J & J Snack Foods Corp (JJSF) 2015 Q3 法說會逐字稿

Welcome to the J&J Snack Foods third quarter earnings conference call.

My name is Christine, and I will be the 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. You may begin.

Good morning, everyone. This is Gerry Shreiber, and welcome to our third quarter conference call. With me today is Dennis Moore, our CFO; Bob Radano, our COO; Jerry Law, my assistant and Senior Vice President. Not with us today is Bob Pape; nor Teddy Shepherd, our CED; but substituting for Bob Pape is Bo Powell.

Let me begin with the obligatory statement. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from these -- from those projected in the forward-looking statements.

You are cautioned not to place undue reliance on these states, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these statements to reflect events or circumstances that arise after the date hereof.

for the quarter and 6% for the nine months.

For the quarter, our net earnings increased by 3% to $24.5 million, or $1.30 a share, from $23.7 million, $1.26 a share, a year ago.

For the nine months, our net earnings increased to $50.4 million or $2.68 a share, from $49.6 million or $2.64 a share a year ago.

We realized a loss of $1.4 million in the quarter as we reduced our holdings of mutual funds. This loss reduced our earnings per share by close to $0.05 a share. Although we expect to recognize additional losses in these funds going forward, our overall return on our investment in mutual funds has been positive since we first made the investments in October 2012.

Our EBITDA -- that's earnings before interest, taxes, depreciation, and amortization -- for the 12 past 12 months was $151.9 million, a record.

Food service -- sales to our food service customers increased 6% for the quarter and 5% for the nine months, in large part due to increased sales to school food service customers, convenience store chains, and warehouse club stores.

Soft pretzel sales were up 4% for the quarter, and 4% for the nine months. Italian ice and frozen juice bar and dessert sales were up 6% in the quarter, and 1% for the nine months.

Churro sales were down 4% in the quarter and down 1% for the nine months, as we continue to lap the loss of Taco Bell. Baker sales were up 10% in the quarter, and 8% for the nine months.

Retail supermarkets and grocery -- sales of products to retail supermarkets were up 18% for the quarter, and 18% for the nine months, and they were up 12% for the quarter and 6% for the nine months without the benefit of Philly Swirl.

Soft pretzel sales were up 5% for the 4% for the nine months, and sales of frozen juice bars and Italian ices were 15% in the quarter, and 12% for the nine months, without the benefit of Philly Swirl.

Handheld sales in the quarter were flat, and down 4% for the nine months. Icy and frozen beverages, which include Arctic Blast and Slush Puppie and parrot-ice. Frozen beverage and related product sales were up 9% in the quarter and 10% for the nine months.

Beverage-related sales alone were up 8% with gallon sales up 7% at our base icy business in the quarter, and up 6% with gallon sales up 6% for the nine months.

Service revenue for others was up 4% for the quarter, and 11% for the nine months.

Consolidated gross profit as a percentage of sales was 32.4% in this year's third quarter, down slightly from 32.8% last year and for the nine months was 30.5% this year, down from 30.8% last year.

The gross profit percentage in this year's quarter was driven higher by icy and retail supermarkets, and offset by reduced margins in food service resulting from -- primarily from higher manufacturing costs and significantly cost of egg raw materials.

Total operating expense as a percentage of sales decreased to 18.9% from 18.5% in last year's quarter, primarily because of increased sales.

Capital spending and cash flow -- our cash and investment securities balance increased $13.5 million to $229.9 million. We continued to look for acquisitions as a use of our cash.

We reduced our holdings of income-generating mutual funds to $90 million at quarter end, and $67 million in our fourth quarter. We have reinvested some of the proceeds in fixed and floating-rate preferred stocks and corporate bonds. Our capital spending was $15.6 million in the quarter, as we continue to invest in plant efficiencies and growing our business.

We are presently estimating capital spending for the year to $45 million to $50 million or so. A cash dividend of $0.36 a share was declared by our Board of Directors and paid on July 2nd. We did not purchase -- buy back any of our stock during the quarter.

Commentary -- our sales growth of soft pretzels in food service was 4% this quarter. Although sales to restaurant chains this year continue to be roughly flat with last year, sales to schools and convenience store chains were strong.

Frozen juice bars and ices sales in food service were up in this quarter, due to our sales of our branded whole fruit organic juice bars to a warehouse club store.

Handheld sales in food service were down again 6%, as we continue to face challenges in this business driving its growth.

Churro sales were down 4%. Excluding the loss of sales to a major food restaurant last August, sales were up 8% in the quarter

Bakery sales continue to be strong, driven by sales to schools and co-packing business.

Sales of soft pretzels in our retail supermarket were up a solid 4% for the quarter, and frozen juice and ices were up a very strong 15%.

Handheld sales in retail supermarket were down 5%, mainly due to lower sales to two customers.

In frozen beverages, gallon sales were up an outstanding 7% as we benefited from sales to movie theaters, where attendance was very strong. And service revenue to others was up 4% in the quarter, as this area of our business continues to grow and perform very well.

Operating income increased $3.1 million in the quarter from a year ago, with operating income in frozen beverages higher by $1 million and retail supermarkets higher by $2.9 million.

Food service was lower by $766,000. Operating income in food service in this quarter was impacted by about $800,000 due to higher egg costs, which were not recovered through selling-price increases, and generally higher manufacturing costs, in part due to startup inefficiencies, and we expand our manufacturing capabilities.

Our estimated income tax rate was 37% this year, and last year for the quarter -- the same quarter. We're estimating a rate of about 36.5% in fiscal year 2015.

We continue to grow our sales quarter after quarter. This marks 175 straight quarters of sales increases.

I want to thank you for your continued interest. The past has been bright and our future is brighter.

I will it now turn it back to the audience for participant questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Jon Andersen. Please go ahead.

Hey, good morning, everybody.

Good morning, Jon.

I wanted to ask, first, about the retail supermarket business, which, as you pointed out, Gerry, was quite strong in the quarter, up double digits on an organic basis. That's the first time I think that's happened since, maybe, the second quarter of 2011. Could you talk a little bit more about the particular points of strength you're seeing in the retail supermarket business, and how sustainable this might be going forward?

Well, it's a good point, Jon. It's a combination of factors. As you well know, our food service soft pretzel business had been growing significantly the last couple of years, as that business was influenced by more soft pretzels on menus everywhere, and our marketing department did a -- we had a couple of special promotions on our major brands, including SuperPretzel. We benefited from the increase of it.

Hopefully -- hopefully what this will -- we'll be able to repeat this in the future, but there is -- there's, obviously, no guarantee that we're going to be double-digit increases in the grocery end of the business.

In the Bavarian launch, how is -- I think that's -- you've been at retail now for some time, and how is that kind of going so far in terms of sell-through, what you're seeing in terms of velocity of the shelves? It meeting expectations?

It is not, all right? So, that's even more significant that our major brand, SuperPretzel, in the frozen section has done so well without having a particular headwind from the other bread product.

Okay.

We'll continue to do things in there, and we've expanded our -- not only our business, but we've expanded our share, however slightly.

And then, just within that -- the same segment, I think you mentioned that handhelds were flat. I think handhelds have been declining. Is there an update you can provide there? I mean, are you seeing some more stability in that business at retail? Or is it still kind of touch and go?

I really can't say stability, but it's terrible for me to say, of all people, that flat was good. But after several declines, flat was good.

We do have a new product that we expect to be in some 500 stores of a major chain in about another month, and so, we're continuing to develop products through R&D, and we have some marketing plans for that.

Okay. Let me shift gears. Let me ask you about the food service segment, because in the press release there was a line in there that indicated the results of the food service segment were disappointing, but I don't know, when I look at it, I see kind of 6% organic growth on a difficult comparison, 8% organic growth a year ago.

That looks pretty good to me. When you say "disappointing," are you referring to the margins within the business? Or what disappointed there?

Well, the -- yes, the margins in the business, and 90% of it was caused by this tremendous increase, and for us, in liquid eggs, which affects a couple of products in there. And we absorbed that.

So, to the extent -- that item, and, perhaps, due to some startup costs in one of our nearby plants it impacted margins. But we were very satisfied with the overall performance on the top line, with food service, particularly since we were able to get back to driving sales in the school food-service channel, and made significant inroads in the C-store business.

That makes sense.

My last question is just on eggs, in particular. Just to be clear, eggs -- is this a headwind of $800,000 to $1 million a month going forward that you are going to be able to fully offset through price and other, maybe, reformation or sourcing alternative inputs? Or is there a -- what portion of that inflation do you think you're going to have to kind of absorb within the P&L over the next several quarters?

Thank you.

To answer your question, on an annualized basis, if we did nothing, it might cost $9 million to $10 million, all right? But we have passed on some pricing, which is going to take effect next month. When I say "next month," in August in there, and, hopefully -- and I say this kind of with tongue in check -- we have been slightly favorable in commodity costs all year, particularly in our major commodity, which is wheat flour, but every once in a while, we run into a wrinkle, too, so, we're going to iron out the wrinkle and take care of it one way or the other.

Okay, thanks. I'll pass it on.

Thank you. Our next question comes from Jonathan Feeney. Please go ahead.

Good morning, Jonathan.

Oh, good morning, Gerry. Thanks very much, as always.

I wanted to ask about, obviously seeing great growth across, particularly, the pretzel part of the business, and you're putting some I guess what they call evidence-based pricing through in other businesses where you have pressure. Is there any pressure on you from customers to reduce price anywhere, or be more promotional anywhere, particularly in the food service business, given some of the, at least, visible apparent declines in grain inputs?

Did customers -- are they aware of that, and has that changed the dynamics at all?

No. Obviously, when we talk to customers about the increase in egg products or products that are made with eggs, their first response is [crying noise], and their second response is what can you lower for us?

So, we -- we try and manage our selling efforts with our customers and be as transparent as we can with cost and what-not. But our people are doing a pretty good job with that, and even though there are some considerations being given, particularly where there's contractual obligations, it has not had a going-forward burden on us yet.

Okay. That's good to hear. I guess as you look at the deal environment, small food companies that might fit into your portfolio, it seems like the price of everything has become extremely but you have historically, even in periods I can remember when we were in -- you go back to '05, '06, when we were in some very elevated pricing environments for deals for food companies, influenced by private equity, you still were able to source some good ones.

So, any -- any sort of viewpoint you have on the level of activity, what you're looking at, if anything, and your philosophy about it right now?

Jon, all I can tell you is that we continue to seek out and search, and there's been ongoing discussions and some of it for longer than I -- for a long time. Last year we made two acquisitions, both of them kind of small, both of them tuck-in kind of things, one in the pretzel, one in ices.

And their benefit is probably going to be more than what meets the eye in the long term, and we continue to look at things. We're looking at things which are somewhat bigger, some of them significantly bigger, but we're not going to make an acquisition just for an acquisition's sake, and the only thing worse than not making an acquisition would be to make a bad one.

Right. That's for sure. And just kind of --

We're kind of (inaudible) about it. We want to be wise about it, and not just make an acquisition for acquisition's sake.

Thank you very much, Gerry, I appreciate it.

Thank you. Our next question comes from Akshay Jagdale. Please go ahead.

Good morning.

Good morning, Akshay.

I just want to ask about the restaurant channel within your food service segment. It seems like things are flattening out a little bit after a couple years of good growth. Can you talk a little bit about just a restaurant channel, why you're seeing sort of flattish growth there?

I mean, I think of it more like a couple years ago you started to get pretzels and, to a lesser extent, churros on restaurant menus, and more and more restaurants caught on. So, what are seeing now? Are people taking these items off the menus, or are you just in a stage where timing-wise you're not adding a lot of new customers? Can you help me understand that?

It's a combination of -- it's a combination of -- sales have been flat -- I'm getting a --

Akshay, are you on a cell? Hello?

Can you hear me?

I can hear you now.

Yes, sorry about that. I was on my headphone, but --

But it's a combination of both factors. Partly, the menu's changing because people get a little bit exposed and tired, so it -- but we're not -- we're keeping a reasonable pace with our targets and goals, and sometimes looking at flat, and there's a lot of effort that goes in to keeping it on the menu and maintaining flat sales.

And can you talk a little bit more about innovation with the Oreo churro? It seems exciting, but doesn't look like a lot of big customers have caught on yet? I know you went through a product formulation change there where it's now filled, right? So, can you talk a little bit about how that launch is going?

We are still very, very -- not only committed, we're very excited with the Oreo churros, and now making it easier for the customers that they don't have to have two SKUs, the churro and the dip. We're getting some interest in the filled churros, and I think that the product, after a slow start, after a lot of marketing, it got off to a slow start, but that pace has accelerated the past few months, and we're cautiously optimistic, and will continue to do so.

Okay, thank you. I'm going to try to dial back in, because my connection is really bad. So, I'll pass it on to the next caller and get back in line. Thank you.

Thank you. Our next question comes from [Brian Radman]. Please go ahead.

Good morning, Gerry.

Good morning, Brian.

You talked a little bit about eggs. Can you go through some of the other ingredients, if there's any delta change, flour, sugar, shortening, chocolate, cocoa, anything else that's up or down, magnitude-wise?

Well, the primary ingredient, the main ingredient that you mentioned, we -- is pretty stable. Flour is stable. As a matter of fact, I've noticed year over year flour is probably down a bit. Dennis, you want to comment on chocolate, or some of the other --?

(Inaudible). This is Dennis. Generally speaking, if you take the entire basket of commodities, without eggs, we're relatively flattish at this point.

Okay, all right. Talk a little bit about -- you guys mentioned with Icee, that's a fairly solid installed base. Some of the other flavors that you have in that frozen drink area -- Arctic Blast, parrot-ice, Slush Puppie -- how are they relative to budget plan? How are they performing versus Icee?

Well, you have to go back to the Genesis of some of the other brands. Arctic Blast was developed to -- as a competitive brand against what was then the Icee distributors. Slush Puppie, a brand that we acquired a few years back, is doing okay, but it's doing significantly -- we're getting a major benefit from Slush Puppie in licensing.

Oftentimes you'll see them in these little transparent plastic tubes, and, more recently, in these -- what you call -- what do they call them?

Pouches.

Pouches. So, Icee has continued to perform well as a subsidiary company, with Icee being the main brand, and some of the secondary and tertiary brands being used in a utility fashion.

Okay. Yes, I remember. Slush Puppie was something you pushed around in carts to, like, baseball fields or Little League. What -- where is Arctic Blast and parrot-ice? Are they just --?

Parrot-ice is primarily like a cocktail enhancer or flavor. Arctic Blast was used in areas where we did not have the benefit of the Icee brand. So, even though he's still part of our -- like a baseball team, a 25th man on our roster, available for special pinch-hitting and benefits, he's not on the front nine.

Okay. Okay. No, that sounds good.

What's the product R&D in those frozen drinks, relative to new flavors and new iterations. Or -- I mean, I'm not a consumer of that, my kids are. What -- what's kind of the novelty there, relative to menu selection

We're constantly developing new flavors. Sometimes we develop so many new flavors we put them together with something called "mix it up," where kids love that, that they can put four, five, six flavors together. We've been experimenting, and some of the flavors that we've been experimenting with don't quite make it to the front of the store at a major chain or what-not, but Icee has a good traction with our syrup suppliers in developing new flavors.

Okay. Talk a little bit, Gerry, on Philly Swirl and New York Pretzel, kind of two recent acquisitions. What's kind of the -- the sales level momentum, maybe CapEx you're putting in, anything you're doing manufacturing-wise?

Well, we're not doing anything CapEx. We wanted to certainly -- I mean, we knew the business, and we wanted to make sure that it was a nice fit and integrate it. They each had different reasons. New York Pretzel was a manufacturer for some 60 years in the key, critical markets of New York City and up through the Northeast.

We've pretty much left that intact. We've added a couple of changes to benefit them, and they're performing well.

Philly Swirl, I think, will be a diamond in the rough for us. We acquired them last May, and it's a very, very popular product with children, and also young adults, and we're expanding its base. That business is on track to do somewhere between $26 million and $30 million for us this coming year.

Yes. That Philly Swirl, Gerry, versus, say, the Manhattan-based New York Pretzel, or the upper East Coast, does Philly Swirl give you more leverage in finding new distribution outlets across the country versus, say, New York Pretzel, or is it (inaudible)?

Not necessarily. Philly Swirl is primarily to grocery and to some of the warehouse clubs. New York Pretzel was -- made a good product, and they were in a key area, which kind of improves our strengths in the Northeast corridor with a like -- no longer a competitive product.

Yes, okay. You talked a little bit about certainly great performance on the grocery store, Gerry. Give us a little sense of the combat and the competition, shelving or shelf location, couponing, maybe encroachments with grocer private label? What's the battle like in the grocery store?

Interesting point that you bring up. We've added a person to our -- actually, the person had been with us a number of years, but we have now a couple of people doing nothing but that, improving the sets at the major chains and what-not. And, of course, that's a long, wide process to do so, but we have people that are feet in the street in the store.

All right. And I'll just ask one more and get back in line. Gerry, if you look at your business and you were looking at -- you've an elasticity with the consumer, fairly value sensitive, somewhat of a tepid economy. You guys certainly have fluctuation impacts from weather. If you looked at kind of three characteristics -- manufacturing efficiency, new distribution outlets, new end customers, or back to the R&D skunk works, where you're developing new flavors and that, where is really the secret forward for your business?

Wow. It's a combination of each of the things that you mentioned, but basically, it's sales, sales, generating sales.

And we continue to put an emphasis on sales, complemented by strong marketing and R&D initiatives, and I think we've benefited from that, and I'm confident we will continue to benefit from that.

Okay. And then, you talked a little bit about some of the deal side. You guys have been very, very good at restructuring, turnarounds. In some cases private equity doesn't necessarily chase that.

Are the multiples as high on -- maybe not bankruptcies, but liquidations, some of these turnarounds, or are you still seeing some deals in areas where business is, maybe, somewhat weaker?

Well, you're right about the private equity structure, and what their function is. And we have been pretty much resolute in not taking too much and -- but if you believe in good business sense and good business risk, but some of our -- we have been outbid on some of our multiples, but more recently I am pretty -- I am pleased that the things that we're looking at, and even getting down to the bid process, it's not because we're being significantly outbid, it's really because, for one reason or the other, ownership has decided to pull back.

But we stay in touch with these people, and we have a relationship with these people. So, one of these -- we are hopeful that one of them will certainly come due, and pretty soon we'll have something to crow about.

Right. Gerry, keep up the good work. Thanks.

Thank you.

Thank you. Our next question comes from [Robert Costello]. Please go ahead.

Hello.

Bob.

How you doing?

Good.

Could you be a little more specific on the cash and what you're invested in and what you were invested in that you took the loss on?

Well, I'm going to -- I'm going to give this one to Dennis, but we have lots of cash and we continue to generate somewhere between $12 million and $14 million in net cash a month in there, and we invested some in some mutual funds with a pretty good yield, roughly 3.5%. But, Dennis, why don't you now explain why we decided to take the loss in this last quarter?

Well, Bob, as Gerry said, we've been invested in these mutual funds, which have been yielding 3.5% to 4%, and continue to, the ones that we continue to own.

However, we were getting good returns, they're a little volatile, and we were sitting with unrealized losses on our bucks. So, we decided to reduce our holdings, and in doing so, we generated losses, and we still have unrealized losses on our books that we will generate as we move forward.

We've taken the funds and we've -- we're now investing some of it in corporate bonds with basically maturity dates in 2019, 2020, which eliminates, for the most part, the risk to principal, as long as we hold them to maturity, which we expect to do.

We've also invested some of our money in bank preferred stock, which has a fixed to floating yield, and the times in the bank that the yield is -- well, the yield is good, but it also is tax advantaged. So, a 5% yield on those is really equivalent to about a 7% pretax yield.

But further, Bob -- this is Gerry again -- we've let our cash build and build and it behooved us to invest some of it as opposed to getting 10 or 20 basis points with cash earning nothing. And putting it in these funds gave us a decent return, and overall, over the past couple of years, we have made some money.

But we also understand that that is not the primary purpose of our business. Our business is continue to grow the business and grow our earnings.

Thanks for that insight. What about the -- about two years ago, I guess, August, September, you doubled the dividend. And is it reviewed quarterly? Annually? What do you normally -- what is your strategy with regards to the dividend policy?

Well, I go way back, maybe eight years ago, when they -- the tax laws changed, and we started generating a dividend for the first time. Since then, we've increased the dividend every year. Now it's roughly $1.42. Correct, Dennis? Am I right? $1.43 a share? $1.44 a share.

We will be -- we look at it every Board of Directors meeting. There's no set time to change it, but I think that --

The last couple years, it's always been in the September quarter, in '12, in '13, in '14, and I was just wondering if that's your general policy?

We'll be looking at it again, and, given our cash position, and given that we -- even if there was a big acquisition, we have plenty of line cap available to us, but I would look at that as a distinct possibility going forward.

One other question. With the consolidation in the dollar store business, what impact, if any, do you see going on your Company?

So far, we have not seen any, and that still represents to us a growing part of our business as put new products, packaged a little bit differently, into the dollar channel.

Yes. I've seen some of your products recently in the back of the frozen novelty section, and is that something relatively new for you?

Well, two things. It's relatively new, and when you see it in the back of the frozen novelty section, help us out and move it to the front.

Well, now the Dollar Tree puts it in the back of the store.

I know.

Yes, I mean, that's just their layout of the store. But, obviously, that's new for you in the novelty category, right?

It's -- yes, it's one of our newer initiatives, maybe not in the last couple years.

Right. Thanks.

Thank you.

Thank you. Our next question from Francesco Pellegrino. Please go ahead.

Good morning, guys.

Good morning.

First off, I wanted to hit on the retail supermarket. Past, oh jeez, going back to Q3 2014, it's been pretty decent double-digit growth and in the first quarter and second quarter of this year coupon redemption was going up significantly. In the first quarter, it was up 58%. Second quarter it was up 35%.

And then there was a dip. It was down 40%, year over year, in the third quarter. Gerry, could you maybe just talk about where you're seeing the American consumer and sort of dipping into the -- into utilizing coupons? Are you guys offering less coupons out there? Because when I look at the handheld business, I would think that more coupon redemption would be used to sort of get that business up afloat. But you know what, you sort of turned that business around slightly, and it wasn't at the expense of coupons.

That coupon number seemed to just jump out at me, and I was just wondering if you had any commentary on your end?

Well, for our major brands, like SuperPretzel, we have -- we're getting a little bit better pull. As far as handhelds, everything we're doing is private label, so, we're not couponing it, and the stores are -- the grocery channel whom we private label for is not putting out a coupon of its own.

We've been impacted a little bit in that business, and we spoke about it before, with the decline, in general, with some of the handheld products like Nestle's Hot Pockets.

All right. The question I'm about to ask, most of the time it's answered with, it's rather unpredictable, but sales of the beverage machines past couple of quarters has been relatively strong. With the relative decent releases of movies this summer, is there any downstream insight into, maybe, where additional beverage machine sales will be for the upcoming quarters, or is just it's still going to be unpredictable going forward?

It follows no defined path.

Right, okay.

When it goes up, we wonder why we can't spot a trend in there, but basically our overall Icee frozen beverage business grows.

Because it grows, people need more drink machines or beverage machines. We're in the business, so, we benefit from it. But we have been very, very pleased and proud of Icee's contribution to sales and earnings, and their managed service for others seems to be benefiting both equipment and beverage sales.

All right. And I just wanted to touch on the egg situation a little bit. Is there a volume number that you guys do on a quarterly basis, just to get our minds wrapped around how volatile egg prices are? I mean, I think you can see 50%, 60% swings over the course of 30 to 40 days if you're going from the fall period to the winter. What type of volume numbers are you really using for eggs on a quarterly basis?

Well, I don't have these figures in front of me, but I would -- to give you an idea, we were paying roughly $0.70, $0.72 a pound for liquid eggs, and when the price started going up, and it wasn't walking up like a treadmill, it rocketed up. Now it's running roughly $2.30 a pound for liquid eggs, although we are doing some experimenting with egg substitutes, and making sure that we don't do anything to suffer in quality and what-not, nor in appearance in there.

We don't have a substitute yet which would give us any type of significant relief.

That was going to be my next question about egg alternatives out there, and I know companies like Hampton Creek are sort of getting a little bit of a windfall from this avian influenza situation. What have been some of the problems that you have been running into when sort of experimenting with these egg alternative products?

Well, that's an R&D question, and that's ongoing. We wanted to make sure that we certainly had a supply of egg products, and our people have done a good job with that. The next burden for us to tackle would be the price of it. We have raised some of our products' pricing. We use eggs in cookies. We use them in our churro mix. Fortunately, it has not -- we don't use eggs in our Icee or in our pretzel products. But you can predict, when your costs go up like that and you don't have an insulator or a barrier to protect those costs, it creates just -- it makes -- it creates some burdens. But we believe we're equal to that.

Right. And it seems as if the avian influenza situation has died down a bit since the --

Well, the chickens --

Right. Since the peak of June, there's talk about it sort of popping up again this fall when the birds start migrating.

So, can you just talk a little bit about what your sourcing is? Because are you able to look into contract terms? Is there any way that you can sort of get consistent supply over the next, I don't know, four to six quarters based upon the unpredictability of this sort of --?

I'll tell you what happened, though. They declared --

Force majeure.

Force majeure.

Right.

And there's not too much we could do. I mean, the birds were destroyed, right? The suppliers declared on, all right? And we either had to absorb the pricing and take care of our customers for today and tomorrow, or make a different decision in there, and we opted to absorb the pricing on the short term. We have gone out to the field, announcing an increase in there, but we still think that our business decisions that we made is best for the long run of J&J Snack Foods.

So, you were previously on contract terms?

Right, but these contract --

Right.

--ended suddenly.

Yes, makes sense to me. All right. Thanks again, Gerry.

Thank you.

Thank you. Our next question comes from Akshay Jagdale. Please go ahead.

All right. I'm back. That was a long wait.

So, just to follow up on what I had asked before, so -- and I apologize, I couldn't hear everything you said, so if you have to repeat, I apologize.

But basically, what I heard on the restaurant side is, it's a combination of some customers taking stuff off the menu, others adding, and then -- so, can you just talk to, like, what's the plan? Like how does it look going forward? Do you -- is it fully penetrated in terms of getting on all the restaurants that you had expected to get on, and from here on it's more about adding more products? Or how should we think of the long-term evolution of growth in that channel?

Is there still plenty of opportunity? Are we -- sort of what inning are we, in baseball terms, in that regard?

Well, that's a good question and we believe there's plenty of opportunity. We hear about it every day. Of course, we have to kind of rinse this opportunity and make a determination on what is immediate, what is two and three years out? And some of the changes -- we're literally working on their menu plans for January not of 2016, but 2017. We bolstered our R&D efforts and our marketing efforts, and complemented that with our sales initiatives.

So, we're looking forward to this business over the next two, three years. We believe it will be -- it'll continue to grow.

And just going back to your commentary on the disappointing food service results, just even last quarter before this egg cost issue, you had a disappointing profit performance in food service. So, you've mentioned a couple of times these startup issues. Can you talk what are these startup issues? What are you starting up, and why is it sort of lingering still? So, can you give us some perspective there?

The startup issues have to do with one of our plants nearby, which we put in some new lines, and we had some issues which we're working through with automation and what-not.

But a lot of it was school food service mix, perhaps a year ago, and I don't think that the issues are all related at all. If you take a look at food service for this most recent quarter, I mean, sales were good. Sales were strong. We had the issue with eggs, which had a 100% delegated to food service, but it continues to be our strong -- a strong business, perhaps our strongest business.

And so, just to be clear, so what lines did you line that you're referring to?

Multiple pretzel lines for pretzel rolls, sticks.

Okay. And then, these increases in the liquid egg costs, what product categories do they impact the most? And once you get the pricing through, how are you thinking about the impact it might have on volumes?

Well, it impacts our cookie business, which is not insignificant, and our churro business, and it always takes you longer to get the pricing passed on, and accepted, and through, than it does to be hit on the other side.

And the long run -- in the long -- over the next year, it may have as much as a $9 million or $10 million impact in cost. We think we're going to be able to offset that with increased sales and pricing.

Okay. And just going back to this topic of capital allocation, obviously we applaud you for being proactive and managing your cash. I think you did the right thing there. But why not buy back shares? Like it seems -- it seems as though -- I mean, clearly, the argument could be made that in today's interest rate environment your balance sheet is not as efficient as it could be.

You've talked about the dividend. It seems like there's a decent chance that that might grow again, but can you talk a little about share repurchases and why you haven't been more active than what we've seen in recent quarters?

Although it's not a hard rule with us, we tend to buy back an equal number of shares for what we give out as stock options each year. That has ranged from roughly 150,000 to 180,000 shares.

I don't -- I personally believe, and, again, I have shareholders that I represent, and my Board, I just think that we have a thin enough float as it is, as you're aware. And buying back shares is an artificial way to increase earnings per share, and I'd much rather concentrate on growing the business aggressively, and increasing sales and earnings, and perhaps making acquisitions.

Yes, I don't, in theory, disagree with anything you said, but essentially -- and correct me if I'm wrong, Dennis -- but essentially with the balance sheet that you have, I mean, and the cash that you have on your balance sheet, you could -- if you wanted to, you have the ability to buy something or several businesses, even more -- you could spend $500 million you could raise easily, it seems as though, and your largest acquisitions have never been anywhere close to that.

So, there seems to be a lot of cushion on your balance sheet to do things like share buybacks, which would be more accretive and more shareholder-friendly than just holding the cash on the balance sheet. So --

I'm going to let Dennis answer that Akshay, but I'm going to look at Dennis when he answers.

I will not disagree with you Akshay. However, as Gerry said, I think our goal is to kind of maintain a stable share count at this time. And we don't see a major benefit in taking a number of shares back.

Keep in mind, over the years, we have bought back a fair number of shares. We have less than 19 million shares outstanding, and probably insiders and funds hold the -- a major portion of that. Until there's a major acquisition or perhaps two or more, we would -- we'd think it's prudent to let the cash build, return some to shareholders, and otherwise use it for our business needs.

Perfect. I'll pass that on. Thank you so much.

Thank you, Akshay.

Thank you. Our next question comes from Brian Radman. Please go ahead.

Yes, Gerry, this is Brian. Your CapEx for the year, you said $45 million to $50 million. If you haven't done budgets for next year, where have you been kind of putting your CapEx? Different plants, refrigerators, fill lines, where's some of that been invested?

Well, we put out equipment. Our Icee business, which has been growing significantly, puts out drink machines, Icee machines, and that can be, depending on an account $20,000 or more for each location, or maybe as little as half of that.

We continue to invest in plant efficiencies where we can drive costs down, and, again, we're looking for other uses of -- other uses of the cash, including acquisitions.

If you look at our factory production, your footprints, are you running any plants with three shifts or plants with significant overtime where you might be building out a footprint in the future?

Yes and yes, but not to the extent that -- an alarming extent. We're going to be visiting one of our plants today that we've expanded probably three times in the last 10 or 12 years. That seems like a lot, all right? But we're going to be looking at some capital plans that they have to further improve efficiency.

Okay, if you look -- just one more question. You look at some of your end customer markets, how tough is it for your people to get sales penetration? Say the difference between convenience stores, warehouse clubs, grocery supermarkets, movie theater chains? Do any of these stand out? Or are they all triage operations?

They're all challenging, and we have various and sundry different sales responsibilities for them. Somebody mentioned earlier the dollar channel. Five years ago, we weren't in there at all. Now we're trying to penetrate them further and further.

We've had a big initiative with convenience stores, and that business has grown for us.

I remember back in the late '90s, movie theaters -- how were we going to put machines in movie theaters and how were we going to benefit from that. Well, obviously, that's been a big part of Icee's growth and success. But we will -- we continue to look for new markets and new customers to sell our existing and new products.

Thanks, Gerry.

Thank you. We have no further questions at this time.

Well, I want to thank everybody for joining us for this conference call, and we look forward to talking to you again three months from now. Thank you.

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