J & J Snack Foods Corp (JJSF) 2010 Q3 法說會逐字稿

Welcome to the J&J Snack Foods third-quarter earnings conference call. My name is Kim and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Good morning. Thank you, Kim. This is Gerry Shreiber. With me today is Dennis Moore, my Senior Vice President and Chief Financial Officer, Vince Melchiorre, our Executive Vice President, Bob Radano, our Senior Vice President and Chief Operating Officer. And also with us today, I have invited our retail bakery group, which is headed up by Bob Pape, Senior Vice President, since we were having meetings and I have invited them into the conference room to listen to this format. Also here is Teddy Shepherd, our CED, and I will begin with the 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 forward-looking 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 6% for the quarter and 6% for the nine months. This represents 155 straight quarters of consecutive sales increases. Excluding sales from the recent acquisition of Parrot Ice in February 2010, and CALIFORNIA CHURROS in June 2010, sales increased 5% for both periods. Approximately $3.0 million or roughly 30% for the three months and $10.5 million or 40% for the nine months of the increased sales were sales of Funnel Cake Fries to one customer, Burger King, which is carrying the product virtually all of its domestic locations.

We, as stated in the past, are not able to provide an estimate of these sales going forward. For the quarter, our net earnings increased by 6% to $15.9 million or $0.85 a share from $14.9 million or $0.80 a share a year ago. For the nine months, our net earnings increased by 21% to $1.71 a share from $1.42 a share the year ago period.

Our EBITDA -- earnings before interest, taxes, depreciation and amortization -- for the past 12 months was $106.6 million, another record.

Foodservice. Sales to foodservice customers increased 3% for the quarter and 4% for the nine months. Without the sales of CALIFORNIA CHURROS, sales increased 2% and 4% for the quarter and nine months. Without sales to Burger King, sales increased less than 1% in both periods.

Soft pretzel sales were up 1% in the quarter and 1% for the nine months, an improvement over previous trends. Italian ice and frozen juice bars and dessert sales decreased 3% for the quarter and 7% for the nine months, in large part due to loss of one private-label customer and continued softness in school foodservice business.

Churros sales were up 7% in the quarter and down 1% in the nine months, benefiting from the sales of CALIFORNIA CHURROS. Bakery sales excluding biscuit and dumpling sales, and fruit and fig bars sales were up 2% in the quarter and 2% for the nine months. Biscuit and dumpling sales were down 7% in the quarter and up 2% for the nine months, and fruit and fig bars sales were down 1%, respectively, caused by lower sales to one customer who discontinued an SKU.

Retail supermarkets, sales of products to retail supermarkets were up 14% for the quarter and 16% for the nine months. Soft pretzel sales were down 5% on a case volume decrease of 7% for the quarter and up 2% on a case volume increase -- I'm sorry, and decrease from the quarter up 2% on a case volume increase of 1% for the nine months.

Sales of our frozen juice bars and Italian ices were up 21% on a case volume increase of 6% -- 16% in the quarter, and 27% on a case volume increase of 22% for the nine months.

ICEE and frozen beverages. ICEE and frozen beverages. including Arctic Blast, Slush Puppie, and more recently Parrot Ice and related product sales were up 8% in the quarter and up 6% for the nine months. Beverage sales alone were up 12% in the quarter and 12% for the nine months. Gallon sales were up 10% in our base ICEE business in the quarter and 8% for the nine months driven by increased sales to three customers.

Service revenue for others was down 6% in the quarter and 5% for the nine months. Sales of frozen beverage machines were up $[0.5] million (technical difficulties) and down $1.2 million for the nine months.

Consolidated. Gross (technical difficulties) sales in the quarter increased to 34.3% from 34% last year and to 32.4% in the nine months from 31.3% a year ago. That's a full percentage and a basis point increase.

We [were] impacted by about $1 million of higher ingredients and packaging costs in the quarter and benefited by about $3.5 million of lower ingredients and packaging costs in the nine months. We cannot project the impact or benefit of changes in ingredients and packaging costs going forward.

Total operating expense as a percentage of sales was 0.1 percentage point higher in the quarter and 0.3 percentage points lower in the nine months.

Capital spending and cash flow. Our cash and investment security balance decreased $7.3 million in the quarter to $109.5 million, due to the purchase of CALIFORNIA CHURROS. We continue to look for and identify acquisitions as a benefit and good resource for our [Klondike and ash].

Our capital spending was $8.2 million in the quarter, and we estimate that capital spending for this year will be in the $33 million range as we continue to invest in plant efficiencies and growing our business. This estimate includes $6 million additional for this year for the purchase of a frozen distribution warehouse in Pennsauken.

A cash dividend of $0.1075 a share was declared by our Board of Directors and paid on July 7, 2010. We also bought back and retired 154,000 shares so far this fiscal year, but none in the June quarter.

Other commentary. Our sales growth of 6% this quarter and year-to-date primarily resulted from unit volume increases and decreases. In foodservice, we had a mixed bag balance with soft pretzels continuing to show improvements and Italian ice and frozen juice bar and dessert sales beginning to stabilize after being down 10% for the first six months of the year.

Our convenience store business also showed signs of stability as well. We acquired the assets of CALIFORNIA CHURROS this quarter. CALIFORNIA CHURROS is a manufacturer and seller of premium brand churros selling as products under the brand CALIFORNIA CHURROS, with last year's sales of approximately $11 million. CALIFORNIA CHURROS brings with it a moderate, efficient manufacturing facility in Southern California, which provides us with capacity to continue to expand our niche churros business.

Unit sales of soft pretzels in our retail supermarket segment were down 7% in the quarter, although still up 1% for the year. We believe that was an aberration which may be complicated by the extremely hot weather here in the East. Case sales of frozen ice and juices were up 16% in the quarter, also perhaps benefiting from the extremely hot weather. Year-over-year increases in unit volume of frozen ices and juices continue a trend which began over a year ago.

Our ICEE frozen beverage segment had strong gallon sales in our base ICEE business because of two new customers and other customer growth. Our service revenue to others dropped this quarter, down 6%, but we are optimistic we will continue to grow this segment of the business going forward.

We were also impacted by $281,000 of higher gasoline costs this quarter and expect that we may continue to be impacted the balance of our fiscal year.

We acquired the assets of Parrot Ice Parrot Ice, original producer of specialty beverages in this past February. Parrot Ice is a manufacturer/distributor of a premium brand frozen beverage sold primarily to convenience stores. We expect revenues from Parrot Ice to be less than $2 million this fiscal year, but more next fiscal year.

Our estimated income tax rate was at 40% for this year, up slightly from last year. We are estimating a tax rate of 40% for the full year.

I want to thank you for your continued interest. And I will now turn this back to the audience for any questions and comments.

(Operator Instructions). Akshay Jagdale.

Good morning, everyone.

Good morning, Akshay. How are you?

Good. Thanks for asking. So I wanted to just start with --.

Are you here in this country? When -- you're getting married soon, right?

Yes I am and thanks for advertising that, but yes I'm getting married on August 14. Everyone is invited.

(multiple speakers) when you go back to your country in a happy and long marriage.

Thank you. Appreciate it. I wanted to, Jerry I wanted to focus a little bit on churros, if I may. I know you made an acquisition in the quarter. You spent about $24 million which, according to what was disclosed in the Q; it looks like you paid 2.2 times sales which is more than you usually pay. And that's at a time when churros sales have been slowing down. They are actually down, I think, 4% year-to-date.

Can you help me understand that, putting those things together here?

This was a specialty premium [company] that we believe will have real good growth and benefits in the future. And as a matter of fact, the price that we pay may be, by our previous statements, a little bit north of the center, but it was significantly below what some of the original asking price in others that were interested in it.

So we are comfortable with that. And we are comfortable that we will integrate it properly and continue to grow the category and benefit overall with contribution to earnings for a long, long time.

And the other question is just -- if you look at this quarter and, if I take a step back and say, longer-term, I wanted to ask you about earnings growth. I mean the sales growth was pretty good -- 5%, 6% this quarter. But earnings growth was not much (technical difficulties).

So, to me it seems like it is a mixed issue. Beverage sales are growing faster than foodservice. So in my opinion you need to reverse that trend to get leverage. But most companies we follow, including your Company, had been growing earnings much faster than sales. So when can we expect that to happen, if you do believe that is going to happen longer-term, and what needs to happen to get that result?

Well, to begin with, even though earnings were up roughly 7% for the quarter and year, we weren't impacted by a couple of things. You asked a very simple question -- when can we expect earnings to propel north of what we were and we are working on that. We think our business is extremely well-balanced between our -- the multi-channels that we are in.

And when you look at it, you also have to take a look at it over the past three, four years and all these 12 to 15 quarters. I mean we group consistently and constantly against a lot of economic barriers. But we believe that we are positioned well to, if not ignite our bakery and our foodservice business, other than grocery and ICEE, but at least to spur it forward.

But what specifically do you need to do in your opinion, other than acquisitions, to get earnings to grow a little bit faster than sales like they have in the past? I do agree that in the past they have grown that way, but this quarter and looks like maybe in the back half next quarter, too, it looks like earnings growth has slowed down and to me it seems like a mix issue.

But I am trying to understand what needs to change in the current business for that to reverse such that you have a little bit more leverage that you can gain from your SG&A and your fixed costs?

Well, certainly sales and particularly in foodservice and that seems to be our primary challenge. And I think that is a challenge that with our people and our strength that we are going to be equal to.

Okay. That's fair. And then on just cash usage, obviously you spent the money buying a business. But can you explain to us maybe why (technical difficulties) purchases here?

I mean, everyone has been talking about M&A and I know you are very prudent with the cash. But can you just walk us through how you are thinking of cash usage right now? Because you do have some flexibility that, in terms of priorities, whether it is dividend, whether it is share repurchase or M&A.

Well, it's all these things. We continue to invest in our business, in our plants to glean efficiencies. We are also -- we are going to grow our business organically. And there's a -- we are looking at acquisitions.

So I mean, we are going to be frugal with our cash and our investment. But at the same time, we have a lot of things that we are looking at. So I don't think we are going to go off on a wild goose chase, but we are going to --. We think we have some good things on the back burner that we will be able to talk about next year.

But is it fair to say that you haven't maybe repurchased more shares recently because you think you're -- you have more finances [in] M&A right? Obviously in dividends. Can you just talk about maybe a special dividend where that would fall in your priority list?

That comes up every once in a while, all right? We started dividends, I think it's five years ago. We have increased that every single year under the [Lotus] formula by earnings. Whether we ever pay a special dividend or not, I don't know. I am against that, all right? I think that we have got to get sharper and quicker with better uses of our cash so that we can grow our business and our earnings more quickly.

I think we have a terrific group of sales and marketing people who are, right now, trying to catch up with our manufacturing efficiencies. And I believe that over the next 12 to 18 months, we will be doing that in there.

So we are going to grow sales and we are going to grow the right mix of sales. But I certainly don't want to use the cash to go up into something that is totally unrelated to the business and then we've gone off on a wild goose chase.

Great. I'm going to pass it on, but I just wanted to for the time that I've known Vince, it has been a pleasure and congratulations on your move. (technical difficulties).

Well, Vince is here, we are trying to lose Vince, and Vince was a friend before he joined us. He fell down and hurt his head and he's been making some decisions. He's gone back -- no, Vince has got a terrific offer and he is going to be going back to the Westin Group which is now [Grupo Bimbo]. And I said, Vince, you are leaving me for a bimbo? What is wrong with you?

But Bob Pape, who has been with us 13 years, and he is not only a seasoned veteran, he has all of the expertise and experience to continue to guide us and we have a hell of a marketing department now that has been formulated. So we are in better shape than we were three years ago and we wish Vince as well and he will always remain a friend and supporter. Akshay, you've got to give somebody else a chance now.

Yes. Thank you.

Brian Rafn.

Good morning. Question for you on the ICEE, the frozen beverages, as well as some of the fruit bars. Superb job in the supermarket area. (multiple speakers).

Is this -- you talked a little bit about it -- is this weather-related or that you've talked about the trend being about a year. Was it heavy couponing early in that cycle or kind of, what -- give me a sense as to what you see the growth in unit volume.

I am going to turn it over to Bob Pape, who is our Senior Vice President just recently appointed. But yes, we are benefiting from weather. There is no question when the weather is 96 degrees, every single day, people drink more beverage and eat more juice bars. We are benefiting there.

But what has to be considered is our people did a great job 90 days and 180 days before by getting us in the right places with the right features and the right ads, with the right customers and then supporting it in there. Bob, say hello and then talk.

Really, the results are generated by a combination of promotional activity, new distribution and, obviously, the weather helped us as well. So those three elements really came together in the last quarter and did a good job for us.

It certainly did a nice job, yes. Superb. On the kind of the ICEE beverage side, again, some good numbers there. Obviously weather probably -- are you seeing any trend differences versus sales of that through retail like a Target versus the standard kind of cinema and movie channel?

ICEE had a terrific quarter and it is having a terrific year. Again, Dan Fachner runs that group in there and they have expanded its beverage business by some additional brands, Slush Puppie and Parrot Ice, which is a new niche premium brand.

But it also has gotten into some other key customers that a year ago was not selling an ICEE beverage or, for that matter, any kind of frozen beverage. So it continues to expand its niche customer base and we continue to look for other opportunities, some of them worldwide for ICEE and our frozen beverage business.

Let me ask you as anecdotally I know that you don't have maybe a perfect answer, but you think you are taking some market share from the soda pop manufacturers?

Not really. We have always been -- years ago, it was kind of difficult for us to get in the same place and go side by side with them, all right?

Then we had to play a little bit of David and Goliath. We were David. We had a dog and a slingshot, but now we are there. And we now -- we work the Cokes, the Coca-Colas of the world who is a tremendous infrastructure partner and we work with some of the other people in there. So we're there and people look for a frozen beverage or a frozen carbonated beverage and when they look for one, chances are we are going to be in the running. We are going to be in the running. Our people run hard, they run long. But we are going to get our benefit of business and it will continue to grow.

Let me ask you, Gerry, on the three brands -- Parrot Ice, Slush Puppie and ICEE -- I am assuming that they all have specifically differentiated flavors. ICEE certainly [Cinema], there is some major retail; Slush Puppie, I think you talked about having these little vendor carts that you go out to baseball leagues and football leagues and that type of thing.

Is Parrot Ice -- is that exclusively in convenience stores?

Well, it is not exclusively in convenience stores. It was a Southwestern, regional beverage. It's a mixed beverage. They were a competitor and it is a terrific quality product.

They had some issues in there. We acquired it in February and we have been integrating it since. And I think we are going to benefit for that and our other brands for a long time to come.

Most of the business is ICEE and it is ICEE managed, including the service. And ICEE today is a $185 million a year company and we think back, it is only a few years ago when we acquired it, it was doing $13 million a year. I can't predict what the next 13 years will be in there, but it will be a lot more than it is today.

Yes. Superb. On the ingredient side, you had about -- an inflection point, do you get a sense in the third quarter, relative to a bottoming and then a modest reflation in some of your ingredient costs?

Well, flour appeared -- it's stable though it showed some signs of springing the last couple of weeks. Chocolate and shortening -- sugar, sugar is up there. We're looking at that. And we have passed on some pricing in the cookie business because of our ingredients.

We don't want to happen to us what happened a couple of years ago when we held back too long and we really never did quite catch up with passing on commodity increases. But we have passed on some for a portion of the bakery business. More specifically, cookies and that will take us back later in August.

Okay. I'll just ask one more and get back in line. How -- you talked about manufacturing, certainly efficiencies, you talked about marketing having to kind of catch up a little. From your stance, are you comfortable with the footprint of your distribution warehouse system? Capacity-wise, location-wise?

I think that we are very, very smart for things that we did years ago. Where is J&J? Oh, they're in Pennsauken. Oh, they are in California. Oh,they're in Atlanta. Oh, they're in Texas. Oh, they are in St. Louis. You know?

So we made some decisions years ago. And now we have 11 facilities that are operating well and we are able to -- and we also have a Texas. So we are able to distribute product and ship product and get product from hither and yon real, real efficiently.

Thanks. I'll get back in line. Thanks.

Mitch Pinheiro.

Good morning. So specifically, just following up on that last question about pricing and bakery. What type of price increase do you think you will ultimately realize there?

Well, we have announced 5.

5%?

So we expect 5. But I understand your question and there's always sometimes, but I will trust my people to make the right decision and judgment.

Just trying to get a sense for the magnitude of (multiple speakers).

They have some flexibility with that, particularly we all know what it is like to be beat up by a customer coming out of there after a 14-hour day. So --.

I haven't felt that yet. So, in your pricing outlook, for other areas can you talk about that, as you look not only in the fourth quarter but into fiscal '11, is part of your revenue growth -- how much do you think pricing would add next year, based on what you know of commodities today?

Don't know, Mitch. Don't know.

What about -- what have discussions been like with your customers in terms of either pricing -- are they coming back to you looking for concessions? Has that abated? Is that increasing? Can you (multiple speakers) over that for us?

It is always a competitive environment. I don't want you to think that we go into a customer and say here is a 4% increase and they give us a hug and a kiss. It doesn't happen like that, all right?

But, hey, we make niche products. And by and large, we have, we are popular priced items and we are generally, whether it be supermarket or in a school channel or a mass merchandising channel, we are generally a (sic) economical purchase, an impulse purchase in there and we are popularly priced.

It is extremely profitable for the customer on a food service basis standpoint. And we want to certainly glean all of our efficiencies without impacting any kind of quality, so that we can deliver a quality product that meets the pricing objectives of our customers and its consumers.

With SEB, not to minimize a nice double-digit increase there, but with the warm weather, would have expected perhaps a stronger performance and I'm curious (multiple speakers).

That's almost unfair and unruly. We -- [they say] -- have a 12% increase in beverage on a product line that has been traditionally slowed by nutritional concerns and other beverages.

No. I think that our ICEE group performed fabulously. And if we can maintain that type of growth, you will be happy, we will be happy and so will our customers and our shareholders.

So, but, so I was wondering how their channels in particular, a lot of the retail C store channel, either traffic or, you know, [where loca--] just the basic mix of your locations, how that had an impact on FCB in the quarter? Are you seeing any discretionary spending impact? Any channel impact positive or negative?

More recently, we have seen a little bit of stability coming to the convenience store channel which -- and we contract that almost daily and weekly with our uptown business. That was running down 6%, 7%, 8%, 9% a year ago and through most of this year.

Now we are getting back to flattish, which is a big improvement and hopefully, you know, the economy is going to come back. We are Americans and we live in America, which we still believe is the greatest country in the world. And we think that the economy will come back. It may not bounce back or snap back, but we are well-positioned and well-balanced with our products throughout -- for all of the different channels and --.

Are you seeing, I mean to say that, you know, are you seeing anything or is that just your personal view? I mean, are you seeing the economy come back in any one of your channels? I mean, it is not coming back in arenas. (multiple speakers) is it -- it's not coming --?

You give me a dangling -- Mitch, you keep giving me extra questions. We are saying a little bit of a bounce back in the convenience store channel. We've certainly seen an overall improvement in our grocery business and our in-store bakery business.

Now the grocery business, I have to balance that. Does that mean more people are eating at home and not going to the movies or a basketball game? I really don't know that. But we are in all of these markets and that is why I keep making reference to our balanced portfolio, our in-store bakery group, our foodservice group, our retail group, our ICEE group.

So we have got good teams out there and we are all going to make the playoffs. And then they will battle each other and we will see who has the best [gains] and the best profitability. But I'm real pleased with our team and our direction.

Last question then. For fiscal '11, what is fiscal '11 going to look like for J&J conceptually? I know you don't give guidance, but is it going to be sort of more of the same in terms of your top line type of growth?

Good. I mean, more of the same is pretty good. When we say more of the same, we are looking that we can grow that top lines (sic) hopefully in the mid-single digits, maybe higher if we get a break, maybe lower if it goes the other way. But we have been consistent now for 38 plus year and 155 straight quarters so I think you can look for is to be consistently good.

And if you look -- and so consistently good, do you also consider, when you look at the various operating segments, will one be -- for fiscal '11, do you expect one of those to outshine the other? Or is it going to be, as you say, consistent among off -- all of your operations? Do you have any --?

(multiple speakers) all working on budgets now. They have all been given a target in there and we will get our first pass and look at it this -- probably the next couple of weeks in there. I think that, a couple of years ago, when we had the perfect storm of commodity increases by commodity by commodity in there, we had a little temporary skip speedbump in earnings. We don't think that is going to be the case going forward.

I want to thank you for your answers.

(inaudible).

It's (multiple speakers). [Adikhan]. I wanted to ask you about the retail supermarket business. Noticed that your margins in that business are up a lot over the last eight quarters or something. Typically you have been kind of 5%, 6%, 7% range and now you are running well into double digits I think 13%, 14% range the last few quarters.

Can you talk about how you've been able to do that and whether you think you can continue to keep those type (sic) of margins?

Well, you are talking specifically our supermarket business, right?

Yes.

It is a combination of a few factors. Slotting has -- you know, slotting varies because you have major slotting in one year and perhaps you don't have it the next year.

I think we have gotten a little bit better with our merchandising and our marketing. We have directed our efforts customer-centric and by that, I mean we have assigned specialty [guards] teams and we've expanded that business albeit. All of a sudden we got into a new channel which up until a year, a year and a half ago we didn't sell. That is called dollar stores.

We were able to take existing products, redress it, keep the equity in the brand names like LUIGI'S, like SUPERPRETZEL, like [AFOP] and put them in smaller packages and get that into the dollar channel and we were able to do it both quickly, efficiently and profitably. So it is a combination of all these factors. And I think that it gives us confidence for continuing to expanding some of our products where it's into these channels.

One of the things I've wanted to ask is you guys have historically your -- well if you look at the last four quarters, I did a calculation, your margins are running about 11% the last four quarters. Historically you have been running about 8% to 9% and I think (multiple speakers) actually up the last few quarters is because some commodity costs might have come down.

And I'm wondering if you are seeing any pressure from any of your customers to give price discounts, because you are kind of running at all-time high margins? Maybe they see that and are asking for some (multiple speakers).

I think that was asked before and I addressed it. Keep in mind that we haven't had any price increase in the last two years and we are very sensitive to passing on pricing.

But by the same token, one of our goals several years back was to get our margins from, I think at the time it was 7% or so, and I made a statement that my CFO and friend Dennis Moore tried to, like, punch touch me in the middle of a conference call. I said my goal was to get to double digits and we got there within two years.

And now we are at 11%. So now we want to stay on that horse, so to speak. So once we get on the horse, we want to stay on there.

Okay. Sounds good, thank you.

Brian Rafn.

Yes, Gerry. I wanted to ask you a little bit of weakness, I think, in the fig bar sales. Is that a seasonal issue or kind of give me a sense of what you see there?

Well, two things. We are straining at capacity there. We are in the middle of an expansion, a plant -- planned expansion. And we lost one SKU with a major customer in there. So, given that there's these kind (sic) of ups and downs that happened in the normal course of business. Nothing crashed, not a major hurdle, but a little -- you know when you look at that business, we've grown the business now during a half years. It was doing $15 million when we acquired it, it'll do close to $38 million this year.

And I think overall, we performed very well with that business and there's plans for it to continue to grow. I would say that, overall, it's something we are happy with, it's something to crow about with that business.

Sure, what type of capacity and volume would you be increasing? Are you doubling or you're up $50 million, give me a sense --?

(technical difficulties) but certainly we can get that business we believed certainly up to the $60 million range.

Okay.

(technical difficulties) four or five years.

What is the distribution channel on that? Is that a supermarket items or is that a convenience store, gas station? (multiple speakers)

Dollar stores or whoever, but at this point our base business is the dollar channel is a strong market and other economy stores. (multiple speakers) -- go on.

Go ahead. No, I'm there. Go ahead.

So it helps to set a little bit of guidance and it helps our supermarket business because we were able to marry the synergies there.

Any comment migration from private label and national brand or vice versa? Any trends in the grocery stores?

I think you saw most of the major influence in that trend over the past four or five years, particularly when commodities were going crazy. It may have slowed down a bit.

Okay, so then, you are seeing once you see a rebound you think the demand for national brands you'll rebound in that?

We are still selling national brands and our brands are national. We still are -- we will produce private label for customers. We have our -- you know, our LUIGI'S is having a terrific year, but we are also doing a product for others. Our pretzel brands, we do most of the private label for supermarkets that are in the business.

So we are real good producers and we are efficient manufacturers. And because we are, that gives us a little bit of an advantage and a mix that we can compete in that market.

Sure. So, could you give us a sense what from the relationship where you guys across your brand, you mentioned pretzels. Certainly the LUIGI'S, the frozen ices. What would your manufacturer or private label be for grocery chains versus what you do in your own national brands? Is it 10% of the mix or --?

Single digits, (inaudible) single digits. (multiple speakers).

So there's a base to grow there then?

Yes. Well, there is a base to grow there certainly. But even though -- and you mentioned pretzels so I will comment on that, even though it is less than at single digits. But we are probably maybe at 80% or 85% share of the private label market. Why?

To begin with, we could make them in multiple plants and we make them lower than -- at a more economical cost basis than anybody else. And we distribute wealth. Site you take all of these factors together, niche quality product, cost-efficient producer, and distribution benefits, and we are ranked number one, number one, number one.

Yes, well, you always do a superb job on that. On the foodservice school cafeteria side, you bring an arsenal of products. You have had I think a lower sugar cookie or a lower less fat or whatever, what seems to (technical difficulties)? What seems to be the issue there? I mean obviously with the -- go ahead.

Couple of things. Number one was nutritional and wellness concerns. We had to reformulate, not only cookie products and completely reformulate our juice bars and we have been channeled. You know, there is a little bit of softness in that category.

We have been making strides. It is not like we're losing share in there. But there's also some complication from budget, state budgets, federal budgets in there. So it is still a very profitable business for us. And we continue to strategically work with and define and work through the challenges.

I asked you last quarter. You are seeing in a supermarket channels rack kiosks close to the front end of the store, single service, generally lunch traffic, sodas, sandwich wraps, cheese -- little cheese sticks.

It seemed to be a natural mix for you guys since you reformulated package size for the dollar stores. Are you guys looking at that or is that something that just doesn't really apply to some of your products?

Doesn't really apply, particularly when you need a freezer box channel. Although we do have some single serves in some of the grocery markets where we will take our cups of Minute Maid and whatnot and some of the others that are being sold.

All right. Can we get on to somebody else who is waiting here just so I have a chance to --?

Thanks.

Thank you. Good questions.

Robert Costello.

Hello. The churros market, prior to buying the CALIFORNIA CHURROS, what kind of sales do you do? Can you give us just an estimate so we have an idea of what your total sales would be for going forward?

Year one, we did about $100 in sales. And this year combined we will do about $48 million to $49 million. So that's pretty good.

You do a lot of business in the frozen novelty in the club stores, but churros availability in club stores in the East is pretty much nil in the club stores. They are not really marketed or distributed well. Given that this is your strength, (multiple speakers). Pardon?

You mean in the freezer section there?

Robert Costello Exactly. I mean you have French toast, you have waffles for people to buy, but you don't have churros. Why? Is there a reason why?

To begin with, they have a few items in there that they move in volume. Now we are selling churros (technical difficulties) snack bars. And we -- by looking for next year about the possibility of putting it in a retail pack, which would be available and sold through supermarkets and perhaps club stores.

But I am going to [look] for -- and this is not, I am not giving you a prediction here, but I would look for increased penetration through the club channel in churros.

Right. You give people an option of another product to buy that otherwise -- that's how you normally have grown your business.

If I owned all the club stores, I would put all of my products in every category in the drugs and the beverage and this, but I don't. They are the boss. We want to make them happy and keep them happy. I think, by and large, that we do. We are selling pretzels and we are selling our [novelties] there.

But if you think your ICEE business you change the ICEE liquid form into a push pop, and you obviously told us that you've been able to increase sales through the same methodology. So it would only seem to be logical that that would be an area where opportunity exists, just as one example.

We're looking at it. Also, (multiple speakers) we still kept our ICEE beverage drink, we just took the equity from the brand and put it into a freeze-up ICEE bar or juice bar.

Right and it's available in the club stores and you can't get enough of it when you go there.

I like that.

Well, I think you have a strong market share there and I look at who makes the products and what's available. And your -- how about [plant] consolidation? You talked in the past in calls that you had opportunities. Is (sic) there any examples of where you have been able to benefit from that in the recent past or going forward you might?

I am satisfied with our plant efficiencies and our plant locations. A couple of years ago, we did close and shifted production from one pretzel facility that was excess capacity to our needs, but it was very small.

But I am looking at our plant capacity now and I think that we have plenty of capacity to grow our business over the next four to five years, and we don't have to build. With the exception of the big and fruit bar facility which we are expanding, we won't have to build any new plants. We may acquire somebody along the way, which will come with a plant, but we have been pretty good at doing that and continuing to grow our business.

If you -- obviously, in the last quarter, you mentioned the benefit of the Burger King business. Is that an exclusive contract where the product can only be sold there Investor Relations is it available to be sold in other end markets?

We sell it to some other venues, but Burger King does have an exclusive for its channel which is QSRs.

Right. Now going forward this time next year, given the success of that, is there logical parallels to additional efforts in that area with other product?

Working on it. We are working on it, but we just can't tell. We just can't tell. We've got our people -- as a matter fact, a couple of our people have been meeting with some of these quick service restaurant chains as recently as this week. Susan Murphy, the big (inaudible) were down there with Burger King and talking some new innovations of new products. But some of these things take a while. Perhaps Burger King will be up.

We have a team that is working on the possibility of developing new healthy products for McDonald's. Might this happen? It's not going to happen this year, but it may be years, but we are working on these things. We have both the marketing and the creativity and development groups to get ourselves into there. And perhaps we will be benefiting from this in 2013 and '14.

When you look at the overall margins of your different product categories that you manufacture, what offers you the best upside on a margin basis, do you think, going forward from either acquisition to additional penetration in a particular industry segment? You know, when you look through your different categories that --.

Where would you find the best return on your investment going forward if you had to put money to work?

Well, we make pretzels, we make pretzels well and it is one of our best margin items and we have capacity at five, six different plants. So I think that answers that.

All right. Thanks very much.

Thank you. At this time, I show no further questions.

I want to thank everybody for participating in the call. My executive team thanks you and my in-store bakery group that has been listening to this thanks you. And we look forward to talking to you again next quarter. Thank you and bye.

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