J & J Snack Foods Corp (JJSF) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the J & J Snack Foods fourth-quarter 2007 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'll now turn the call over to Mr. Gerald Shreiber. Mr. Shreiber, you may begin.

Good morning everyone and welcome to our fourth-quarter conference call. I am Gerry Shreiber and with me today is Dennis Moorer, our Senior Vice President and Chief Financial Officer; Bob Radano, our Senior Vice President and COO, who incidentally is responsible for commodities; and Vince Melchiorre, our Executive Vice President of sales and marketing. I would like to begin the conference call with the obligatory statement and then I'll get into discussing results of operation and other points of interest.

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 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 acquisitions we made over the past year sales decreased approximately 3% for the quarter. However, this year's fourth quarter has one last week; 13 weeks compared to 14 and prior year. One less week reduced sales about 7% for the quarter resulting in the 3% decline. Net sales increased 11% for the fiscal year. Adjusting for sales related to the acquisitions we made over the past year sales increased 2% for the year. Again this includes one less week in this fiscal year reducing sales by approximately 2 points in fiscal 2007.

For the quarter, our net earnings decreased by 9% to $10.5 million or $0.55 per share from $11.5 million or $0.61 a share a year ago. For the year our net earnings increased by 9% to $32.1 million or $1.69 per share from $29.5 million or $1.57 per share from last year. Our EBITDA for the past twelve months with $78.3 million. Prior to this quarter our earnings as you know had increased over the prior year 25 quarters in a row.

Foodservice. Sales to foodservice customers increased 10% for the quarter and 11% for the year. Without the benefit of sales of Homemade Foods and Daddy Ray's, sales were down 4% for the quarter and 1% for the year. Soft pretzel sales were down three percent in the quarter and less than 1% for the year. Italian ice and frozen juice bar dessert sales decreased 3% for the quarter and were up 7% for the year -- down 10% for the quarter and up 3% for the year without the acquisition of Whole Fruit and Fruit-a-Freeze acquired this past April.

Churro sales were down 2% in the quarter and flat for the year going up against strong increases in the year ago period of 45 and 50%. Bakery sales, excluding homemade and Daddy Ray's (technical difficulty) down 1% in the quarter and up 3% for the year as our foodservice branded cookie business continued to struggle in part due to changed nutritional guidelines in schools. Sales of our Funnel Cake product were down 28% for the quarter and 15% for the year as sales declined to one customer.

Retail supermarkets sales of products for flat for the quarter and up 11% for the year. Soft pretzel sales were up 16% for the quarter and up 10% for the year due primarily to increased case volume. Sales of frozen juice bars and Italian ices were down 2% for the quarter and 14% for the year. Sales were down in the quarter mainly because of increased trade spending which is treated as a reduction of sales. In addition to strong sales growth of Luigi's Italian Ice and our Minute Maid licensed products we had very strong growth of our new products introduced last year.

Restaurant group continued to decrease. Sales were down 36% for the quarter, 29% for the year due to our strategy of closing or licensing these stores. During this quarter, we closed one store. Same-store sales for the nine remaining stores were down about 8% for the year representing in comparison to the decline in mall traffic.

ICEE and frozen beverages. Frozen beverages and related product sales were down 1% in the fourth quarter but increased 10% for the year. Keep in mind again this year's fourth quarter had 13 weeks as compared to 14 weeks last year. Excluding the impact of acquisitions, sales were down 2% for the quarter and up 2% for the year. Beverage sales alone were down 4% for the quarter and were up 9% for the year and down 4% and up 1% without the benefit of the acquisitions. Gallon sales were down 9% in our base ICEE business in the quarter and down 3% for the year.

Service revenue for others was up 14% in the quarter and 23% for the here. Sales of drink machines, frozen carbonated beverage machines were down $609,000 in the quarter and down $3.6 million for the year.

Consolidated gross profit as a percentage of sales in the quarter decreased to 32.8% from 34.6% last year. A significant portion of decline resulted from the lower margin Daddy Ray's business and increases in our commodity costs. We are impacted by over $3.5 million of higher commodity costs in the quarter and over $8 million for the year. And we expect we might continue to be impacted going forward.

Additionally, some costs which had declined earlier in the year such as insurance and one time year-over-year increases. In this quarter trade spending in our retail supermarket segment which had run lower for the first half of the year, the first six months of the year increased this quarter to above year ago levels. And coupon expense treated as a reduction of sales also increased in the quarter.

Total operating expense as a percentage of sales was 0.2 percentage points lower in the quarter mainly due to insurance gains. Excluding other income total operating expenses were higher than last year by 0.1 percentage point. Approximately $650,000 of our net earnings for the quarter ending September was directly attributable to homemade and Daddy Ray's. Without homemade and Daddy Ray's, our net earnings would have decreased by approximately 15%.

Capital spending and cash flow. Our cash and marketable securities balance increased $16.4 million in the quarter to $57 million at year-end as we continued to generate strong free cash flow. Our capital spending was $5.4 million in the quarter, in line with our estimates. Our free cash flow, operating cash flow less capital spending for the year was $35.1 million or $1.85 per diluted share. The cash dividend of $0.85 a share was declared by our Board of Directors and paid on Oct. 4.

We're continuing to seek acquisitions to supplement our internal organic growth. This past year we acquired Homemade Foods, Daddy Ray's, and Whole Fruit and Fruit-a-Freeze and Mid-America ICEE, a small ICEE distributor in Kansas.

Some other commentary. Our internal sales growth adjusted for one less week was 4% this quarter and 4% for the year as a whole. In a reversal of the third quarter, foodservice, soft pretzel and churro sales on a weekly basis increased this quarter after being down in the third quarter.

We continue to face a challenge with our cooking products in our foodservice business in part because of nutritional concerns primarily focused on schools. We have made progress with reformulated products launched for this school year. We have restructured our sales organization to take better advantage of our inherent strength in the foodservice business.

Vince Melchiorre former Senior Vice President of the George Western Bakery Group is now responsible for all sales and marketing. These plans were initiated in June and will further grow the organization by tying product and segments together better and drive innovation and sales for the long-term.

Our frozen juice bar and dessert sales should strengthen as we begin to emphasize growth in the health services sector in addition to our existing strengths in schools, stadiums, arenas, theme parks. Our recent acquisition of the Fruit-a-Freeze and Whole Fruit brands should add incremental strength to our frozen dessert sales efforts. And six-month foodservice sales of Whole Fruit and Fruit-a-Freeze, were approximately $1.8 million, slightly above are our preliminary estimates. We're projecting sales of these brands to double for fiscal-year 2008. That is double or more.

In 2007 we also completed an expansion at our frozen novelty plant in Scranton to further increase our capacity. We anticipate continued growth in our retail supermarket channel. We expect both Fruit-a-Freeze and Whole Fruit to gain significant distribution in 2008 and we expect to double sales of these brands in both retail and foodservice.

Although our ICEE and frozen beverage segment experienced slightly down gallon sales, we expect to continue to be challenged by our major customers as they make changes to their food service operations which includes some closing of snack bars. Our service revenue to others continues to grow, up 23% in year as this is a key component of our growth plans going forward. Slush Puppie had a strong quarter and we expect continued improvement from these products and brands.

Obviously the big story of the quarter going forward is higher commodity costs. Almost half of our commodity cost increases for this year came in this recent quarter. We expect to continue to be impacted by higher commodity costs for the foreseeable future.

We have implemented price increases and may have to consider further price increases in the future. However, we will always balance what is beneficial -- what we believe is beneficial for our business over the long-term versus the impact of aggressive pricing over a short period of time.

Costs which were down in the first six months in the past year such as liability and group health insurance costs were slightly higher in the second half and contributed to the downturn in gross margin percent. Our investment income will be lower over the short-term because of the money we spent, we invested on acquisitions this past year and perhaps lower short-term interest rates. Our estimated income tax was 39% in both last year's quarter and in this quarter.

In closing, commodity's outlook may be clouded but our future is not. This quarter, my opinion represents a bump and perhaps an aberration which we believe and hope will be short-term. Our sales for the future will grow. We believe our profits will increase. Our EPS will climb. We will continue to work hard for the long-term benefit of our organization.

Thank you for your interest and now I'll turn it back to you for any questions or comments.

(OPERATOR INSTRUCTIONS) Mitchell Pinheiro .

Listen, so a bunch of questions here and focusing on the commodity issue. One thing I don't understand. First of all you didn't talk about how much pricing you received in this quarter. Sales were up 5%. How much of that was pricing?

Not a significant amount.

As you entered this quarter with wheat at least up probably 30, 40% going into the fourth quarter, it just surprises me that you wouldn't have been a little faster on the pricing. Here's my question. You want to balance your long-term health of the business versus the short-term issues but what I see is a reluctance to take pricing and maybe your brands are not that strong.

Maybe J & J Snack Foods service, your ability to service these clients -- you feel that there's others out there that do it better than you? I don't understand why -- where is Aramark going to get pretzels for the stadiums at a cheaper price with better service --?

Can I comment please? All the points you're making are good ones. However, keep in mind what I said before. We are in this business long-term and whoever we're talking -- some of our customers were on a annualized term basis. It's not the question of who they can get the product from or who is going to provide them with better service. It is the equitable relationship there.

Sometimes it takes 90 to 120 days to implement something. We are servicing ballparks and stadiums in there. And the season starts in April. We can hardly run in there (inaudible) it just cannot be done. We (inaudible) aggressive in the short-term and be able to get that but what are we doing long-term? There are no stronger brands than SUPERPRETZEL in the pretzel end; nobody even close. There are no stronger brands in frozen beverages than ICEE except the number two brand is Slush Puppie which we own too. Our Luigi's is the strongest brand in Italian ice.

So we believe our brands and the equity of our brands. We also -- and perhaps you're right -- maybe we got hung up between first and second before we could round third on the pricing and on commodities. But we're certainly -- what happened this year perhaps what happened in the past four months in there was unparalleled before. We hear from our suppliers or the major people in the world, the ConAgras, the (inaudible), [McGee Miller] -- we hear from that all the time. It's gone up. Wait until July crop. Wait until this. Don't buy now in May or June and we will come down.

Guess what happened. It hit there and it took off like it was shot out of a cannon. Yes we got caught. Did we learn something from it? We hope so. But we have taken some pricing. We're in the process of advising our customers and even then it is a process. We just can't open and slam the door and here is your price and take it. That is not our style. That's not how we built our business. That's not how we conduct our affairs.

You have seen -- you follow other food companies what the Krafts have said, what the Sara Lees have said, what the Dean Foods have said. And a lot of people got trapped in something that was unparalleled in the history of commodity supply and purchases this year. Now do we think we have passed on enough so that we can certainly recover from this and continue to rebuild? Yes, we think so. Are we absolutely sure? No. But we think that we have -- this experience will make us better for the long-term.

I mean I appreciate the answer and I do appreciate the situation it is unprecedented and especially in your fourth quarter wheat was up 60% from the beginning to the end of the quarter which is obviously unheard of. But that said, are you looking at why should shareholders take -- bear the risk of commodity cost increases especially when you are not a commodity product?

I would think that you could implement more -- higher -- more active price -- the frequency of pricing mechanisms to at least allow you not to -- you're hurt here in the fourth quarter. But you are going to be hurt again in the first quarter and probably a little bit in the second quarter.

Why does this have to drag out and why couldn't there be mechanisms to reprice -- go to your customers and say hey, we're giving you the best service, the best product but we're not going to get hurt here everytime wheat goes and doubles in a quarter. We need to the ability to -- you have got to work with us, Aramark (multiple speakers)

Let's not single out Aramark because they happen to be a terrific customer and a terrific partner as like a lot of our customers. But you can go into Wawa and you buy that coffee and you buy something often, right don't you? What would you do if you went in there every week and the prices was going up 20% or 15% in there. You would perhaps look at something -- I can tell you that some of our customers alone have absorbed major major costs from dairy products, cheese, dairy products without changing the price because they have the same I think philosophy that we do -- provide a popular price product for its guests and its consumers.

Perhaps we should have pulled that trigger on this sooner but we face guns that we just had never faced before. We got caught. We got hurt a little bit. We got hurt a lot a bit on commodities for fourth quarter. We think we're in a better position to face these challenges for this year and going forward.

You know, how much gas -- gas is now $3.00 again or $3.20 again. Oil is $100 a barrel in there. I'm sure there are people in the energy segment and whatnot that are going through some of the same questions and adjustments that we are here. (multiple speakers) We do have a brand. There's no better brand. We are the number one brands in all of our core products. We expect the equity of these brands and we have worked real hard over the year by being fair in pricing and having good relationships with our customers. We don't want to interrupt that because of what I consider a short-term bump.

I understand. Let me ask you this about '08. So if commodities had a $3.5 dollars incremental impact in the fourth quarter it looks like it's going to (multiple speakers)

$8 million over the year.

Okay but it looks like it's going to be higher in Q1 just the way the commodity -- so let's just take my numbers just sort of as estimates. If we had a $5 million increment higher commodity cost in Q1 probably and maybe $5 million again in Q2 and maybe it settles down because of comparisons and it's maybe $5 million for the entire back half. I would see $15 million of incremental costs just everything being equal and on $568 million in sales you would need 2.6% average pricing to overcome $15 million. Is that on a full year basis in '08 -- is that achievable?

We hope so but your analysis is right on. That is the plan and that is what the process (multiple speakers)

So okay. That's good. Now second question is --

Fourth question but that's okay --

I'm sorry. Ninth question.

That's all right.

You talked about trade spending. You increased trade spending in the quarter, which has a -- it's a function or couponing has a function of reducing sales from an accounting point of view. Why wouldn't volumes increase with increased trade spending? Are you not getting the ROI on that trade? You would think that --

How about I let Vince answer that.

I think what happened was the summer as we got a little too aggressive in terms of our deep discounting price point and we pulled back from that.

And I might add this happened prior to Vince joining us. It was in place, Vince joined us (inaudible), some of these programs were in place before.

So next year -- what are your plans with regard to trade spending?

Better displays, lower price point -- from my previous experience stronger display activity, promoted price points that are more reasonable but not too deep and just good focus on display execution.

Will you guys have sliding expense as you rollout Fruit-a-Freeze and Whole Fruit?

We will have some.

Would that have a -- will Whole Fruit and Fruit-a-Freeze be incremental on an earnings basis?

Let me answer this way. We expect to have a better year in retail next year than we did this year. That's one of the fix-it Vince has been assigned.

Let me ask you this. Dennis, amortization of intangibles and deferred costs I saw were 3 or $4 million higher year-over-year. What is that from?

That's from the intangibles acquired in the Homemade and the Daddy Ray's acquisitions.

Are they going to stay -- how long do they get amortized for?

It varies but most are over seven years.

Okay, so that's another (multiple speakers)

(multiple speakers) doing over 100 like the crusades but Dennis wouldn't let me.

I'm sorry I missed that --

I said I wanted to do it over 100 like the crusades but Dennis wouldn't let me.

I will yield to the floor. Thank you.

Bob Costello.

Hi, I have a question about the pricing. At retail, how much of your pricing is the retailer tacking on in addition to what you pass on in this opportunistic time for doing that? For instance like at ICE at the club stores I've noticed in the last couple like two months there has been a price increase at say, BJ's. How much of that is yours and how much it BJ's?

Well if you noticed it in BJ's in the past couple of months -- when you say with ICEE you are talking about the drink or the frozen juice bar?

The drink.

The drink. They might have been advised of a price increase and what you call jumped the gate a bit but our ICEE pricing strategy doesn't begin until about like a couple of days. So, we might have given people required 60 days --

Currently, with some of the pricing you're indicating that they're raising prices before you?

I'm not saying that. I'm not aware that they have. But sometimes when people know that a price increase is in the [offing], they will (inaudible) already. They will adjust their price.

: On another note, about a year ago you talked in the call about the -- getting into the beverage, restaurant, in the bar section. What is the status with those plans?

We're doing some of it and we are expanding it within our ICEE branches. We're doing a few things in the Las Vegas market and some others who've participated in (inaudible). But we have under our Slush Puppie group there was a [Lanakai] brand that was a -- has bar mixes, which have some frozen beverages that can and will be sold throughout that system.

When you mention the commodities, how forward do you buy when you're purchasing your main top five commodities?

Sometimes we will go out three to six months. More recently it's been abbreviated particularly in wheat because of the record-setting prices. But we will go out a fair distance on things like -- with cheese we're limited to how much we can buy 30 to 45 days out at certain pricing levels. But we will go out a couple of months on sugars, and on shortenings and on chocolate.

Last question -- with the current credit market conditions and your cash on hand is the acquisition opportunity better given that some players might not be interested in borrowing the money or can't get the money?

Some combination of both and we would hope so although we haven't seen a real abundance of that yet. But we are aware that some deals that should happen that were out there that should've closed perhaps three or four months ago are still hanging as they rework some of the credit assignments and some of the private equity fundraising events. We think that our position -- we are in a pretty good position.

So do you think businesses that are for sale on the commodity based business are better opportunistically now because of that situation to buy because people that don't have the deep pockets or the cash on hand want to stay away from them otherwise?

It could be. It could be.

Sarah Lester.

I have a question about the Whole Sorbet and the Fruit-a-Freeze brands. How big were those brands for Cool Brands when they owned them I guess in terms of revenue? I know they let them sort of decline but I guess in the -- maybe around 2004 it looked like they were pretty big brands for them.

Well, they were. And if you go way back at one time Whole Fruit was a $30 million brand. I think both products combined were significantly less than $1 million for the year 2006 and maybe several hundred thousand dollars. So what -- we acquired them probably if not the way down on the elevator base they were probably as low as what they had been since startup and that's why we expected Fruit-a-Freeze gives us a stick item to round out our frozen novelties and Whole Fruit gives us a brand for both foodservice and possible retail. So if we can get back to near their previous levels when they were managed by Cool Brands or mismanaged you might say then I think that we would have a heck of an opportunity.

So how long do you think -- do you think you'll be able to get back up to that level then in a few years? Is this sort of like a three to four year --?

We want to double this year. We had modest sales -- we acquired it in April which was late for the season and hard to get the product out there into the supermarkets. We had a very prudent (inaudible) program. We relaxed that a little bit but we expect to double our sales levels from this past year and then we will see if we can ignite something and build from there.

As far as the strategy you use when you purchase your commodities I guess looking to 2008 what is your strategy going to be?

Well, one of our strategies was to re-look and revisit our previous strategies. Not that I don't want to use the word you get comfortable but for three decades we were operating with well we will book quarter to quarter, sometimes go out six months. And then this past late spring because of the recent rise we were advised and guided not to because these levels were record highs. Well guess what? They went even forth further north of that.

We have been talking to others, major companies, people much bigger than us and trying to understand and see what their strategies is and guidelines and we expect to maybe take a more conservative approach on or not to look and get the bottom of the crop price but to make sure that we are booked out for a proper three to six months perhaps more if prices drop so that we won't have a wild swing or get hit like we did in this past fourth quarter which incidentally started to happen in the third quarter.

But again we were advised by both the supply end and the other strategists that wait until the summer crop when it will come in. (inaudible) it didn't happen, it was too dry here and then China and India -- a whole bunch of things. Maybe speculators. Corn became used for ethanol which farmers gave up planned wheat. Now these things are supposed to at least come back around. So we will see.

Mitchell Pinheiro .

Gerry, for '08 -- I know you don't give earnings guidance -- but do you expect earnings to be up in 2008 vs. 2007?

No, we're still in the process of recasting based on what we have said were some clouds. And although we have a lot of things going forward with us positively I would hate like hell to even give what could be considered some kind of guidance in there and then be faced with commodities going north of where we're at another 30%.

Right. Let me ask you then all things being equal today meaning if commodities don't move where wheat stays at these unprecedented level but don't go higher, the high sevens --

High sevens -- you mean high sevens a bushell which is incidentally 20, $22 100 weight which represents about a 70% increase above where we were this time the year ago

Assuming that doesn't change, do you think you can drive -- I understand commodities are an unknown. But all things being equal today would you expect earnings to be up year-over-year?

That's what our plan is. That's what we are pushing towards.

Another question is regarding margins and this is a pricing issue that might be over the long-term as well. When I look at your EBITDA margin in the foodservice business over the last five years it has dropped about 300 basis points. So it's not just a 2007 issue. Back in 2002 your foodservice margin was at 16.7 and now we are about 13.9.

Obviously I know you have some businesses there like Daddy Ray's which is lower and some things. Are you -- so I guess my question would be is there underlying latent price increases that you could have had? Is it just the mix of business that you are much more commodity oriented or foodservice nonbranded? Why would margins have fallen like that over the five-year period?

First of all I think you are right with your analysis. A lot of our growth has been in the bakery segment. Perhaps five or six years ago we weren't selling any products to like a convenience store chain like a Wawa. And now they represent a fairly significant part of our sales. That's at a much different margin than what our branded frozen product is. Some of our other bakery businesses at a much lower margin than our ICEE or our Superpretzel branded business. But we're not looking for that margin to continue to be impacted like that.

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

I want to thank everybody for their continued interest and we look forward to talking to you again next quarter.

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