J & J Snack Foods Corp (JJSF) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods first quarter 2007 earnings conference call. At this time, all participants are in the 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. Gerry Shreiber, President and CEO of J&J Snack Foods. Mr. Shreiber, you may begin.

Good morning, everyone, and thank you for participating in our conference call today January 26. With me today is Dennis Moore, our Senior Vice President, Chief Financial Officer, and Bob Radano, our Senior Vice President and Chief Operating Officer.

I will begin with the customary obligatory statement and then I will talk about the quarter and I will be glad to entertain any and all questions and comments from those in the field.

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 date hereof.

Results of operations. Net sales increased 5% for the quarter. Adjusting for sales related to the acquisition of ICEE of Hawaii acquired last January and SLUSH PUPPIE acquired this past June, sales increased approximately 2.5%. For the quarter, our net earnings increased by 26% to $3.8 million, $0.20 a share, from $3.0 million, $0.16 a share, of a year ago.

This past quarter marks the 23rd straight consecutive quarter of increased earnings over the prior year. Our EBITDA -- Earnings Before Interest, Taxes, Depreciation and Amortization -- for the last 12 months again reached an all-time high of $74.2 million for a 12-month period. The momentum continues. Period.

Foodservice. Sales to Foodservice customers increased 1% for the quarter. Soft pretzel sales were up less than 1% in the quarter. Italian ice and frozen juice bar and dessert sales increased 14% for the quarter primarily due to sales of LUIGI'S Sherbet Cups, a product introduced about 15 months ago, and expanded sales into new business channels.

(technical difficulty) sales were up 7% in the quarter as we had large sales increases. Again bakery sales were down 2% due to reduction of some of our private-label business and lower sales to school food service accounts as menus reflect changing nutritional guidelines and requirements.

Retail supermarkets and grocery stores. Sales of products to retail supermarkets increased 15% for the quarter. Soft pretzel sales were up 10% due to a combination of volume and pricing. Sales of frozen juice bars and Italian ices were up 23% for the quarter. Sales of our Minute Maid licensed products and our ICEE products improved as we introduced new products late last spring.

The restaurant group. Sales of our restaurant group continued as planned, decreased 22% for the quarter due to the continued closing of unprofitable stores. Same store sales for the 13 remaining stores were up about 1%.

ICEE and frozen beverages. Frozen beverage and related products sales increased 15% in the first quarter. Excluding the impact of Hawaii ICEE and SLUSH PUPPIE, sales were up 4%. Beverage sales alone were up 14% for the quarter but up only about 1% without the acquisition.

Gallon sales were down about 5% in our base ICEE business. Service revenue for Others was up 23% in the quarter with half of the increase coming from two customers.

Overall profitability for the quarter benefited from a reduction in insurance costs, which more than offset a seasonal operating loss of approximately $250,000 for SLUSH PUPPIE.

Consolidated. Gross profit as a percentage of sales increased to 30.88% from 30.50% last year. Lower costs of $900,000 in insurance and utilities and pricing offset higher some commodity costs of about $1.5 million.

Total operating expense as a percentage of sales was .25 percentage points lower in the quarter as we were able to control costs, especially in light of our sluggish volume. Our operating income was impacted by $600,000 or $0.02 a share of costs for our national sales and management meeting in celebration for our 35th anniversary year. We did not have a similar meeting in fiscal year 2006.

Our cash and marketable -- capital spending and cash flow. Our cash and marketable securities balance decreased $1.5 million in the quarter to $75.2 million at quarter end. We made a payment of $2.8 million toward our Hom/Ade Foods acquisition which we acquired this past January. Our capital spending was about $6 million for the quarter. We are expecting, projecting capital spending to be about $24 to $25 million this year which we estimate will leave us with free cash flow, operating cash flow less capital spending of about $33 million.

A cash dividend of $0.085 this year was declared by our Board of Directors and paid on January 4th, 2007. Cash dividend was a 13% increase from the previous rate of $0.075 a share.

We are continuing to seek acquisitions to complement and supplement our internal growth. Although there is nothing we can say for sure but we are in the preliminary stages of advanced evaluation on a couple of matters.

Commentary. Although we are disappointed with our internal sales growth of 2.5% for the quarter, we are confident that it was abbreviated in nature. We are facing a continuing challenge with some of our products, particularly cookies in our school food service business, because of the nutritional regulations and concerns regarding calories and fats. Our frozen juice bar and dessert sales should continue to be strong in the school food service sector as we began to emphasize growth in school food service as well as the health services sector.

We anticipate continued growth in our retail supermarket segment in pretzels and especially in frozen juice bars and ices as the new varieties of our Minute Maid branded license product introduced last spring appear to have been very well received by consumers. Additionally we are hopeful of expanding sales of our frozen juice bar and ices under private-label brands this year. To that end, we have several commitments which should begin kicking in late in the second quarter.

We acquired Hom/Ade Foods Inc. on January 9th, 2007. This biscuit and dumpling manufacturer distributor is expected to produce sales in excess of $30 million annually, selling primarily to the grocery and supermarket trade. Located in Pensacola, Florida, the business will be run by Greg Lowry, current President and CEO of Hom/Ade Foods Inc.

Greg has brought industry experience including management and leadership positions with companies such as Frito-Lay and Tropicana and a major brokerage sales and marketing company.

Our frozen beverage segment experienced a 5% gallon decline in our base ICEE business. We expect to continue to be challenged by our major customers as they make changes to their Foodservice operations. We also expect to be equal to those challenges.

Our service revenue to others continues to grow, up 23% in the quarter, and this is a key component of our growth plans going forward. SLUSH PUPPIE had a seasonal slow period as expected, as we integrated and prepare for our first full selling period. On an operating basis our restaurant group's bottom-line performance was better than last year although the numbers were small. We will continue to pursue closing or licensing of additional stores as we fulfill our strategic plan to reduce or eliminate losses from this business.

We expect to continue to be impacted by higher commodity costs for the foreseeable future. Our liability and group health insurance costs were down for the quarter as our increased focus on controlling these costs and reducing incidents of accidents has produced some measurable benefit. However, we do not expect to see the same magnitude of decreases in these costs going forward.

Energy and utility costs for the quarter declined as well. And likewise we do not expect to see future declines to be as sharp. Our estimated income tax remains at 38%. We planned on supplementing our organic growth and to that end, we are highly confident that we will be increasing the number in the first quarter significantly going forward this year.

I thank you for your interest. And I open it back up to those in the field for any questions or comments.

(technical difficulty) Are we there? Hello?

Pardon me. This is the operator.

This is Gerry Shreiber. I have turned it back to you.

Okay. You can hear me now, correct?

Yes.

(OPERATOR INSTRUCTIONS) [Brian Rafn].

Can you give us a sense -- you talked kind of an outline relative to your ingredients inflation. Can you give us a sense going into '07? Are there any specific ingredients in all the eggs or corn sweetener or is there anything specific that you may see a rotation in inflation amongst your ingredients? And can you kind of give us a sense of overall what the ingredient pool might be, from a cost basis, might be up this year?

The bad news is, we are looking at all of these things because we have been surprised over the past few years as one and then the other ran away. The good news is that it's -- we seem to have a pretty good fiscal and management control with respect to our costs and our bookings.

So I don't think we are going to see -- I mean, flour is up considerably this year and but some of the other runaway commodity increases have been stabilized, particularly in energy and eggs and shortening and whatnot. So I'm keeping my fingers and legs crossed and whatnot but I don't think that the dynamics of it is going to give us much problem as it did.

Has the run-up in corn prices with the ethanol, has that bled through to corn sweeter and fructose?

It has and not only that it gets some sympathy from some of the other products you're [going on] but over the past three or four years we've had some sharp challenges from chocolate and shortening and eggy weggys and all of this and we've been able to handle it and we expect that we will continue to grow our business and improve our profitability notwithstanding what the challenges we're faced with.

You mentioned on the bakery side of reduction, relative to menus and fats and calories from the cafeteria or the school area. Are there substitution chances or pretzels for cookies or or there ways you can take transfats out of cookies or what is your thrust there?

We are doing that. The immediate transfer results is not as quickly as what we would have hoped. You know something gets discontinued, say, a certain kind of cookie; and then the new revised formula with the revised fats and something else is submitted and tasted and missed. So there is no question we were impacted in the school food service sector with some of our products in the quarter.

It really has not affected pretzels there, and certainly hasn't affected our frozen juice bar and juices initiative. That appears to be doing okay.

On your SLUSH PUPPIE acquisition you have had that now for a few quarters. Have you been able to either do any brand extensions or flavor upgrades or have you done dug anything with that product line versus where you bought it?

We have all sorts of things in the offing. We've had it for the fourth quarter which was, we had to hurry up and get our arms around it. We had to put the first quarter this year which is always a loss, but we are and we're getting the balls in order and so that we will have a real good selling season which will begin or a real good SLUSH PUPPIE season, which really begins come April or May.

Okay. You mentioned, too, on your private label on the -- I think you said the frozen juice bar. Are you blending different formulations for that or are you using your same high-quality products for that? Are you doing -- ?

The same high-quality products and those in the field love it and they are able to attach their label and I don't want to mention a particular company but we have had one success and it is one of the major food chains. And I don't want to name the business but it begins with a K and we beat out four or five other people in there for the first time they are going with us with a private label impact in there which is a reflection of not only our product quality but our people being able to sell through the systems.

Does that -- would that customer impact your shelf stocking units? Your freezer case (MULTIPLE SPEAKERS)

It will complement it.

It will complement it. Okay. Did you expect some cannibalization from the private label on a volume basis from your branded stuff with that client?

Well, the one that I kind of indicated and you gleaned out we were in their with any of our other -- (MULTIPLE SPEAKERS)

Okay.

That's a great question, Brian.

Okay. Well I'm just checking. You mentioned $24 to $25 million on capital expenditures. What would be the maintenance component of that?

Roughly half.

All right. I will get back in, line, thanks.

Mitchell Pinheiro.

Couple of things. You had a nice margin expansion in the quarter. Were there any permanent components to that? I mean, should we expect margins to improve throughout the year, regardless of the commodity picture either up or down?

If you go to church and I know you do, pray for us. All right. I'm tried to get Dennis up to St. Patrick's Cathedral to take that hex off of [Arod] but every time we go up there we will pray for margin improvement to.

So is that the answer. It's prayer.

Mitch, we do a good job managing costs even when we had like and all-out blitz loss, like, for two years. We still did a pretty good job. We gave up a fractional margin on operating gross margins. We are kind of tested and battle hardened.

Well, with that, you know, Jerry, I went back and look at the operating margin for going back to 1980 something and you had, way early on, double-digit margins and I would say for the last ten years they settled in the high single digits.

So is there any -- do you see operating margin -- can you return to a double digit margin which would be about another roughly 100 basis points higher than -- (MULTIPLE SPEAKERS).

When you said the '80s what were we making then? One product?

Yes. I mean, it is a different business for sure.

Sales of maybe $25 million. A little bit different.

But you would say -- I hear you but I guess my question is do you see at just below 9% high single digit you have hung in that area for a while. But do you see any other permanent factors in margin improvement?

Yes let me answer that question. I think to be there at that 9% level, in spite of all of the cost factors, competitive factors, other issue factors is and I'm not bragging but I think it is satisfying. Now can we get, can we improve that by 20-something % to get up to 11? That's the goal.

It would be great but our product mix has changed. We've grown our business. We've expanded our business. We've had increased sales every year. We've had increased profits. We have had increased earnings per share. And I don't want to go out and be bold and say we are going to have double-digit margins in two years. But we do have aspirations to get our numbers back up there and it is something that is internally discussed.

And I beat my people sometimes. "Look at this, in 1987 in there, we had of 11.2% margin." But what we forget is sales were $42 million. We had one product, soft pretzels. and a little bit of churn. It's just not quite the same.

Let me ask you a couple of other things then. How were -- in this particular quarter how -- you mentioned that margins were terrific in the quarter and I must say that you've had these problems throughout your -- not problems, challenges throughout the last couple of years whether energy or whatever the cost problem. And you've managed to overcome it.

What in this quarter were you able to do to control the costs, despite the higher commodity, etc.? You mentioned very discrete items or is it just -- ?

We are always working on our efficiency. We've got a little bit of pricing.

Okay.

Some of the product mix. Some of it when they call is a new service -- is what we call APS, accidental product mix which happens when -- even though you don't plan it.

Right. Okay. We will discuss that later. How about, Dennis, what are your coupon costs in the quarter?

They were about the same as last year. Roughly $400,000.

Okay. I will call you off-line to get the exact number for my model. In terms of, did -- was SLUSH PUPPIE dilutive in the quarter?

Yes.

By a penny or two or did it have that big of impact?

Yes. On an operating income basis is a penny.

Okay. Very great.

And that was not unexpected.

Sure. Sure. What about margins in the private-label business? When you -- with the new customers, are margins equal to, better than, less than your normal margins? Does it have any other ancillary benefits to your business with that customer that would even things out?

No. It's new initiatives. We think that it is well planned although the margins like upfront at first glance appear to be a little bit trim. All right? By the time the guess through the system and you look at it without the overall marketing and support and some of the other initiatives in connection with gross [re in slotting] we are hopeful it could be better.

Last thing. I don't know if I heard the entire thing. You had mentioned in your discussion about the gross margin that you said something about 900,000 and I missed that. What was 900,000?

Because it was an insurance and. Insurance and -- insurance reduction, lower cost of $900,000 in insurance and utilities. So it is a combination. I'm not sure how much was -- .

But that was a benefit in the quarter offset by 1.5 million I heard of commodity cost increases?

Exactly right.

Okay. That's it. Thank you.

Jim Rice.

I had a question on the acquisition, and correct me if I am wrong, it seems like it's a little bit out of the snack foods arena. If that is correct is that something that maybe you are progressing towards we should be drifting towards, we should be looking at going forward?

Good point, Jim. It fits within our specialty bakery niche and frozen and it's a brand that also does private label. It is a well-run company. Been around for a few years with the field management team. And it was a customer, all right? Our Country Home facility was producing roughly half of their required supplies.

So it made sense for us for a lot of reasons and now it is gives us one of the No. 2 brand in that small niche of the frozen biscuit category.

It should complement our school food service initiatives too.

In the past you have mentioned some white cloth restaurant initiatives. Anything going on with that right now?

Yes. When I say white cloth, we are selling a small line of products including some special pretzel breads and sticks to hotels. The big initiative is what we have been working on for several years with the fast food chains which were different types of pretzels with different types of fillings, different types of sizes and trying to get our pretzel bread sticks and other products onto menus.

We have a small chain in Ohio with a couple hundred stores that tested our product; and now they have just expanded this back in and we look at that as one of our last real frontiers of serious potential growth in -- here in the U.S. that we have heretofore untouched. So we are making some progress there. We hope that as the quarters come on this year that we can be reporting sizable progress.

Lastly you didn't change CapEx guidance. So the acquisition won't have any effect on that?

No.

Great. That's it for me. Thanks.

[Brian Rafn].

You had mentioned in several of the past conference calls that in the freezer case area, the juices and the juice bars and stuff when you punch through the $3.00 level there is an elasticity on volume with the customer. How have you guys that it from the standpoint of a lot of competitors -- whether it is frozen juice bars or shampoo -- have held prices but they have delivered packaging in smaller unit quantities.

You have not done that. You have not cheated the consumer. How have you been able to do that, given the rising ingredient cost in that?

Don't know if I can answer your question clearly. One of the ways we have been able to -- we have become more efficient over the years in there and we have an old peddler's mentality. If our customer and our business partner value and earned transport value across the distribution chain -- fact of the matter is, we have taken some pricing rather reluctantly and it has affected some of the retail [ring], but most of our products are still probably the best valued products whether you are buying them in a supermarket, whether you are buying -- whether they are being offered in a chain or a syndicate store or even being offered at a leisure team event like a baseball or a football stadium in there, that oftentimes they are -- even though they may be pricey but they are the best value for the price -- product being sold there.

You guys have done a superb job with that. We see it all over and you guys have really held the line in that so you have delivered great value to the consumer certainly.

Well look for us at Super Bowl. I'm sure they're going to have $15 hamburgers down there and $4 beers. But we think that there is going to $3, $4 soft pretzels down there too. And we will sell several hundred cases and we will be rooting for the longest game possible so we can sell the most of our products.

And the hottest weather. Okay. Can you give me a sense of what your kind of in-field installation of machines are on ICEE and SLUSH PUPPIE? Maybe Jeff has got that.

On a total combination, we are probably approaching a number of 50,000 pieces of equipment. They may not all be chugging drinks at one time in one day and whatnot but with the ICEE numbers in the 30,000 plus and we're all familiar with where they are and now with SLUSH PUPPIE machines being at some of these swim clubs and swimming pools, Little Leagues, secondary and tertiary locations which have more of a little seasonal impact to it. It gives us the top brand -- ICEE, Arctic Blast and now SLUSH PUPPIE -- are top brands in this segment and this category.

Is there any -- you have talked about the differences in venues, relative from ICEE versus SLUSH PUPPIE. Is there on a unit basis more penetration and distribution sites with SLUSH PUPPIE than maybe ICEE? ICEE being a little more mature. Do you get any sense of that or are they both about the same from from the standpoint of maturity?

Actually and I don't know if this is a well-known fact there's more ICEE machines out there than there are SLUSH PUPPIE machines and we look upon it as an opportunity to grow both.

On the acquisition side, Gerry, you guys have done a great job in certainly the M&A side in doing some rehabs and buying some things where you have to inject marketing or capital or technology for manufacturing. What are you seeing from the standpoint of pricing? Is multiples of EBITDA, is it -- a market that pricing is levitating with all the private equity in the deals and the IPOs in that? Or are you still finding things that are -- certainly fit your radar screens?

There's no question, all right, when there's (indiscernible) out of focus when there's a few things in there that causes pricing to levitate or to go up. We have been -- we've had particularly good experience in finding neat little things that weren't discoverable. Some of them losing money, acquiring them right, fixing them quickly, integrating them and continuing to build them and that's a -- something that we have some expertise in, that we have some talent. A lot of our people are -- have been honed at that.

We are hopeful of still, like -- and it is not exactly finding a rabbit in a hat. So we think there are some things out there and we are looking at some things now that we are hopeful of bringing home this year. But we may be -- to answer your question. Yes. Pricing will be more of the of a factor and we consider these things.

We've never made an acquisition to this point that we've had to come back and a year later and kind of discuss why that it was not accretive. And we expect to make continued acquisitions and we expect them to be accretive and we expect them to perhaps expand the boundaries of our product offerings and business channels.

Well you've certainly done a judicious job there. You guys got a great history in doing that so my hats are off to you.

I have got a lot of good people that really carry this burden and that are deserving of your compliments.

You mentioned something about niche size and discovery. Is the fact that some of these deals might be too small for the major integrators, the Nabisco's and that of the world, does that help you ferret out some of these little smaller product lines that maybe would be unattractive to a bigger buyer?

Yes. That's a good point.

Relative to your summer business with ICEE and that and your distribution through cinema and movie theaters has -- the last few years we've had some weakness in theater sales. Has that impacted you guys from the traffic standpoint and a buying standpoint?

It has. You don't have good movies, you don't have good attendance, you are not selling as many people. You may not have to wait in line when you go up there for your pretzel, popcorn, or ICEE, but good movies means -- good movies even at high pricing brings good attendance and we benefit from it.

You guys have done a super job. It's getting old hat but, boy, I tell you you really knocked the cover off the ball.

It's not old hat to us.

(indiscernible) take care.

(technical difficulties) but you know what I mean.

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

This is Gerry Shreiber again and I want to thank everybody for participating and we look forward to talking to you three months from now and being able to report similar results. Take care.

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