J & J Snack Foods Corp (JJSF) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods Corp. second 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 that this conference is being recorded. I would now like to turn the call over to Mr. Gerald Shreiber. Mr. Shreiber, you may begin.

Good morning, everyone. This is Gerry Schreiber and with me today is Dennis Moore, our Chief Financial Officer; Bob Radano, our Senior Vice President and COO; and Michael Karaban, our Senior Vice President of Marketing.

Welcome to our conference call. I am going to begin with the obligatory statement and then I will go through my narration here and then open it up for questions and comments.

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 day hereof.

Results of operations. Net sales increased 13% for the quarter and 11% for the first half. Adjusting for sales related to the acquisition of Snack Works LLC acquired last March and Hawaii ICEE acquired this past January, sales still increased 10% for the quarter at 8% for the first half.

For the quarter, our net earnings increased by 9% to $4.1 million or $0.22 a share of $3.8 million or $0.20 a share a year ago. For the 6 months our net earnings increased by 14% to $7.1 million, or $0.38 a share from $6.3 million, or $0.34 a share a year ago. Operating income in this year's quarter was impacted by $357,000 of share base compensation expense for expensing of stock options.

Net earnings were impacted by $250,000 or $0.13 per diluted share, excluding the impact of share-based compensation expense recognized this year and not last year, operating income increased 12%. And net earnings increased 16%. Operating income in this year's six months was impacted by 600 (technical difficulties) thousand dollars of share-based compensation expense -- expensing of stock options. Net earnings were impacted by $422,000 or $0.23 per diluted share.

Excluding the impact of share-based compensation expense recognized this year and not last year operating income increased 16% and net earnings increased 21%.

This past quarter was the 20th straight quarter of increased earnings over the prior year. Our EBITDA for the last 12 months reached an all-time high of $68.2 million for 12-month period.

Foodservice. Sales to foodservice customers increased 12% for the quarter and 17% for the six months. Without Snack Works, sales increased a strong 8% for the quarter and 12% for the six months. Soft pretzel sales were up 14% for the quarter and 13% for the six months. 2 and 4% without Snack Works.

Italian ice and frozen juice treat and dessert sales increased 15% for the quarter and 13% for the six months primarily due to a new product introduced - LUIGI'S sherbet cup sold primarily to schools, to school foodservice accounts. (indiscernible) sales were up 49% and 47% in the quarter and six months as we had large sales increases to two primary customers. Bakery sales were up 7% and 14% due mainly to increase sales to our existing private label customers.

Retail supermarket. Sales of product to retail supermarkets increased 7% for the quarter and 6% for the first half. Soft pretzel sales were up 2% and 3% for the period. Sales of our frozen juice and Italian ices were down 6% for the quarter and 7% for the six months.

Unit sales of our MINUTE MAID licensed products and our ICEE products reversed their recent decline as we have introduced several new packages and flavors. Actual dollar sales were down, however, because of the slotting expense required to gain shelf space, which we recognized during the quarter that it had occurred.

Restaurant Group. Sales of our Bavarian restaurant group increased 28% for the quarter and 30% for the year, due primarily to the closing of unprofitable stores. Same-store sales were down about 3% for both periods. We closed two additional stores during the quarter and today have 15 remaining open at quarter end.

We are on track with our strategy and plan to withdraw from this business and, notably, we are (indiscernible) it without a major impact or write down to our business.

ICEE and Frozen Beverages. ICEE frozen beverages and related products sales were up 18% in the quarter and 3% in the six months. And increased and frozen beverage drink machine sales primarily to two customers accounted for virtually all of the overall sales increase in both periods. Excluding ICEE of Hawaii, beverage sales alone were down 1% for the quarter and 2% for the six months.

Actual dollar sales for both periods would have been up except for a change in the way we bill one of our major customers. Managed service revenue for others was flat for both the three and six months period. Service to one customer down about $1.2 million for the six months or representing about 12% of service revenue in both the three and six month period.

Gross profit as a percentage of sales dropped a percentage point from last year. About half of the drop resulted from increased sales of beverage machines, which have a lower margin. The balance of the decrease resulted from a mix of both negative and positive factors - including higher utility commodity costs of about $1.6 million and slotted cost to introduce the new supermarket frozen novelty products. And [plant] efficiencies due to higher volume and pricing including a $779,000 decrease in coupon costs in our retail supermarket business, which had an impact on the positive side.

Total operating expenses as a percentage of sales was .6 percentage points lower in the quarter as our cost remains controlled as our sales volume increased.

Cash spending and cash flow. Our cash and marketable securities balance decreased $6.8 million in the quarter to $70.4 million at quarter end, as we spent $2.4 million on an acquisition and our balance of current liabilities adjusted to a more normal level at second quarter end compared to the end of the first quarter or December period.

Our capital spending was $6.1 million for the quarter. We are projecting capital spending to be about $22 to $23 million this year which we estimate will leave us with free cash flow, operating cash flow, less capital spending of 25 to 30 million. We paid a regular quarterly dividend of $1.4 million on April 6.

We will continue to seek acquisitions, as we have historically done in the past, to supplement our internal organic growth and notably we have made key strategic acquisitions in the past. And more importantly, made them fit and integrated them quickly to further grow our business.

Additional commentary. We are pleased with our internal sales growth of 10% and overall growth of 13% for the quarter. Our internal food service sales book growth slowed a bit but was still a healthy 8% as we continue to have very strong sales growth in several of our product lines.

We are optimistic that we will continue to generate continued strong growth.

Specialty pretzels products continue showing some promise, including our specialty rolls and specialty pretzel bread products for the restaurant industry. We continue to maintain our leadership in our core product business as we expand the boundaries of traditional soft pretzels and complement them with other day parts and menu offerings.

Although our LUIGI'S Real Italian Ice continued to be a strong performer in our retail supermarket segments, it was up 10% in unit volume in the second quarter. In a further effort to resurrect the balance of our frozen novelty business in supermarket, we introduced new flavor varieties in packs of our MINUTE MAID and ICEE Freeze products this past quarter. We are also introducing an exciting new flavor combination - mango and pina colada to our LUIGI'S line.

Also we introduced a no sugar added LUIGI'S Real Italian Ice and a product called Hot Ice, a combination of two specialty ices designed for the fast-growing Hispanic market. We are projecting slotting expense of $2,300,000 to be incurred this year for these special introductions. It is still early yet but they look like they are being promisingly received.

Our Frozen Beverage segment benefited from strong machine sales during this quarter. Although machine sales are our one-time sales for most customers we do generate ongoing postsale income from the servicing of these machines. As we expect to be continually impacted by changes that some of our major customers may be undergoing in their restaurant operations, we will continue to focus our energies on expanding our managed service businesses.

On an operating basis, our Restaurant Group's bottom-line improved by over $100,000 compared to last year. We will continue to pursue closing our (indiscernible) up additional stores as we attempt to reduce or eliminate this business.

Expect [me] to continue to be impacted by higher commodities and utility costs going forward. Our insurance costs have continued to increase due to increased claims under our liability policies. We have increased our focus in this area and expect to be -- 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 benefits for this year may be offset by higher state taxes and a lower tax benefit on a share-based compensation or stock options.

I thank you for your interest and I now turn this back to those in attendance listening for their questions and comments.

(OPERATOR INSTRUCTIONS) Robert Costello.

Hello. One question about the club store business growth versus supermarket. What have you seen lately on a percentage increase basis?

Actually, our supermarket business for the first time in a couple of years is growing at a more northern pace than our club store business although both of them appear to be healthy.

Second question. You mentioned about the new flavor, mango.

Mango and pina colada.

Right. Is there any thought of bringing that ICEE product into the restaurant near the bars where they make a lot of mixed drinks?

Interestingly that you should ask that. Stay tuned.

Yes. Because I mean, I am sitting there at a restaurant yesterday and I saw Lipton with the iced tea and there's obviously a lot of parallels to that flavor with what you make.

Interesting that you should ask that. Stay tuned.

Okay. Thanks.

Thank you.

Mitchell Pinheiro.

Good morning.

Morning Mitch.

Question on your organic growth and as it relates to sort of commodity costs going up. I was wondering if you could talk about what pricing accounted for in the quarter, relative to volume?

I don't have those exact figures. We did have what we call a price adjustment and I believe we had it this past January, February. So there is some benefit in their pricing. We never get it all if you know what I mean and there's also -- we want to be real careful that there's not a corresponding volume decline with pricing but it may be as much as half of that.

So mid single digit type of pricing increase was in this last quarter?

We hit mid single digit. That's what was planned and maybe we got half of what was planned.

Okay and is that something where you sort of promote into the price and burn it into the -- ultimately burn it in this full price? Is that what you're doing?

We haven't promoted into the price yet. When you go to a ballpark and you're paying $3 for a pretzel you're not getting two for four if you know what I'm saying.

Right. I thought maybe you're giving free product and things like that. I didn't know.

We've met the individual customer situations or requests on an individual basis. Some pricing had to be delayed as we had to go through the necessary step building, and getting it through with some of the major customers. But we did get -- we had what amounted to roughly a 5% increase. A little bit less. And I would suspect right now that if we got real 3% into price increase so far, all right? Which would be roughly [6], 60% and the rest will come from organic sales volume. Now we have some pricing.

For example our school pricing and our [bar head] pricing in there are set a year in advance. So it's too hard to enter -- so some of that will not be affected until come June or September.

Are there any other pricing actions planned for the rest of this fiscal year?

Well, we're looking at our costs even though we remain real efficient and real good producers, there are certain things that we use a little bit of sugar in some of our products. Not in pretzels, but in some of our other products and sugar costs have literally -- they are up about 80%. We are looking at it again. And so, we have not made a decision yet other than to decide.

For the full year, would you expect -- what do you expect to happen to the gross margin for the balance of the year? Excluding the impact of the machine sales?

I don't think there will be any impact. If anything this is the first time in a while, I think, that our gross margin negatively tracked down. No matter how many basis points, we are looking to improve that.

In terms of the slotting I think you said 2.3 million in slotting for your frozen (indiscernible) What was the slotting in this quarter?

About 600,000. 5 or 600,000. Already absorbed in the cost we take, you know. We expense the slotting when it occurs. It's an offset to sales. It's an offset to sales and we may in years past we've estimated slotting and for one reason or the other it's gone a little higher, it's gone a little lower. It looks like this one may go to the full authorized amount because we're getting pretty good acceptance. The benefit that we did get out a couple of these products at one of our major customers who are slotless. Their name will remain unsaid -- but they've excepted a couple of these products and there's no slotting fees in there.

So therefore we are looking to have a little more volume than what was originally projected way back when my slot maskers were computing sales.

And in terms of sort of just longer-term, looking at your margin picture, does -- where do you think this business -- you know you've been like in the nine area. Where do you think this business can get to?

Higher.

Okay. But I mean -- is this you know -- what do you think? I mean is this a double-digit margin business?

You know it would depend on a couple of factors. If we had a little you know -- perhaps if we weren't as seriously impacted by some of these commodity costs in there. But it's our goal to drive these into the double digits. Now if I told you and I said 15 that's not going to be practical nor possible this year. I think if we can get cut 10.5 and those kinds of numbers and then we could inch up higher and higher.

Which is the business of that that you believe has the most opportunity for margin expansion? Which one of your segments?

Our Foodservice business is a strong healthy, viable business. That's been growing both well balanced organically and the acquisitions that we've made have complemented that well. I want to get more out of the retail supermarket business and I'm optimistic that we are going to reach our budgeted financial goals this year.

How about [FCB]?

FCB has some good things happening there. We expect that FSB will have a record year. We are also looking at -- you know we just made a little acquisition that will help things a little bit; and we are looking at a couple of other things that would help things a little bit more. A little bit more. A little bit more and a little bit more. It's like three singles in an inning. They're going to run.

Okay.

Thank you Mitch.

(OPERATOR INSTRUCTIONS) Robert Costello.

Yes. One other question on the distribution. You mentioned two customers on the frozen machine side helped you out. Can you give us an idea of how the [sea] store business is doing overall. And what do you see as market expansion opportunities with your -- you pick up the Hawaiian franchise?

I will answer that in two parts. You mentioned customers in your question but you didn't ask who they were but then you nail them. They are related to the sea store and they are related to the petroleum industry. So, yes, that business is expanding for us, for our ICEE business. And more so, it offers us some significant upside for our snack food business, because we are trying to tie in some of that relationships between our ICEE and frozen beverage people in business with our snack food side. So we are pleased that we are making progress on that.

As far as the Hawaii business, we owned that in years past and we sold it to someone that we had a buyback provision in there. We've exercised it now after, I guess, 11 years later. We had grown the business rather nicely almost doubled it and we think there's plenty of potential growth in Hawaii and further expanding it to the Pacific Rim.

ICEE itself has a -- we have a very potentially big opportunity that we are handling in a small way. We have begun to test the product and the equipment with a company out of China. And it's very very early but everybody is very very happy. Sometimes people are happy with a prospect once you get the project going in there things happen. But we have us a potential licensing opportunities that can expand our ICEE business on a licensed basis significantly.

Can you give just a brief like market share like East Coast, West Coast where you stand? Like a percentage of the stores that are sea stores, how many you have ICEEs in them?

ICEE is either in or somehow (indiscernible). ICEE is either in or performing some type of service revenue, managed service equation in about 30,000 stores nationally. Of that I would say upwards of half are convenience stores.

Thanks.

Thank you.

(OPERATOR INSTRUCTIONS) We are showing no further questions at this time.

This is Gerry Schreiber again. I want to thank everybody for participating in the second quarter conference call. We look forward to talking to you again next quarter.

Thank you. Ladies and gentlemen, this concludes the J&J Snack Foods Corp. second quarter 2006 earnings conference call. You may disconnect and thank you for participating.

I guess we can sign off now, right?