J & J Snack Foods Corp (JJSF) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods fourth-quarter 2008 earnings call. (Operator Instructions). Please note that this conference is being recorded. I will now turn the call over to President and CEO Jerry Schreiber. Mr. Schreiber, you may begin.

Good morning, everyone, and thank you for attending today our conference call. I am Jerry Schreiber and with me today is Dennis Moore, our Senior Vice President and Chief Financial Officer; Bob Radano, our Senior Vice President and Chief Operating Officer; and Vincent Melchiorre, our Executive Vice President in charge of Sales and Marketing.

I am going to begin with an obligatory statement on forward-looking statements and then I will go into the results of operations.

The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from these -- 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 -- net sales increased 9% in the quarter, and 11% for the year. Adjusting for sales related to the acquisitions we made over the past [two years], sales increased the same 9% for the quarter and approximately 7% for the year. For the quarter, our net earnings increased by 7% to $11.2 million or $0.59 a share, from $10.5 million or $0.55 a share a year ago. Not too shabby during these challenging economic circumstances either, I might add.

For the year, our net earnings decreased by 13% to $1.47 a share from $1.69 a share in the year ago period. Give me a moment. Our EBITDA for the past 12 months was $73.4 million.

Food-service -- sales to food-service customers increased 9% for the quarter and 12% for the year. Without the acquired sales of Hom/Ade Foods and Daddy Ray's and Whole Fruit and Fruit-a-Freeze, sales were still up 7% for the year, while pretzel sales were up about 2% in the quarter and 1% for the year as unit sales overall declined. Italian ice and frozen juice bars and treats and dessert sales increased 4% for the quarter and 8% for the year. Without acquired sales, those sales were up 5% in the year.

Churro sales were up strong, 14% in the quarter and 15% for the year. Bakery sales, excluding Hom/Ade and Daddy Ray's, were up 13% in the quarter and 14% for the year. Hom/Ade biscuit sales were down 4% in the quarter and Daddy Ray's sales were up 29%.

Retail supermarkets -- sales of products to retail and grocery supermarkets were up 10% for the quarter and for the year. Soft pretzel sales were up 5% for the quarter and 11% for the year, although case sales were down significantly in the quarter and were up less than 1% for the year. Sales of our frozen juice bars and Italian ices were up 11% in the quarter and up 8% in the year due to all from increased volume of Whole Fruit and Fruit-a-Freeze and reduced allowances on our other products.

ICEE and frozen beverages -- frozen beverage and related product sales were up 11% in the fourth quarter and 8% in the year. Beverage sales alone were up 10% in the quarter and 6% for the year. Most of the beverage dollar sales increase resulted from a change in program structure for one major customer, which resulted in both higher sales and higher cost of sales and operating expenses.

Gallon sales were down 3% in our base ICEE business in the quarter and approximately 4% for the year. Service revenue for others was up 14% in the quarter and 24% for the year, with most of the increase to one customer. Sales of frozen carbonated beverage machines were down $0.1 million in the quarter and $1.7 million for the year.

Consolidated -- Gross profit as a percentage of sales in the quarter decreased to 31.2% from 32.8% last year and to 29.7% in the year from 32.8% a year ago. The 1.6 percentage point decrease in the quarter compared to a 3.7 percentage point decrease in the first nine months of the year. We were impacted by over $7 million of higher commodity costs in the quarter and $30 million for the year. And we expect to continue to be impacted moving forward, at least over the short term. We are, however, optimistic that the year-over-year increase in costs that began to decline in our recent fourth quarter may continue.

Total operating expense as a percentage of sales was 1.5 percentage points lower in the quarter and 1.4 percentage points lower in the year due to both higher sales volume and controlled expenses.

Marketing expenses alone were lower by 1.2 percentage points. Last year we spent $600,000 on a national sales meeting during our first quarter, which we did not repeat this year. Additionally, advertising expense in our retail supermarket business was lower by $2 million for the year. Other operating in income was $480,000 less in this year's fourth quarter and $1 million less for the year, which had a negative impact on the comparison of this year's operating income compared to last year.

Capital spending and cash flow -- our cash and investment securities balance increased $20.3 million in the quarter to $81.9 million. Let me just repeat that statement. Our cash and investment securities balance increased $20.3 million in the quarter to $81.9 million.

We bought back $3.5 million of our stock in the nine-month period but none in the recent fourth quarter. Our capital spending was $22.8 million for the year. Our cash dividend of $0.0925 a share was declared by our Board of Directors and paid on October 2, 2008. Our Board of Directors also authorized a million-share stock buyback in February. We bought back and retired 135,000 shares through the end of September.

At the end of the quarter, we held $35.2 million of auction market preferred stock, of which approximately $14 million has been redeemed at par. So we now hold approximately $21 million. As you know, the market for this type of asset sale failed beginning in February of 2008. It is the failure of the market, approximately $24 million of our holdings have been redeemed at par by the issuer, and we anticipate further redemptions.

Additionally, Merrill Lynch has offered to buy at par auction market stock of the type we own from its clients during the period January 2, 2009, through January 15, 2010. So presently, we expect to be paid our full principal and to continue to receive the dividends until we are paid in full the principal.

We continue to (technical difficulty) -- acquisitions to supplement our internal growth, but we are not running foolhardy into things that are not beneficial to our shareholders and the company for the long-term.

Commentary -- our internal sales growth of 9% for this quarter resulted from a combination of price increases, unit volume increases and decreases and reduced [freight] spending in our retail supermarket business segment. In food service, soft pretzels and biscuits had volume declines, while frozen juice bars and ices, churros, Daddy Ray's fruit and fig bars and other bakery items had flat to strong positive unit growth.

Unit sales of soft pretzels in our retail supermarket segment were down significantly in the quarter and up slightly for the year. Part of this might have been trade spending and shifting of buying patterns. Case sales of frozen ices and juices were down 9% in the quarter as we sharply reduced trade spending against these products to improve profitability.

Operating income in this segment improved by $3.1 million in the quarter, and largely as a result of the reduced trade spending. We are planning to institute a new advertising campaign perhaps in the second or third quarter of this year to further promote our soft pretzel business.

ICEE and our frozen beverage segment continues to experience challenging sales in the base beverage business. Our service revenue to others continue to grow, up 14% in the quarter and 24% in the year, following a 23% increase for the last year as this is a key component of our growth plans going forward.

We installed in our servicing the frozen beverage machines for major retailer, Taco Bell, under their new product ramp, Fruitista Freeze, in the third quarter. We have recently begun small initiatives in the Middle East and in China and we are experiencing interest in other countries around the globe.

Higher commodities once again are the big story of the quarter and going forward. The $7 million in cost increases from a year ago in the quarter, and $30 million for the year, is unprecedented in our 37 year history. We expect commodity costs to continue to impact us going forward, although to a lesser extent each succeeding quarter.

We will continue to balance what is beneficial for our business over the long term first is the impact of aggressive pricing over a very short period of time. We expect our investment income will be moderately lower over the short term, even though our balance of investment securities and cash equivalents is higher than a year ago. We have invested in relatively safe investments since mid-September. We are losing the benefit from our holdings in the higher-yielding auction market preferred stock as they are redeemed.

Our estimated income tax rate increased to 39% for this year from 37% last year due to a combination of factors. We presently are estimating a tax rate of 39% for our 2000 (sic) fiscal year.

I wanted to take this time to assure our investors and our listeners that the company will continue to focus on the long-term for the benefit of our shareholders. I believe that the past year we were challenged both on input costs and economic challenges, and all in all we had, although perhaps not as good a year as we had hoped, we had a satisfactory year. And we will continue to manage this company in the best interest of our shareholders over the long-term.

Thank you very much. I will turn it back to you for questions.

(Operator Instructions). Andrew Cash.

I just had a question on this joint venture that Dean Foods and Hero has recently formed. They are planning on launching Fruit2day in the US, as I understand it, by about the middle of 2009. So on the one hand, this might be good for you because they may throw a lot of advertising dollars out there and this could expand the category. On the other hand, it might take some of your share. So I was just wondering what perspective you have on this Fruit2day.

When you say Fruit2day, can you be a little more specific? I'm not sure I am fully up to date on that initiative.

Dean Foods and -- I guess I'm saying that's right -- Hero, H-E-R-O in Switzerland, Hero sells a bunch of these refrigerated fruit products in Europe. And apparently they are pretty good hit over there. I don't know how big they are. But Dean Foods just announced they did a joint venture with Hero to launch this product that Hero sells in Europe called for Fruit2day. It is a refrigerated way to get your fruit. So I just -- (multiple speakers)

Well, that's interesting. Right now we don't participate in the refrigerated section at all. And again, we are constantly looking for ways that we can leverage our resources and our assets. A few years ago we were not in the Dollar Store channel either, and grew the initiatives at our Daddy Ray and our sales people, suddenly it represents close to a $30 million business for us.

So we will certainly be looking at Dean's initiative as we look at all of the companies that come out with new products.

I just thought it might be -- it might bump up against your frozen Minute Maid product, your refrigerated Minute Maid product as well as your Luigi's ICEEs.

Well, it is a good point, it is an interesting point. And we are looking to have a strong year from both Luigi's and Minute Maid in our frozen novelty section again for next year.

The other question I had is just what do you think soft pretzels, unit volumes are off?

I think it was a combination of factors. One might have been buying input and some redistribution of trade allowances. I don't think it's -- if anything, I think the next time we are talking about it, perhaps it will be an aberration.

And by the way, thanks a lot for doing a great job. You are really doing a fantastic job managing your costs. We appreciate it.

I have a lot of good people that help me with this 24 hours a day, seven days a week. So I appreciate it.

[Brian Raffin].

A question for you. You made a comment on the delta change in your commodity costs. Are you seeing actual declines in commodity feedstock costs or is the growth and acceleration of the inflation of your commodity costs decelerating?

Dennis, do you want to comment on that?

We are -- compared to a year ago, the increased his decelerating. We are not out of the woods yet. Now, we want you to monitor it every day. It would be nice to get back to two or three year ago levels. And last year was a shock. I think that we were equal to the challenge overall, but it is no fun seeing your costs run up and being a little bit hesitant to pass on these costs to valued customers to have their own set of issues too.

Okay. If you guys were too -- you put a percentage magnitude, if you look across shortening, sugar, eggs, some of your different costs, what year-over-year as a percentage would they be up? Would they be up 10%, 15%, 20%, 30%? Give me a sense of kind of a frame of reference.

Years ago we used to budget for maybe 2% in there so that we could handle it really. Last year they attached [euros] to that 2% and 3% in there and that made it more difficult. But Dennis, what are we figuring on now?

Yes, we figured that our commodity costs were approximately 36.5% of --

Manufacturing costs.

Cost of sales this year compared to about 33.5% last year.

Okay. In the past you have talked about you guys have really done a fantastic job in trying to hold the line in pricing inflation on -- at the grocery store or at retail. And obviously with the tremendous cost pressures, you had to kind of give that up with some price increases. I think you have mentioned in the past that when you get beyond $3 in the freezer case goods, there is some elasticity with the customer.

Given the price increases you have put on across Minute Maid and Luigi's and some of the different areas, what are you seeing from the standpoint of the elasticity with your consumer, your end consumer, specifically maybe at grocery stores or wholesale clubs? Are they continuing to buy the volume? Are they going for more private label or generics? Give me a sense of what you are seeing.

Well, to begin with, your statement or question has a lot of merit. And Vince and his group are constantly looking at consumers' resistance levels and what that means and whether there is a delta point at it or an Alpha or a beta point in there. We would like to be -- we are priced competitively with all the popular snack foods and we have unique shares. And so it is our intention to do everything we can to be a low cost producer as well as the leading brand.

Okay. What -- give me a sense and if you look out into 2009, 2010, given the malaise in the market, certainly the recession, is your sense that going forward and growing your SKU towns and growing your product lines, is it going to be more of a waiting to developing organic internal products, flavors, textures? Or is it going to be more of an M&A, and where you are buying orphan brands or whatever and then resuscitating them?

Well, we have had some successes in buying orphan brands and a lot of fun in putting life into them and running with them and watching them grow and playing with them. This company is about hard work and growing and having fun.

We also for the first time we have four or five new products that are coming (technical difficulty) all right? So they are not perhaps they are not (technical difficulty) as quickly as Jerry Schreiber would like them to, but I think that we are doing it right.

And we expect to have a couple of new products from the soft pretzel line extensions and frozen novelty extensions and something unique called Funnel Fries, a new product that is developed from our funnel cake business. So it is going to be a combination of both. And I think in some ways the company has never been stronger, never been better.

We recognize what is out there that are not barriers to our success, what might be slow caution signs with what's going on economically. But we have these things put into our equation of business challenges. So we are going to see both development of new products and hopefully some acquisitions down the road.

Okay. Could you talk a little -- and we always kind of focus on your branded products. Is there any -- are you doing anything in the private label or generics areas for other grocery store chains or anything?

Yes, we are. Actually, our bakery in California has a fairly sizable business today doing private label and store brands. In the soft pretzel end we have seen a little bit of a movement in private label brands with grocers and most of them we are the partner, the producer for them, and we are seeing some interest also in the frozen novelties.

Our ICEE business continues to have what we think some interesting potential coming internationally. Our Mexico business was very, very strong. We have begun initiatives in the Middle East with an operation going in Bahrain. We have nearly 20 ICEE beverage machines producing ICEE drinks in China.

There is interest from several other countries. There is a contingency from Africa, representing Africa and some of the other countries that want to visit us soon to talk about developments. So we have a lot of confidence and we have a lot of potential in our brands.

Okay. Give me a sense of, given certainly with, again, the recession, are you guys doing anything initiative wise, cost structure, cellular layouts, robotics, anything, plant closures? Give me a sense of what you are doing on the manufacturing side.

We are constantly looking for ways to further improve our manufacturing operations. And we are quite frankly now, given these economic times, we are looking for ways how we could do more with either the same or less.

We are also looking to see where we have maybe a little bit of fat. And I don't mean muscle, but over the years, companies grow and as they mature and even though it's a fertile maturity, we are constantly looking for ways to invent or reinvent ourselves to make sure that there's no access around. And I think my people and my staff, my senior management people do a real good job with that. I'm always on their [expletive] to make sure they are.

Okay. I didn't hear it from your comments. What is your -- do you guys have a CapEx budget for next year?

It will be roughly the same as it has been, $22 million range, maybe a little bit less.

Which means we are going to be generating, once again, cash [access] to our needs.

And you do a superb job at that. So hats off to you. You guys do a marvelous job. Dennis, what percentage of that $22 million would be maintenance CapEx?

We estimate roughly half.

Okay, okay. And then just in closing, do you have any comment relative to kind of the school or education side relative to getting sugar and salt and that type of thing out of vending machines? And where is that program kind of nationally right now?

Again, it is a good question. Our school food service business has been a challenging year for us. In some cases, there are restrictions on what they can sell. We have also had to reformulate as well as refresh of some of our products. Overall, we are still expecting to grow that business this year, and we have developed some products that meet the wellness programs. And it still represents a key contributing part of our business.

Okay. Well, you guys do a bang up job. I've got two little grade schoolers that live off your Italian ices. So just keep up the good work. Thanks again.

Thank you. Thank you very much.

Mitchell Pinheiro.

Hey, to start out, just sort of housekeeping. Hey, Dennis, could you provide us with the marketing, distribution and administrative expenses for the fourth quarter?

Mitch, I don't have it right in front of me.

Well, okay. I will follow up with you off-line on that.

As far as hedging is concerned, do you guys hedge at all? Or is it just sort of buying forward for a quarter or two?

In the strict sense of the word, we do not do any hedging. We do forward buying.

So I know commodity costs are going to come down, or at least the rate of increase will decline. But when I look at wheat prices in the mid-$5 per bushel range, which is historically at the high end of its range, but certainly it is at the bottom end of its 2008 and certainly 2007 range, I would suspect that not only is it going to come down, but relative year-over-year, you are going to see gains in the commodities side. Not gains, but certainly significantly -- not only increases, as you were saying, but they should be down year-over-year, particularly in the second half. Why would I be wrong?

You might be wrong because there are other commodities other than wheat that are continuing to increase, such as sugar, high fructose corn syrup, cocoa, chocolate --

I see sugar -- I mean, this is world sugar, but it seems to be at the lowest point or near lowest point of the year right now. It is up -- (multiple speakers)

(multiple speakers) are significantly (technical difficulty) [less] than they are in this country.

Right. Soy oil, which is a good proxy for your edible oil needs, is down 17% year-over-year. I would expect that to be a wind at your back. Natural gas for the ovens, it seems to be down. Dairy is starting to come down.

So I would -- unless you are bought out at some unfavorable hedges for the first half or unfavorable forward buys, I would really think -- why wouldn't we expect -- I know things change, new crop year coming up next year, but why wouldn't you want to lock in, if you could, to some of these favorable prices and have a pretty favorable year-over-year second-half?

This is Jerry, and we look at it every day. We never long-term hedge. And maybe it is a good thing we didn't, because you have seen some of the bigger companies and some of the companies that we kind of like watch and monitor in there, as a matter of fact have to take some write-downs because of some long-term -- some LTA (inaudible) or long-term hedging.

We watch the sugar, the world sugar market. We have a strong, strong allegiance and a strong partner in Coca-Cola. So we kind of get a feel for what is going on there. But to answer your question and provide further commentary, I like our position this year as opposed to last year, when we were chasing the rabbit.

Right. Okay. So you have taken pricing this year, which --

Last year.

Excuse me, last year in fiscal 2008. I'm sorry, it's already over. I can't -- hard to remember that. And with the commodity costs decelerating it's still -- was it enough? Was the pricing that you have in place enough for the first quarter? To cover -- (multiple speakers)

It is an interesting question. And we -- our gross margin is still down. And we really never passed on enough of the price increase, enough of our inputting, to get ahead of the curve, all right? And again, and I've commented on this before, we have spent 3.5 decades, actually 37 years in building up relationships with customers and consumers. So we take any kind of pricing initiative very, very seriously. We would like to get our margin and our profitabilities up, but we don't want to risk loyal relationships and good partnerships as well as -- and consumer impact on it, either.

Okay, well, that is fair. But the first quarter -- so what you are saying is you have bitten the bullet a little bit, and biting it still might hurt in the near term, but at a lesser extent.

I like our position today much better than yesterday. The fact of the matter is our gross margins are a little bit down. So --

Okay. What about traffic trends? Obviously, food service traffic is least of -- I mean, certain areas are stronger than others. Obviously Wal-Mart traffic trends are going to be stronger than perhaps Home Depot traffic trends. But you are in all these snack bars across the country. Can you talk a little bit about what you are seeing there and how that might impact in the near term?

Well, certainly we had a pretty good year in baseball. Baseball attendance was up. I guess we will see what happens with hockey and basketball. Traffic at the convenience stores, convenience store business segment has been somewhat disturbed, first by high oil -- gas prices and lately more by the people maybe not spending as much as what they used to.

You don't have the construction worker, or the home improvement guy going in there with a $20 bill and buying two donuts and a pretzel and a coffee. So I guess as the impact of earnings, until that settles down and people's salaries in there, we are going to have some of the same challenges that everybody else has, that is traffic and consumer spending. However, and I've said this before, we believe that our business will be less impacted by any recessionary or worse.

Besides like arenas or stadium business, is there any other -- are there any other bright spots amongst your major channels?

Well, Dollar Stores has been rather for us a pleasant surprise for us the past actually year and a half. And that continues to grow. And our club store business has been strong.

We are looking for ways to expand our products into colleges. There's still at 2%, 2.5%, 3% population growth in this country. And they all don't start out at age 60. They start out as kids, infants and then they get to be five and six. So that total market, we are pretty good in the street and in the hunt and smelling out, finding and discovering new places and new business segments to sell our products.

Are club stores and Dollar Stores reported in your food services segment?

Yes.

Okay. That's what I thought. It looks, Dennis you had talked about CapEx, $22 million-ish, half maintenance. And the other half in terms of projects, have you -- do you have any plans to creating frozen (technical difficulty) manufacturing on the West Coast and expand or grow into the stick business with the Whole Fruit?

What have you been, sitting in our R&D meetings? We haven't even made these announcements yet, and you seem like you're not ahead of the curve, man, you are around the corner. Yes, to answer your question, yes.

Okay, good. That's all -- it's an incremental product line for you. I mean, you haven't had (multiple speakers)

And again, we still measure the green -- we grab the green off of the (technical difficulty) part of our plans for our fiscal year 2009.

Okay. Then final question is, so when you look in fiscal 2009, you will still get some benefit out of whatever pricing you have been able to hang onto or put through. Commodity costs begin to turn favorable or at least not get any worse for you. You (technical difficulty) back from the auction rate preferred ultimately, which is good. You have a pristine balance sheet, the ability -- you know, you are generating a lot of free cash. So '09 could be a turn here.

The question I have is -- I mean, the only question would be I think on the demand side, which is a little bit out of your control. Is it -- how should we think about it? I mean, is this something where the first half might be tougher and it is just going to be a better second half? How do we look at 2009 playing out?

We are, I would say, cautiously optimistic. Everything you said, you are right on point. Yet I wake up, I go to bed at night, and after loving my dogs and hugging my six dogs and I wake up in the morning and I hear General Motors maybe has 100 days, and I am thinking, hell, [why don't] you sell a few of the GM and Chevy plants in there, but we also sell to their parts suppliers, all right? We also sell to where their kids go to school or shop in there.

So you have some major things that are going on. And notwithstanding the election and we are going to have a change in administration, and as good Americans we support and are loyal to whoever is President of the United States, and I am just very, very hopeful that we can solve some of these issues that are screaming in the headlines, that we solve them so these problems, these incremental bumps don't become major highway disasters.

Okay. Well, I guess one last question. At the NAC show, I don't know if Vince is in -- is on the conference call, but --

Vince is right here.

Hi, Vince. I saw -- I was impressed with some of the new products that you were showing in to the c-store customer, the [Fry] -- the Funnel Cake Fries or whatever, however you call it, and the [Mini-bites]. And all that stuff looks pretty good. I was curious as to what has happened post the convenience store show, whether you had follow conversations and what the take is on the potential success of some of these things.

It is only a month or so after the show, but we have had lots of follow-up conversations where it is early to tell right now in terms of what we are going to do saleswise. But we felt like you did. We felt like we had a good show. We showed some very good products, and we are optimistic.

Well, month after the show, Jerry, what is the deal there? I would think by a month after the show --

You know what, we are having these kind of conversations every day. And we are on the market, and confident -- matter of fact, I am pleased with the initiative of our people. We like the product. We like the packaging. We are out there making contact.

Sometimes you get an interest at a show and it is like buyers and management and they are -- they want it done. They want it right away. They are in heat. And then it is a few months later -- well, I don't know. I don't have space. But our people are out there and are out there every day, and we are expecting these products to contribute to our 2009 success.

Okay. All right, well, thank you very much.

Brian Raffin.

I just had a couple of follow-up questions. Jerry, you talked about your price inflation, your escalation being a little behind the curve, and you are very sensitive certainly to your customer relationships. If we get a substantial rollover in your commodity costs, do you get a sense that they will be, with again the malaise with the consumer, do you think there is going to be some price concessions? Do you think there will be some freezer case discounting, so to speak?

If we get to that point and if commodities stink, then I guess that is something that we would make sure that we are in a position to benefit.

Okay. What have you guys noticed relative to -- and I think you touched on some of the arenas and stadiums in that type of thing. Do you get any anecdotal sense from the standpoint of -- do you think your average ticket from your sports fan is fairly inelastic, or are you seeing some of that volume come down? I think you mentioned it with the convenience store guy buying less doughnuts and cigarettes and papers or whatever. But what are you seeing in the stadiums?

Well, we had a good year in baseball, all right? And we sell a lot of the college football stadiums, and they seem to be having a good year. I am not so sure I would give that same branding to the basketball and hockey segment. I think the sports tickets, the admission tickets, the pricing have risen rather dramatically over the past five, six years. And there may be some resistance point there. I think it will be interesting what happens come spring, when baseball comes into another season there, and if this economy is still in the sluggish demeanor it is now.

Okay, fair enough. Maybe you or Dennis (inaudible), what is sure total installed base, guys, on ICEE and Slush Puppies as far as machines?

Something over 40,000, Dennis, with everything?

We have -- yes, we have 46,000.

Okay. And Dennis, how does that split between ICEE and Slush Puppy?

It is about -- well, Slush Puppies are not our machines. They are not included in that number. (multiple speakers) [The bulk of] that number is ICEE machines.

[Sarah Lester].

You had some pretty good sales growth at Daddy Ray's. I think you had talked about expansion maybe six months or a year ago. Are there any plans there to expand now?

We are in the process of installing additional lines as we speak.

So would that about double capacity, then?

It gives us the potential for double, yes.

Brian Raffin.

Just under the wire. What are you guys seeing as far as the salary and wage and health care cost increases?

We are looking at our overall wage as something in the low single digits. (multiple speakers) And health care, we have done a real good job managing our healthcare over the past couple of years, and it was a still real hard to keep that under the double-digit increases. So Dennis, what are we looking for?

Over half of our health insurance program is self-insured. And actually over the last couple of years increases have been in the low single digits. But from time to time, from year to year that can go either -- that can go up significantly. But it has not recently.

Okay. And then what are you seeing relative to -- in the M&A area on multiples of EBITDA? I mean, with the private equity guys being kind of quiet, are you seeing better prices for available companies from -- for strategic buyers?

Sometimes it's like -- and I am not singling anything out, but if you raise a child then you spoil them for years, it takes a little while to break them out of their bad habits. And some of the people -- some of the sellers thought or they were told they can get 7, 8, 9, 10 times EBITDA. And now in reality, they have to come down to earth. We kind of want to be the parachute helping them get down to earth.

Okay. All right. Thanks again, guys. You guys do a bang up job. Thanks.

No further questions at this time.

Well, I want to thank everybody for being with us, and we look forward to hosting our next conference call with you and reporting good results.

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