J & J Snack Foods Corp (JJSF) 2013 Q1 法說會逐字稿

Welcome to the J&J Snack Foods First Quarter Earnings Conference Call. My name is Sandra 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 Schreiber. Mr. Schreiber, you may begin.

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

I will begin with the customary obligatory statement. The forward-looking statements contained herein are subject to certain risks and uncertainties and 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 objection to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operations. We had a good quarter, a pretty good quarter, indeed. Net sales increased 11% for the quarter, excluding sales resulting from the acquisition of Kim & Scott's Gourmet Pretzels in June 2012, sales increased 10%. For the quarter, our net earnings increased by 86% to $10.2 million, or $0.54 a share, from $5.5 million, or $0.29 a share, a year ago. Our EBITDA for the past 12 months was $124.7 million, a record.

Food service. Sales to food service customers increased 15% for the quarter and 14% without the benefit of the Kim & Scott's recent acquisition. Soft pretzels, one of our core product sales, were up 27% for the quarter, 23% without Kim & Scott's. Italian ice and frozen juice bar and frozen dessert sales decreased 4% for the quarter. Churros sales were up 33% in the quarter, and bakery sales were up 12%.

Retail supermarkets and groceries. Sales of products to retail super markets were down less than 1% for the quarter, adjusting for Kim & Scott's sales, were down 2%. Soft pretzel sales, however, were up 5% for the quarter, 2% without Kim & Scott's. Unit volume of pretzels was up 6%, sales of our frozen juice and Italian ices were down 9% in the quarter on a case volume decrease of approximately 14%. Handheld sales, acquired about a year and a half ago in the ConAgra acquisition, in the quarter increased 7% to $6.3 million.

ICEE and frozen beverages. Frozen beverage and related product sales were up 4% in the quarter. Beverage-related sales alone were up almost 5%. Domestic gallon sales were up 2% and our base ICEE business in the quarter. Service revenue for others was up 3%.

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

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

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

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

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

As we have previously stated, we bought back 187,649 shares of our common stock at a cost of $10.8 million, or approximately $57.60 a share, over the period of July 25th to October 31st. On November 8, our Board authorized the purchase of an additional 500,000 shares.

Commentary. Our sales growth of 10% this quarter before the benefit of acquisitions was very strong. Sales of soft pretzels and of food service were extremely strong, and include new pretzel products such as sticks and soft pretzel buns and rolls for casual dining restaurants. Frozen juice bar and ICEE sales in food service were down as we were impacted by the elimination of the USDA school service program in this area of our business. We're still looking for traction in our handheld sales and food service which sales were down 2%, but we remain very bullish on this category. Churros also did exceptionally well, as we began selling to a major fast food restaurant chain.

Unit sales of soft pretzel in our retail supermarket segment were modestly higher in the quarter, but frozen juice bar and ices had a significant drop in this -- the slower season and was partially due to the recent Hurricane Sandy in the winter. Handheld sales in retail supermarkets were up 7%, as we have begun to have positive results in the private label end of the business.

In ICEE and frozen beverages, gallon sales were up modestly and service revenue to others was up 3% in the quarter, as this area of our business continues to perform well. Frozen beverages had a strong quarter through a combination of sales growth and expense management. Mexico continues to perform outstanding. This is the first December quarter for the ICEE business in which our frozen beverage business made a profit. So the benefit of expanding into managed service for others has been slowly but surely paying off.

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

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

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

Are you ready for questions?

We surely are.

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

Good morning.

Good morning.

Good morning. First of all, congratulations. I mean I don't -- I follow a lot of companies, but a 10% organic growth number in this environment is truly impressive. So I think -- I think you should have these sales meetings every year. I would be a proponent especially of that. It seems to have had a major impact. So first of all congrats.

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

Sure. So in terms of the question -- the first question is really how sustainable is this growth? We've obviously we have seen in some large chain restaurants, pretzel sticks with the dipping sauce seems like a very good product and it's sticking. We've seen churros at large Mexican chain that are doing really well, and were called out by that company. It seems different than funnel fries, right? Which I consider as like a one hit wonder that really didn't work that well beyond that first year.

So in that context can you help us understand how you think of these -- of this sort of acceleration in organic growth especially on pretzels and churros? I mean how sustainable is it to you? And you also mentioned at one point that you are starting to hit on all cylinders so perhaps you could see -- could we see a higher growth number than 10% sometime this year?

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

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

I could not in good conscience predict a continued double-digit increase in our core products, but we're going to do everything we can from our end and we like achieving, overachieving.

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

I think it is. We were definitely underpenetrated in the quick service restaurant and the casual dining restaurants. And at many conferences, a matter of fact even in a conference that KeyBanc has held, we spoke about and pointed to the tremendous potential that was out there. And we kind of updated on our targets and our goals and our achievements in these potentials and now they're getting -- appear to be that we're accelerating this.

But.

Okay. I'm sorry.

Two last questions. I know you want to get along with the other guys, but one on retail supermarket. It seemed like a relatively weak quarter especially from a profit standpoint. I saw that couponing was up a little bit and sales were down. Maybe that's seasonal. Should we be worried about that? I mean are you worried? Is that a trend for the remainder of the year, or is it sort of a one-off performance?

And the second question, and I will leave it there, would be on just cash usage. I mean you keep accumulating more cash. I think you put some money into mutual funds. What does that tell us about the M&A opportunities that you are seeing out there?

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

As far as the supermarket end of the business, I think that our supermarket end of the business has probably been in the best shape that it's ever been. But I don't think the grocery units themselves, the customers are in the best shape they've ever been. But let me turn this over to Bob Pape who's sitting right across from me. Bob.

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

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

Thank you, Akshay.

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

Hi.

Hello, Bob. How are you?

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

On retail?

Yes. Exactly.

Specifically soft pretzels were up 5% in the quarter.

Right. But you had mentioned I think after you were talking about retail you spoke about a 2% number and a 6% number for soft pretzel. One was volume was 6% and the other was 2%.

Well, maybe -- yes, volume was 6% and it was really a net of 2% without the benefit of the acquisition from Kim & Scott's.

Right. So with regards to that what accounts for the difference in the 4% number besides the acquisition? Is that because your customers are buying product mix difference on the pretzels or what?

Hello, Bob. This is Dennis. The number you're comparing 5% compared to 6% so it's not enough to.

Oh, I thought I heard 2%. All right.

What about the tax rate, Dennis? It's one of the lowest rates you've had in a while. Is there any specific reason or is that a trend that should be sustainable?

We're -- we said that 35%+ was in the first quarter but we're expecting the year to be between 36.5% to 37%. So.

Okay.

So that was lower, however, that's not an awful lot lower than what it was last year.

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

Sure, Bob. We did make an aborted attempt maybe about two years ago right after the acquisition of California Churro, and we weren't happy with our preliminary results in what we saw. So we went back to the drawing board, re-designed the package, the case count, made it more user friendly, operator-friendly, and we're looking to launch something perhaps in the next quarter here. And we are hopeful that it will have a -- it will be successful, but perhaps by the next -- over in the next six we'll be able to point to some early results.

All right. Thank you very much.

Thank you, Bob.

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

Good morning, Gerry.

Good morning, Brian. How are you?

I'm good. Good. Give me a sense -- you guys talked a little bit about the frozen juice bars. You guys have had the Minute Maid lemonade, Barq's Italian Ices. Is that performance there over the last couple quarters a weather-specific performance, or are you looking at reformulations in recipes or flavorings, or what's -- what kind of what's going on in the frozen juice bar section?

Well, are you talking particularly in the school food service end of it? I think maybe you're, you know.

Yes. I'm talking primarily, yes. Supermarket primarily.

Well, and supermarket sales, there's a combination of factors, and one is the industry itself being sensitive to pricing and I'm not -- we haven't lost any share, but we're sharing the share. You've got people like Nestle's and Unilever and Big Bob's and whatnot. You've got lots of competition in there, but our overall share of the category has remained neutral to growing.

Okay. Okay. What -- if you guys looked at the --

Food service and I thought that's what you were particularly referring to, the USDA reformulations and nutritional restrictions has put at least temporarily a little ceiling on our sales there and it's had a negative impact.

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

You know, it's a good comment by you. We've already done the reformulation. We've made it 100% juice. we have taken out the other additive and sweeteners, and we meet or exceed all of the regimentation, all the compliance issues. Kids got to like it, too. So that's what we are --

Okay.

Maneuvering with.

Okay. Gerry, if you looked at your beverage side in total, ICEE, Slush Puppie, and Parrot Ice -- what's kind of the sales size of that business on an annualized basis?

The ICEE group in total is doing over $200 million a year and it is probably -- I'm sorry. What?

(inaudible).

The Slush Puppie and Parrot Ice would be less than 10% of the sales overall.

Right. So it's really an ICEE-driven and generated business.

Okay. Okay. And what kind of numbers you guys think -- or what's your sense of Daddy Ray's? You guys have done a marvelous job in taking that small brand up to $40 million, $50 million. Is that?

More, Bob. Maybe a little bit more this year. We have some nice things happening and we're not like beginning to happening we're in the middle of the happening and we're just a little bit reluctant and conservative in sharing it. But that business will -- that business has quadrupled since we acquired it about six years ago.

Okay. Okay. Gerry, what are, and I missed your opening comments -- so what are you guys seeing on commodity price pressure, you know, eggs, shortening, sugar, the whole gamut? What are you seeing on feed stocks?

Brian, what we -- well, we look at all commodities. Flour is up from about a year ago and even though we're bought out on flour committed to flour about six to eight months ahead, most of the other commodities are somewhere between neutral to slightly up. Sugar is down, protein is up, but I don't think we're going to have a -- it's not going to be like it was a couple of years ago, where commodities went crazy all at once real quick just trying like -- trying to catch, you know, a monkey in a zoo.

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

Well, to begin with, we don't know. And secondly, we certainly believe that the product lines and their shelf life and whatnot will be longer than our previous experience, which wasn't very much experience. So we're looking at it and we're experiencing it, and we're very hopeful and optimistic about it going forward.

Okay. Okay. You said $30 million, Gerry, in CapEx. What component of maintenance and where might that CapEx be going, you know, across the factories?

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

Yes. It depends on what you meant by maintenance, but normally on an ongoing basis we will spend $10 million to $12 million to maintain our ICEE business. And then the rest of it is maintenance, but it's also in our plants, but it's also improving the operations as well. So it's maintenance plus I guess you would call it.

Maintenance plus plant efficiencies.

Yes. Okay. Okay and then I would be remiss to ask the Hostess brands with Twinkies and that came up in the quarter. You guys have been certainly very, very selective on an acquisition basis and so very, very mature and measured. Was the Hostess brand/Interstate Bakeries, was that a non-event for you guys, or did you sniff around the margins at some product lines? I'm just curious.

Ultimately, Brian, we passed on it.

Okay. All right. Okay.

On things we do and sometimes we're also smart on the things we don't do.

Yes. Okay. All right. All right. Guys. Thanks much.

Thank you.

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

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

Good morning Brian.

Quick question for you. How do you see price -- I know historically you have had a little bit of lag on the pricing side when you've seen commodities bump up. Certainly the commodities won't be as significant as they've been, as you talked about a few years ago. Pricing looks solid at the moment. Do you think you've got sufficient pricing in place to sort of offset the cost inflation?

That's a good point. Good question. We believe so. We hope so. But we'll just have to -- right now we're reasonably comfortable with the outlook on both sides of the business.

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

Well, to begin with we're improving our financial performance albeit slightly on almost every quarter. And we're slightly ahead of what our targets and our projections were when we first acquired that business a year and a half ago. We remain very much bullish on that business and its ultimate contribution to our sales and earnings. Retail -- our private label end of the business, which is retail and grocery, was up about 7.5% for the quarter. We need to do a little more work in capturing and in growing the food service end of the business, but there's been an increased emphasis on it and we're comfortable that we will be. We remain bullish on the business and as soon as I can find (inaudible).

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

Not really. To begin with that's a heavy -- well, it's heavy white bread and heavy sweet category and most of it door to door --

Sure.

Distribution and that's an area of the business that we know about, we watch, but it doesn't -- it's not our sweet spot, if you will. And it would be really a little bit more transformational than we would like. Keep in mind one of the reasons for our success, we have our niches, we do real well with them, we are certainly cost-efficient and there are barriers to entry to the product lines that we are the leader in, and we want to continually improve our niches but make sure that we don't extend too far from what we're good at.

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

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

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

Thank you.

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

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

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

Yes. It's Garo Norian.

Garo, G-A-R-O?

Yes.

Thank you, Garo.

Yes.

There's no real ramping up. I mean there may be a couple of months planning in there and introducing it and most of it is what we call food service, which would be snack bars and restaurants and amusements and theme and theme parks and baseball arenas all across the country, which is about 70% to 80% of our business. So most of it is coming from that retail itself at a slower or a more modest improvement. And we have been expanding our core products, which is pretzels and churros and our ICEE and frozen beverages over the years and now, it appears that not only are they continuing to grow, but we're getting traction for the next support level and the next support level. So we're pleased with the overall results of our business, but we also realize that it wasn't all of a sudden. This combines the wisdom and experience of our decision making process and our strategies for several years.

Okay. So it's not a dramatic influence from the couple new customers?

No.

Thank you.

Thank you.

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

Yes, Gerry. What's the comment on you know your kind of dollar chain sales, the smaller items from the dollar chains? What's going on business there?

Dennis, you want to comment?

I can't hear, what?

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

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

Our total installations?

Yes.

Is it total number of --

The machines that we own I believe it's roughly 38,000 machines or so on the beverage side.

Could you hear that, Brian?

Yes I've got it. I've got it. Give me a sense, Gerry, on -- on the ICEEs? Okay.

We're adding to that number almost every quarter.

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

Oh, obviously hot weather, you know, people drink more and they drink more, and we're going to sell more of our ICEE and frozen beverages. It's true as you noted that the movies have been better recently -- and what does that mean for us overall? It means more sales of our products that we sell in movies which include ICEEs and pretzels and, hopefully soon some churros. What ICEE has done over the past eight to ten years, it has balanced their business over ICEE as a business would lose money in October, November, December, January, February, March, April could be a swing months and that would make all of its monies through May through September.

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

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

We have it and it's available and occasionally every year -- every couple years a new flavor will hit like lightning. A couple years ago we were -- we did something with Vanilla Coke and it had a nice run for a while. But we have a constant -- we're developing constant flavors on our drinks all the time, and we mix it up. As a matter of fact, that became a new flavor a couple years ago called Mix It Up where the customer can literally mix six, eight, nine different flavors in a large ICEE or Slush Puppie drink.

Yes. Good. Good. Good. Okay. And then just in closing, Gerry, what -- as you look out the M&A area, you know, what's your sense on pricing multiples of EBITDA? You know, is there more damaged goods, you know, bankruptcy type stuff? Give me a sense as to what you kind of see.

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

Sounds good, Gerry, we've been shareholders for 16 years. You have done a superb job. Keep it up.

Well, thank you very much. I have a good team that's been supporting me and helping to he grow this thing of ours.

Thank you. Bye.

Thank you.

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

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

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

Thank you. That's a big compliment. On gross margin I have a couple of questions.

A couple?

Yes. With soft pretzels and churros driving the growth and becoming a bigger part of the mix, shouldn't gross margins do better than they did this quarter? I mean I know they were up. It was still a good performance, but I mean aren't these products, soft pretzels and churros, higher-margin than pretty much most of your other products?

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

So, in other words, like can you help me with -- are there a couple of things this quarter that maybe will -- you know, aren't going to continue for the remainder of the year like investment and slotting or just inefficiencies when you're starting to serve a new customer, things like that? I mean is there anything that's not evident in the numbers color-wise that you could help us with that may have negatively impacted gross margins?

No, I don't think so.

Okay.

Obviously, in certain part of the business, we're always faced with investment spending be it equipment or be it retail slotting, and we will continue to look at that at the same kind of pace that we have been. Sometimes more so, sometimes not so much. Just like marketing. Sometimes the see-saw may tip because we're going to have an opportunity perhaps with churros in the third quarter this year, and maybe we're going to spend some money in there. So that marketing spend may move the needle a bit. But, again, we are he thinking not necessarily for today's sale and today's profit but for tomorrow's growth and future.

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

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

Okay. And one last one. I was surprised and I hadn't done this analysis before so shame on me, but your bakery business and that's everything in there, right?

Right.

Really has been driving a ton of growth in the Company, right? So most -- a lot of growth in the Company has been driven by the bakery business, especially recently, including this quarter. And I believe that's slightly lower margins of co-packing type of business?

That's correct.

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

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

Yes. My -- and I don't disagree. My point is perhaps you -- there's other investments where you could get a higher percentage return. I don't know if you think of it that way, but perhaps there wasn't an option, right, which is why you chose this at that current time?

If there are and there were, we're not going to find a pretzel with every kind of business opportunity or a churro or an ICEE group in there, but we continue to look for ways to grow our business, but making sure that we are conservative in our thinking and discipline but (inaudible) calculating risks.

And last one I promise. This is on M&A again. So there has been a in M&A activity at least on the public side of things, that's all we can track really. And there's been a lot of spin-offs, split-offs, so lots of financial engineering I guess to derive growth. You don't have to do that because you have organic growth that's very solid. But what's kept you from using -- I mean you have had a lot of firepower, right, with the cash you're accumulating now for a couple of years, so clearly financing is not a hurdle. So the only two other hurdles could be finding a good fit, which is driven by the flow of assets available out there, and/or the multiples at which these are selling. So can you help understand if it's one or the other, or a combination of both that has kept you on the sideline and not -- you know, have you aren't been able to (inaudible).

It's both. It's finding the right fit, and quite frankly the valuation of the business is as it relates to us which really means the multiples.

And is more recently is it that the multiples aren't (inaudible) because certainly we are seeing that in the smid-cap publicly traded food companies the multiples have expanded. I wonder if you've seen that happen in terms of the deals you're looking at as well.

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

Great. Thank you and Thanks for taking all the questions.

Akshay.

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

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

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