J & J Snack Foods Corp (JJSF) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. I would now like to turn the call over to Mr. Gerald Schreiber, President and Chief Executive Officer. Mr. Schreiber, you may begin.

Good morning, everybody. This is Gerry Schreiber from J&J Snack Foods. And with me today is Dennis Moore, our Senior Vice President and Chief Financial Officer; and Bob Radano, our Senior Vice President and COO. And welcome to our conference call for second quarter.

Let me start off 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 those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

We'll continue. You have been emailed drafts of our financial statements this morning. And you will notice that we have reclassed some costs and expenses on our income statement. This has resulted from discussions with the SEC. On our income statement, the cost of

equipment frozen beverage dispensers, depreciation and maintenance costs have been reclassed from

marketing expense to cost of goods sold and certain costs and income have been reclassed from sundry to operating expenses. Both years reported reflect the reclasses. There have been no changes or suggested changes by the SEC to reported assets, liabilities, stockholders equity, net income or net income per share. Nor has the SEC suggested that our financial statement presentation was in any way misleading to the readers of the statements.

Results of operations: net sales increased 9 percent for the quarter and 11 percent for the six months, 9 percent adjusted for sales from acquisitions. In the quarter, our net earnings increased to $2,336,000, 25 cents a share, from $367,000, 4 cents a share of a year ago. Last year's earnings included $411,000 of good will amortization after tax. Without good will amortization, last year's second quarter earnings would have been $778,000, or 9 cents a share. Therefore, on a comparable basis, earnings improved by 1,558,000 or 16 cents a share to 25 cents a share this year from 5 cents a share last year.

For the six months, our net earnings increased to $3,158,000, or 35 cents a share from a loss of $326,000, or 4 cents a share a year ago. Last year's loss included $823,000 of good will amortization after tax. Without good will amortization, last year's six months earnings would have been $497,000, or 6 cents a share. Therefore on a comparable basis, earnings improved by $2,661,000, or 29 cents a share to 35 cents a share this year from 6 cents a share last year.

Snack foods, our snack foods business: sales to food service customers increased 9 percent in the quarter and 12 percent for the six months. Excluding sales from the acquisition of Uptown, food service sales increased approximately 9 percent for both the quarter and six months. The pretzel sales increased 7 percent in the quarter and 8 percent in the six months from last year, due mostly to sales of our recently introduced new product, Pretzel Fillers. Italian ice and frozen juice bar and dessert sales increased 4 percent in the three months and 9 percent in the six months due to increased sales to school food service customers, partly offset by lower sales to warehouse club stores.

True, our sales to food service customers increased 7 percent in the quarter and 5 percent in the six months. And cookie sales to traditional food service customers increased 27 percent in the quarter and 34 percent in the six months due to increased distribution. Sales of product to retail supermarkets and groceries increased 11 percent in the quarter and 6 percent in the six months, while pretzel sales and sales of our flagship, Super Pretzel brand soft pretzels were up 2 percent in the quarter and flat for the six months.

Sales of frozen juice bars and Italian ices increased 23 percent in the quarter and 15 percent in the first half. Overall sales of our bakery products were up 15 percent in the second quarter and 25 percent in the six months. The additional 10 percent in the six months resulted from the Uptown acquisition. Sales of our Bavarian Pretzel Bakery retail stores decreased 10 percent in the quarter and 12 percent in the first half due to decreased mall traffic and our continued closing of unprofitable stores. Icee and frozen beverages: Icee frozen beverages and related product sales increased 13 percent in the quarter and 16 percent for the six months. Beverage sales, alone, increased 6 percent and 5 percent, respectively. Service revenue increased 82 percent in the quarter and 70 percent in the six months, all benefited from using our infrastructure that we have been building up over the years that we talked about in previous conference calls.

Consolidated gross profit as a percentage of sales increased to 37 percent in this year's second quarter from 36 percent last year, primarily because of efficiencies caused by higher unit volume, some price adjustments. And gross profit was 36 percent in both years and six month period.

For the quarter, total operating expenses as a percentage of sales decreased to 33 percent from 34 percent last year because of a drop in good will expense. For the six months, operating expenses dropped to 32 percent from 35 percent a year ago because of the drop in good will expense and the inclusion of Uptown Bakeries. Distribution expenses decreased to 7 percent of sales this year from 8 percent in last year's periods due to the inclusion of Uptown Bakeries and lower fuel costs. Administrative expenses as a percent of sales remained at 4 percent compared to last year in both the quarter and six months.

On a slightly negative side, continuing poor results, including store write-downs at our Bavarian Pretzel Bakery retail stores impacted earnings by about 2.5 cents per share for the six months compared to last year. And although we continue to pursue alternatives to improve this situation, with the exception of closing poorly performing stores and with the licensing of one other store, we're still wrestling with this problem. We have been and continue to be impacted by higher liability and property insurance costs. For the quarter, our costs were higher than last year by about $500,000 or 3.5 cents per share, and for the six months our costs were higher by about $750,000 or 5 cents a share.

Overall operating income increased by 2.3 million or 162 percent in the quarter and by $4,147,000 or 425 percent in the first half. Interest expense was lower by $794,000 in the quarter and by $1,298,000 in the six months because of lower interest rates and lower debt.

Other highlights of the quarter: financial, we paid down $4 million in debt in the first quarter, $8 million in the first half, and a total of $30 million or over $3 a share in the past 12 months. With regard to FAS 142, J&J did not record any impairment loss on either its intangible assets or good will as a result of the adoption of the standard. This is a testimony to J&J's skill in making acquisitions and fitting them in and in making them work. We have lowered our effective tax rate to 35 percent from last year's full rate of 36 percent as a result of the adoption of FAS 142 and other factors.

Frozen beverages: Icee beverage sales, alone, increased 6 percent this quarter, continuing a trend which began in the third quarter of last year. We attribute the increased beverage sales to a combination of factors, including our new cup set of increased sizes and aggressive marketing programs with our chain accounts in addition to increasing our number of base of dispensing machines. We continue to pursue servicing opportunities that take advantage of our national service infrastructure. In the six months, our service revenue increased 70 percent to over 13 percent of overall domestic revenue, up from about 9 percent a year ago. That puts us in at somewhere in excess of $12 million. We expect continued increases in service revenue based on current commitments.

Snack foods: the introduction of our award-winning Pretzel Fillers last May has helped us to regain strength and momentum in the pretzel category after several years of sluggish sales. Second quarter and six month pretzel sales, excluding Uptown Bakeries, were up about 7 percent. This follows a 7 percent increase in the fourth quarter of last year. Although the overall increase in sales of our frozen juice and ice has slowed to 4 percent in the quarter from 18 percent in the first half, our school food service Shape Ups product continued its strong growth because of the introduction of the Minute Maid brand on the product.

The growth was offset by a drop in club sales because of the discontinuation of a product lines, although we have added other products for the third and fourth quarters in an effort to make up for the discontinued products. Additionally, and very recent news, McDonald's began selling last week our Minute Maid brand soft frozen lemonade as part of a dollar menu in its 600 New York City area stores. We expect another 920 stores to add the product in the Philadelphia area, central Pennsylvania, Baltimore and Washington markets sometime next month in May.

Our food service cookie business continues its strong growth. Sales were up 27 percent in the quarter and 34 percent year to date, as we continue to make inroads in this very large category. Food service operating expenses as a percent of sales were roughly a quarter percentage point lower in the second quarter versus last year and about three quarters of a percentage point lower for the six months. This represents and is a key indication of cost control in this area of our business. A price increase was instituted in the second quarter, which should provide additional revenue over the balance of the year, somewhere in the area of $1.5 million, plus or minus.

Supermarket retail: our sales increased 11 percent in the second quarter after being down 1 percent in the first quarter. Sales turned around in both our pretzel and frozen juice and ices product lines. Among the products introduced for this coming season are Minute Maid Fruit and Cream Swirl - tastes like a creamsicle only better, an additional flavor of Luigi's Swirl variety pack, and two new flavors of Icy Tubes. Initial acceptance of these new offerings have been very favorable. We expect sales levels to be strong enough to possibly offset the

loss incurred to roll these products out.

Capital spending and cash flow: for our fiscal year 2002 we expect to spend approximately $20 million, which we estimate will result in free cash flow, operating cash flow less capital spending, of 20 to 25 million. Included in the spending estimate is $3 million for a new manufacturing line to produce Pretzel Fillers. We expect to continue to generate these significant levels of free cash flow, while growing our existing base business in the mid to high single digits. Beginning in fiscal year 2003, we should begin to see a significant drop-off in depreciation expense in our existing business by as much as $5 million compared to this year. Additionally, without including any possible acquisitions or stock buy-backs, we should have very little interest expense next year. I just want to caution you that would be without any possible acquisitions.

One of our biggest challenges is to find a use, a good use for our excess cash. We continue to pursue acquisitions - actively pursue acquisitions. That concludes my comments and I will turn it back to the listening audience for your questions and comments.

Thank you. We will now begin the question and answer session. If you have a question, you will need to press the 1 on your touch tone phone. You will hear an acknowledgement that you have been placed in queue. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speaker phone, please pick up the hand set before pressing the numbers. Once again, if you would like to ask a question, please press the 1 on your touch tone phone. We have

on line with a question. Please state your question.

Yes, it's Janney Montgomery Scott. Very good quarter, Gerry, Dennis, Bob. Couple of questions for you. First, with regard to the new McDonald's venture, you are going to be putting in, you're going to own the freezers that McDonald's uses, correct?

That's correct.

And that's going to be roughly on-that's $400 a unit or so, looks like about $620,000 of capital costs for those 1,500 plus stores?

Your math is right.

Okay and Dennis, how are you going to treat that, accounting-wise? Is it going to be expensed? Is it capitalized and depreciated and over what period, if you're doing that?

A lot of it depends on what happens with the program. If the sales are as McDonald's expects, then the program will continue on into the future years, we'll capitalize them and depreciate them over a three-year period. However, if the sales are not what McDonald's expects and needs to keep the products in, we will probably expense that this year.

Either way, it was a business decision on our part and a pretty easy one there. Worst case scenario, if a couple of them drop off, we move the freezers to a

the big head variety, you know what I'm saying?

Yes. Okay, how about-what kind of-I didn't read the press release fully. Did it say it was a limited time offer or was this-do you know what the plan is there?

Bob the-this is Dennis. The plan is they will go in, they're expected to do a certain level to remain on the dollar menu and if they maintain the level, they will stay in.

So okay, so regardless of the season, in the winter it will be-

I think the expectation right now is that they would remain in but it all depends on the sales and what the sales are in the fall.

item, Mitch. You know, and again we're going to back to something that somebody at McDonald's said to us, "We sell sodas in the winter, that's cold."

How about this: what would your sales expectations, what are the minimum sales expectations from McDonald's point of view or what do these 1,500 stores, what will they contribute in the back half of year '02?

The expected sales in dollars would be roughly $2.5 to $3 million over a six month period, which would generate gross profit of roughly half of that. Now, those are expected numbers. We'll see what happens.

And you will report those in your food service business?

Yes, that is correct.

Second question is regarding Uptown. Curious how-was the entire bakery segment's 15 percent growth driven by Uptown? If not, what did Uptown do by itself?

Roughly all areas of the bakery business were up about 15 percent. Sales to traditional food service accounted for us, I believe, 24 percent and then what we classify as other bakery products were up about 9 - 10 percent. You know, you mix that in with Uptown and it all comes out to about 15 percent.

So Uptown, you're saying is about 9 to 10 percent growth?

A little over that, about 11 or 12 percent.

Okay, and is that a function of same store sales at

in other words, your bakery case in there is growing or is that a function of unit growth at

.

Actually, Mitch - it's Gerry - it's both. We've added some new stores, so as

expands, we expand and we added a new item. You know, we're in the cookie business and we continue to look for ways to sell more products to the same customers. We had a cookie

and we continue to expand it and now we have cookies in essentially over 400 stores and we'll continue to add cookies and possibly other products there.

Okay, two more questions, I'll yield the floor. Pretzel Fillers, what is you-what is the estimated revenue contribution of Pretzel Fillers in food service for the entire fiscal year, roughly?

About $5 to 6 million.

Five to six million?

For this year.

Is that profitable? What I'm trying to say is, have you been having to spend to promote against that gross or has that sort of hit the ground running from the P&L point of view?

Well, we are spending actively in marketing and display and promotionally and we're expensing it along the way. We have rather aggressive marketing programs in the field with distributors in there but the spending is certainly managed spending. And it's incremental. We're adding-you know, it's profitable in its first year.

Well yes, I'm trying to see-I mean that is a significantly higher dollar per pound revenue item for you, relative to your Super Pretzels, I'd imagine. Correct?

That's true. It will be even more profitable with the new line when we can further improve the manufacturing process.

Okay, so did Pretzel Fillers contribute, of the 7 percent food service-I don't know if you said that, I don't know if you broke that out. How much would you attribute to the Pretzel Filler business, roughly?

Most, if not all.

Final question for now is, Gerry, you mentioned slotting in retail. Is that for all of fiscal '02, will that be-how does that compare to your slotting expense in '01? Is this an incremental cost or is there actually year over year, a decline in slotting expense?

Mitch, this is Dennis. Roughly, slotting will be about $1.2 million more this year than it was last year for products.

Okay, and out of curiosity, have you looked at your '03 sort of budget and forecast, where do you think slotting is next year? Do you have any idea yet?

slotting should back off a little bit. I don't think we'll be introducing four new products next year. Hopefully. By the same token, if this goes well, we're going to be more actively pushing the pedal.

Mitch, it's Gerry. You know if this goes well, and expect it will, we will continue to invest in the retail segment.

All right, thank you.

Once again, if you would like to ask a question, please press the 1 on your touch tone phone. Gentlemen, we have no additional questions at this time. Mr. Moore, we did receive two questions. We have

on line, please go ahead, sir.

Good quarter, Gerry. And Dennis, I just wanted to know what prompted the change of your classification for the second quarter?

This is Dennis. We received a comment letter from the SEC. And essentially there were-the main reclassification had to do with the marketing equipment in the frozen beverage business. And the theory that the SEC put forth was that the product is actually manufactured at point of sale by the machine. Therefore, those costs should not be marketing expense, but rather a cost of goods sold.

Does it affect your amortization period?

No it does not. It affects nothing, other than where it shows on the income statement.

Okay, thank you.

You're welcome.

We have

on line with your question. Please state your question.

Hi, I just wanted a little more clarification on the McDonald's rollout. When you said they expected sales of 2.5 to 3 million over six months, is that I guess the coming six months? And I guess how would that compare to your expectation for next year? Are you just doubling that or is there a rollout issue, or if it's the next six months are more warm weather months. You know, how does that work out and is there any G&A attached to this?

Gary, this is Dennis. There is very little G&A attached to it. In terms of the expectations, these were numbers that were given to us by McDonald's. This would be for the six month period. You know, they haven't said what drop-off they would expect over the winter months. The $.5 to 3 million is our sales, obviously, to McDonald's.

But it's based on the numbers they have given you?

As what they expect, yes.

Okay, and your cap ex expectation for the year, is that still below 20 million?

It's roughly $20 million. We have committed to the new Pretzel Filler manufacturing line, which is $3 million by itself, so we should not-I don't think we'll be less than 20. We should be around 20 and if we're over we should not be over by much.

Great, thank you.

We have

on line with a follow-up question. Please state your question.

FCB, what was your gross profit per dispenser growth?

The gross profit per dispenser growth was probably 2 -3 percent. Overall growth in gross profit was roughly 6 percent. And we've had about 2 -3 percent more dispensers than a year ago.

Okay, what is-last year, what was your operating profit performance this year versus last year in FCB?

For the-it was up. It was up considerably due to the increased service revenue for the most part but also because of the increased sales of the beverages as well.

So were you still-were at a profit or a loss in FCB in the second quarter?

We were at a loss, a large loss.

Okay, but a lot less than a year ago?

Less than a year ago, yes.

And how-so I'm just trying to get-I guess what I'm getting at is I wanted to know how much of your earnings per share improvement came from FCB's improved results?

I would say roughly-with the six months, roughly 3 - 4 cents.

Okay for the six months.

Right, but the six months and for the quarter probably 1.5 to 2 cents.

Okay, excellent. Okay thank you very much.

Any other questions?

We have

on line with a follow-up question. Please state your question.

Hi, Gerry, just wanted to follow up on the use of cash that you mentioned. Clearly next year, you've paid down your debt. What do you see in terms of acquisitions? Is there anything that looks interesting but is far off? Is there nothing out there? Could you just give us your general thoughts on that?

Well there are some things out there and we are actively pursing some of these things. And beyond that, I can't comment at this time. We are reasonably prudent and fiscally responsible. We need to make sure that the acquisition fits and we can work and there are synergies there. So the things that we're looking at fall into those preliminary criteria.

Okay, great, thanks.

Gentlemen, we have no further questions.

I want to thank everybody for participating with us in the conference and we'll look forward to talking to you again next quarter with equally demonstrative results. Bye.

Thank you. This does conclude today's teleconference. You may all disconnect at this time.