J & J Snack Foods Corp (JJSF) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods Corporation first-quarter 2006 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 will now turn the call over to Mr. Gerald Shreiber. Mr. Schreiber, you may begin.

Good morning, everybody. I'm Gerry Schreiber, and I want to welcome you to our quarterly conference call. With me today is Dennis Moore, our Senior VP and Chief Financial Officer, Bob Radano, our Senior Vice President and Chief Operating Officer, and Michael Karaban, our Senior Vice President and Marketing Manager, or Vice President of Marketing.

Let me begin with my obligatory statement and then I will get into the results of operations. 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 reflects 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 10% for the quarter. Adjusting for sales related to the acquisition of Snackworks, LLC acquired last March, sales increased 7%. For the quarter, our net earnings increased by 21% to $3.0 million or $0.16 a share from 2.5 million, $0.13 a share a year ago.

Operating income in this year's quarter was impacted by $260,000 of share-based compensation expense; that's the expensing of stock options. Net earnings were impacted by $171,000 or $0.01 per diluted share. Excluding the impact of share-based compensation expense recognized this year and not last year, operating income increased 22% and net earnings increased 28%.

This past quarter marks the 19th straight quarter of increased earnings over the prior year. Our EBITDA, earnings before interest, taxes, depreciation and amortization, for the last 12 months reached an all-time high, again of $67.3 million for a 12-month period.

Foodservice -- continued strong performance by our foodservice business was largely responsible for our overall improvements. Sales to foodservice customers increased 21% for the quarter. Even without the benefit of the Snackworks acquisition, sales increased a whopping 16%. Soft pretzel sales alone were up 23% in the quarter, 7% without Snackworks. Italian ice and frozen juice bar and dessert sales increased 10% for the quarter, primarily due to a new product, Luigi's Sherbet Cup. Churro sales were up 45% in the quarter, as we had significant sales increases to three customers. Bakery sales were up 20%, due mainly to increased sales to our existing private-label customers.

Retail supermarkets -- sales of products to retail supermarkets and groceries increased 4% for the quarter. Soft pretzel sales were up 4%. Sales of our frozen juices and Italian ices were down 9% for the quarter, which seasonally is our slowest quarter, being winter months. Sales of our Minute Maid-licensed products and our Icee products continued their recent decline due to a general business decline and loss of distribution.

The Restaurant Group -- sales of our Restaurant Group decreased 32% for the quarter due to decreased mall traffic and a continued closing of our unprofitable stores. Same-store's sales were down about 4%. We closed one additional store during the quarter and as of quarter's end, we have 18 remaining open, as opposed to 57 some three years ago.

Icee and frozen beverages -- Icee and frozen beverage and related products sales decreased 10% in the first quarter. Beverage sales alone decreased 3% for the quarter due mainly to a change in pricing and an accounting change with a major customer.

Service revenue for Others was down less than 1% in the quarter. One service customer was down $649,000, which was about 12% of last year's sales. Sales of machines dropped $2.3 million, as sales last year were unusually high. Overall profitability in the quarter was impacted by higher general costs, compared to last year, compounded by the decline in sales.

Consolidated -- gross profit as a percentage of sales was essentially unchanged from last year. Higher volume, mix and pricing offset increases of $600,000 in unit commodity costs, 500,000 in plant utility costs, and 250,000 in insurance liability costs. Total operating expense as a percentage of sales was 0.1 percentage point lower in the quarter but distribution expenses increased about 0.5 of a percentage point because of high fuel and outside carrier trucking costs.

Capital spending and cash flow -- our cash and marketable securities balance increased $7.2 million in the quarter to $77.2 million at quarter end, as we continue to accumulate and generate cash flow in excess of our operating requirements, indeed a healthy sign. Our capital spending was $4.7 million for the quarter. We are projecting capital spending to be about 20 to $22 million this year, which we estimate would leave us with free cash flow, operating cash flow less capital spending, of 27 to $32 million.

Our Board of Directors declared a two-for-one stock split, which was distributed on January 5, 2006. A cash dividend of $0.075 a share was also declared and payable on January 5, 2006. The cash dividend was a 20% increase from the previous rate of $0.125 per share, which was pre-split.

Assuming no acquisitions this year, and we are busy working on some, or a stock buyback, we would expect to end the year with about $95 million in cash and marketable securities. However, we will continue to seek acquisitions to further supplement our internal growth.

Some other points of comment -- we are satisfied with our internal sales [growth] of 7% and overall growth of 12% for the quarter. As a matter of fact, we are slightly pleased. Although our internal foodservice sales growth accelerating this quarter to 16%, we cannot, in all reality, expect this rate of increase to continue. The increases, though, were spread among all of our product lines and our customer base, so we are optimistic that we will continue to generate strong growth. Although our Luigi's Italian ice continues to be a strong performer in our retail supermarkets segment, in an effort to resurrect the balance of our frozen novelty business in supermarkets, we are introducing new varieties and packs of our Minute Maid and Icee products this coming season. We are also introducing an exciting new flavor combination, mango and pina colada, to our Luigi's line. We are projecting a [sliding] expenses of $2.3 million for these products introductions. We are hopeful that they will be successful.

Our frozen Icee and our frozen beverages segment was socked as sales declines went throughout all of the business. Coupled with higher costs need to support this business during its seasonally slow period, operating income dropped by $1 million in the quarter. We will continue to focus energies on expanding our managed service business and deal with the issues as our major customers -- as they make changes to their snack bar operations.

China -- over the past year, we have been [ceding] possible opportunities for licensing for our Icee brand in China. We are happy to advise a test location has been installed with an interested license partner of repute and size and we are pursuing multiple opportunities throughout the country. We hope to be able to report further good news on this as the year moves forward.

On an operating basis, our Restaurant Group's bottom-line performance was roughly the same as last year. We will continue to pursue closing or licensing of additional stores as we eliminate this business losses. We expect to be somewhat impacted by higher commodities and utility costs going forward. Our insurance costs have continued to increase due to increased claims under our liability policies. However, we have increased our focus in the area, and we expect to see a benefit going forward.

Our estimated income tax rate remains at 38% compared to last year's full-year rate. We will refine this rate as we analyze the benefits of the American Jobs Creation Act of 2004. However, much of the benefit for this year may be offset by higher state taxes.

We continue to make progress with our robotics installation and continue to develop line extensions and new products to grow our sales.

I thank all of our shareholders and our employees for their continued support and dedication. Thank you for your interest.

I will entertain any questions from the field.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Joe [Kineusel].

Good morning, guys. This is Joe Kineusel; I am pinch-hitting for Mitch Pinheiro this morning.

You mentioned pricing and it seems like you benefited from pricing in the quarter. But how much did that add to sales growth and in what lines of business?

Well, the pricing I mentioned -- I'm sorry, this is Gerry answering your question. The pricing I mentioned, we benefited very little in the quarter although some of them might have been in balance with product mix. We did take a little pricing at the quarter's end, like January 1, and we may have some benefit going forward.

Okay. The foodservice growth, 20% or 21%, 16% organically -- that was better than what we were looking for, and you said that we cannot expect that rate to continue. Should we expect the rate to go back to the traditional rates there?

Well, I don't know what traditional rates are, but we are very pleased with the strong, double-digit increase in the quarter, and let's assume that it was even adjusted for acquisition at 16%; we are driving our people based on that number, that if we did it before, dammit why can't we do it again?!

Okay. Is there any way to quantify the impact of the NHL season this year?

Well, obviously, teams are playing and then there's 30 teams, I believe, and they are all playing 40 games at home. We are having more opportunities to sell products at another venue that we didn't have last year. Games are shorter. I don't know if anybody realizes it, because of the rules change, the games are shorter, which probably takes away a little bit of selling time. We look at those kind of things as we look at our business. But it probably will add somewhere between $0.01 and $0.02 for the year.

Okay. In the frozen carbonated beverage service business -- I'm sorry if you mentioned this -- but where there any loss of customers and will the business become -- or will the business become less predictable going forward?

There were no loss of customers, but there was one customer or rather a sizable customer went from gross pricing toward net pricing. Even though our gross margin was not impacted, it did put a little bit of lid on our sales, on our topline sales level. But in looking beyond that, our sales actually grew with this customer.

The other two factors there is that we continue to be impacted by what was once our largest customer, Kmart, as they move forward with their new strategy. But we've had significant declines in sales there, double-digit significant declines, over a long-term period. I would define long-term now because we are probably in the seventh or eighth year of that. One of our other large customers has been closing their own snack bars in favor of leasing to others, including people like Subway and Blimpie's and McDonald's. Even though we are getting the locations in the new, leased restaurants within the customer, sometimes there is a lull of upwards to -- from 60 days to 120 days as these snack bars are closed and remodeled and what not. So that's been a little bit disruptive in there. But overall, there's a lot of good, positive signs with our Icee and our beverage business -- not alone in beverage sales but along the managed service end also.

Okay, thank you. I just have one more question. If Roger Clemens doesn't sign with anyone, does that in any way impact your relationship with him as spokesperson?

No, it does not. As a matter of fact, you know, we wish Roger the best and rumors are abound where he's going and -- but if, for some reason, he ends somewhere other than Texas, which could be if not Houston, Texas or maybe into New York, I think regardless anybody that puts up the stats he does and All-American icon like he is and doing it at 44 years old, being a real statesman and a patriot and a family man I think brings value and a halo over our product and our company. We are just very, very pleased with the relationship.

I agree. If you could put in a good word for Philadelphia, we could really use him on the Phillies; I would appreciate it!

You know, I would agree with you. We just have to probably convince the owners and the managers of the purse strings there that -- of his worth and net value.

Yes, good luck with that!

Thanks. (LAUGHTER)

[Devern Pesci].

My name is [Devern]. I'm with Citigroup. I'm not an analyst; I'm just a broker with them, but I have clients in your stocks and I followed them for quite a few years.

Really?!

Yes, I have. I actually wrote a report but no one really cares (LAUGHTER).

You wrote a report and no one cares!

Absolutely not. I mean, I told them how in the last five years were increased earnings and so on and so forth, but I haven't really gotten anybody's attention.

You've got real instincts. I would walk in there with that report again and just lay it down on somebody's desk!

I try, I try! Actually, the question I have is I want to allude to something in the annual report that you expected higher utility costs, which might have a significant impact on 2006 operating results. I just wanted to find out if that's really a major concern, because it seems like it kind stood out a little bit to me and that your expectations were for a significant increase in 2006. Could you kind of comment on that?

Well, we are having higher energy costs. These range from the basic functions of making our product, freezing it and storing it, into heating the offices and what not. It is an a significant increase across all channels of our structure here. However, we are good producers and we are challenged by these costs to become more and more efficient. I think, if you measure us by our operating income and by our gross margins, you'll see that's the little engine that could, that we are equal to these challenges. So, we continue to have efforts initiated across the manufacturing group, distribution group and engineering group in there, so that even with these increased costs in there, we will make -- we will establish and maintain our profit objectives.

Great. Can I have a follow-up question on that? You mentioned also something about your outside carrier trucking costs.

Right.

does that -- do you have any kind of relationship like with a Sysco or a company like that distributing your products?

Yes, we are in I want to say all of the Sysco houses, all 60-some of them throughout the country, as well as other companies like Sysco, you know, and we price our products to them on a delivered basis, which means we ship to them, to their operating warehouse or distribution company, with a net cost delivered. So to the extent that our costs go up, trucking costs -- and they have. You know, there are a lot of factors, the price of fuel, the Katrina, the availability of trucks, the competition between others that needed these trucks -- but to the extent that our costs go up, that is indeed a layer of expense on top of our selling price and all the other costs involved.

They are actually doing more new redistribution centers across the United States. Will that have any kind of an effect on food companies like yourself?

We are in them. We think the redistribution probably will be a good thing. I think there's only a very few that they have set up right now, and we partner with our major customers. Sysco is -- who handles our product for themselves and others, is a good example of that. So we are looking forward to participating with Sysco in the redistribution centers.

Thank you, Gerry. I appreciate your comments.

Ron Strauss.

Ron Strauss from Pekin, Singer, Strauss Asset Management. Gerry, good quarter. I remember it wasn't so long ago that it was a toss-up as to whether or not you were going to breakeven in the first quarter.

(technical difficulty) -- so cold. All right? And with Icee being such a big part of our first quarter's performance in there, it was oftentimes difficult. But you've got a good memory, Ron, and you also have good instincts.

Let me ask you this, Gerry -- did I hear you imply that 7% internal growth that you achieved in the first quarter is one that you think is sustainable over a three to five-year period of time?

That's our goal.

What areas would lead that charge, in your opinion?

Well, we've always been a strong foodservice company, and we've always been kind of like at the cutting edge of growing that with niche products in niche markets. We continue to grow our school foodservice business, and that's a good business for us. I mean, we could talk about the (indiscernible) population shifting, and we could talk about people aging, but every year, our population growth there is a couple percent more, they are all in school and some of them are in the school not just a single lunch meal but throughout the day. Most of our products are approved on the children's nutritional school lunch program in there, which means that we don't have -- we don't face as many of the issues as some of the other companies might that have too much sugar or cola or what not. But the pretzels and our juice bars in there are growing nicely with schools, and we expect that to be a continued part of our future growth.

From a cost-pressure standpoint, do you see the environment a little bit easier to raise prices in today versus a few years ago, or is it tougher in light of the consolidation that's taken place in the retail industry?

It's a little bit easier for no other reason because everybody has been impacted by things like -- I mean, let's just take energy, all right? You know, we used to look at energy as a minor part of our manufacturing expense, and quite frankly, right now, you know, you look at -- you know, you've got your raw materials and you've got -- I mean energy is chasing some of the other -- it's almost an ingredient now. I guess everybody throughout the country, perhaps throughout the world, are all faced with escalating energy. That's aside from ingredients, costs and what not in there. Sometimes energy can be a component of ingredient costs, for example with packaging and with plastics and what have you. But overall commodity costs, they will go up, they'll go down, we will manage that in there, but the energy costs, as well as insurance and particularly medical insurance for our employees, are costs that we have been -- that we're going to have to kind of deal with and there's not too much that we can do except try to manage our efforts a little bit better and get a little wiser.

Who is your top two customers, now, Gerry?

Well, to begin with, I don't think we have a customer that's more than about 7, 8%. We've got a -- (multiple speakers) -- if I through out the top ten names, it would include people like of course Wal-Mart and Costco and Sam's would be part of Wal-Mart, and Wawa, Shop Rite as a supermarket in there, but we are pretty well-balanced. I don't think we have -- certainly we don't have any customer that's more than 8%, and I don't think that any of our ten top customers are more than 20, 25%. But we're well-balanced seasonally and we are well-balanced overall with our customer and product mix.

Let me ask you this, Gerry -- with a projected $90 million in cash on your balance sheet --.

95.

95 million in September and obviously considerable borrowing power, is it possible that you might take out a real significant acquisition now, or are you going to continue to do these bite-sized deals that just add incrementally to you?

We would look at opportunities that make sense for our business and enhance shareholders value. As you are aware -- and you, Ron -- we go back to the late '80s and we've always operated within niches or by little product lines, and we could make an establishing niche and establish competitive barriers and what not. So, we will continue to address our focus on these areas, but there are such things available, and we're looking at things, you know, as we speak. I'm not going to go out and bet the store and with all due respect, I'd like to see our growth continue at the area that it's been in there and I think, between new products, some of our organic growth, our line extensions and acquisitions that we will be able to get there.

I'm particularly pleased that our retail supermarket business, particularly on the pretzel side, has shown some recent life in the past two years. We've got to continue to expand that category and perhaps improve in some of the other categories that we are in. But to answer your question, yes, we're looking at acquisitions. I would be careful, though, not to get too far off of what our central focus is.

Okay, thank you very much.

You're welcome. Thank you.

(OPERATOR INSTRUCTIONS). At this time, we have no further questions.

Again, I thank everybody for participating in this conference call and I look forward to talking to you again. Bye, now.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.