business.

Overall sales to restaurant chains are down this year while sales to schools have been up modestly. Operating income in our Food Service segment was down 5% to $18.9 million in the quarter because of overall declines in volume and nonrecurring cost resulting from wrapping up production to meet increased bakery sales demand from a single customer. Increase was from $74.1 million in 2018 $78.1 million in 2019, resulting from benefits of improved operations and several of our manufacturing facilities and to some degrees increased pricing.

Soft pretzel sales in our Supermarket segment were down 4% for the quarter because of decreases in volume. Frozen novelty sales were up 4% in the quarter due to price adjustments and lower trade spending. Operating income in our Retail Supermarkets segment was $1.1 million in the quarter compared to none in last year's quarter, an increase from $8.3 million to $8.9 million for the year.

The primary contribution through the higher operating income in this year was increases to pricing. Sales in our Frozen Beverage segment were up a strong 13% for the quarter. Service revenue was up 10% in the quarter as this business continued its strong sales growth and machine sales and revenues were up 41% or $3.5 million in the quarter.

ICEE's operating income for the year was up $2.1 million or 8% due to strong sales growth and was down $181,000 for the quarter, mainly due to inventory adjustment balances. Thank you for your continued interest, and I will now turn it back to the listening audience for any questions or comments. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Okay. Our first question comes from Jon Anderson.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [2]

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

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [3]

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Yes, we do. From my perspective, at least early in the year, it looks good for next year too.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [4]

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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?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [5]

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Well we want to continue with 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.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [6]

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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 2? Are you -- as good as? Better than?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [7]

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Our -- well, hopefully it's at least as good as and perhaps a couple of points even better, but we continue 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 12 months. Jerry, you want to comment on that? Jerry Law?

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Gerard G. Law, J & J Snack Foods Corp. - Senior VP & Assistant to the President [8]

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Yes Jon, we have soft pretzels or frozen desserts, funnel cakes as we continue to add products across the C store channel, health care channels, we continue to see some growth in those areas.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [9]

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Yes. Let me pause for a second. A few years ago, I mentioned in the sessions, our plans to increase overall our presence in convenience store, the convenience store markets. We've done that, and we're continuing. And now we think we have some momentum behind them to continue that for the next several years.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [10]

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Good. That's great to hear. Is -- so 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 the growth area for you for multiple years. And I'm just wondering are you still seeing the kind of opportunity there for further product penetration? Or do you feel like you've kind of tapped that now and need to look beyond the C stores, health care, other channel?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [11]

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You'll recall that we entered that business about 5 or 6 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. And now it represents about $60 million overall in our revenue, and we have specific products at specific chains that we have plans to increase that for this year. So we're looking ahead to next -- certainly a year or 2 in there with a good degree of confidence.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [12]

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Excellent to hear. I'm -- what's holding back margins at this point? Because I think the top line's 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 you're middle innings of that? Or are we now getting to a point where mid-single digit growth can translate into higher margins as well?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [13]

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Dennis you want to comment on that?

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Dennis G. Moore, J & J Snack Foods Corp. - Senior VP, CFO, Treasurer & Director [14]

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Yes. Our margins for this year were impacted by a couple of factors. One being the prior sales of the level of margin ICEE machines. Overall, our margins in the balance of the business were higher. So that kind of is -- distorts 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, which impacted our margins in the fourth quarter. So I would say overall the margin profile -- the gross margin profile is -- was better this year, but was masked by those 2 issues, the prior machine sales and the issue that we had in our fourth quarter in our bakery business.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [15]

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And actually, Jon as a little bit explain, we have one large customer, and I -- it begins with an M that we got a big bunch of business from in our fourth quarter. Looking ahead for the next year or 2, we will perform better with that business, but we had some issues in just absorbing it all in to our -- couple of our Midwest plants.

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Dennis G. Moore, J & J Snack Foods Corp. - Senior VP, CFO, Treasurer & Director [16]

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Yes, Jon, the projected business was much lower than what actually came in and it caused a disruption where we had -- we had built a line to take on the business, and we were prepared. But when the business came in, it was much bigger and we had started from 2 facilities and moved into 4 facilities, and our ramp-up curve was pretty steep on that one.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [17]

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And Jon, and I apologize on behalf of everybody if that sounds like a lame excuse, picture a chicken with a one leg, it is a lame excuse. We will do better.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [18]

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All right. I guess that's a high quality problem to have.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [19]

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A bit, yes.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [20]

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Okay. Last one my for me is -- I think at one point over the years, we've talked -- someone mentioned hey if we built a cash and investment pile that exceeded $200 million, something like that, we'd really look it -- be a little bit maybe 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?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [21]

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Well, the thought process is to use that cash in the most efficient way that we can. 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 we'll -- the best use for that cash, in my estimation, is for acquisition.

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Operator [22]

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Our next question comes from Debra.

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Debra Manche;Lakewood Capital;Analyst, [23]

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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 a reversion next year to historical averages?

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

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

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Daniel Fachner, J & J Snack Foods Corp. - President of ICEE Company [25]

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Sure. Deborah, last year 2019 was a great year for us in 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.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [26]

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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.

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Daniel Fachner, J & J Snack Foods Corp. - President of ICEE Company [27]

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Gallons and service revenue.

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

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Right.

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Operator [29]

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Our next question comes from David Mandel.

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David Mandel, Consumer Edge Research, LLC - Research Associate [30]

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Congratulations on the strong year. Just wanted to get into a couple of questions. One regarding on the Auntie Anne's rollout. Where you -- do you see -- it looked like there was some cannibalization off of SUPERPRETZEL. Are you seeing that across the board in most places? Was that expected? And was that a negative margin mix for you?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [31]

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Jerry Law, you want to comment on that?

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Gerard G. Law, J & J Snack Foods Corp. - Senior VP & Assistant to the President [32]

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In our analysis we don't see cannibalization of SUPERPRETZEL at all. The -- and the lower sales of the quarter were a result of some of our pricing in the quarter. We had increased our pricing which reduced -- resulted lower -- less promotions of our product. That's what we primarily attribute this to.

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [33]

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And this is Gerry again. Auntie Anne's was a formidable competitor for a number of years. We bought them, and we are integrating it within our system. And as we have in past years -- have bought other competitors and win 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 5 or 6 years, it makes our overall business more bullish.

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David Mandel, Consumer Edge Research, LLC - Research Associate [34]

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Got you. That makes sense. When I look at your convenience distribution. I know we just discussed one of your opportunities for the future is kind of white 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 at convenience?

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Gerald B. Shreiber, J & J Snack Foods Corp. - Founder, Chairman, President & CEO [35]

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We are. And if you go into any of the national convenience stores, you can look at the front. We had dreams of getting on that front counter 8 and 10 years ago. And now we're there. There's a big display case, featuring 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.

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David Mandel, Consumer Edge Research, LLC - Research Associate [36]

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Yes, it seems like there's a lot of white 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?

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

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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 2 or 3 years ago. It's not quite what it was 10 years ago, but we continue to look for good space, not just white space, good space for us in there as we continue to grow our soft pretzel market.

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Operator [38]

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(Operator Instructions) And speaker, at this time I show no further questions in queue.

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

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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.

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Operator [40]

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