J & J Snack Foods Corp (JJSF) 2004 Q1 法說會逐字稿

[Audio quality poor – transcript is best product.]

Good morning everyone and welcome to the J&J Snack Foods First Quarter Earnings conference call. At this time, all participants are on a listen-only mode. Later we will conduct a question and answer session. I would now like to turn the call over to Gerald Shreiber, President and CEO of J&J Foods. Sir, you may begin.

Good morning, everyone. I appreciate everybody joining us this morning. I'm Jerry Shreiber and I'm going to go through a narrative in connection with our conference call and then I look forward to entertaining questions and comments from the listening audience afterwards. 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 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 to reflect events or circumstances that arise after the date hereof.

Results of operations for the quarter. Net sales increased 3% for the quarter. Our net earnings increased to $1.8 million or 20 cents a share from $1.2 million or 13 cents a share a year ago. Food Service. Sales to our food service customers increased 9% for the quarter. Soft pretzel sales increased 9% due mostly to increased sales of pretzel fillers to a major customer. Italian Ice and frozen juice bar and dessert sales increased 9% due to increased sales to our growing school food service customers. Shuro sales to food service customers increased 2% for the quarter and our branded cookie sales to food service customers were up 9%. Overall, sales of our bakery products were up 11% for the quarter.

Retail supermarkets. Sales of products to retail supermarkets increased 9% for the quarter. Soft pretzel sales, led by our newly introduced pretzel fills, were up 13% from a year ago. Based on the early sales of pretzel fills, we are hopeful, optimistic that we have launched a successful new product line. Although case sales of our frozen juices and Italian ices were down approximately 12% for the quarter, dollar sales were up 6% because of better management of expenses and reduced trade spending.

Restaurant group. Sales of our Bavarian pretzel bakeries decreased 17% for the quarter due to decreased mall traffic and the closing of unprofitable stores. ICEE and frozen beverages. Our frozen beverage and related product sales decreased 6% for the quarter. Beverage sales themselves were down only 2%, while managed service revenue for others increased 27%. Excluding a one time equipment sale to one customer in last year's first quarter, overall frozen beverage sales in this business segment would have been down less than one half of one percent. Our overall sales to Kmart, our fourth largest frozen beverage customer, were down 28% for the quarter, making it two consecutive quarters of dramatically lower sales to Kmart. We estimate these lower sales impacted our earnings by over 2 cents a share this quarter. Although we are pursuing an aggressive strategy with Kmart to reverse or lessen the decline, we are anticipating continued negative impact from lower sales at Kmart for the balance of the year. Considering our efforts, we expect the decline will be much less than the past two quarters.

We continue to emphasize growing our managed service business to take advantage of our national service infrastructure. This is especially important as we continue to be impacted by the beverage sales declines in some areas of the business. Consolidated. Gross profit as a percentage of sales increased more than two full percentage points from last year. The primary reason for the improvement was lower depreciation of over $1.1 million primarily in our frozen beverage business. Also helping to improve gross profit was a lower level of allowances in our retail supermarket business. Gross profit was negatively impacted by approximately $800,000 of higher commodity and special packaging costs and group health insurance. Total operating expenses as a percentage of sales increased to 27% from 26% a year ago. Marketing expenses were 14% of sales in both years. Distribution expenses increased to 9% of sales from 8% of sales because of higher fuel costs and shifts in product mix.

Administrative expenses increased one third of one percentage point to 5% of sales due to increased legal and Calhoun costs. Operating income increased by 54% in the quarter to $2.8 million from $1.8 million a year ago. Capital spending, cash flow and depreciation. Our cash balance increased $2.5 million in the quarter to $40.2 million at quarter end. Our capital spending was $3.3 million for the quarter. We are projecting capital spending to be about $20 million again this year which would leave us with free cash flow, operating cash flow less capital spending, of $25 to $30 million. Assuming no additional acquisitions or stock buyback, we would expect to end the year with about $40 million or more in cash. However, we will continue to seek acquisitions and other opportunities to supplement our internal growth.

We have, over the past four quarters, experienced sharp decreases in depreciation expense. We will not have this benefit going forward. Country Home Bakers acquisition. As previously announced, we acquired the bakery assets of County Home Bakers for approximately $13 million of cash which included about $6 million of working capital. The acquisition closed on January 5, 2004. Country Home has a 98,000 square foot leased manufacturing facility in Atlanta, Georgia and bakes and sells cookies, biscuits and frozen bread doughs sold through food service channels, supermarkets and in-store bakeries. Its major brand names are Ready Bake and Country Home and in addition it does co-packing. We expect Country Home to add approximately $55 million in annual sales and be accretive this year and provide significant earnings in future years.

Balance of fiscal year 2004. As I stated in our previous conference call, to continue to post increases in earnings, we need to improve upon our recent top line internal growth of 3%. We did not in our first quarter, but we are optimistic and hopeful that we will be able to get to that 5% to 6% range for the balance of the year. Excluding the one time equipment sale in our frozen beverage segment last year, consolidated sales would have been up more than 5% this quarter compared to last year first quarter. 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 which, I repeat, was up a sharp 9% for the quarter. 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 three varieties of pretzel fills in the supermarkets this past September. Pretzel fills are filled and topped bite size soft pretzel sticks. We hope to piggyback on the success of pretzel fillers in food service and the recent growth of our pretzels in supermarkets. Sales have exceeded our expectation the first quarter. Although it is still early, we are optimistic that the product will be a long term success.

Our frozen beverage segment sales, ICEE, have depressed our top line growth over the recent past. It was down 1% in fiscal 2003 and 6% the first quarter, although impacted by the aforementioned equipment sale last year. We are working on many opportunities in the managed service area which we believe will provide much needed growth and although we are still being impacted by Kmart, other customer issues which have recently impacted this segment are now behind us and we are hopeful of getting some wind and some momentum behind our sails. We are aggressively pursuing exit and alternative strategies for our restaurant business and hopefully we will have more to report later on in our next call.

In recent calls we mentioned the installation of robotics packaging equipment. This project is currently running a bit behind schedule and accordingly we are not anticipating a significant benefit this year although the project will provide significant benefits and accrued expense control in future years. I thank you for your continued support and interest and I turn this back to you now 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 star 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, simply press the pound sign. Your questions will be queued in the order that they are received. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, for questions please press star one on your touchtone phone. Our first question comes from Mitch Denaro. Please go ahead.

Good morning. A couple of questions. One, specifically on a line item in the distribution, what is the shift in product mix causing distribution costs to go up?

We brought some products in from the west coast. We also had some delivered product costs in there. It's not a significant thing going forward. We're looking at it. We're addressing it. One of the things we've done over the years is provide anywhere from good to outstanding service in distribution and half pallets and half this, and we've continued to do that and maybe we've just got to focus in on it and be a little bit more controlled with it.

Let me ask another question. You mentioned that lower allowances help retail but I imagine slotting with pretzel sales would have been a negative impact. Is that accurate?

I think we took all of that, Mitch, in the fourth quarter of last year. We introduced it in September and you know how conservative we are. We took those charges and those costs in quarter four even though we had next to nothing or very, very little in September sales of pretzel fillers.

Now in terms of Country Home, you will have - - so next quarter is your first quarter - - I was anticipating perhaps some one time charges in the quarter that may be related to severance and some other acquisition related costs.

Mitch, this is Dennis. There will be additional costs that we incur during the integration phase, but there will not be any significant one time charges.

Okay, and will all the other sort of integration costs, etc. just be included as a normal expense item, operating item?

Yeah.

Mitch, this is Jerry. We hit the deck running in connection with that. We've had people at the plant over the past three weeks on a regular basis. We've had people shuffling back and forth to Connecticut where their headquarters are and we have an integration team assembled and assigned that we're moving quickly. We have an ambitious schedule to what's going to be consolidated and what's going to be integrated, and so far we're on that schedule.

How do you feel about the sales maintaining that level of volume? I mean sometimes when - - was there any unprofitable volume in there that you're going to purge? $55 million in true run rate for us to model and do you see any growth in that $55 million in the next 12 to 24 months?

You're asking all the tough questions, right? I'm not going to have anything left to say in the future trips in New York. We're anticipating that we can grow that business, all right? And we're anticipating that we're going to improve the profitability of that business. But even with it existing the way it is right now and putting the conservative factors that we have put into the matrix in there, it will be accretive this year and more so going forward.

So is it fair to assume that you could get a mid single digit type of operating margin from that business once you do your magic?

Dennis?

Well, longer term we certainly would expect it to be at that rate and perhaps even higher.

And that's the number that is really forecasted and budgeted and that we are looking to achieve.

And how fast do you get to that? Are we talking a two year process? An 18 month process?

Two years would be okay. I would not be pleased if it took us that long, Mitch.

Okay, last question just relates to earning growth. You mentioned that you think high mid single digit top line for the balance of the year is okay. I would have to assume that's excluding Country Home?

Of course.

Okay. And so from an earnings point of view, is there leverage here on the margin line? I mean, we should, I guess, expect a significantly greater than mid single digit earnings growth. Is that fair to assume? I know you don’t give exact guidance, but - -

Yeah, Mitch, I think that is a fair assumption. We've got to do the 5%, 6% range. If we don't, if we're at the 3% level, then obviously we're not getting leverage. So if we can get up to the 6% range, yeah, we would expect some leverage.

And food service sales, this is Jerry, food service sales to this point have been fairly strong.

Okay, great. I said one more question, but I do have one more. I'm sorry to monopolize here, but when it comes to - - you've always done a decent job in your inventory management and I was just curious whether you're seeing any push back from the retailer. You know, putting a little more of the inventory burden on you and whether you see modest increases in your inventory levels going forward.

Not really. We've had - - we turned our inventory constantly. Even though our SKUs have grown probably faster than our profits, but we've always done a good job of turning our inventories. Part of it goes way, way back to 30 years ago when, quite frankly, I had to buy flour every two days in there because I didn't have enough money to have any inventory. But we're turning our inventory in some segments of the business 35, 40 times a year.

But inventories did rise from your year end to the end of this quarter by 9% or so.

Mitch, what we buy, as we increase, we have to begin storing more products with frozen novelties for the spring so we have in the past several years had that increase from September to December and it will go up again by the end of the March quarter. Additionally, we did have a significant number of new products, especially out of our bakery business which requires additional inventory.

Okay, excellent. Thank you. I'll speak with you next quarter.

The next question comes from Mark Chekanow. Please go ahead.

Good morning, gentlemen. Can you talk about this push that you're getting in school food service? Is there a particular new product that is driving that or is there a new distribution base? Because 9% growth in that area seems pretty strong. Can you talk about that?

Well, about a year ago we formed a selling group totally dedicated to school food service sales and as more of our product lines are qualified to being accepted and welcomed to school food service, we're just, quite frankly, focusing on it more and spending more time in developing and growing school food service sales. We've also introduced a few new products in the juice bar variety and it appeared that the branding to Minute Maid brings both comfort level and reliability and opportunity in that sector.

So you say this was formed about a year ago. Is this right now, as current quarter I guess, the biggest push you've seen so far and can we expect some further gains or are you kind of lapping that gain?

Well, I'll be real happy if we could maintain this type of growth, but the school food service has been targeted as an opportunity for us to grow continuously across the country and we're hopeful that we will be able to enjoy similar types of pushes.

Okay. Certainly now I just want to talk about all the media craze around low carb products. Is there any initiative underway for you guys to put out some type of low carb pretzel?

Well, you know, we have developed a low carb pretzel and right now we're not real happy with the way it tastes. It tastes somewhere between a stale pretzel and cardboard, okay? And we're sensitive and we're aware of what's going on with the diets and the Atkins type of endorsements and we're looking at it so we have some things in development stage which covers our line of juice bars and Italian ices and in our other bakery products. We have developed through Country Home a sugarless cookie and we're working on some low carb items, but we don't expect it to be a contributing factor to either sales or earnings for ourselves this year and hopefully we will not be impacted by the shifts in consumer intake too much either. I saw something very interesting on one of the morning shows about, I think it was "Imis in the Morning", today where they're a little bit critical about the Atkins' diet and about what the real long term benefit and health benefit was to that. I was running around about 6:30, 7:00 in the morning and I didn't quite have time to focus in on it, but I'd be interested in learning more about that, too.

Okay. With this Country Home, and you have a new plant in the southeast now, are there any regional chains that you could partner with similar to the (indiscernible) relationship that you could leverage that plant and maybe put some other bakery products and kind of get another similar operation like you have with Uptown Bakery?

That would be like finding another gem. The Country Home plant is all frozen dough. They bake virtually nothing there. Everything is frozen cookie dough, frozen bread dough, frozen biscuits, and it's all baked fresh at either in-store bakeries or at point of sale. We have - - about six months ago we put on a director if sales in our Uptown group who's mandate is to find similar opportunities for Walla, albeit smaller, to get started and to take some of those products that we're making in there. They're good products that everybody enjoys and we make them well, and expand them into food service. Now in looking at this a few months later with Country Home, we think we may have an ever better top of the realm opportunity with a whole bakery opportunity there. So we're kind of excited and we're taking a look at that.

And lastly, can you talk about why you're having a little bit of a delay in the automation of the robotics in the packaging equipment?

Nothing really serious. A programmer was delayed, there was some hardware coming in from Europe, there was a couple of other minor issues. We think that right now that we are close to passing, signing off on the running of the installation which is about 70 miles from here. As a matter of fact, just this week, we have about 4 or 5, 6 people, our mechanics, up at the facility being trained on it in anticipation of it coming in in the next 45 days and being installed. So it delays a couple of months but quite frankly, I push my people and I marvel at how well they work and organize and take on these responsibilities. I personally am not concerned with the delay at all and we had an ambitious install for the first quarter. It looks like it will be completed late second quarter, perhaps early April at the latest.

Great, thanks a lot.

The next question comes from Amy Green. Please go ahead.

Hi, Amy.

Hi, how are you? Just wanted to ask a couple of questions about frozen beverage and ICEE and see - - I know you're lapping the big equipment sale, but are you doing anything different from a sales and marketing standpoint or anything to - - I think you've got some relatively easier comps coming up in that sector to kind of spur some of that business on.

Well, I bet you that with Kmart - - you know, for awhile, the management of Kmart was, I guess, and properly so, they were more concerned with will there be a Kmart in '04 as opposed to how much ICEE and other products they would be promoting through their stores. And we had a difficult time in getting our signage, in getting the promotions, and doing this and they went through some changes in distribution. We think that the worst of that is over, all right, and we don't expect to have these 25% and 30% declines in Kmart stores over the next 9 months. Most of the other major customers are doing okay to improved with the one possible exception. There still seems to be an ongoing decline in business and sales with customers who are in malls and that are experiencing some traffic problems. The one area in the business that continues to grow and improve is the managed service revenue and that, which we got started with our partners at Coca Cola a number of years ago in connection with Burger King, appears to be a real growth vehicle. We have the infrastructure in place. We do it really, really well, better than most others and we're developing opportunities that - - we have these technicians and these vehicles and these infrastructure people on our staff, and we're expanding it from taking care of FCB equipment into other types of equipment that requires reliable engineering and technical assistance from time to time.

Speaking of the managed service business, what is - - is it realistic to look for the next couple of quarters for it to grow similar to what we've seen over the past two quarters?

Well, we're up 20% this quarter, all right? And I would be a little bit aggressively ambitious to expect to keep it at that pace for the rest of the year. However, we have a lot of the tough work in place right now. We have the people, we have the system, and if we can grow that double digits throughout the rest of the year, it will have some nice impact to the business and some flow to the bottom line.

Amy Green. Okay and then, well I think that's most of my questions. Oh, one quick one. Can you give any update about or is there anything new going on with the Burger King?

Update? They're still selling, being converted to ICEE and we're very close to working out a royalty, a modest royalty arrangement. But considering where that was 6 months ago and where it is right now, we are very pleased.

Great. Thanks, guys.

Your next question comes from Ron Strough. Please go ahead.

Ron who? Hey, Ron!

How are you, Jerry?

Good.

The issue with the Atkins diet was touched on earlier. Have you adjusted your long term growth rate expectations for your top line as a result of this phenomenon?

No.

So you think it's just a passing fad?

I didn't say that. No, I think it's more than a passing fad and I hope it doesn't become a trend. We are - - if it is going to - - we're working very hard to make sure that it does not have a significant impact on our business and if we can take out some carbs without sacrificing "too much flavor and enjoyment", we will be doing that and we will have a product line in there where - -wouldn't it be great to enjoy these great pretzels and juice bars that now are 4 or 5 or 6 carbs?

On another subject, your huge cash flow generation capability is terrific. Are you going to share that with your shareholders at all in terms of perhaps initiating a dividend of some sort in light of the fact that dividends are now taxed at a 15% rate for individuals?

That's an interesting suggestion and from time to time we review it. I think the best thing that I can do with that huge cash flow for our shareholders is to continue to invest it wisely and to grow the business in there. But it's something that we have looked at before and perhaps we will look at it again. But there are no immediate plans to declare or to pay a dividend.

Any thoughts about getting into the nut business in light of the fact that that category is growing dramatically now, in part because of the health benefits of consumption?

Yeah. It makes you scratch your head, doesn't it? A few years ago you couldn't eat those things because they were fat and they were this and it did all that and there was certainly a quantity and an overabundance of things. Now we're doing some things with nuts in some of our products, all right? And I know there's a huge nut company, matter of fact, headquartered right near around you that has been for sale, not for sale and whatnot, but there's no immediate plans for us to get into the nut business.

Okay, thank you.

As a reminder, to ask a question, please press star one on your touchtone phone. Our next question comes from Gary Sturro. Please go ahead.

Hi, Jerry. Hi, Dennis. Just wanted to follow up on the Country Home acquisition. Did you guys say what the valuation was that you paid for it and can you give a little bit more detail in terms of what they have in terms of operation? The overlap with you, that sort of thing.

Well, Gary, this is Jerry. We paid approximately $13 million for it. It had $15 million plus sales. It had seven production lines in Atlanta. It had a whole corporate office, advanced administrative and computer system up in Shelton, Connecticut. It was staffed. We bought it at a 363 Code of federal bankruptcy. Beyond that, we think we got it at the right price and I think more importantly we'll be able to show people we got it at a good price when we in the future show what we are able to glean out of it.

Okay, great. Thank you very much.

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

This is Jerry. I want to thank everybody again for joining in this conference call today. I appreciate your continued interest and support and we look forward to delivering additional good news for the rest of 2004. Take care.

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