J & J Snack Foods Corp (JJSF) 2005 Q3 法說會逐字稿

OPERATOR INSTRUCTIONS Mr. Shreiber, you may begin.

Good morning everyone and thank you for attending our conference call this morning.

I'm Jerry Shreiber and with me today is Dennis Moore our Chief Financial Officer, Bob Radano, our C. O. O. and Michael Caraban (ph) Vice President of Marketing.

I'm going to begin with the obligatory statement concerning forward-looking statements and then I'll read through the rest of my narrative and we'll open it up for questions and comments from the field. The forward-looking statements contained here and 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 here of. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date here of.

Results of operations -- Net sales increased 9% for the quarter and 11% for the nine months. Excluding acquisition related sales from Country Home Bakers acquired in January of 2004, and Snackworks LLC acquired this past March 2005, sales still increased six percent for the quarter in nine months. For the quarter, our net earnings increased to $9.9 million, $1.06 per share from $8.7 million dollars, $0.95 a share a year ago. For the 9 months our net earnings increased to $16.2 million, $1.74 a share from $13. 9 million or $1.52 a share a year ago. This past quarter marks the 17th straight quarter of increased earnings over the prior year.

Our EBITDA for the last twelve months reached an all time high of $63.9 million for a 12-month period.

Food service -- Sales to food service customers increased 12% for the quarter and 14% for nine months. Without Country Home Bakers and Snackworks LLC, sales increased 8% for the quarter and 5% for the nine months.

Our core soft pretzel sales were up 20% in the quarter and 8% for the nine months. Excluding sales of pretzels resulting from the Snackworks acquisition, soft pretzel sales were up 5% for the quarter and 3% for the nine months.

Italian ice and frozen juice bar and dessert sales increased 4% in the quarter and 2% for the nine months. Increases in sales were to school food service customers and to warehouse club stores. Churro sales to food service customers increased 13% for the quarter and 10% for the nine months as sales increased across our customer base.

Sales of bakery products increased 7% for the quarter and 20% for the nine months. Excluding Country Home acquisition related sales, sales of bakery products were up 4% for the nine months.

Sales of our specialty funnel cake products were up $1.1 million in the quarter, which represents 80% increase to $2.5 million, caused in large part to a promotion we're running with a major restaurant chain.

Retail super markets -- sales of products to retail super markets decreased 2% for the quarter, and were up 3% for the nine months. Soft pretzel sales, led by the geographic expansion of Pretzelfils, and by increased sales of Super Pretzel in existing markets, were up 16% from a year ago for the quarter, and 20% for the nine months.

Sales of our frozen juices and Italian ices were down 6% in the quarter and 4% for the nine months, as this product line continues to underperform to our expectations.

Couponing costs were up 293,000 in the quarter and 1,038,000 for the nine months as we attempted to gain trial and long term customers through this marketing aid.

The restaraunt group -- sales of our Bavarian pretzel bakery decreased 26% for the quarter, and 28% for the nine months due to the closing or licensing of previously identified stores. We closed or licensed nine stores so far this year and have 21 remaining open stores at quarter end.

ICEE and frozen beverages -- frozen beverage and related product sales increased 8% for the quarter, and were up 12% for the nine months. Machine sales were up $5.0 million for the nine months compared to last year, and accounted for about 50% or roughly half of the nine months sales increase. Beverage sales alone were flat for the quarter and for the nine months.

We continue to emphasize growing our manage service business to take advantage of our national service infrastructure. Revenue from this business was up 34% for the quarter and 36% for year to date.

Consolidated -- gross profit as a percentages of sales increased by 2/10 of a percent in the quarter, mainly due to the increased volumes throughout our businesses. Total operating expenses as percentage of sales were 24% and 26% for both years' third quarter in nine months.

Marketing expenses dropped about 3/4 of 1 percentage point of sales for the quarter and nine months due to better control of spending throughout all of our business groups.

Distribution expenses rose about half of one percentage point of sales in both the quarter and the nine months due to the higher cost -- higher cost of gasoline and third party transportation costs.

Administrative expenses as a percentage of sales were approximately the same as last year in both periods.

Operating income increased by 14% in the quarter to $15.5 million, from $13.6 million last year, and increased 16% in the nine months, $24.9 million from $21.5 million last year.

Capital spending and cash flow -- our balance of cash and cash equivalence of marketable securities increased $5.3 million in the quarter to $55.3 million at quarter end as we continue to build and generate cash in excess of our operating needs. Our capital spending was $15.6 million for the nine months.

We're projecting capital spending to be roughly 20 month -- $20 million again this year, maybe a little bit more, which we are projecting will leave us with free cash flow, operating cash flow, less capital spending of $27 to $30 million.

We paid our regular quarterly dividend of 12.5 cents a share or $1,140,000 on July 6, 2005.

Snackworks LLC acquisition -- as previously announced on March 17, 2005, we acquired the assets of Snackworks LLC, doing business as Bavarian Brothers, a manufacturer of soft pretzels, headquartered in Rancho Cucamonga, California. We have since closed down one of its two manufacturing plants, and have consolidated its selling distribution and administrative functions into existing J & J facilities. We accomplished this in less than three months from the acquisition date.

Commentary -- we are pleased with our overall sales growth of 6% for the quarter, which was pretty much across the board of our main business segments. The only slightly disappointment is in sales of frozen juice and Italian ices in our retail super market business. All of our food service product line had strong growth in the quarter.

As I said previously, we have realigned the selling structure of our food service business to take advantage of our strengths. This, combined with the acquisition of Snackworks, should enable us to continue to improve growth in this area.

We have also made progress toward our goal of penetrating the casual dining and bar markets. We have been designated the exclusive supplier of stuffed soft pretzels by Cisco, and we have begun selling a funnel cake product to I-Hop restaurants this summer. We are hopeful that other multi-unit restaurants will be buying product from us before too long.

We introduced three varieties of Pretzelfils in the supermarkets in September of 2003. Pretzelfils are filled in top bite soft pretzel sticks. Based on their success in 2004, we rolled out the Pretzelfils into other markets this past fall, resulting in a whopping 16% increase in overall retail soft pretzel sales this quarter, and 20% for the nine months, which came on top of a 13% increase for the year 2004. So we believe our core soft pretzel business remains very fertile indeed.

We have just introduced a Fanta brand frozen novelty product in select markets and we have expanded our selling markets for Barq's floats.

We aggressively coupon in the retail supermarket sector, the past two quarters which impacted our earnings in hope of gaining new and -- users and building for the future.

ICEE beverage sales alone in our frozen beverage segment were flat in the third quarter and for the year.

We continue to pursue many opportunities in the manage service area as we continue to grow and improve profitability of this part of the business. We believe this is necessary as the beverage portion of this business continues to be impacted from competition and changes in snack bar operations at some of our major customers.

We are aggressively pursuing exit strategies for our restaurant business. After closing or licensing to other 18 stores in 2004, we have closed nine additional stores so far this year which had $270,000 of negative cash flow in 2004. After closing these stores we have 21 stores still operating. Our goal is to close down or license to others the remaining money losing stores as quickly as we can.

The strategy has begun to payoff as excluding gains or losses resulting from the closing of stores, losses in this segment were reduced by almost $200,000 in the third quarter, actually $190,000, and $340,000 for the year so far.

Although, the over all prices of food commodities are still high by historical standards, the year over year impact continues to be less with each passing quarter and is at least for now not a major issue. However, our energy gasoline and third party trucking costs and higher prices of electricity and natural gas have taken their place in impacting our bottom line. The impact of these costs in the second quarter was over $500,000, and we believe these costs will continue going forward.

We expect to be -- we expect to continue to be impacted by increased group health insurances cost and liability insurance costs and estimate this year's cost will be approximately $1 million higher than last year.

Our robotics packaging equipment has been installed at our frozen juice bar manufacturing facility and is running near full efficiency. The robotics equipment at our Pennsauken soft pretzel manufacturing plant is in the process of final completion and being debugged.

We have increased our estimated income tax rate for 2005 to 38% from 36% in 2004 due to increased state income taxes we expect to incur. This is an estimate which we will continue to refine. We expect the rate to drop back to the 36 to 37% level in 2006 as a result of the American Jobs Creation Act of 2004.

We're deep into the process of complying with the requirements of Sarbanes-Oxley. The process is quite onerous and expensive. However, we have reduced our estimate of the external costs to comply to be less than $500,000, of which we have incurred $200,000 through our third quarter. This is due to the hard work and special efforts of our employees and our accounting finance and information services group.

I thank you all for your interest, and now I'll turn the call back to you for any questions or comments.

Thank you. (Operator instructions). I have Mitchell Pinheiro on the line with a question. Please state your question.

Hi. Good morning.

Good morning Mitch.

Hey, a couple of things. A -- kind of a couple of odd and end questions here.

First, Jerry, in the ICEE business, what's -- why the flat sort of beverage sales? What part did maybe the cool spring play -- but it's been flat for a while, so besides having that one customer that continues to hit you a little bit as they close snack bars or the traffic declines --

Both --

-- what else is happening?

Well, there's lots of competition to wet your thirst, ranging from the juices and the teas to the all -- to all the cola companies, and a big competitor in the past few years is -- has been water.

Some of the business -- some of our major customers have been going through a strategy definement in their snack bars. We're in the process of transitioning perhaps as many as 400 to 500 stores from Wal-Mart, which they're closing certain snack bars and then there will be others in there, somebody like a McDonald's or a Subway. But sometimes there's a several month delay from the time that a snack bar closes until a -- until the new one is built and open.

And part of it is just a little bit more overall competitiveness in the -- in the beverage market that we find ourselves competing with all of the other beverages.

I would assume, Jerry, that you had increased placements in the quarter. Would that -- so my point is is that, maybe on the same beverage machine basis sales would have been flat --

Sales would have been --

-- or down a little, excuse me.

Sales would have been flat to down slightly.

Okay.

We've recently, and -- we recently developed a ICEE line of juice products which can be sold to and through the school food service system. This is now met with the early approvals of the school nutritional guidelines, and we just debuted it at the school food service show this past week in Baltimore, and we're hopeful that that will give it a little bit of a spike in sales, what has been, for beverage sales, what has been over all a -- a difficult market to grow the core business.

With all that, and we spoke about this a couple of years ago, we didn't exactly sit back and wait to get blind sided. We used the infrastructure that we have, which is very experienced and talented and has lots of expertise ,and we have been building -- we have been building and increasing the revenue business from service, from manage service and it has helped the over all profitability.

That leads me, that's sort of a good segway into that -- the manage service. It was up thirty-something percent in the quarter.

I think it was 36 or 34%.

Okay. So -- so if I -- just for sort of modeling purposes, what kind of visibility do you have as far as revenue growth even into '06? Do you see further account wins and large ones or is it going to be smaller gains?

Well, we do, we see further account wins. As a matter of fact, we're going through this budgeting process as we speak right now. Our ICEE group is having some meetings.

This is a business as Mitch, you're well aware. We've been in it about five years now, and it went from a ground floor, a grass floor from nothing to the point where it's in the 20 plus million dollar a year sales level. I don't know if we're going to grow at 34% next year, but we certainly know we're going to grow in double digits, and we'll kind of work with the numbers and see if they're crooked ones or threes or something like that.

Okay. Last question on ICEE. Is -- and both for manage service and the beverage side, is -- do you have any pricing power in this business, to A.: account for your energy and fuel costs for your trucks, and B: just general pricing power to keep the returns on your -- on your capital, your investment where they should be?

Well, pricing power -- sometimes comes at the impact or at the expense of sales level. You increase prices and sometimes it has an impact on your volume. So we look at that very cautiously but to answer your question, yeah, we have been able to generate some pricing, certainly to pass on our costs as they relate to the program.

Is any of that in your '06 -- as you're budgeting, do you anticipate any pricing in '06?

Can't answer that quite right now with any kind of degree of certainty.

All right, just last question on beverage -- beverage, the machine sales, what was the dollar amount of the beverage machine sales in the quarter?

Dennis, do you know that?

They were approximately $4 million.

Okay, and the margins on this type of business are approximately, are they below company average, above?

Yes, they're below company -- much below company average but they -- you often lead to increased service revenue and/or beverage business.

Okay.

There's a nice comfortable, and I won't use the word tie here, but there's a nice comfortable link between a machine sales and then service afterwards and the possibility of other revenue building type of programs.

Last question for you. I'm taking up a lot of time here but by -- just by looking at Q4, it would seem that Q4 should look a lot like Q3. Is there anything that we should be aware of that -- that would sort of impact that statement?

Well, about a quarter (indiscernible), right?

Yeah. You have, they're -- they're generally somewhere --

You're trying to revise your estimate with me on the phone, right?

What's that?

You're trying to revise your estimate with us on the phone.

Maybe.

Mitch, let me just say this. We are pleased with our over all performance. A lot of people work hard to accomplish this everyday but we are in no means relaxed yet. Nothing is an automatic. If you look back at our numbers about five years ago, we earned 60 cents a share. So, you add everything together and we're up something four and a half times that, and if we earned a dime better from quarter three to last year, right?

Yes.

You can do the math.

Okay. All right. Good enough. I'll yield the floor. Thank you.

All right Mitch. Good talking to you.

I have Brian Raffney on the line with a question. Please go ahead.

Good morning, Jerry.

Good morning, Brian.

Hey, question for you. You kind of talked about commodity cost, can you give us a sense of magnitude, Jerry, across the line -- butter, sugar, eggs, dairy flour -- what's the magnitude in decline maybe from the over all peak that you guys saw in commodity feed stocks, either late last year or early this year?

This is Dennis, Brian.

Okay.

Probably at this point we are -- we're on a flat basis compared to last year, so, we're not increasing at this point, we're not going down, some commodity costs have dropped substantially, such as shortening. Others are still -- are still going up. So on average, we're about even where we were a year ago and we're still near the top of where they were, after a two or three year climb.

Okay. Given the -- the deflation in shortening costs, has that -- has the over all increase in your energy costs, I think Jerry mentioned about 500,000, has the decline in commodity costs offset the increase in energy or is energy net still plus?

No, the -- although shortening cost declined, our over all commodity cost, we're only down slightly in the quarter because there are other costs that are so higher than a year ago.

Okay.

So they did not offset the higher cost of fuel and utility.

Okay. You guys have -- you guys have a national, kind of in-field count on the number of ICEE machines placed in all the channels?

I'm sorry, I heard the question, but I'm not sure I understand. Do we have a --

You have a machine count, Jerry?

Including what we service, we're probably close to 50 -- we service close to 50,000 machines in total.

Okay. Okay. You also mentioned, I think you guys were talking a little about couponing. Can you give us a sense as to where the -- what products are you couponing on new product launches or are there specific products that the consumers are a little more elastic and sensitive to price? Is it an issue of Barq's versus Pretzelfils? Can you kind of give us a sense of where you're focusing?

Well, we coupon fairly aggressively with our new Pretzelfil product and although you never know definitively, it appears to be certainly be working. We were, perhaps, a little bit aggressive this year with some of our couponing and dealing, but if we had to do it over again, we'd probably do the exact same thing and we have been experiencing nice double digit increases across our core soft pretzel business. The couponing, in connection with the frozen novelties and Barq's was new products, new triers, and otherwise a -- an attempt to gain some traction and boost on other recently introduced novelty products of a couple of years ago.

The weather in the past several weeks has been extremely good for us. I certainly don't like to use weather as an excuse. We don't let our people do that. but some of this couponing and together with weather, it can paint a nice picture for -- for continued sales.

You guys will take all the sunshine and humidity you can get.

You know what? It's balanced and I'm very proud f our products and our balance portfolio all the sunshine and humidity will serve well for frozen novelties, perhaps ICEE. It doesn't exactly generate through the roof sales for pretzels. So if I had to manage weather across the country, I'd be fooling with a thermometer throughout the day parts. We'll take it the way it is.

Okay.

We have a good year this year, we have no complaints.

Okay. On your CapEx budget, 20 million -- what would be kind of new capacity additions, robotics, versus just cap maintenance?

Most of that is cap maintenance. The robotics has been part of that over the past year and a half and right now, we're doing some things in connection with -- one of our bakeries, but most of that is -- is pretty much maintenance, Dennis, isn't it?

Yes, it is.

Okay. You also talked, I think, about the -- you were talking about the closing and licensing of some of the stores, you're down to 21. What kind of a core base, obviously you want to keep profitable ones but you had also talked about using those stores as kind of a trial for some of your products. If you go out 2, 3, 4 years Jerry, what type of a core base are you going to get down, is it 8 stores, 3 stores, 10 stores?

In between 8 and a dozen. Okay. It might not be 6, maybe, let it be 13, it could be.

Okay. Okay. Okay. Relative to ICEE, what has been the impact, mentioned this in the last quarter you guys, last quarter, relative to the summer film, cinema, movie theatre, relative to blockbuster pictures for kids? Has -- what has ICEE done beverage wise in that channel? Has it been a good summer for movies or a weaker summer?

It's been a weak summer. It's been a weak summer. There hasn't been -- it's been a weak summer for movies in general, although we have pretty good placement in distribution, what you really need is attendance and blockbuster movies. I don't have the actual figures on what the movie industries or what attendance is down, but we do -- we're building the pretzel business there because we didn't have that before but the ICEE impact has not been very, very positive this year from movie goers.

Okay. Mitch asked a question relative to pricing power. What's been your strategy Jerry, as you guys launch and innovate new products? Is the launch and the adoption of volume and the elasticity of the customer, such that when you launch a new product you're probably not trying to price it very high or do new products create new interest and allow you and afford you more pricing power?

Well, that's a two -- I'm going to answer that in two parts. Sometimes the new product, particularly if it's a more of an up scale or a higher platform price will allow some of the other traditionally popular price products that have a little bit of wiggle room. Above all, we want to -- we make quality pitch products with high consumer appeal for the masses. We can be -- we like to think that we're relatively price resistant. In most cases we are either the lowest or amongst the lowest priced items, food stuff at a snack bar or at a theme park.

However, when you start to stretch the elasticity of a soft pretzel product or an ICEE drink to the point that it's passed the $3 mark, when mom and dad are going with two and three children to a ballpark or to a leisure and theme park, it'll have some resistance, so we're sensitive to that. We have decent margins, we have good margins, we work real hard to maintain these margins and to drive cost out through efficiencies in the manufacturing process, not by reducing the quality of the product. And we're always going to be sensitive to that.

Okay. You also mention, too, about -- I'd asked last quarter relative to some of the food guidelines in the education area, the academic area. You -- you mentioned you came out with an ICEE that has a juice contact. Is that 100 percent juice contact or just a percentage?

It's 50% juice contact, which is above the requirements, and it's being introduced into the school food service system network as we're speaking right now.

Okay.

Hopefully we'll have these in lots and lots of schools beginning in the end of August. I couldn't give you a count but maybe by this time next year, I can tell you whether our efforts --

Sure. Sure. Does the -- do the pretzel products in that school channel, do they get much resistance? I would think that would be kind of a dietary staple, or have a roughage or fiber content to it.

Exactly right. It -- if anything, the new guideline will -- may be helpful to our core soft pretzel business, the product is baked, not fried. It's all natural. There's no sugar. It's fat free. It serves as a bread replacement or substitute. It has all the character and all the stars of an award winning product line and we just got to carry this message everyday in every way out there.

Okay. One last one, Jerry. We kind of put this low carbohydrate diet, South Beach, and that -- the rest, is that kind of an issue that's dissipated?

After you go through it, you never put it completely to rest because even though we had a record year last year, it impacted us, so we had a couple of new products that we held off with. It took away some attention. We've seen some customers change SKU's and what not. I think right now, it's pretty much in the dormant or quietly returned to -- it's Rip Van Winkle sleeping. What happens with nutrition, you know, and -- and -- at least product crazes every 10 to 15 years. We've always been in the mainstream of good products, with good nutrition. We expect to be there. We're pleased with where we're at today.

Good. You guys always do a bang up job. Thanks Jerry.

Thank you.

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

Hi. You clearly integrated the Snackworks acquisition pretty quickly and you were, maybe a little cautious when you first made the acquisition about how fast that would happen. Would you say it's fair to say that it was accretive already in the most recent quarter?

Mark, you -- this is Jerry. You come out with the right question and the right analysis.

Yeah, we were a little hesitant because we were making that acquisition and we were going through the process with people that were cooperating, but they were not exactly dancing a jig on the floor and cooperating, all right, but we took control. We had a couple of pretty good people, Tom Webber, Bob Bradanna (ph), Jerry Long (ph) took control and we moved -- we had an ambitious goal to completion and we beat that. I said it would be accretive within a year and I was off by nine months. It was accretive within the first quarter, so I think we did a good job there and we've always done a good job with acquisitions, making them, making them at the right value, making them fit and then building a platform with them.

When you look at the top line, when you guys bought Country Home, a little while after that, you had to take down the kind of revenue assumption on that deal because they had lost some customers and through some of their financial troubles. Would you -- have you got any sales synergies from Snackworks, and I assume you wouldn't be losing any customers or perhaps only gaining some customers or distribution. How has the sales synergy worked so far?

I believe there's some sales synergies, and as a matter of fact, if I could just pick up on your comment, Country Home, we also assimilated and integrated in record time and turned it from a negative cash flow into something very positive. It, too, now is beginning to build its revenue sales and revenue base so that -- and hopefully it will continue to contribute and -- to our sales and earnings. No, we haven't lost anybody with this.

We've had a -- we had a attempt to introduce this product line into one particular specialty market, and that was club stores that was pretty much dying on the vine when we acquired it, and we've taken that back to the drawing board and we're looking at a possible introduction into the retail supermarket with -- a product with the Cinnabon pretzel.

Okay. And then onto the margins. The operating margin on the food service, was up 100 basis points up to about 10 and a half percent. Is there anything unusual or things that you would point to that would not be sustainable, that 10 and a half percent level, during your seasonably strong periods? Anything unusual happen in the quarter that would push that higher?

Well, the first thing I would think of would be commodity. The next thing and there's -- we seem to be, at least, (indiscernible) as far as we can see itself, so to answer your question, with the exception of something extraordinarily happening, with a product mix or whatnot, or a plant disruption, I don't see it.

Great. Thank you.

Thank you.

Our final question comes from Allen Caplan. Please go ahead.

Hi. I was just wondering if the integration costs charged to expense for Snackworks were significant in the quarter.

Hi Allen. This is Jerry Shreiber. There was no really integration cost charged. We kind of like do this as we go and there's no one time extraordinary number that's put off there to -- but we moved. We moved quickly. We worked long -- long and hard. Just got it done. So there's no benefit -- I don't think there is. There's no -- there's no one time extraordinary charge sitting there.

Not even for the plant closing?

Not even for the plant closing. We absorbed some -- there's some minor rents, there was some -- I'm not even sure how much there -- but, not even for the plant closing, so the numbers that you get from us is -- are conservatively and fiscally sound and you don't have to worry about a dangling participle being adjusted in the next quarter or next year.

Okay. Thank you.

You're welcome.

We have no further questions.

All right. I want to thank everybody for participating in the call. We look forward to talking to you again next quarter.

Thank you.

Thank you for participating. This concludes today's teleconference. You may now disconnect.