J & J Snack Foods Corp (JJSF) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods Corporation 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 Shreiber, President and Chief Executive Officer. Mr. Shreiber, you may begin.

Thank you. Good morning, everybody. This is Gerry Shreiber and with me today is Dennis Moore, our Senior Vice President and Chief Financial Officer; and Bob Radano, our COO.

I'd like to start off this morning's conference call 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. 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. Net sales increased 17% for the quarter and 10% for the six months. Excluding Country Home Bakers, acquired this past January the 5th, sales increased 2% for the quarter and 3% for the six months. For the quarter, our net earnings increased to $3.3 million, 36 cents a share, from $3.0 million, 33 cents a share, a year ago. For the six months, our net earnings increased to $5.2 million, 57 cents a share, from $4.2 million, 46 cents a share, a year ago.

Food Service. Sales to food service customers increased 29% for the quarter and 19% for the six months. Without Country Home Bakers, sales increased 4% for the quarter and 6% for the six months. Soft pretzel sales were down slightly 1% in the quarter and up 4% for the six months. In the year-ago quarter, pretzel sales were up 19% with about 70% of that increase coming from one major customer. This year, sales for that customer were down significantly causing the 1% overall decline in sales. Excluding the drop off in sales to the one customer, pretzel sales would have been up 9% in the quarter. Italian Ice and frozen treat and dessert sales decreased 12% in the quarter and 4% for the six months.

Increases in sales to our school food service customers have been offset by decline in sales to warehouse and club stores, as some of our products have been replaced at least temporarily by low carb offerings. We expect the lower sales to continue through the balance of our fiscal year. Churro sales to food service customers increased 3% for the quarter and six months. Excluding Country Home, our branded cookie sales to food service customers were up 6% and 12% for the six months. Excluding Country Home, overall sales of our bakery products were up a very strong 18% for the quarter and 14% for the six months. Country Home sales were approximately $11.8 million for the quarter, roughly in line with our expectations.

Retail supermarkets. Sales of products to retail supermarkets decreased 1% for the quarter and were up 3% for the first half. Soft pretzel sales, led by newly introduced pretzel fills, were up 3% from the year-ago for the quarter and 7% for the six months. Based on the early sales of pretzel fills, we are hopeful that we have launched a successful new product line; and although case sales of our frozen juices and Italian ices were down approximately 12% for the quarter in six months, dollar sales were down only 4% in the quarter and pretty much flat for the six months because of reduced trade spending.

Restaurant group. Sales of our Bavarian pretzel bakeries decreased 16% for the quarter and 17% for the six months, due to continued decreased mall traffic and the closing or licensing of our unprofitable stores, which has been an ongoing process that accelerated during this past quarter. Operating income was impacted by about $160,000, or 1 cent a share, due to closing of the stores.

ICEE and frozen beverages. Frozen beverage and related product sales increased 4% for the quarter and were down 1% for the six months. Excluding a onetime equipment sale to one customer in last year's first quarter, overall frozen beverage sales would have been up 2% for the six months. Beverage sales alone were up 6% in the quarter and 2% for the six months, while managed service revenue or others increased 2% in the quarter and 14% for the six months.

We continue to be impacted by K-Mart, once one of our largest customers in the frozen beverage category. Our overall sales to K-Mart, our fourth-largest frozen beverage customer in fiscal year 2003, were down 30% for the quarter and 35% for the six-month, making the three consecutive quarters of dramatically lower sales to K-Mart. We believe this is all traffic-related. We estimate these lower sales impacted our earnings by about 4 cents a share for the six months. Although we are pursuing an aggressive strategy with K-Mart to reverse or lessen decline, we are anticipating continued negative impact from lower sales to K-Mart for the balance of the year. We continue to emphasize growing our managed service business to take advantage of our national service and technical infrastructure.

Consolidated. Gross profit as a percentage of sales decreased by 0.7, 7/10s of 1% in the quarter. The decrease in margin resulted mainly from increased sales of our bakery products, including from Country Home Bakers. For the six months, gross profit percentage improved by 8/10s of 1%, 0.8. 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 the lower level of allowances in our supermarket business. For the six months, gross profit was negatively impacted by approximately $1.6 million of higher commodity and packaging costs and group insurance -- group health insurance.

Total operating expenses, as a percentage of sales, were 27% for all periods reported. Marketing expenses dropped to 14% of sales in the quarter from last year and were 14% of sales in both years' six-month periods. Distribution expenses at 8% of sales and administrative expenses at 5% of sales were relatively stable throughout. Operating income increased by 11% in the quarter to $5.1 million from $4.6 million last year, and operating income increased 23% in the six months to $7.9 million from $6.4 million, a year ago.

Capital spending, cash flow and depreciation. Our cash balance increased $5.6 million in the quarter to $34.7 million at quarter-end as a result of approximate $11 million in payments this quarter for the acquisition of Country Home Bakers. Our capital spending was $8.5 million for the six months, and 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 approximately $25 million. Assuming no additional acquisitions or, perhaps, the stock buyback, we would expect to end the year with about $50 million in cash. However, we will continue and are continuing to seek acquisitions to supplement our internal growth. We experienced sharp increases in depreciation expense over the four quarters, which ended December of '03. This past quarter depreciation expense was the same as last year, and we expect this expense to be in line with prior period for the foreseeable future.

Country Home Bakers acquisition. As previously announced, we acquired the assets of Country Home Bakers, Inc. for approximately $13 million in cash, which included about $5 million of working capital. The acquisition closed on January the 5th 2004. Country Home has a 98,000-square-foot manufacturing facility in Atlanta, Georgia, and sells cookies, frozen doughs and biscuits through food service channels of distribution including two in-store bakeries at Supermarkets. The major brand names are Readi-bake and Country Home. We expect Country Home to add approximately $55 million of annual sales and be accretive this year and provide significant earnings in future years. During the quarter, we closed our Country Home's Connecticut headquarters and transferred its operations -- its functions to a J&J Snack Foods building in Bellmawr, New Jersey. And we also began slimming down its management team and improving efficiencies at its plant in Atlanta.

Balance of fiscal year 2004. As I stated previously to continue to post increases in earnings, we need to improve upon our recent topline internal growth of 2 to 3%. We did not in our six months, but we are hopeful to make that optimistic about doing it for the balance of the year.

We have a number of opportunities before us, which we believe will help us to continue our strong pretzel growth, not withstanding the 1% drop in the sales this quarter 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; however, in the immediate future, we anticipate lower sales of frozen, juice and ices to warehouse club stores as a result of their switching to some low carb offerings. This, we will have to overcome; and we will. Sales of our bakery products have been very strong over the first six months of the year, as we continue to develop new products for existing customers and develop new products for new customers as well.

Our talented R&D group, which we have strengthened in the recent past, has successfully developed some low carb products including pretzels and cookies. We are cautiously optimistic about these potential new offerings. We introduced three varieties of pretzel fills in the supermarkets this past September. Pretzel fillers are filled and topped bite-sized 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 met our expectations in the first six months; and, although it is still very early, we are optimistic that the product will be a long-term success and will enable us to continue our core product pretzel growth in supermarkets. Our Barq's root beer float supermarket product was introduced into the additional markets this year and has sold well. Our expectations are that this product will continue to do well over the spring and summer quarters.

Our frozen beverage segment sales have depressed our topline growth over the recent past, down 1% in fiscal 2003 and 6% in the first quarter. However, we believe this past quarter with a 4% overall increase in sales and 6% in beverage sales alone is the high bringer of things to come. Our new entry in the frozen uncarbonated beverage business ICEE Peak has been very promising in its initial trials and hopefully will supplement growth by traditional ICEE frozen carbonated beverage market. We are continuing to work on many opportunities in the managed service area, which we believe will provide for future growth. And although we are still being impacted by K-Mart, other customer issues, which have recently impacted the segment, appeared to be the highness.

We're aggressively pursuing exit strategies for our restaurant business. During the quarter, we closed relations to others eight stores, which had over $110 of negative cash flow in fiscal year 2003. At quarter's end, we will be operating only 38 stores. Our goal is to close down or licensed to others the money-losing stores as quickly as we can. And keep a few stores, perhaps, to successfully compliment our R&D efforts with new products. Although we would like to eliminate the losses from this segment as quickly as possible, it may take a little longer than we would like.

Certain money costs such as eggs, cheese, shortening and butter have spiked over the past several months. Additionally, flour costs are approximately 15% to 20% higher than a year ago. Although, we will attempt to pass on these cost decreases, we expect that they will have some impacts on our operating income over the next two quarters.

As you may know, the installation of our robotics packaging equipment, which was mentioned earlier this year, has run slightly behind schedule. However, we are presently testing this equipment; and it should be installed and running during this quarter.

I want to thank you for your continued interest and support. And now I will turn it back to the listening audience for 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 "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, please press the "pound" sign. Your questions will be queued in the order that they are received. If you are using a speakerphone, please pickup the handset before pressing the numbers. Once again, for any questions, please press "star" "one" on your touchtone phone.

Our first question comes from Mitchell Temaro (ph). Please go ahead.

Hey. Good morning.

Good morning, Mitch.

A couple of questions for you. FCB was certainly strong and with sort of volume growth is 6%. But I just don't understand -- what I want to understand is, you know, what's driving that? Could you break that out maybe same store sales, same dispenser sales versus new locations? And, you know, are your programs working or what's driving that number?

Mitch, this is Jerry. We told you all our secrets then we wouldn't have any positive surprises for you. Actually a lot of things are driving that. One, we continue to execute better. Two, we have expanded a little bit in geography. You know, it's not only ICEE. It's Artic Blast. The new ICEE slurp (ph) for the first time. The frozen uncarbonated beverage. We're using the ICEE name in there. So, there is a bunch of little things and you and I've discussed this before, there's thousands of little things that we have to execute on every day, every week. And in the end, you know, you start to see some positive tough spin in the quarterly and year-end results. But there is a lot of things that have been driving in there. We're going to work very hard to continue that way.

Would weather have had any impact in this quarter positively?

I don't think it helps. I don't think - weather was, you know, I'd be the first guy to credit weather and I want to be the last guy to blame our woes on weather. I don't think weather -- you know, weather in California was OK. All right, but you saw what the weather was like in March in there. And weather was -- it was hardly temperate in the North East. So, we're kind of optimistic that if this continues, that ICEE can have a better year. And still I noticed that -- we can add a detail but I noticed that Coca Cola reported a better quarter too. So, may be the economy -- people drinking more or something.

OK. (inaudible) is there, you know, Jerry the commodity costs going up a lot of food companies are looking to try to get pricing to offset some of it. Where do you stand on that, I know - generally, traditionally, you know, you've been somewhat reluctant to raise prices if you don't have to? But you might have to. So, what's the strategy?

Well, first of all you're right. We're looking at it as off last night and we'll book with some of these things into the near term, all right. But we're also -- if we had to be buying our major ingredients right now, in that flour will be a lot more and saucing (ph) a lot more and eggs a lot more. So, we're formulating strategy and it's up to us as good business managers to monitors business and to manage it properly. And I think, dealing with the commodity increases and price increases, it's about managing it properly.

OK. I mean are you -- it is - it's easier obviously to got a price increase through retail. I guess food service will be a little harder. Is that the -- is that correct?

Well, it's a little easier if there's still some -- you know, and I have the highest degree of respect for all of our customers in there. But for a while there was, you know, it wasn't really easy to pass on any, kind of, increase. I think it may be a little bit easier now, but, you know, we're -- we've been in business 32 years, and now 6 months and 21 days in there. And we can see a storm come. We got to get the hell out of the rain or we're going to get real wet. So, it's part of my job and my -- others to protect our business and not to get real wet.

OK. Last question just regarding the allowances in the supermarket business, what is -- could you help -- explain your strategy here, why, refer to why allowances are lower?

I'm looking at that but I don't know. I think really our finance people and our management -- you know, and our management team has done a better job. You know, sometimes we would pass on allowances because we were supposed to be getting a certain feature, a certain deal.

Right.

So, in the first half, right, you can't get the allowance. But you can get the other.

Right

But maybe we're just tightening it a little bit. The guys -- the team is on certain, you know performance basis too which includes not only just sales but profitability and maybe the measurement tool process is working better. We still need to get better. But we think we are getting better.

All right. Well, thank you.

You're welcome Mitch.

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

Hi guys.

Hey, Mark.

Could you talk a little bit about frozen desserts in the warehouse clubs they've substitute out to some of the low carb products. Yet, we haven't really seen much of the low carb impact on your other grain-based products. Can you talk a little bit about what exactly the carbs are doing, is this in the concession area or is this in the shopping hall where they are or shopping out some of the products and where they going to?

That's a good question and comment, Mark. It's pretty much and the club stores and the freezer section in there -- products like Armene Maytube (ph), and some of our MAMA TISH'S, you know, stay and nice even know they feel strong increases for several years with the club store that they've been subjected it out for Active Ice Cream. And some low carb ice cream sandwich and low carb BarQ cups and the club stores appear to be acting early and acting swiftly in committing to this windows in the year and we were advised kind of link you know, in the process to like in February that our products were at least to be, it's healthy suspended, while some of this going on. I was getting kind of like mix early reduced on how they are doing? But we're poised and that already and yet around we have or even in the process of developing some -- lower carb it stay nice, but the low carb diets appear to be really addressed more to the adults and to the lifestyle follower as, other than to younger adults and children but the club stores had the biggest impact on us. But seeing that we initiated some R&D efforts -- initially with Cookies and then quickly with Pretzels and what we're pleased with the results that we had as far as product profile as taste we've been able to dramatically reduced the cost in the Pretzel, we had some expense to it and dramatically reduced the cost and the Cookies, I know, they of course having costs to it, true. And were early with this and we have a couple of customers who have this under and they review right now -- as a matter of fact, the career post recently, I think -- the other days did a little story on our low carb products and I know we're meeting with the guys tomorrow in New York. So, they'll bring copy of that article. But it hasn't had the impact at Snack Poison (ph) and Food Stance (ph), which is really our food service business as it had the club and warehouse stores. And it's impacting a supermarket sector, appears to be really dynamically in the Ice cream and sweet goods type area.

OK. And then lastly I - did you end up with 50 million in cash at the end of the year, leaving besides the last acquisition, you could afford and a plenty of acquisition and still not put too much of the dent in the cash balance. Is 50 million a threshold, where we could say either initiated dividend or maybe even declare a special dividend as opposed to building upwards the 50 million in cash.

That's an interesting comment. And let's just say the matter is under renewed study.

Perfect. Would it be favorite as opposed this year buyback? I guess if you're, you're to priorize that uses of cash, which is higher?

It should be -- It should be.

The dividend would be higher.

Right.

OK. Thanks.

The next question comes from Annie Denson (ph). Please go ahead.

Hi guys. Just a couple of - on the commodity outlook, could you give us some idea of which product you are - you have any type of hedging going on and for how long? You kind of how much you're saying some of the different pieces that you mentioned how much you're seeing them out?

Well, actually Annie on the Cookie end, that that we have been booking things like our chocolate, is Poriados (ph) six months which is -- coco and I love that, you know, that -- there is critical on rest of the side and I've been close with does impact there, flower, if we call booking out and hedging the same and - a lot of people commonly referring to as the same depending on the type of the grain, we're heading ways from a couple of months to six months out and -- but we continue to monitor the commodity report, some of the experts advice and it's going to be a (inaudible). More significantly cheese. Our cheese has gone through the roof over the past short term perhaps in the past couple of months and has almost doubled. We are not paying that yet but we can see coming June or so that the our price of cheese could go up significantly in a lot about newer products PRETZELFILS, our new PRETZELFILS has some kind of cheese ingredient in there. SO it's something that we're moderating. We'll have an impact this year if it continues but we are looking to see how much we could pass on so that that impact is minimized.

The next question kind of goes to that very question about raising prices. What kind of lag do you all get or have between your outlet for commodities and when you could get price to the channel?

Would probably be a quarter behind.

OK. And then lastly of your stores, you talked about wanting to get out. You have 38 left and you wanted to get out of ones that are losing money. Can you quantify for us on a number of percentage what that is over the 38?

About half of them are losing money. We'll probably wind up keeping may be a dozen give or take 2 or 3. We do a lot of product testing through this. So we get immediate results and there are some, you know, that are near that further show. I could see us perhaps a year and half from now having 12 to 14 stores. So we will be selling off for license out some two dozen stores.

OK and then this is my last one, regarding the low carb price you guys have been developing and testing. What should timeline to getting those out to the channel.

We can move it pretty quickly. If we think that the demand is really there for our products. But we could build the supply chain I mean quicker than a monkey could find a tree.

Sir you are not really seeing the demand there that much, lets say with the -- as speedy as the clubs were. You said the sales are quite -- they've been mixed. Are you just not saying the demand is strong enough?

Let's take a look at couple of our markets. We do a big-big job at school food service and our PRETZEL business continues to grow there. We are not getting quite the enquiry at the interest from schools as to feeding low class to children given the age from 10 to 12 leisure theme parks, baseball and all the arenas which are now just opening up and they are all now getting ready for a full bloom and I have been in a couple of stadiums in the past couple of weeks and there and I am looking at how people are eating in there. I am really not seeing any kind of low carb type specialty offerings there. So the actual snack bars and food stands where people visit in food service, the demand is not nearly as immediate as what you would have in some of the -- in other sectors so the low cost interest in our food service has been an additional to our regular line and that has stayed up. By that I mean we made the -- like there is one major customer and I don't want to tell you who it is but there in one major customer who is thinking of setting up a low carb display offerings in his stores. That would include low cost (inaudible), it would include a low carb cookie, it would include a low carb something else, perhaps muffin. Now we believe that if they choose to go that way they were delighted, they were really happy with our low carb PRETZEL and if they go that way we will have that product in their DCs and their stores. But if they don't go that way or they do test that way and that it doesn't become -- it doesn't support itself, it just appears that low carb and the food service menu for the everyday type of snacks is not in as much greater demand as it is with somebody adopting and selling a lifestyle.

OK. Thank guys.

You are welcome.

As a reminder, for any question, please, press "star" "one" on your touchtone phone. Our next question is a follow-up from Mark Chekanow. Please go ahead.

Hi. Could you give us the Country Home number from last year's quarter? Was there any growth there? And I guess, what are your growth expectations, what do you think you can grow the 55 million annually?

Mark, this is Jay (ph). Actually the Country Home number from last year's first quarter for January to March period is that -- this year's number is down from that number of last year, but that's formed as the bogus number but they lost so much business during the period (inaudible). They lost a lot of business because they suddenly announced bankruptcy. I guess at the end of January or early February with hardly any notice to the fuel, so they had a lot of customers that lasted. We believe -- our first order of business with Country Home was to integrate it successfully into our type of operations and our type of culture with a six-month plan, and I'm pleased to say that we're ahead of schedule. We negotiated a new four-year bargaining agreement in the Atlanta plant. We literally closed down the plant one day, fired all of these workers and we hired about 85% back and we were able to revise, restructure some of the work loss to make it, say, for more productive. We also look at some of the other shop expenses in connection with that so that we can manage them better. Country Home has a palatial headquarters office with close to 35 people at Shelton, Connecticut. Dennis -- after Den and I took a look at that, we closed that within three months due to all of it's accounting and administrative functions into one of our Bellmawr facilities. So the first six months without Country Home was really dedicated, determined to get its operations went down and now start to build, you know, for future growth. We've cut a lot of fact out of its activities and without cutting hopefully any of the (inaudible). Now, we're looking to boost its sales. We are -- it was modestly profitable during the first period primarily because of some expense cutting and we're good at that. We made acquisitions in the past of troubled companies and people scratch their heads why would we want to buy that. We've done a lot of why would we want to buy that. Feed them fit; let them work. We think this is going to be another one.

Again, what do you think you can do with the 55 million in sales? What -- I mean, it's just kind of a mid-single digit growth rate business or are you looking to regain some of these customers they lost when they went bankruptcy?

Let's say both but we are looking -- this would be in the low to mid range single digit business in near term.

OK. Thank you.

Our next question is a follow-up from Mitchell Temaro. Please go ahead.

Yeah, hey. Sort of looking at, let's say, the bigger picture from this year, you know. you said that you're optimistic or hopeful to get your attitude that you can return the internal growth of 2 to 3%. If you can do -- if you're optimistic, you know, these are translated into similar earnings growth for the balance of the year. I mean is there -- I mean I understand the commodity cost issue, some things like that but if you can get 2 to 3% internal topline growth, can you do double digit...?

No.

Earnings growth.

I think what I said is I wouldn't prove on the 2 to 3% internal growth. We only want to get a 2 to 3% internal growth that doesn't translate -- at least I don't believe...

OK.

To a 10% increase in earnings growth.

OK. So, then you're optimistic that you can improve upon 2 to 3, is that you're saying? OK. And if you can get the mid single digit area, does that translate to, you know...?

Yes, it does. Yes, it does.

You know when -- at what point in the year, when do you get very comfortable?

September 29th.

So, I guess I'm just trying to get a read, I mean it's hard to - you had a very good first half from an earnings point of view, you have Ellata (ph). You have, you know, ICEE seems to be trending well for you and you know, you seem to have generally a stable, you know, business year at country home, it becomes more clearer I mean, it would seem to me that you can end this year in a double digit earnings growth type perfection (ph).

We're planning on that...

OK.

You know and you know the limitations to our guidance, but and I don't know what numbers are out there on the street, but no we've had. I think we've, you know, we've doubled earnings in the first four, five years, and its our plan, hope we plan to do that again, which I guess we've got to keep growing with that. You know the top line has to grow but the bottom line has to grow even at a higher accelerated rate.

OK. Thank you.

Thank you. You bet.

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

I just want to thank everybody for their continued interest and support of J&J Snack Foods and to assure you that our management team is determined to continue to grow this business, just like we have over the past years and we hope to continue and report to you good news every quarter. Thank you.

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