J & J Snack Foods Corp (JJSF) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to J&J Snack Foods conference call. At this time, participants are in a listen-only mode mood. Please note this conference is being recorded. I will turn the call over to Mr. Gerry Shreiber, President and CEO of J&J Snack.

Good morning, everyone, on this rainy morning in the East. Thank you for attending our conference call. I am Gerry Shreiber and with me today is Dennis Moore our Chief Financial Officer and Senior Vice President. I will begin with an obligatory statement and then we'll go on from there. The forward-looking statements contained 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 publically revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operation, net sales increased 16% for the quarter and 11% for the six months. Adjusting for sales related to the acquisition of the Hawaii ICEE company acquired in January 2006 and Slush Puppie, acquired last May and Home/Ade foods and Daddy Ray's acquired this past January, sales increased approximately 4% for the quarter and 3% for the six months.

For the quarter, our net earnings increased by 29% to $5.3 million or $0.28 a share, from $4.1 million or $0.22 a share a year ago. For the six months our net earnings increased by 28% to $9.1 million or $0.48 a share from $7.1 million or $0.38 a share from last year.

This past quarter marks the 24th straight quarter, 24, of increased earnings over the prior year. EBITDA, as earnings before TV taxes, depreciation and amortization for the last 12 months, reached an all-time high of $76.8 million for the 12--month period. Food service - Sales of food service currents increased 19% for the quarter and 10% for 6 months. Without the sales of Hom/Ade food and Daddy Rays, sales increased 6% for the quarter and 3% for 6 months.

Although most of the sales of Home/Ade foods and Daddy Rays are to the retail grocery supermarkets we are including them in our food service segment because of the make-up of our internal go-to market organization and reporting structure. This is in accordance with accounting standards. Soft pretzel sales were up 3% in the quarter and 2% in the six months.

Italian ice and frozen juice bar and dessert sales increased 15% for the quarter and six months primarily due to sales of Luigi's sherbet cups, a product introduced a year and a half ago. Sherbert sales up 2% in the quarter and 5% in the six months going up very, very strong increases of year-ago period of 47 and 49%.

Bakery sales up 6% in the quarter and 2% for the six months as our private label bakery business recovered somewhat in the quarter to offset lower sales to school food service accounts as menus changing nutritional guidelines were reflective in our sales. Retail supermarkets, sales of products to retail supermarkets increased 11% for the quarter, and 13% for the six months.

Soft pretzel sales were flat for the quarter and up 4% over the six months, because of reduced trade spending treated as a reduction of sales. Cake sales however were down 10% in the quarter and 5% in the six months. Sales of our frozen juice bars and Italian ices were up sharply, 34% for the quarter and 30% in the first-half. Sales of our Minute Maid licensed productsand ICEE products improved as we introduced new products last spring.

Restaurant group, sales of our restaurant group decreased 30% for the quarter and 26% for the year due to the closing of unprofitable stores. During the quarter we closed or licensed two stores, actually closed one and licensed one, same store sales for the eleven remaining stores were down 3% for the six month period.

ICEE and frozen beverages - ICEE frozen beverages and related product sales increased 13% in the second-quarter and 14% in the first half. Excluding the impact of the Hawaii ICEE acquisition and Slush Puppie, sales were down 1% for the quarter and up 2% for the six months.

Beverage sales alone were up 19% for the quarter and 17% for the six months. But up only 3 and 2% without acquisitions. Gallon sales were flat in our base ICEE business in the second-quarter, which has an improvement from being down 5% in our first-quarter. Service revenue, and this is managed service for others, was up 37% in the quarter and 30% for the six months. Sales of frozen carbon beverage, drink machines, were down $2.9 million in the quarter, almost 10% of last year's sales.

Overall profitability for the ICEE business in the quarter benefited from a very strong March. Consolidated - gross profit as a percentage of sales increased to 32.61% from 31.4% last year. More of half of the improvement resulted from decreased sales of low margin frozen carbonated beverage machines in the quarter compared to last year.

None of the improvement, none of the improvement in the gross margin came from the acquired businesses. During the quarter we were impacted by $1.5 million of higher commodity cost as we expect to be to, continue to be impacted going forward. Total operating expenses as a percentage of sales was .22 percentage points higher in the quarter due to $925,000 of expense for a TV-Internet advertising campaign for our retail pretzel, Superpretzel products.

Operating expenses otherwise dropped as a percent of sales mainly due to lower operating expenses of the acquired business. Approximately $627,000 of our increase in net earnings for the March quarter was directly attributable to Hom/Ade and Daddy Ray's. Without Home/Ade and Daddy Ray's, our net earnings still would have increased by approximately $569,000 or 14%. So what was good, became gooder. Capital spending and cash flow - our cash and marketable securities balance decreased $39.4 million in the quarter to $35.7 million at quarter end, as we spent $46 million on the Hom/Ade and Daddy Ray acquisitions. Our capital spending was $11.9 million for the quarter. We are projecting capital spending to be about $24 to $25 million this year.

Which we estimate will leave us with free cash flow, that's operating cash flow less capital spending, of about $33 to $35 million. A cash dividend of $08.5 a share was declared and paid by our Board of Directors on April 5, 2007. As we continue to develop our business to grow organically, we're continuing to seek acquisition to supplement our internal growth. Since our last call we have acquired Daddy Ray's, a producer of fig and fruit bars with annual sales in excess of $23 million.

Located in Moscow Mills Missouri, outside of St. Louis, this is a well-run, efficient company that was under the radar screen. We plan to add manufacturing capacity in the next twelve months to grow this business significantly. This acquisition was completed on January 29th and reports to our West Coast bakery group under Jerry Law. It was integrated quickly and efficiently. On April 2nd, our third quarter, in our third-quarter, we acquired the Whole Fruit Sorbet and Fruit-A-Freeze Frozen Fruit Bar from Cool Brands International. Over the past several years, sales of the products have declined for various reasons, however, we believe we have purchased the brands at the right time and the right price and expect modest sales for the reminder of our 2007 fiscal year, which ends in September, with significantly higher sales in succeeding years. We also, along with that, aquired a manufacturing facility in Southern California, which gives us a West Coast manufacturing presence for our frozen novelty items and the ability to make thick items. We think in years to come this will be a contributor to our growth on these products and the West Coast facility will give us some geographic and distribution savings. Commentary - our internal sales growth improved to over 4% this quarter from about 2.5% in the first quarter.

Adjusting for the drop in frozen carbonated beverage machine sales, which is always kind of a wild-card and they're one time and sporadic in nature, internal sales grew by over 7%. Our food service sales growth accelerated in this quarter to 6% from 1% in the first quarter, with bakery products improving to a 6% increase from a 2% decline in the first-quarter, mainly resulting from improvement in our private label business.

Soft pretzel sales improved only slightly to 3% growth. We're facing continuing challenge with cookies in our school food service business because of the nutritional concerns regarding trans-fats. We have made some progress with reformulated progress, products,, but the progress has been slow.

Our frozen juice treat and dessert sales should continue to be strong as we begin to emphasize growth in the health services sector in addition to school food service and stadium arenas and theme parks. We have recently completed an expansion at our frozen novelty plant in Scranton, Pennsylvania, actually [inaudible], which has increased our capacity to make [inaudible] significantly.

We anticipate continued growth in our retail supermarket segment, especially in frozen juice and ices as the new varieties of our Minute Maid branded licensed products introduced last spring appear to have been very well received by customers. Additionally we plan to expand sales of our frozen juice and ices under private label brands this year with two major grocers. We began a TV- internet advertising program in March to support our Superpretzels brand. Total cost of this program is approximately $2 million of which $925,000 was incurred in the quarter ending March. Our frozen beverage segment experienced flat gallon sales in our base Icee business. We expect to continue to be challenged by major customers as they make changes to their food service operations.

Our service revenue to others continues to grow, up 37% in the quarter, as this is a key component of our growth plans going forward. Slush Puppie, which was acquired last May, had a positive quarter and now is moving into their seasonal selling period. Our restaurant groups bottom line deteriorated compared to last year, although numbers are small.

We'll continue to pursue our strategy of closing or licensing the remaining stores. We closed one store and licensed one store during the quarter. We expect to continue to be impacted by higher commodity cost for the foreseeable future, costs which were down in the first quarter, such as liability and group health insurance and utility costs were basically flat in the second quarter, and we do not expect any significant benefit from [inaudible] these costs to the balance of the year.

Our investment income will be lower over the foreseeable future because of the money we spent on the recent acquisitions. Our estimated income tax increased to 39% in the quarter, due to a lower tax benefit on share-based compensation. We believe we had an excellent quarter and our people did a great job in managing and growing our business and integrating a couple of acquisitions. We look forward to having continued good results the rest of the year. And we'll now turn it back to you guys for any questions and comments.

We will now begin the question-and-answer session. Mitchell Pinero on line with a question. Please, go ahead.

Hey, good morning, guys. A couple of questions for you. First can you talk about the soft pretzel, basically up 0.5% in the soft pretzel growth in the foodservice segment, is that, what is driving that? I thought you would have some pricing, so it looks like volume is down in that area.

I think soft pretzel sales in the food service sector were up 3%, Mitch.

Okay.

I think, I'm pretty sure, so it's being driven, it's a core product.

You are right. 3%. My bad. Never mind, never mind.. So are you getting pricing in food service?

We got a little bit of pricing. We also keep expanding the product base. Some of it is newer kinds of soft pretzels we're completing now. We have gotten a couple of products into some of the fast-food restaurants and chains and this Max & Erma's thing, which was a test and then got discontinued and got back on the menu and it's doing very, very well. We still are looking for, long-term for, to an opportunity to develop with the major fast-food restaurant chains and you know who they are in there ,and we don't want to - . Our eyes are on that. Our focus is on our regular business everyday, so we continue to push and develop the core products and that includes soft pretzels.

So is the soft pretzel market, is it still a growth market?

It's still a growth market, because we have been making it a growth market for 34 years. Now, we do some different things to get day parts and for the first time there are soft pretzels in all sorts of shapes and varieties you you and you can have it for breakfast, you can have it sweet., you can have it salty, you know? We have been expanding our business into other niche products and product lines just so that the overall company's growth is as fertile as what we like it to be. Are soft pretzel going to grow 10-12% per year over the next few years? Not without us making something bold, you know, creating something bold and decisive into a new sector, but for business that you know, performs well, we're still hopeful to driving that, into, you know, with some fairly good single-digits.

Okay. How about pricing? of the 7% sort of organic growth that you described, was pricing half of that growth?

You know what, not quite half, all right? And I know your next question is going to be, well, why can't it be a half? And part of it is because we're all peddlers at heart and this goes back to my days my father always tells me you give somebody five pounds for a quarter, give them five and a half pounds, there, so - One of the things, we could be more aggressive on pricing, but there is that old corollary that comes from Fluff One, or that marketing course, everytime you increase price your velocity is going to be impacted by ,so we're a little bit sensitive to that.

I look at your knowing that you sell soft pretzels to the stadium operators for, you know, $0.25 or $0.30 a piece and I pay $3 or $4 for the pretzel.

Every penny translates to a quarter in there.

Well, that is the thing and at some point you are not in control of that end price. You rise your price a nickel and they rise it $0.50 and then that velocity drops significantly, but - At some point I see a lot of pricing power left, especially to the major operators, and obviously you use it at your discretion, that pricing, but I see a big opportunity there. Anyway, another question, integration costs. Were there any costs in the quarter? I know obviously they contributed, but were there any one-time costs?

They are in there, Mitch. We do something, we expense it. They are in there.

Were they significant at all?

Not.

Where do you think you are on integrations? 100% on the acquisitions or are there some pieces left, projects left?

Well, speak of Hom/Ade and Daddy Ray's were 100% of the acquisition on the West Coast that was just completed a couple of weeks ago. All right, we have projects there, but the biscuit group was, you know, we had management in place there under Greg Lowry, we hit the deck running, that was seamless. That was run almost picture perfect and Daddy Ray's, people were in place there and Gerry Law's group and Barbara Danno and I others and it's done. We have always done that over the years. We acquired things and made them fit and integrated well. We expect to continue to do them well.

Okay. Just a couple of other quick questions. One, commodity costs. Obviously, I saw $1.5 million negative in the quarter. Does it get year-over-year does it get worse from here? Does it stay about the state your name? terms of year-over-year?

I don't see it getting any better. It may stay about the same. Not as bad as it was a couple of years ago, but not as good as it was six or seven years ago.

Okay, so if things kind of stay where they are, do you feel that you can manage your margins effectively?

As before in the past, we continue to do so now. I would bet on a horse that always wins.

Okay. How about, you mentioned the TV/Internet advertising, is there anything that you can, obviously advertising we don't know if it works. You never really know --

Half dozen, you never know which half that it is. That is right.

What is the early read on your spending there.

Unfortunately with a marketing and advertising campaign, the things that are really right-on forecast is what you spend; right? We're getting a lot of -- this was supposed to be a combination of TV and [inaudible] and it's early in the campaign. We don't appear to be getting any kind of benefit yet. You know, I'm not the most patient guy in the world and my marketing and retail people and they are really managing this right and we had a couple of good agencies. They both proposed the same type of go-to market strategy. So, it's too early to tell, but we wanted to spend some money on one of our core products, Superpretzel, where we have this great, great, great share of the segment, but I want to grow the segment. If I had to make some judgments now, they would be frosted with the lack of sales improvement. As may matter of fact, it went the other way, but let's just wait. a little bit, let's just wait a little bit. There is not like there is somethingless able or taking market share as a matter of fact, the whole category of hot appetizers is down some 12% overall. I don't know why and sometimes you know, you get caught up in that, but Superpretzel is still one of the top products in the category and it's a very profitable item for us and we're in almost all the supermarkets in the country, and we believe in the long-term that marketing and advertising is good for a brand, and that we just need to focus it here on the things that maybe are working, so we don't repeat the things that didn't work.

That is it for me, thank you.

Thank you, Mitch.

Robert Castello on line with a question. Please state your question.

I have a question regarding the manufacturing. You were up to almost a dozen plants, if I'm correct. Is there any optimization goals going forwards on maybe closing some of them that you acquired now through the recent acquisitions?

That is a pretty good question, Bob Costello. This is Gerry. I have a granddaughter who is 7-years-old and I was visiting her school a couple of weeks ago and she says to her class, my pop pop has ten plants and I was thinking to myself why you have ten or eleven. Actually we have, I believe, eleven factories or maybe with the additional Fruit-to-Freezefactory in California, that might make it twelve. We're looking at perhaps consolidating one or two of them where it might make economic sense. Years ago, when we made a couple of acquisitions in the Midwest and West coast, we did it for reasons of strategy and geographic concerns and they did make sense. Right now in all the categories that we're in, we're the only ones with East Coast, Midwest and West coast manufacturing capability. That gives us some real benefits, but taking a look at it now, we may want to look at a couple of those down the road.

With the recent acquisitions in the figs market and the biscuits, can you give us an idea of the upside or market share or companies acquired or what the market share overall is in that category in the U.S.?

Well, frozen biscuits, we think we acquired one of the best little secrets in the country with Hom/Ade foods. They are a frozen biscuit and dumpling manufacturer in Pensacola. We're a $30 million company and the category is something four times that. There is a major, major company in the category and you probably know who it is. I don't want to give any hints. It begins with a p, but we're the probably the number two branded company there and could do some private label business. So we think that that business can grow at the double-digit rate in the next few years. And likewise with the fruit bars. We make an excellent fruit bar that cuts compares and cuts favorably to anyone out there. We like to be good manufacturers and we're going to continue to invest in our resources, to be good manufacturers and do our darndest to sell it everyday.

Are there any new licensing novelty opportunities coming out for the next summer or for year or products in the C store that you have been known for?

There are new things on the horizon. Next year would have to happen right now, so there is nothing happening right now. Although there is some interest in our Slush Puppie for licensing and for novelties and Slush Pupplies is our frozen, uncarbonated beverage but there is some possible interest in the frozen novelty sector.

You talked in two call before about the pina colada project.

It's out there, this is its first year.

Is this something you think has a lot of upside or a small idea right now?

When you say "Pina colada," you mean the frozen juice bar, the tube?

The product you would sell maybe to the bar industry for the mixed drinks and all.

Which would be the non-alcoholic beverages?

Right.

There is no alcohol in it.

They would put it in, you would just tell them to mix.

We have that available and we're hoping to expand those sales.

Because I see it right now in the bars with Lipton has a machine that sits on the bar.

Right. We have a machine that sits on the bar too and hopefully by next year you will say, I see the your Slush Puppie machine.

I see it one of the sit-down restaurant chains.

Hello?? Who is it?

This is operator, should I proceed to the next question?

I'm sorry, Yes, next question.

Mitchell Pinero is on the line with a follow-up question.

Hello, one follow-up related to FCB for the frozne carbonated. No. Number One - Was there dispenser growth in the quarter? was it flat? could you talk about that?

Well, I know we lost some dispensers in Wal-Mart locations because of some redesign, and some elements within their own strategy, but overall it's about the same.

Okay, are you also, given weakness in the carbonated soft drink market, does that parallel, maybe the other way around, does FCB parallel what is happening in the CSD market? people switch to non-carb energy drinks, things like that, is there any way you can capture that in ICEE?

We have an energy type of ICEE product available. Keep in mind with the drink machines you are booking between two and four dispensers and you have two or three flavors which are permanent, mainstays and giving anything up in there would take away from a base business. Bottles and cans are going through a major shift from the sugar water you from a switch from the brown sodas to the energy drinks and vitamin drinks. We extended our ICEE business not only with the ICEE beverages and flavors and Arctic blast, but now with Slush Puppie and now with managing the service for all containers, that is $150 million business for us. So we're fining -- finding ways to grow and manage it and we still have some major opportunities in this country and abroad.

It always seems you are limited in SCB growth because your dispensers have limited two or four, I forget what you call --

Valves.

When I attended the [inaudible] show back in November, I ran into some of the machine manufacturing that were coming out with increased number of valves, but in the same dispenser footprint. Is that, are you seeing that? Are they hitting the market? And if so, you are able to incorporate that into your marketing plans?

We're using one line of equipment that has the same footprint of a two-valve machine. It has three. Sometimes the drawing board, what you see on the drawing board and then in the show, it will take a couple of cycles until they get out in the field and get proven and what not.

That seems like it would be a pretty decent innovation to put some flavors up there that you don't want to swap for your cherry or your blue raspberry but could bring in incremental users.

You are right, Mitch. Years ago, we used to put in a machine, I don't want to mention the particular machine name, whether we built it ourself or whatever, but it would be two-valve machine and we would be rotating flavors in there so the only way to increase it would be to get another machine or four-valve machine in there and the investment would have gone from $6 or $7,000 to $12 or $13,000. One of the equipment suppliers we partner with, Lancer, developed a three-valve machine in the same footprint of a two-valve machine and Dan Fachner and his group, Dan runs our drink company, our ICEE division, they have has put out a number of the Lancer three-valve machines in the same footprint and it has helped to steady sales.

Last question related to SCB, in terms of watching the -- I have seen that milkshake machine in the [inaudible] stores in this area and I have seen them in other convenience stores now. That obviously seems like that would have a potential for cannibalization, not cannibalization, but would take share from ICEE perhaps, but are you looking at that type of business - the milkshake machine type of business?

We're not taking a serious look at that. That machine is made by a company on the West Coast. I know a local chain here bought a bunch of these machines. They appear, at least their first season, they appear to have done okay. A little bit different operation. It's a lot more -- it's cleaning operation and some of the dairy requirements on the location are a lot different than what the ICEE machines are. I admire what they have done and I think it's interesting, but we're not ready to leap into that segment of the business right now.

Okay. All right, thank you.

Thank you, Mitch.

John Rogers is online with a question. Please, go ahead.

Good morning.

Good morning, John.

I have a quick question on the cost of goods line, I know you said half of it came from lower sales and I was wondering where else you saw cost-savings?

Volume.

Excuse me, improvements in volume? And also the second question, your service revenue showed strong improvement during the quarter. Do you expect that to stay high or is this a quarter, a blip in the quarter?

Our service revenue has been a contributor now for six years since we got into it and what our ICEE group has done is that they have taken what is essentially a base-core infrastructure that was being utilized and we've utilized them better and expanded them better. I cannot there, there is no way I can expect them to grow at 35-40% every quarter, all right, but I continue to be enthralled by our possibilities and potential to grow that business, and we have all of those resources already in place. What we do, we do well. We handle fairly complicated semi frozen electrical and technical equipment and install and repair and train. There is nobody else quite like that in the country and our business has been growing along with our reputation and our ability to service it. So yes, we're going to grow that end of the business.

All right, thanks a lot.

Thank you.

Richard Smith is on the line. Please, go ahead.

Could you give us a quick rundown off your website and announcement saying about the Dogster frozen treats. Could you tell us how that might play out for you and why that avenue, Gerry?

I'll tell you what happened, we bought two brands from Cool Brands called Fruit-a-Freeze, which a premium fruit bar on a stick and a Whole Fruit, which is a pint of sorbet. Along with that, almost as a throw in, came this Dogsters, ice cream - This dogster frozen treat, what is that exactly, Bob? It's a soy product, non-dairy and they had attempted to bring it to market about a year or two ago, they had a fully-paid up license. So we get it almost as a throw-in. There was inventory with it and we are looking to perhaps grow this or to take a look at the strong pet market and perhaps have this in our portfolio.

Would it by divertive for your sales time to start selling dog food?

It's not going to be divertive for our sales team at all

Interesting acquisition.

It's already in the frozen food aisle, and same buyer. It's another piece of paper for our sales people. We don't have very much invested in this and we think it might be an interesting category.

Sounds like a fun thing. Thanks very much.

Thank you.

At this time, I show no further questions.

I want to thank everybody for attending the conference call. I look forward to having you all here for the next quarter, and hopefully we could be reporting equally good results. Thank you for your time.

Thank you, ladies and gentlemen, this concludes today's conference.