J & J Snack Foods Corp (JJSF) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to J&J Snack Foods third quarter earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Mr. Gerry Shreiber CEO of J&J Snack Foods. Mr. Shreiber, you may begin.

Good morning, everyone, and I want to take this opportunity to thank you for joining us this morning. With me today is Dennis Moore, our Senior Vice President and Chief Financial Officer; Bob Radona, our COO and Michael Karaban, our Senior Vice President of Marketing.

Let me begin 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 obligations 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 16 percent for the quarter and 13 percent for the nine months. Excluding Country Home Bakers acquired this past January sales increased 4 percent for the quarter and 3 percent for the nine months. For the quarter our net earnings increased to 8.7 million or 95 cents a share from 7.8 million or 87 cents a share a year ago.

For the nine months, our net earnings increased to $13.9 million or $1.52 a share from $12.0 million or $1.32 a share a year ago.

Foodservice. Sales to foodservice customers increased a whopping 29 percent for the quarter and 23 percent for the nine months. Without Country Home Bakers, sales increased 7 percent for the quarter and 6 percent for the nine months. Soft pretzel sales were up 11 percent in the quarter and 6 percent for the nine months. Italian Ice and frozen juice treats and dessert sales decreased 1 percent of the quarter and 2 percent in the nine months. This was significantly better than we had expected as some of our products have been replaced by low carb entries in warehouse club stores.

However, strong sales of our Barq's floats, a frozen root beer and ice cream float, and continued strong sales to school foodservice almost offset all this sales decline. Excluding Country Home, overall sales for our bakery products were up 11 percent for the quarter and 13 percent for the nine months.

Country Home sales were approximately $12 million for the quarter and $24 million for the nine months -- actually six months since we acquired them -- roughly in line with our expectations.

Retail supermarkets. Sales of products to retail supermarkets decreased 4 percent for the quarter and were flat for the nine months. Soft pretzel sales led by Pretzelfils introduced last September were up 7 percent from a year ago for the quarter and nine months. Pay (ph) sales of frozen juice, bars, and Italian ices were down approximately 9 percent for the quarter and 10 percent for the nine months led down by our Minute Maid licensed products and our ICEE products.

On a positive side, pay sales of Barq's floats were up 33 percent in the quarter and 80 percent for the nine months.

The restaurant group. Sales of our Bavarian pretzel bakery decreased 30 percent for the quarter and 20 percent for the nine months due to decreased mall traffic and our continued strategy of closing or licensing of unprofitable stores.

ICEE and frozen beverages. Frozen beverage and related product sales increased 6 percent for the quarter and were up 2 percent for the nine months. Beverage sales alone were flat for the quarter and up 1 percent for the nine months while service revenue for others increased 30 percent in the quarter and 19 percent for the nine months. We continue to emphasize growing our managed service businesses to take advantage of our national in-service infrastructure.

Consolidated. Gross profit as a percentage of sales decreased by 1.9 percentage points in the quarter; the decrease in margin resulted from product mix and higher group insurance and commodity costs. For the nine months, our gross profit percentage were up by 2/10 of a percentage point. The nine months benefited from lower depreciation of about 1,200,000 in our frozen beverage business as well as by a lower level of allowances in our retail supermarket business.

For the three months, gross profit was negatively impacted by approximately $850,000 of higher commodity and packaging costs and group health insurance. And for the nine months these costs were about $2.3 million higher than a year ago.

Total operating expenses as a percentage of sales were 1.5 percentage points lower in the quarter mainly because of our increased bakery business but also because of slightly lower spending throughout all of our businesses. Distribution expenses increased by .25, a 1/4 percentage point due mainly to higher fuel cost.

Administrative expenses decreased by 6/10 of a percentage point for the period.

Operating income increased by 12 percent in the quarter to $13.6 million from $12.2 million last year and increased 16 percent in the nine months to $21.4 million from $18.6 million last year.

Capital spending cash flow and depreciation expense. Our cash balance increased $7.4 million in the quarter to $42.1 million at quarter end, as we continued to generate cash flow in excess of our operating requirements.

Our capital spending was $15.0 million for the nine months. We are projecting capital spending to be about $20 million this year, which will leave us with free cash flow -- operating cash flow, less capital spending of approximately $25 million. Assuming no additional acquisitions or stock buyback, we would expect to end the year with about $53 million in cash.

However, we will continue to seek acquisitions to supplement our internal growth.

Balance of the fiscal year. Although we are not satisfied with our overall sales growth, excluding Country Home Bakers, our sales increase was 4 percent for the quarter, we are pleased that we were able to increase our growth above the previous 2 to 3 percent level.

Our main focus going forward is to improve upon the 4 percent. We have a number of opportunities before us which we believe will help us to continue our strong pretzel growth which we have experienced over the past two years and overall growth in our foodservice business. We expect to continue to generate foodservice growth in the mid- to high mid-single digits for the foreseeable future.

Sales of our frozen juice and ices to some warehouse club that have been impacted by the low-carb phenomenon or the low-carb fad -- however we believe that our sales will be up in the fourth quarter, as some of these clubs are restating our products that they had previously discontinued.

Sales of our bakery products have been very strong over the first nine months of the year as we continue to develop new products for existing customers and for new customers as well. We introduced three varieties of Pretzelfils in the supermarkets last September. Pretzelfils are filled and top bite-size soft pretzel sticks.

Based on sales for the last nine months and other market data we have decided to roll out the Pretzelfils to other markets this fall.

Our Barq's root beer floats supermarket product has introduced into additional markets this year and we believe it's selling well. Our expectations are that the this product will continue to do well in the fourth quarter. Our frozen beverage segment sales increased in the past two quarters after being down 1 percent in fiscal year 2003 and 6 percent in the first quarter of this year.

Our new entry in the frozen uncarbonated beverage business, ICEE Peak, has been a very promising in its initial trials and, hopefully, it will supplement wrote for our traditional ICEE frozen carbonated beverages. And we are continuing to work on many other opportunities in the managed service area which we believe will provide additional growth and profitability as we better utilize our strong infrastructure network.

We are aggressively pursuing exit strategies for our restaurant business. During the first nine months of the year, we closed or licensed to others 13 stores which had over $110,000 of negative cash flow in fiscal year 2003. At quarter end, we will operate about 35 stores. Our goal is to close down or licensed to others the money-losing stores as quickly as we can.

Last quarter, we reported and commented that certain commodity costs -- such as eggs, cheese, shortening, and butter -- have spiked over the previous several months and that flour costs were approximately 15 and 20 percent higher than a year ago.

Fortunately prices have begun to come down over the past month or so, although the prices of some of these commodities remain high by historical standards. Although we will attempt to pass on these cost increases we expect that they will have some impact on our operating income over the next quarters and perhaps beyond.

As you may know, the installation of our robotics packaging equipment has run behind schedule. However, at present, we are installing and testing this equipment.

We thank you for your interest and continued support and at this time I would like to turn it back to the listeners for any comments.

(OPERATOR INSTRUCTIONS) Amy Vincent.

Just a couple of questions. What do you think drove -- you cited Barq's several times during your comments. What do you think drove the sales of the Barq's product during the quarter?

To begin with it's a niche. It's a first-time product entry, combining the features of root beer and ice cream. We had some successful testing in our foodservice group and it was introduced in some fairly high EDI markets that were Barq's and root beer loyalists. And it's priced attractively. We did a good job in getting it in the market and it's been performing pretty well.

So most of the -- outside you saw from Barq's during the quarter that does include some sell-through and not just initial stocking and --?

Absolutely yes. And the product -- Michael Karaban, our vice president of marketing is here with us. Michael why don't you comment on that?

I think a couple of things. Number one, Barq's truly is a different kind of product. It really is a niche but it is different than anything else on the market. Also Barq's is a number one root beer nationally so it comes with a well-known brand name.

And Michael's being a little bit modest. The product is a good-tasting product. I mean rarely have we whether it be foodservice or in retail before when we were making a presentation across the table and the buyer or the committee tastes the product and both their eyes and ears light up. It's different, it's a good product.

Mark Cheknow (ph).

I noticed in the Q you talked about Country Home and the $55 million original expectation looks like it's now about 48. Could you just kind of talk us through what happened there as they are going through bankruptcy and I guess your original expectation why do you think you'll be able to keep that business or regain it. And and then I guess your time frame being able to get back to that 55 level?

Let me comment on that if I can. Originally the 55 --which was an annualized number that they had presented and that we had passed through -- probably a little bit soft to begin with. We took this over in January and aggressively fought for it to integrate this and to kind of cut out the losses and return it to profitability which I'm pleased to say that we did a modest profit within the first three months. That $55 million might have been a little bit steep to begin with and they have lost some business and they really hadn't adjusted their forecast appropriately and some of the gross sales vs. net sales should have been factored out. We are more comfortable with 48 and might have said 50. We are more comfortable with 48. We thought it was time to adjust it.

I think what is even more telling is that we are going to be -- we believe -- getting to our profitability levels on schedule and in advance of schedule and we will catch up with the volume too.

Could you talk a little about ICEE sales and the effect that Kmart had on that? In the quarter we are still seeing, and I'm sure they're still feeling some of that?

Actually ICEE sales, we're pleased overall. Kmart sales were down approximately 29 to 30 percent for the quarter like, hello what's new? So it's not like we are immune to what's going on there. But I think our overall ICEE business has shown good resiliency, good strength. ICEE had a -- not withstanding what you call the Kmart factor. They had a pretty good quarter in there. So we have -- it probably cost us maybe 2 cents for the quarter on an earnings per share basis perhaps as much as a nickel to 6 cents for the year. I think that even more significantly that we have been able to absorb that.

And as we continue to polish the tentacles (ph) of that business and grow it forward so its profitable level is being maintained or increased.

Any early signs in July so far now that we're in kind of the peak summer months here?

Too early.

Keep -- you know, good weather, positive impact, rain and cold weather have an impact all right. And so, it's not like it was a couple of years ago when the weather was gloomy and it kind of was a precursor of the numbers. We are cautiously optimistic of having a record year overall (indiscernible).

Lastly, on behalf of your shareholders, any progress on maybe paying out some of this cash in the form of a dividend?

It's something that from time to time we have thought about and we will just have to see going forward. I think the best use that we can do of our excess cash is to grow the business aggressively. (technical difficulty)

Am I still on here? (technical difficulty) You cut out for a few minutes there.

I think the question has to do with dividends and my reply was that it is a subject that we have considered in the past but we believe that the best use of our cash is to use it to aggressively grow the business. And to the extent that there is available cash for acquisitions and for other growth in there we will address or readdress the possibility of a dividend at some time in the future.

Mitch Pinheiro.

I got a bunch of questions. My first one is for Roger Clemens. Is he there.

Roger's not here today but he will be in town on Aug. 17.

Then I will leave that for Aug. 17.

All right. He pitched a heck of a game the other day, you know. (MULTIPLE SPEAKERS)

Speaking of ICEE and FCD (ph). First, is the service revenue in that business a sustainable business? Are these contracts that you have with other national players or is it like on an ad hoc or as you're needed you are used and then once you're not needed, that's gone?

You know, Mitch, that was one of our concerns albeit a legitimate concern some 2 1/2, 3 years ago when we started with Burger King and (indiscernible) that is not the case now. These things have grown and they've expanded to the point now where we are looking at some dates coming forward that are available to us and we -- for the first time -- we've been utilizing our infrastructure to a maximum level but for the first time we've been -- you know Dan and Dennis and Dan and I have been communicating because we're talking about there are considerably more opportunities for us. And we have -- we're building, adding to what is a first-class reputation of managing service and whatnot, so we are looking at the possibility of further expanding that.

Any time you have a 30 percent growth or for that matter a 15 to 20 percent growth in there and you really don't have solid infrastructure in there that bodes well for, perhaps, future growth. So we think that what we have there is both sustainable and expandable and we think we are managing it properly.

I know you've been in this business for quite a while but service business is different than your consumer product business. How comfortable are you with being able to manage that business and -- it's almost a separate business unit now. How do you handle that from a management point of view?

It's almost, it's almost in perfect alignment with having the 28,000 ICEE pieces and equipment that are out there all the time. That we're servicing all the time. Both in preventative maintenance calls and emergency calls. We are in the business. We're in the business. It's kind of like we are -- I mean, we are in the business. I mean we're doing it for ourselves, you know we are doing it in essence for (indiscernible) Burger King, we're doing it for an orange juice company. All right? There is another beverage company that wants us to do it. I mean, we're in the business.

Let me ask you also staying on ICEE and, how -- did you have them -- your dispenser placements in the quarter were they up vs. last year?

This is Dennis. Yes they were -- roughly they were increasing probably at a rate of about 200 units a quarter.

But on a base of 20 some thousand -- that is relatively minor. Correct?

That's correct.

There are huge opportunities out -- there's still ...

Yes well why don't you talk about that? Because I want to see, I just want to understand where SCD how you're growing it? It's sort of been stuck in the mud a little bit from a sales point of view, and I would like to know how you or where you see the opportunity?

Well if you take away the Kmart factor and the negative contributions that has come from closing of 700 stores in the past four years, I think the overall beverage business our drink business would be up. We have and going from the frozen carbonated beverage to including a frozen uncarbonated beverage program like ICEE Peak has given us tremendous opportunities to grow that. As a matter of fact we had the reins a little bit tight on their capital investment, on their capital spending ending some of the early, pending some of the results. We're also going into non-traditional locations which go beyond the shopping centers and the malls and the amusement parks with ICEE.

For example we are in the process of rolling perhaps 500 machines into a company called Valero (ph) which operates convenience stores and petroleum stores in the Midwest. We are also in the first stages of a major major rollout into Toys R Us where they are going to have machines installed literally up front. You go to the register and you buy your cup and you have self-serve machines up front where the shopper and their kids can get an ICEE as they shop in the store or leave the store.

So we're looking at a lot of non-traditional locations to perhaps complement, if not spur, the ICEE growth.

How has -- are you able to get pricing in ICEE?

We -- our gross margin in the drink business has been solidly maintained. So to answer that question, we've been able to convert and pass through some of the -- most of the pricing.

My last question on ICEE is how has -- what's Burger King's experience -- how are they doing there?

Doing okay with ICEE. We hope that their experience with the grilling of hamburgers and salads and everything else starts to keep pace. As you know, a year ago that total program using frozen Coke at Burger King was in serious jeopardy. We got involved in the mix and we were part of leading -- spearheading the efforts to convert to ICEE. Working with our partnership and our terrific partnership with Coca-Cola we re-imaged all of the machines with the exception of a couple of areas that there's -- that we can't the ICEE name. And it appears to have had a decent impact and we plan on continuing to build on those positives.

Changing the subject to bakery, your bakery growth of 11 percent excluding Country Home is remarkable. Where -- you talked about new products and new customers. What kind of new products do you have and what type of new customers are you gaining?

You know, Mitch, we have looked at that group and there's a combination of factors. Let me just equate this to -- and I know you are a sports fan. Sometimes you can be a batter, you can hit line drives and they go right at somebody. All right? And sometimes things change. We are benefiting from what evidently over the past few years. Some of the major co-packers and private-label bakeries either disappeared or for whatever reason were doing -- were less of a factor. In between, along with that some of the customers that we had been doing business, their business has grown and we developed some products too. And we -- our reputation as a quality co-packer with the ability to turn things around quickly and with energy and with enthusiasm has grown.

And, hopefully, we anticipate a continuance of that. It's not any one single product. It's a bunch of products into a bunch of different channels and we're pleased.

And who do you view as your major competitor in that area? Who do you bump up against the most? Is there any?

There's different, there's regional people, certainly, some of the branded people that are around. And there's names that -- but I don't know if we have any one major competitor. The overall segment is quite fragmented but it's not like we're taking tremendous share from somebody on a one-time big kind of thing. Most of the things that we do, what's happening now, they're repeating.

Okay. Good enough. When it comes I know you don't sort of give formal guidance but in the past, your fourth quarter often looks just like your third quarter. Is that what we should expect?

I would hope that it might be better. And, again, there's a lot of things that come into play. Fourth quarter we hey, we're benefiting. Baseball is having a terrific season. Sales are up 12 tennis is up 12 percent or so. It's good for us. The amusement -- it's good for us because we are and I guess 80 percent of -- I mean, we had terrific representation in both minor and major league ballpark. Our pretzels. Our frozen novelties in there. And to a lesser extent ICEE. Amusement park business appears to at least have stabilized and perhaps it's growing -- I mean people are traveling, the economy is good. There's some momentum. There's some wind behind the overall economic sails. All those things are good for us. I would be the last person not to acknowledge that.

So hopefully weather patterns permitting we are going to have a decent fourth quarter. And if that happens we will have, again, a record year in sales and earnings again.

Haven't asked about pretzels, Mitch.

Okay. What about pretzels?

Obviously, when we can show the kind of growth that we've had with our core product, something that we know how to make, know how to ship, know how to sell, and we've developed new products for new channels. Similarly to some of the things that may be have worked from bakery for us, over the -- three years ago we were challenged in our pretzel business by a couple of small little upstarts here and there. They had a good idea. And a different idea and they were able to take this out to places and not that we were a sleeping giant or a quiet elephant all right? But we -- I used to say that we could stop and turn on a dime and now it takes us -- we have to stop and turn on a quarter. But we were able to act and react to that. We have developed a whole line of pretzel products -- gourmet pretzels, filled pretzels, different sizes, different shapes, Pretzelfils -- that suddenly have helped to spur our core product. Soft pretzels which used to be a 1.98 percent of our sales which are still today represents some 33 percent of our total sales and it's probably overall on an operating income our most profitable product.

You've got done a nice job moving up the price chain, the price value chain with the Pretzelfils. Have -- I'm sure that's part of the sales increase. Are your volumes in pretzels the non Pretzelfils up? Are your units up in the -- in your sort of --?

No, but they are no longer Kmarting down, if you know what I mean.

Brian Rabin (ph).

Question for you Gerry. You mentioned flour being up I think, year-over-year, about 15 to 20 percent. Can you put a numerical growth rate on your cost increases on eggs and cheese and shortening and better?

Well I can't. But here's what happened with eggs and cheese and -- to a lesser extent -- butter. They started running uphill I guess you would call it because that's escalating. And they in some cases like cheese doubled within a 4 or 5 month frame. Now we got impacted by that escalation. And we do certain things from a cost containment and cost management standpoint to offset that including bookings, including taking pricing, looking at pricing where we can. Going forward we're not nearly as concerned as what we were this time a year ago. I think flour now is modestly higher from a year ago and the other products have come significantly down from their highs. For example, cheese which got to be $2 a pound two months ago is now about $1.40 or so in there, $1.50 in there which is certainly more manageable, more easily managed than where we would be. So we think we are in decent shape in there and hopefully the commodity increases, the commodity adjustments will not go rapid fire like they did a year ago.

You've mentioned on the Italian ices being down both in the quarter and nine months. Is that a function of weather? Is it the warehouse club destocking? Is it the lifecycle of the product? Is there a reimaging campaign there? What --?

Well in our particular instance case, we lost a lot of SKUs. In the warehouse, and club stores due to the Atkins and the low carb fad we're going to call it, because I still don't believe it's a real trend yet. As a result their demand to have products that they perceive that they needed resulted in a lot of products being suspended or if you will discontinued even though the product that were discontinued like our Minute Maid soft frozen lemonade, like our Mama Tish's Italian ices were doing well. Well, so we lost this whole winter and you do so the club stores in the winter like February March you get ready for the spring and summer. We lost probably six months and only recently, very very recently, have there been signs of reconsideration in that as some of the club stores are now coming back and asking, could we get ICEE tubes back in. What is your stock -- we want Minute Maid back in. So we think that at least from our viewpoint that the worst is certainly over for us there. We wish we hadn't gone through it and, overall, given what we did go through, the category of our frozen juice bars and ices performed, overall, okay considering.

Okay and I'm going to kind of jump into a question you half answered and I am sure you've gotten this every which way but Sunday. But the whole low carb -- you called it a fad -- what's kind of your thought processes? Are you getting anecdotal information that things are rolling over and that that's kind of a muted cycle?

Well if a buyer in March tells us that he's going to discontinue ICEE tubes and this is because he has to put in Atkins low carb ice cream and a cup, sorry guys, and then come July, we get a callback that we'd like to bring you back in, and how quickly can you respond? And we read the papers and we've read the marketing reports and we hear from some of our other brethren that are in the industry it appears to have peaked and now it's gone the other way.

Now that doesn't mean that people on a low carb diet might not count carbs or people on a low carb meal balance might not count carbs. But whether or not they want to replace good stuff -- foods that taste good with things that are being presented out there which are to begin with very expensive and don't taste as well I think that part is past. We've also introduced a low carb soft pretzel and we rolled it to 1900 Wal-Mart stores and we worked on the product development. We made some great strides. We tested it, we met with them. They decided to put the product in their snack bars as part of a low carb offering. We were selected to be one of the products that they are showing along with an Atkins kind of cheesecake, perhaps something else.

I think the jury is still out on whether -- what kind of impact that is going to have and what kind of sales that is going to have going forward and we decided to be part of that equation and factor because if there was up the happily there and again I used the expression before that we could kind of stop on a dime or a quarter and turn some things around. We wanted to be part of it. I don't -- I don't profess to be a marketing guru and be able to make a determination on nutritionals as to where this is going to be a year or two from now. I do believe that a product has to taste good and has to deliver value. And it has to be good nutritionally. We think all of our products do that.

Okay do you see your exposure in that whole Atkins diet low carb, do you see it more prevalent in the frozen juices or the frozen, the Minute Maid lemonade vs., say, the pretzel side?

Yes this is Michael Karaban. I think, I think it's part of it and I think it's overall awareness and concern or consciousness about carbs. I think the original -- the carb low carb craze of people running to buy low carp product is definitely on the way. Will the consciousness about the carbs keep up? Yes, to some extent. Just like there was a consciousness about low-fat and on that front and low fat front, we score very very high. So I think it's going to be more moderate and will eventually go to another part of a person's consideration about nutrition.

Across all your different product lines, have you guys seem any capacity other than your pass-through, relative to commodity cause? Any pricing inflation capacity on your side?

Did you say any pricing inflation?

Well your ability to raise prices on your products to your customers?

Any time you raise prices, any time you take pricing you're always putting a little bit of pressure on your volume, which is not a good thing. All right? I think, overall, that our pricing, the pricing of our products their popular price. Have you ever been into a venue, whether it be a stadium or an amusement park or any kind of foodservice venue? Oftentimes pretzels and some of our other products are the cheapest products on the menu. So to that extent they're meeting the profit objectives of everybody. We do what we can to maintain an increased volume and taking pricing is always sensitive.

One final one. I think, Jerry, you mentioned you're looking at some different channel distribution, channel rollouts for the soft pretzel fill. Can you kind of talk about that?

Well in addition to the supermarkets, we are developing plans and strategies to be selling the fills as appetizers and hors d'oeuvres into restaurants and to bar settings. And matter of fact one of the -- there's a whole campaign that we're developing now. We appear to be and we're studying this further but in looking at our product and what the product delivers and how it's priced, we think there's a lot of advantages to the operator, to the restaurant operator whether it be an Applebees, whether it be a Friday's whether it be a Landview (ph) restaurant, they could be selling the product that is quite different, too, it's a little bit healthier. It doesn't have to be fried although it could be. It's food costs are lower than comparable products that they're selling now. And they're offering a point of difference. So our people are excited and we are anticipating driving this new product into this new business channel for us.

Okay. Superb job guys, keep it up, thanks.

(OPERATOR INSTRUCTIONS) I am showing we have no further questions at this time.

I want to thank everybody again for attending this conference call. We look forward to talking to you after our fourth quarter and, hopefully, reporting equally as good news. Goodbye now.

This concludes our conference for today. You may disconnect at this time.