J & J Snack Foods Corp (JJSF) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods fourth 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 will not turn the call over to Mr. Gerald Shreiber. Mr. Shreiber, you may begin.

Good morning, everyone, and thank you for attending our conference call. My name is Jerry Shreiber. I am President and CEO of J&J Snack Foods. With me today is Dennis Moore, our Senior Vice President and Chief Financial Officer, and [A. Bob] Bob Radano, our COO and Senior Vice President.

Let me begin with the obligatory statements, which I'll read very quickly, and then I'll get into results of operations. Forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operations. Net sales increased 19% for the quarter and 13% for the year. Adjusting for sales related to the acquisition of Snack Works LLC acquired in March of 2005, ICEE of Hawaii acquired this past January, and Slush Puppie acquired at the end of May in 2006, sales increased 14% for the quarter and 10% for the year. This year's fourth quarter had 14 weeks compared to 13 weeks last year, and the year had 53 weeks this year compared to 52 last year. The additional week added about 7% to sales for the quarter and 2% for the year.

For the quarter, our net earnings increased by 16% to $11.5 million, or $0.61 a share, of $9.9 million or $0.53 a share a year ago. For the year, our net earnings increased by 13%, $29.5 million, $1.57 a share, from $26 million or $1.40 a share from a year ago. Operating income in this year's quarter was impacted negatively by $337,000 of share-based compensation expense, expensing of stock options, and net earnings were impacted by $289,000, or $0.015 per diluted share. Adjusting for share-based compensation expense that would have been recognized in 2005, if statement 123(R) had been followed, operating income increased 21%, and net earnings increased 20%. Operating income for the year was impacted by $1,304,000 of share-based compensation expense, or stock option expense, and net earnings were impacted by $988,000, or $0.052 per diluted share.

Adjusting for share-based compensation expense that would have been recognized in 2005, if statement 123(R) had been followed, operating income increased 16% and net earnings increased 18%,

Let me just repeat that for a moment. In a year, in which we had to contend and wrestle with $4.5 million of higher commodity costs, $2.3 million of higher energy costs to run our manufacturing facilities, and $1 million of higher gasoline and fuel costs to run our vehicles and trucks, our earnings increased 18% after adjusting for the share-based accounting charge. And we took an impairment charge of $1.2 million, or $0.04 a share, in the third quarter this year for the robotic packaging system. Without this charge and the accounting change, our net earnings would have been up 21%.

This past quarter marks the twenty-second straight quarter of increased earnings over the prior year. Our EBIDTA, earnings before interest, taxes, depreciation, and amortization for the last 12 months, reached an all-time high of $72.8 million for the 12-month period.

Food service. Sales to food service customers increased 18% for the quarter and 14% for the year. Without Snack Works, sales increased a strong 12% for the year. Soft pretzel sales, one of our core products, were up 13% in the quarter and 14% for the year, set percent for the year without Snack Works. All the fourth quarter pretzel sales increase was from internal growth. Italian ice and frozen juice bar dessert sales increased 20% for the quarter and 12% for the year, due in large part to expansion of market and a new product, Luigi's Sherbet Cups, sold primarily to school food service.

Churro sales were up 45% and 50% in the quarter and the year, as we had significant sales increases to one customer. Bakery sales were up 20% for the quarter and up 12% for the year, due mainly to increased sales to our existing private label customers. Bakery sales in the third and fourth quarter were impacted by the loss of one account which accounted for $2.1 million in sales in last year's third and fourth quarter, respectively. But we made that up plus some.

Retail grocery supermarkets. Sales of products to retail supermarkets increased 15% for the quarter and 11% for the year. Soft pretzel sales were up 6% and 3%, respectively. Sales of our frozen juice bars and Italian ices were up 23% for the quarter and 18% for the year. Unit sales of our Minute Maid licensed product and our ICEE products were up 55% in the last six months of the year, as we have introduced several new packages and flavors. Unit sales of our Luigi's Italian Ice products continued their strong performance, up 11% for the quarter and 10% for the year.

Restaurant group. Sales of our restaurant group, as planned, decreased 21% for the quarter and 28% for the year, primarily to the closing of unprofitable stores. Same store sales were down about 2% for the year. We closed one additional store during the quarter and had 13 remaining open at quarter end. We are on track with our strategy and plans to withdraw from this business, and we've been handling it without a major impact or write-down to our business.

ICEE and frozen beverages. Frozen beverage and related product sales were up 22% in the quarter and 11% for the year. Excluding Hawaiian ICEE sales and Slush Puppie sales, frozen beverage and related product sales were up 8% for the quarter and 5% for the year, with increased frozen beverage drink machine sales accounting for about two-thirds of the year's increase. Excluding ICEE of Hawaii and Slush Puppie, beverage sales alone were up 6% for the quarter and up 1% for the year.

Managed service revenue for others was up 14% for the quarter and 5% for the year, even though service to one customer was down about $1.6 million for the year, or about 6% of service revenue for the year. Slush Puppie and ICEE of Hawaii contributed $5.5 million of sales during the quarter and $8.3 million of sales for the year.

For the quarter, gross profit as a percentage of sales decreased 1.27 percentage points, or 1.27 basis points, from last year, and was down 0.43 of a percentage point for the year. Factors causing the decline during the quarter were higher commodity impact costs of $1.5 million, utility costs of $600,000, and slotting expenses in connection with our retail grocery market entries of $845,000 to introduce the new novelty products, along with lower unit sales in our base ICEE and frozen carbonated beverage business.

Total operating expenses as a percentage of sales was 1.19 percentage point lower in the quarter and 0.37 for the year as our costs remained controlled as our sales volume increased, even though our distribution costs continued to be impacted by higher fuel and third-party-related trucking costs.

Cash spending and cash flow. Our cash marketable securities balance increased $17.7 million in the quarter to $76.6 million at year end as we continued to generate strong free cash flow. Our capital spending was $19.7 million for the year, a little bit less than planned. Our free cash flow, defined as operating cash flow less capital spending for the year, was $35.2 million, or $1.87 per diluted share. We paid a regular quarterly dividend of $1.4 million on October 5, 2006.

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

Some additional commentary. We are pleased with our internal sales growth of 14% and overall growth of 19% for the quarter. Our internal food service sales growth was a very healthy 18% as we continued to have very strong sales growth in several of our product lines, with each of our four major product lines having double-digit sales growth for the year. And we have a nice head start for this year. We are optimistic that we will continue to generate strong growth. Specialty pretzel products that are showing some promise includes rolls and other specialty products to restaurants and white dinner tablecloth locations. We will continue to maintain our leadership in our core product business as we extend the boundaries of traditional soft pretzels and complement them with other day product menu offerings.

Although our Luigi's Real Italian Ice continues to be a strong performer in our retail supermarket segment--it's up 11% unit volume in the third and fourth quarter--in an effort to rejuvenate the balance of our frozen novelty business at supermarkets, we introduced new flavor varieties and packs of our Minute Main and ICEE products this past year. We also introduced exciting new flavor combinations, mango and pina colada, for our Luigi's line. The result was a 16% increase in overall case sales of our frozen novelties for the supermarket trade during the third and fourth quarter. We also introduced NSA, a no sugar added, of Luigi's Italian Ice, which is showing certain promise. Slotting expense of $2,340,000 was incurred this year for the product introduction. Slotting expense is expected to be a little bit less, or about $1.5 million, in 2007 than in 2006.

Our frozen beverage segment benefited from strong machine sales during the past year. Although machine sales are one time to most customers, we do generate ongoing post-sales income from the servicing of these machines. And as we expect to be continually impacted by fundamental changes that some of our major customers may be undergoing in their snack bar and restaurant operations, we will continue to focus our energies and strategy on expanding our managed service business, which had a 14% sales increase in the quarter after being flat for the first three quarters.

Drink machine sales and managed service together accounted for 30% of total frozen beverage segment sales for the year. Slush Puppie was acquired in the end of May. Integration into our business is being completed, and it was slightly accretive in our fiscal year 2006. Although the business model of the Slush Puppie differs slightly from our ICEE business because of its use of independent distributors, we believe that it is an excellent fit because of how the Slush Puppie frozen beverage products complement our ICEE beverage products.

In our operating business, our restaurant group's bottom line improved by about $60,000 compared to last year for the full year. We will continue to pursue closing or licensing of the remaining stores as we attempt to reduce or eliminate this business losses.

We expect to continue to be impacted by higher commodities and utility costs going forward. Our liability and group health insurance costs were down for the year, as an increased focus on controlling these costs and reducing incidence of accidents has produced some benefit. However, we do not expect to see the same magnitude of decreases in these costs going forward.

Our income tax rate increased to 38.7% from last year's rate of 37.7%. The lower tax rate benefit on share-based compensation accounted for approximately 40% of the rate increase.

I thank you for your continued interest, and I look forward to hearing some of your questions and comments.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Mitchell Pinheiro. Please go ahead.

Good morning. This is Martha [McKitess] filling in for Mitch today.

Good morning, Martha.

Hi, how are you? Would you be able to be more specific about the factors in your third quarter gross margin decline? For instance, how much did raw materials cost to you versus last year or utility costs?

I think I may have commented on that. You mean our fourth quarter.

Correct.

Product mix, fuel, commodities, was probably--Dennis, what's the expense maybe? It was a combination of factors, Martha. All of them which we were able to take a peek as they came head up on the horizon and we wish we didn't have them, but I thought, I think that we were able to manage the impact of them fairly well.

Right. Will you be planning on taking any price increases next year to offset these costs?

That's something that we're looking at, and I think the sales bent that we do, we want to make sure that we maintain how our sales trends going forward as we have a little bit of momentum. We might not want to do too much to shock that.

Right. So you're not sure when this may be or what segment.

We're looking at the different product categories to evaluate what has happened in the past year or so with some of these commodity increases, and we're still in the process of evaluating that.

Okay, great. And what are your capital spending plans for next year, if any?

Probably a little bit more than this past year. We're doing some things in both the, in our frozen novelty plant and our West Coast bakery facility to make our plants even more efficient and expand and extend some of our product lines, so we'll be about 20, somewhere between $24 million and $26 million for next year.

Okay, great. Thank you very much.

You're welcome.

Congratulations on a great quarter.

Thank you.

[Operator Instructions]. We have no further questions at this time.

Well, I want to thank everybody for attending the conference call, and we look forward to speaking with you again next quarter and continuing this continued good news reporting.

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