J & J Snack Foods Corp (JJSF) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to J&J Snack Foods fourth 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. Gerry Schreiber, President and Chief Executive Officer. Mr. Schreiber, you may begin.

Good morning, everyone, and thank you for attending our conference call this morning. With me today are Dennis Moore, our CFO and Senior Vice President, and Bob Radano, our Senior Vice President and COO.

I would like to begin this morning's conference call comments with a statement on forward-looking statements. Here we go. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You're cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arrive after the date hereof.

I will now begin the comments on the results of operations, and at the conclusion of this will, we will be glad to take some questions and comments. Net sales increased 3 percent for our fourth quarter and 3 percent for the year. For the quarter, our net earnings increased to $7.9 million, 88 cents a share, from $7.4 million, 81 cents a share, a year ago. And for the year, our net earnings increased to $19.9 million, $2.20 from $18.1 million, $1.99 a share last year.

Food Service. Sales to our Food Service customers increased 11 percent for the quarter and 8 percent for the year. Soft pretzel sales increased 21 percent in the quarter, and 15 percent in the year due primarily to increased sales of our new pretzel products, including Pretzel Fillers (ph) and Gourmet Twists. Soft pretzel sales increased across the board, although sales to two customers accounted for approximately two-thirds of the sales increase in both periods. Italian Ices and frozen juice bars and dessert sales increased 1 percent for the quarter, and were up 4 percent for the year, due mainly to increased sales to school food service and warehouse club stores.

Excluding sales from McDonald's, last year's which discontinued sales of our products this year, sales would have been up 5 percent in the quarter and 7 percent in the year. Considering the weather, we are extremely pleased with these results. Churros sales to food service customers were up 2 percent for the quarter and 3 percent for the year. Sales of our bakery products were up 8 percent for the quarter and 6 percent for the nine months.

Retail Supermarkets. Sales of our products to Retail Supermarkets decreased 14 percent for the quarter and were down 4 percent for the year. Soft pretzel sales and dollar sales of our flagship SUPERPRETZEL soft pretzels were up 2 percent for the quarter and 2 percent for the year. And dollar sales of frozen juices and Italian Ices were down 12 percent for the quarter and 5 percent for the year. Case sales of soft pretzels were up about 3 percent for the year, and case sales of frozen juices and Italian Ices were down about 10 percent for the year, mainly due to the failure of products that were introduced last year.

We were pleased with the sales performance of our continuing products, especially considering the impact of the weather. Additionally, better management of trade spending, the impact that slotting (ph) expenses had on last year's results and increased pretzel sales resulted in an 11 percent overall improvement in operating income for the year, even though the fourth quarter included a charge of $575,000 for slotting for a new product, Pretzelfils, which are being introduced right now. And very little sales were experienced in September.

The Restaurant Group. Sales of our Bavarian Pretzel Bakery were down 13 percent for the quarter and 9 percent for the year due to the closing of unprofitable stores and decreased mall traffic. We continue to utilize our Bavarian Pretzel Group for testing of our new products.

Icee and Frozen Beverages. Frozen Beverages answer related product sales were flat compared to last year for the quarter and down 1 percent for the year. Beverage sales alone were down 2 percent in the quarter and for the year, while service revenue for others increased 32 percent in the quarter and 6 percent for the year. Beverage sales to two customers were down more than the overall decline in sales. And again, considering the weather and other issues, we are pleased that, excluding these two customers, we were able to increase sales overall.

Our overall sales at Kmart were down 33 percent in the quarter and for the year. I'm sorry, our overall sales to Kmart were down 33 percent in the quarter and were down 12 percent for the year. In this quarter, we felt the full impact of store closings of earlier this year. Although we do believe that weather also contributed significantly to the drop-off in sales. We will continue to pursue an aggressive strategy with Kmart to minimize the impact of the store closings.

Beverage sales also were impacted by changes in our sales and marketing programs. We expect that some of the changed programs, for example, selling or leasing equipment with service-providing contracts rather than loaning our company-owned equipment, may have a negative short-term impact, but will increase our return on assets in the long run.

Our managed service to Burger King is expected to continue and be in place through 2007, at least. Burger King will be marketing its product under the name Icee, which should provide significant added exposure and benefit to our brand.

Consolidated. Gross profit as a percentage of sales increased approximately half of 1 percentage point from last year in the quarter for the year. For the year, gross profit was impacted by over $5 million, higher cost of raw materials, and increases in insurance costs. However, we were able to overcome these cost increases and other general cost increases with higher volume in our Food Service business, some increased selling prices, and reduced depreciation of about $6 million and a lower level of allowances in our Retail Supermarket business. For the quarter, total operating expenses increased 4 percent, and as a percentage of sales, were slightly higher than last year. For the year, total operating expenses increased only 3.1 percent, and as a percentage of sales, were slightly lower than last year. Marketing expenses were about the same in dollars for the full year.

Distribution and Administration expenses both increased about a quarter of a percentage point of sales for both the quarter and the year. Operating income increased by 6 percent in the quarter to 12.3 million, and by 9 percent in the year to 30.8 million. Interest expense was lower by $28,000 for the quarter and $408,000 for the year, as we now have no long-term debt.

Financial highlights. Total stock purchased and retired for the year was 297,000 shares, at an aggregate cost of $8,565,000. Our Board of Directors authorized an additional 500,000 shares buyback in April, of which 478,000 shares 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 $37.7 million at year end, an increase of $23.5 million from a year ago. As we have no long-term debt to pay down, we will continue to accumulate cash while we seek an appropriate use for it. We've increased our effective tax 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 $19.3 million for the year. Our free cash flow, operating cash flow less capital spending, for the year, was $27.1 million, or $2.99 per diluted share. As we've done in the past, we will continue to seek expansion and growth opportunities to supplement our internal growth. And as we've recently done, we will buy back our stock from time to time when we feel it is appropriate to do so.

Fiscal year 2004 and beyond. Before commenting on the future, let me just say that we are pleased with our performance for our fiscal year which just ended, given overall circumstances. We were able to improve revenue and earnings in the face of a tough economic environment, higher commodity and insurance costs, and poor weather for our seasonal products. Our operating income was impacted by approximately $4 million of higher unit costs of raw materials and packaging for the year. This level of cost increases is continuing into our new year, but we expect will moderate in the second half of next year. Additionally, we expect property and casualty and group insurance to be higher by about $1 million to $1.5 million next year. We continue to examine and make changes to our insurance programs to better manage and reduce the increase in costs. Additionally, lower depreciation expense will continue to have a significant positive impact into the first quarter of this coming year. For the entire year, we estimate that to be about 12 cents a share. However, to continue to post year-over-year increases in earnings, we will need to improve upon our topline growth from the 3 percent we posted this past year. And we are planning to do so. We have a number of opportunities before us which we believe will help us to continue our strong core product soft 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 introduced, and are testing, three varieties of Pretzelfils in the supermarkets late this past September. Pretzelfils are small soft pretzel sticks filled and top (ph) (indiscernible) pretzel sticks. We hope to piggyback on the success of Pretzel Fillers in Food Service and the recent growth of our pretzels in supermarkets. We took the full slotting charge for this test introduction in the fourth quarter of our fiscal year '03. We estimate that to be about 4 cents a share.

Our Icee and Frozen Beverage segment will continue to be impacted by problems at some of our customers' outlets. Our sales to Kmart were down over 33 percent in the fourth quarter. Store closings by other chains in addition to changes we've made in some customers' programs will continue to impact beverage sales. As I mentioned earlier, these changes may impact us in the short run, but over the long run -- and we are long-run thinkers -- will increase our return on assets. We believe that the worst of the short-term impact is behind us. Our managed service revenues for others, which we spoke about in the past, improved nicely in the fourth quarter, up 32 percent. And we're continuing to emphasize this business, and expect increased sales going forward.

We are installing robotics packaging equipment early next year in two of our manufacturing plants. This will be our first use of robotics, and if successful, will lead to significant improvement in efficiencies and probable of the expansion of the use of robotics. We are estimating that this can save 5 cents or more in the coming year per share.

I want to thank you again for your continued interest and support. And now I will turn the rest of the phone call over to you for questions and comments.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from our Mark Chekenow (ph). Please go ahead.

Good morning, gentlemen. Not too long ago, I went on Wawa's web site, and on their front page was a picture of your Pretzel Fillers. And I want to know how actively -- was that any kind of short-term promotion? Or is Wawa still running aggressive promotions with some of these new product placements?

Mark, this is Gerry. The program at Wawa has been successful -- let me add the words very successful. And it's a great -- it's a real good example of two partners working together closely. About a year ago, Wawa thought they wanted to test something, and different groups wanted to test that our people work with them; and ultimately, we provided all of the components and have began testing, and it went way, way beyond their forecasts. And we expect that this will continue with Wawa. We expect to add some other products and some other fillings into there. But the success of the fillers with Wawa has taken -- this product was doing well for us, and suddenly gotten a lot of exposure, not only with convenience stores but with other selling locations throughout the country. So we are -- we clearly benefited from the positioning with Wawa and their excellent execution.

Okay. Also could you comment on how long -- how much longer should we be expecting these -- especially the Kmart comps to be an issue? At what point do you kind of lap that?

I think we are lapping it now, provided that there are no more holes in the boat.

Okay. Thanks.

Your next question comes from Halie O'Shea. Please go ahead.

Good morning. It sounds like you had a pretty strong performance in Food Service in the fourth quarter. Could you talk a little bit about overall trends you are seeing in Food Service and your plans for expanding or growing in that channel?

Well, the overall trends that we are seeing in Food Service include some of the same consolidation that we have seen in the Supermarket and Retail (indiscernible) over the past few years. However, you know, the Food Service, the operation of the business is a little bit different. Products are generally posted and sold out there on a -- you won't have a bunch of different pretzels, or a bunch of different churros, or a bunch of different frozen beverages at a location. As we continue to be creative and inventive and add new product offerings, we will be able to get the products included within the location. And as we expand the Food Service venues to include the business and industry and the in-store bakery, and small Food Service outlets, we will add to our overall nucleus of account.

Okay. Great. Could you tell us, looking at '04, you talked about sales expectations in sort of the mid single digits. Could you break that down by division, your sales expectation for Food Service, or for supermarket, for beverage?

Food Service is in the high-end of that. Actually most of our groups have come in from a mid to high end of single digits forecast for next year. And we're going to do our best to make sure they all deliver on it.

So your revenue growth expectations for next year are in the mid to high-end of the single digits?

Six to 8.

Okay. Terrific. Okay. And, just looking at the pretzel sales in the supermarket, you talked about a slotting expense of $575,000 in the quarter, and of course expensed that off (ph)?

I think it was 545.

Oh, I'm sorry, okay, 545. I wrote quickly, maybe not quick enough.

It is 575. Okay.

Okay. What are your sort of expectations for the Pretzelfils product in the supermarket? What would you consider to be sort of a good return on that investment, looking out over the next year?

It is early and it's hard to say, but hopefully it will -- if it meets our expectations, everybody will be happy. I think it's important to note that we had the expense in the fourth quarter; we didn't spread it out; we took the expense. And I think it computes to roughly 4 cents a share. So if the product does well, and we are cautiously optimistic, we will expand this product throughout the country, and help grow the soft pretzel business in the supermarket category.

Okay thank you, very much. No more questions.

Your next question comes from Amy Greene. Please go ahead.

Hi guys. You had mentioned, I think in your comments a little bit about changing some existing Icee and Frozen Beverage contracts, and focusing some more on the servicing of other people or the sale and leasing of the equipment. Could you just talk about, or give us some clarity on how the existing customers that are being proposed, the new contracts are taking them? I mean, if it's seen as a positive by them, or if they are kind of pushing back on it?

Amy, this is Gerry. I'm going to comment on that, then I'm going to turn it over to Dennis. In years past, we've had some installs of some equipment and locations that for one reason or another didn't quite meet the minimal sales volume. As a result, our objectives weren't being met. Going forward, we've kind of maintained a more rigid standard for both renewal and both new placement. And customers -- equipment is leased to customers, either directly or through a third party, or they are bought by the customers, and we in turn are providing the managed service -- the managed service that is associated with that. But they save a little bit -- they save something on their share (ph) of purchases, which drives that gross margin down, but it will improve our overall operating income. Dennis.

Yes, I'm not sure what I can add to that. But I mean, the goal was to increase our turnaround on assets over time. And as Gerry sad, the return that we were getting from some of the equipment that we were putting out was not cutting it. So the goal was to increase return on assets over time. And I think we are beginning to see that in the Icee business.

As far as the managed service goes, it goes beyond just servicing frozen beverage machines. We have an infrastructure throughout the country, and our plan is to take advantage of that and provide service for all kinds of food equipment in various locations and snack bars, you know, arenas, whatever, throughout the country.

How should we expect to see that component of the business grow over the next couple of years or for the foreseeable future?

This year, we had a slight slowdown and have been growing well in excess of 20 percent a year over the previous three years. This year, we were up just 6 percent. But our goal is to increase that at a rate of 15, 20 percent a year, minimum.

Okay, thanks, guys.

The next question comes from Anne Selcovitch (ph). Please go ahead.

Hi, Gerry. Quick question for you. Would you consider using your large cash balances to institute a dividend for shareholders?

That is a topic that has been discussed, and that is a topic that I could -- look at that more seriously depending on other possible use of funds.

But as you look at potential acquisitions, historically, you haven't made really huge acquisitions. So it would seem that you would have the opportunity to both payout a dividend, which obviously is a tax advantage today, as well as continue on the prowl for new acquisitions. Isn't that a fair statement?

That is indeed a worthy statement, and fair. And I would suspect -- I mean, years ago, we made some acquisitions with little bit (ph) cash, small acquisitions, made them fit and made them work in there. And chances are -- and I can't comment on anything right now -- but they would be of a bigger scale perhaps if something is to be made. But your point is well taken, and it is something that we'll continually look at.

Okay. Thank you.

Thank you. The next question is a follow-up from Mark Chekenow. Please go ahead.

Hi. I (indiscernible) on the call a few minutes late, and I think I may have missed -- you gave some information on stock repurchases for the quarter and for the year. And also, you talked about sales guidance, high single digits. Did you give an EPS guidance in your opening remarks?

Mark, it's Gerry. It was mid to high single digits on sales guidance -- Food Service. I would look for mid single digits -- perhaps I spoke too boldly before -- mid single digits for the overall growth of our basic company without acquisitions.

As far as guidance for next year, we didn't give any. But you know what this year is? There is some projected depreciation -- savings of about 12 cents, I believe, is that right, Dennis? Perhaps there is some savings that we're going to realize once the improve mechanization from robotics are installed, which will be the early part of next year, which will be our second quarter, that should add a nickel. We are going to have some sales growth. So if somebody out there real quickly can take that 12 cents and add 5 cents and add that and pick up some other stuff in there, and could possibly come up with a number in there that --

Okay. Have you seen any improvement, or talk from your distributors -- improvements and attendance at theme parks, and stadiums, and some of those kind of highly economically sensitive end markets?

It was a little bit at the end of the summer than it was at the beginning of the summer. Baseball appeared to really turn it up a notch too towards the end of the year. Now whether that was because more teams were involved than the (indiscernible) for the playoff (indiscernible) and the caliber of play was better, but baseball started off real poorly, and made up a lot of that ground towards the end. I don't know what the overall attendance results were for baseball.

Is there an improved kind of sentiment I guess from your distributors that sell to the amusement parks?

Not yet.

Not yet. Okay. Thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, at this time, we have no additional questions. Do you have any closing comments?

No. No, we don't. But I wanted to thank everybody for their continued support and interest. And you can leave this conference call knowing that the management team at J&J Snack Foods will continue to do its best to justify investors' confidence in us. Thank you.

This concludes today's teleconference. Thank you for participating. You may all disconnect at this time.