J & J Snack Foods Corp (JJSF) 2003 Q3 法說會逐字稿

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

Good morning, everyone. I want to thank you for joining us in our conference call this morning. With me today is Dennis Moore, our chief financial officer, and Bob Radano, our COO. I will begin with the following statement. The forward-looking statements contained herein are subject to certain risk and uncertainty as they could cause actual results to differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements or reflect events or circumstances that arise after the dates hereof.

Results of operations – net sales increase two percent for the quarter and three percent for the nine months. For the quarter, our net earnings increased to $7.8 million, 87 cents a share, from $7.5 million, 80 cents a share, from a year ago. And for the nine months, our net earnings increased to $12 million, $1.32 a share, from $10.7 million, $1.16 a share, of last year.

Food service – sales to food service customers increased five percent for the quarter, and seven percent for the nine months. Soft pretzels sales increased 11 percent in the quarter and 13 percent in the nine months due primarily to increased sales of new pretzel products, including pretzel fillers and gourmet twists.

Sales increased across the board in this, our core category, although sales to two customers accounted for approximately 70 percent of the sales increase in both periods.

Italian ice and frozen juice bars and desert sales decreased one percent for the quarter, but were up five percent for the nine months, due mostly to increased sales to warehouse, club stores, and school food service venues.

Excluding sales to McDonalds last year, which discontinued sales of our product, sales would have been up six percent in the quarter and nine percent for the year to date. Considering the weather, we are extremely pleased with these results.

Sales to food service customers were up two percent for the quarter and three percent for the nine months. Sales of our bakery products were up eight percent for the quarter and five percent for the nine months.

Retail supermarkets – sales of products to retail supermarkets increased nine percent for the quarter and were flat for the nine months. Soft pretzel sales and sales of our flagship super pretzel brand soft pretzels were up 10 percent for the quarter and three percent for the nine months. And case sales of frozen juice and Italian ices were down two percent for the quarter and down six percent for the nine months, although dollar sales of frozen juices and ices were up eight percent in the quarter and down only one percent for the nine months because of reduced trade spending this year.

This is the second quarter in a row of strong pretzel sales increases, up eight percent last quarter, after a disappointing first quarter, although case sales of frozen juice and ICEE product introduced last year’s drop 70 percent in the quarter, we were pleased with the sales increases of our continuing products, especially considering the poor weather we had.

Additionally, better management of trade spending, the impact slotting expenses had on last year’s results, and increased pretzel sales resulted in an approximately one million dollar improvement in operating income for the quarter compared to last year.

The restaurant group – sales of our Bavarian pretzel bakery were down six percent for the quarter and eight percent for the six months due to decreased mall traffic and the closing of unprofitable stores. We continue to utilize this group for testing of our new products.

ICEE and frozen beverages – frozen beverage and related product sales were down five percent for the quarter and two percent for the nine months. Beverage sales alone were down three percent for the quarter and two percent for the nine months, while service revenue to others decreased 21 percent in the quarter and two percent in the nine months. Beverage sales to two customers were down more than the overall decline in sales. Considering the weather, particularly in the northeast, we are pleased that excluding these two customers, we were able to increase sales overall. One customer accounted for the entire decline and managed service revenue because of a timing delay, a delay in the customer’s in-store program. We expect to make some of this up in the fourth quarter.

Our overall sales to K-mart were up 10 percent in the quarter, and for the nine months, sales were down one percent.

In this quarter, we’ve felt the full impact of store closings earlier this year. Although we believe weather also contributed significantly to the drop-off in sales, we will continue to pursue an aggressive strategy with K-mart to minimize the impact of the store closings.

Much of the decrease in beverage sales resulted from changes in marketing programs. We expect that some of the changed programs selling or leasing equipment with service contracts rather than loaning out company-owned equipment may have negative short-term impacts but will increase our return on assets in the long run.

There has been speculation regarding our managed service business to Burger King. Within the past two weeks, there have been reports that Burger King would be phasing out its frozen beverage business sold under the frozen Coke brands. This has been followed most recently by an article in the Atlanta Constitution stating that Burger King is “continuing to evaluate” the program. Even if we lose this entire business, our sales would be impacted by about $7 million annually, with an estimated $300,000 to $400,000 impact on net revenue, consolidated. Gross profit as a percentage of sales increased over one percentage point from last year in the quarter, and less than one half of a percentage point for the nine months. For the quarter, gross profit was impacted by about $1.1 million, or eight cents a share, by higher unit cost of raw materials.

However, we were able to overcome these cost increases and other general cost increases with higher volume in our food service business, some increase in our selling prices, and reduced depreciation of over $1.9 million, and a lower level of allowances in our retail supermarket business. For the quarter, total operating expenses increased 5.6 percentage points, and as a percentage of sales increased almost a full percentage point.

For the nine months, total operating expenses increased only 2.7 percent, and as a percentage of sales, was slightly lower than last year.

Marketing expenses were actually lower in dollars for the first nine months of the year.

Distribution and administrative expenses both increased about three quarters of a percentage point in the three months, and about a quarter of a percentage point for the nine months. Administration expenses were impacted by approximately $400,000, or three cents a share, compared to last year, by higher legal costs related to litigation.

Operating income increased by five percent in the quarter to $12.2 million, and by 11 percent in the nine months to $18.6 million.

Interest expense was lower by $38,000 for the quarter, and $390,000 for the nine months, as we now have no long-term debt and the interest expense just mentioned is in connection with standby lines.

Financial highlights – during the quarter, we purchased and retired 79,000 shares of our common stock at a cost of $2.4 million, or $29.82 a share. Total purchase for the year through June was 297,000 shares at a cost of $8,565,000. Our board of directors authorized an additional 500,000 shares buy-back in April, of which 478,000 remain to be purchased. We will, from time to time, buy back our stock when we feel it is appropriate to do so. Our cash balance increased to $22.9 million at quarter end. That would be as of June 30th. As we have no long-term debts to pay down, we will continue to accumulate cash while we seek appropriate use for it.

We increased our tax-effective rate to 36 percent this year from 35 percent last year because of changes in the New Jersey tax laws.

Capital spending, cash flow and depreciation expense – our capital spending was $14.8 million for the nine months. We are projecting capital spending to be about $20 million this year, which would leave us with free cash flow, operating cash flow, less capital spending, of approximately $24 million. As we have done in the past, we will continue to seek expansion and growth opportunities to supplement our internal growth. And, as we have recently done, we will buy back our stock from time to time, when we feel it is appropriate to do so.

Balance of fiscal year 2003 and beyond – prior to commenting on the balance of year, let me just say that we are pleased with our performance for the third quarter. We were able to improve revenue and improve earnings in the face of a rather tough economic environment, higher, in some cases much higher commodity costs, and incredibly poor weather for our seasonal products.

Our operating income was impacted by approximately $1,100,000 of higher unit costs of raw materials of packaging in the third quarter, and $2,850,000 in the nine months. This level of cost increase is continuing in the fourth quarter, but we expect will moderate beginning in the first quarter of next year. Additionally, we expect property and casualty and group insurance costs to be higher by about $200,000 to $300,000 in the fourth quarter, $800,000 to $900,000 for the full year. To offset these increases, we implemented some price increases in January, which have been generating revenue to partially offset the cost increases. We also continue to make changes and adjustments to our insurance and risk coverage programs to reduce the increase in costs. Additionally, lower depreciation expense will continue to have a significant positive impact into the first quarter of next year.

However, to continue to post year over year increases in earning, we will need to improve upon our top-line growth, and to that end, we are fully committed.

We have a number of opportunities before us which we believe will help us to continue our strong pretzel growth and overall growth in our food service business. Our expectations are that these opportunities can help us to continue to generate growth in the mid to high mid single digits for the foreseeable future. We will be introducing three varieties of pretzel fills in the supermarkets in late summer and fall. Pretzel fills are filled and topped bite-sized soft pretzel sticks. We hope to duplicate and piggyback on the success of pretzel fillers in food service, and the recent growth of our pretzels in supermarkets.

Our frozen beverage segment will continue to be impacted by problems at some of our customer’s outlets. We expect this year’s closing of additional K-mart stores to impact our sales to K-mart by about 10 percent in the second half of our year and into the first part of next year.

Store closings by other chains, in addition to changes we have made in some customers’ programs, will continue to impact beverage sales in the balance of the year. As I mentioned earlier, these changes may impact us in the short term, but over the long term, over the long run, will increase our return on assets. We will begin to lap these changes early next year.

Although our managed service revenue for others was down in the quarter and the nine months, we are continuing to emphasize this business and expect increased sales going forward, starting in the fourth quarter.

We will begin to install robotics packaging equipment in the late summer and fall in two of our manufacturing plants. This will be our first use of robotics, and it culminates a year-and-a-half search of program and install, an install program, and if successful, will lead to significant improvements and efficiencies, and probable expansion of the use of robotics within our system.

Again, one more time in closing, under difficult circumstances, I thought we performed essentially well for the third quarter. We look forward to continuing this and improving on this. Thank you for your interest, and I will entertain any questions or comments.

Thank you. We will now begin the question and answer session. If you have a question, you will need to press the one on your touchtone 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 a handset before pressing the numbers. Once again, if there are any questions, please press the one on your touchtone phone.

Our first question is from Amy Green. Please state your question.

Hi, guys, good quarter. I wanted to kind of touch base with you a little bit about the commodity cost increases. Are those primarily all coming from packaging or are you seeing them in any other areas?

Primarily, they are in ingredients, in flour, chocolate, sugar, shortening, but the two biggest categories, the two biggest items would be flour and chocolate. Packaging is impacting us, but at a lesser extent than the others.

And are you seeing any of the ingredient pricing, is that mitigating itself as we go into 04, or do you expect that to kind of continue?

This is Dennis. We expect the increases to mitigate. Prices will not overall be lower than what they’ve been, but the rate of increase will be less than what it’s been.

Okay. And then you mentioned the property and casual increases, and that you were making some changes to try and offset some of the increase there. Do you think, and you might have said it and I missed it, are we looking for an increase on the year over year basis, as we go into 04 at the insurance line?

Yeah, we are. We’re probably looking for, you know, it’s tough to estimate because we’re on a -- our medical plans are self-insured program, so it can fluctuate, but probably somewhere in the range of 500 to a million dollars next year over this year.

Okay. And then, the top line gross that you mentioned, because, you know, that’s saying that we need to stimulate that, that’s an easy one, but other than the pretzel fills, what do you see yourself doing, or do you have any plans in place for growing the beverage line? I think we’re seeing some good growth at the school foodservice and a couple of others, but is there anything there to continue to push that growth?

Good question, good point, and we’ve been challenging our people – this is Gerry – we’ve been challenging our people and our marketing group to build on some of the successes that we’ve had, particularly in the fill products and the other creativity, and we have a litany of products in connection with small food service and in connection with soft pretzels and frozen juice bars. Now we have to be reasonably selective and we have to be well-founded strategically to put these products in the pipeline, and to hopefully ensure their success. We introduced a product about a year, year-and-a-half ago in school foodservice that met all of the protein and all of the nutritional requirements, and it met a couple of proteins, it was filled with egg and we were, although about a year ago, we were very hopeful about that product, the fact of the matter is that it had some issues with taste and there’s nothing that can dampen a product’s possible success other than the fact that it doesn’t taste good.

Especially with kids.

Right. This was endorsed by the schools, endorsed by the nutritionist, endorsed by the food services managers, and now we’ve got to get out taste buds out in there so we continue to have something so people say “Wow, this is great, the cost is right, and it tastes good.”

Well you should have known if all the grown-ups liked it and it met… you were able to check off all the boxes on the adult side, the kids weren’t going to be liking it.

We learn something new every year.

Okay, and then last, you mentioned use of cash. I assume you guys continue to look at possible acquisitions or things to add into the business. Are you having any luck there? Because you are building up a fair amount of cash.

Are we having any luck… I’ll tell you, we’re looking at a lot of things. I guess we’re having some luck because some of the things we decided no or walked away from really were not good deals, or they didn’t make it, or the numbers that came in on these companies were far below what we were led to believe. We will continue to be -- you know, we’re looking at some things, we’re hopeful of getting some things done, but we’re not going to make an acquisition just for acquisition’s sake.

Okay, I just wanted to touch base. Thanks, guys.

Our next question is from Mitch Vanheero. Please state your question.

Hey, good morning.

Good morning, Mitch.

A couple of things. So you’re comfortable here, or you think mid to high single digit revenue for next year.

Food service, Mitch.

Oh, food service. So what would then -- what’s the number for the overall company?

Probably mid to high digit still, all right, but I’m real -- you know, and Mitch, we’ve known each other a long time, and when we’re comfortable with a number, you know, when we’re real comfortable with food service and we’re cautiously optimistic overall.

Okay, but now, so translating that to the bottom line, seeing these, some of the cost increases that you’re still going to experience, and so it looks like there’s going to be slotting for the three new varieties of the pretzel fills in the supermarket, are we going to have any margin pressure, or do you think, you know, you can actually take mid to high single digit into a double digit earning for us next year?

Well, I would hope so. We had some margin pressure this year, and overall, you know, we didn’t perform too badly.

Right. How about on a cash basis? I mean, depreciation, you know, you benefited this year by, you know, the timing of the depreciation decline. And it’s going to benefit for about a quarter you said next year. You know, that was a big help this year. Is that still going to be about 38, 40 cents on a full-year basis, Dennis?

For this year, yes, it will be, yes.

And next year, what, another --

Next year, another 15 cents or so.

Okay, so what else, I mean, what else are you doing-- where do you see, you know, your operating leverage?

We do see -- Gerry mentioned the robotics, which, on a full-year basis and hopefully it will be in, a lot of it will be in for a full year, and if it starts performing well, it could benefit us seven to eight cents a share. And like Gerry said, if that is successful, then we can continue to do that and it will benefit future years as well, with incremental robotics.

Does that replace that packaging? Is that in the soft pretzel packaging?

It’s in the soft pretzels, it’s in our frozen use plant, labour.

Okay, that seemed to be an area, you know, that you’ve been looking for a solution for quite some time.

Right.

So that sounds pretty good. What about -- okay, what about the super pretzel specifically? How is volume in food service and in retail? Just trying to get away, back out, I saw the 10 percent growth in retail on the quarter.

That’s all super pretzel, Mitch, with very little of it being private label.

Okay. Any pricing there?

No, not this year.

Not in the supermarket business.

What about in food service? How’s that volume? I’m just trying to figure out, you know, how strong the pretzel filler business is.

It’s been strong. It’s been strong digit increases, in some cases, double-digit. And we think it still has a lot of spring in its legs.

Okay, so is super pretzel --

It’s expanding in -- I don’t mean to interrupt you, but it’s expanding in popularity… Mitch, when was the last time you saw a convenience store, you know, featuring a soft pretzel in its full page ads and what not? All right? This is expanding and I don’t want to get, you know, too excited over it, but we’re pretty pleased with what’s happened so far, and there’s a whole new line of filler products that we’re working on upstairs in the lab room right now that our people are just excited about with the taste, and running back and forth. We got to manage the introduction of these and make sure that the selective process of, you know, hey, it’s great to have a toffee-almond peanut butter with chocolate sauce gooing out of a pretzel, but we’ve got to make sure that these things will be operationally sound and efficient.

Yeah, I’ve been to -- well, I’ve actually purchased your filler products there, and --

What did you think of it there?

Well, it was good quality. I was a little worried about, as always, you know, I was always worried about how these pretzels stay in the warmers and you lose quality control, but they were good, and just anecdotally, it seemed to be the clerks at the store thought they were selling pretty well.

Right. Well, the fact of the matter is, the sales are pretty well, are going pretty well, and “is ahead” of their expectations, and we’ve got to make sure that whatever we’ve done there to keep, to make sure that we can expand that.

Okay, so just getting back, the super pretzel in food service, you know, your core business there, how’s that doing, volume-wise?

In some cases, it’s flat to down, but being really offset by the gourmet twist and the other product sales, and we’re really trading up. It’s kind of like almost sometimes you’ve got to reinvent yourself, and we’re doing that, and we’re doing that, but we’re eagerly and enthusiastically, you know, developing these products ourselves.

How have sales for your food service products been in the really true tourist venues, such as Disney World and theme parks?

This year, they’ve been down, all right, but primarily, at least through June, we believe it’s mostly weather related and attendance affected. When some of our theme parks are down 12 to 20 percent people in attendance, you know, we hurt too.

Right, sure. How about in terms of, how have your ICEE and frozen novelty trends been now that the weather has normalized?

You mean the last two weeks?

Yeah.

Up. Actually, give us hot weather, all right, and we’re give you ICEE and novelty sales. I’ve got to tell you, the month of May and part of June, we were set up, we had the equipment out there, we had, you know, we were running adds in supermarkets, the pangrams were set, the product was in there, and we were all set to have a real good May and June, and week after week, we saw clouds, we saw rain, and we took a little bit of a beating. However, I think it speaks volumes of our business and the overall resiliency was such that we still had a pretty decent quarter, given the weather and some other economic conditions.

How about points of distribution on ICEE? Where’s that? I mean, how many owned-machines, not including the Burger King account?

There’s over 20,000 machines out there.

Is that flattish?

That has been overall flat with the gains being neutralized by the polls. However, for the first time, we showed an ICEE nutritional drink more in a tub program at National School Show, which is going on as we speak now, and it’s the first time that the ICEE brand name in a beverage is being introduced to the schools. We’ve added some juice content to make it nutritionally approved, and you know, we think there may be some opportunities there.

Okay, that’s an ICEE, that’s not frozen, that’s a normal beverage?

No, it’s an ICEE frozen beverage, but affordable by the schools and the students, and is packed with nutritional juice in there, so as to get it passing grades.

Okay. In terms of -- how about Burger King for a second? You know, the --

I thought you would never ask.

Yeah, the Burger King in my area has ICEE signage now, not frozen Coke. I’m getting confused. Burger King’s going to pull it out, now they may not, and now I see ICEE signage at the Burger King near me, and --

A perfect world, all right, Burger King had frozen Coke. They were selling Coke beverages and Coke frozen carbonated beverages. We were only the infrastructure part. We kept the equipment running and did the installs. It was great. They provided some service revenue for us. It helped to complement, you know, our infrastructure, and we made a little money at it too. However, for whatever reason, Burger King’s slide in performance overall affected not just their frozen beverages, but probably their regular Coke, their hamburgers, have it your way, whatever, and Burger King was recently acquired by this financial buyout group. There was this issue where is Coke, this disgruntled former employee that wanted to blackmail Coke and he had a bunch of allegations, including they rigged the test or they spun a test, and then Coke and Burger King got involved in some discussions, which I guess are still going on. They might have gotten edgy at one point and spirited in there, and so Burger King made a statement they were going to discontinue the sale of frozen Coke products. While this was going on, or shortly before, there was a little bit of a test in a couple of areas by rebranding the product. Instead of calling it frozen Coke, calling it ICEE. And the short-term results – very narrow short-term, within two months – showed a little bit of a spike. A spike in increases during bad weather. That was enough that it got the attention of Coke people, who discussed it with us and our senior ICEE people, Dan Fatchner, and we were in the process of negotiating, reducing in writing a possible license of the ICEE name, when the discussions with Burger King came to, if not a sore point, to at least a saber rattling, and Burger King announced that they were going to discontinue the program.

Since then, both parties have backed up and they’re talking about further testing, and quite frankly, there’s some cause for optimism there as it affects us.

Well, it seems to be, you know, if ICEE is the forum and Coke or Minute Maid or Cherry is the flavor, it would seem that would go a long way in brand awareness and building that brand equity.

We agree with you, Mitch, and Burger King, as Bob Radano just pointed out, Burger King has a huge investment, with 7,000 or 7,500 machines, at $7,000 or $8,000 a pop. They have a huge investment in there, and the franchisees appear to be not so quick on that negative decision making, and sometimes, as you know, the franchisees, particularly when they are in support of the product and program development, go a long way in making it successful or not.

Okay.

After all, it’s their flapjack, it’s their money invested in the equipment.

Just two more questions. Dennis, what do you think, what’s depreciation expense going to be for the fourth quarter, or what would the full year be of it?

Well, it should roughly be the same in the fourth quarter as it was in the third quarter.

Okay. And finally, Gerry, when would your board consider dividend? Is this something that would be at your, you know, at your next board meeting, or would it be at something, you know, at your end-of-the-year, you know, at your annual meeting? When does something like that happen, if it were to happen?

When Dennis walks into my office and says, you know, this will be a matter that will be looked at in the very near future. There’s been some discussion.

I mean, you only have, really, three choices, a dividend, more aggressive share purchase or acquisitions, and you’ve been kind of quiet on the acquisition front for the last 18 months plus, and you’ve been purchasing stock. It seems the only missing piece in the use of your cash, other than becoming a bank, is a dividend, especially with the favorable --

Hmmm… becoming a bank. Shreiber National Bank – that kind of has a ring to it, huh?

Yeah, let’s let interest margins expand a little bit before you get into it. All right, that’s it. Thank you.

Thank you, Mitch.

Our next question comes from Jamie Wiggins. Please state your question.

Can you guys comment on what the increase in legal expenses relates to?

It’s litigation in connection with the beverage business and ICEE trademarks and the ICEE of America group. In this litigation, we are both defendant and plaintiff. We expect, going forward, that it should not be at these levels and that hopefully there will be a, that it will be a thing of the past in the near future.

Thank you.

Once again, if there are any questions, please press the one on your touchtone phone. We do have James Clark on line with a question. Please state your question.

Yeah, hi. I wanted to talk more about the pretzel filler product. We’re here in Philadelphia. We’re part of the home team, where we eat pretzels for breakfast and stuff, but has this been a national rollout?

Food service has become nationally available. There will be more of an emphasis on this product. The recent successful introduction into the convenience store chains here, which quite frankly, were really beyond anybody’s projected, gleeful anticipation. It’s going to be a featured part in the national convenience store show this October. There will be more emphasis on it throughout. And retail, it is part of a test in several markets, beginning in September. I think it’s five markets, and it will not be nationally rolled out there until later.

In retail, are we talking about a frozen product or a fresh product?

Frozen product.

Okay, can you remember the ones you served us in your R&D lab when we visited you in January. My analyst here is asking about the pizza one that we liked so much. Would that work as a frozen product?

Yes, it will, all right? And I appreciate your comment and your compliment. The pizza product that you tested there, we had some issues with that with shelf life and with spice and what not, and we really worked it and worked it again. One of the benefits that we’re getting out of our Bavarian stores is the quick opportunity to make something, R&D it and get it into a general mall population and conduct intercepts and tests, and the pizza product was, you know, one that we really benefited from that way, but we expect to continue the double digit growth there.

So you can keep the egg product in the R&D lab, but can you get the pizza one into LaLa? The convenience store channel?

Lala has two right now, they are not testing, they rolled it. They test three products and they choose two. We can recommend, sometimes we can strongly recommend and we’ve seen both ways with this, but LaLa wanted the Hotter than Hotter Pepper Jack and they wanted the cream cheese and maybe we can get the pizza one in there two.

Keep up the good work. Thank you.

Thank you.

Gentlemen, we have no further questions at this time. Were there any concluding remarks?

Dennis and I, all of us here at J&J appreciate your continued support and interest and we look forward to continuing to grow our business with a benefit to enhance the shareholders. Take care. Bye now.

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for participating. You may now disconnect.