J & J Snack Foods Corp (JJSF) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods first-quarter 2008 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 now turn made call over to Mr. Gerald Shreiber, President and CEO. Mr. Shreiber, you may begin.

Thank you. Good morning, everyone. With me today is Dennis Moore, our Senior Vice President and Chief Financial Officer; Bob Radano, our COO and Senior Vice President; and Vince Melchiorre, our Executive Vice President in charge of sales and marketing. I will begin with a customary obligatory statement.

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 15% for the quarter. Adjusting for sales related to the acquisitions we have made over the past year sales increased approximately 3%. For the quarter our net earnings decreased by 50% to $1.9 million, $0.10 a share, from $3.8 million, $0.20 a share a year ago; nearly all of it attributable to unprecedented increases in direct commodities that we procure. Our EBITDA for the past 12 months was $76 million.

Foodservice -- sales to foodservice customers increased 18% for the quarter. Without sales of Hom/Ade Foods, Daddy Ray's and Whole Fruit Fruit-a-Freeze, sales were still up 2% for the quarter. Soft pretzel sales were down about one-half of 1% in the quarter. Frozen juice bars, Italian ice and frozen juice treat and desert sales increased 7% for the quarter, but were about the same without the acquisition of Whole Fruit and Fruit-a-Freeze. Churros sales were up 6% in the quarter. Bakery sales, excluding Hom/Ade and Daddy Ray's were up 3% in the quarter.

Retail supermarkets -- sales and product to retail supermarkets were up 28% for the quarter. Some of this may have been attributable to previous marketing and advertising campaigns last year. Soft pretzel sales were up 26% for the quarter due entirely to increased case volume. Sales of our frozen juice and Italian ices were up 39% for the quarter also due to increased case volume.

ICEE and frozen beverages -- frozen beverage and related product sales were up 3% in the first quarter. Beverage sales alone were down 1% for the quarter and down about 6% in our base ICEE business in the quarter. Managed service revenue for others was up 24% for the quarter as we continue to strategically expand this niche part of the business. Sales of frozen carbonated beverage machines were down $361,000 in the quarter, most of that attributable to timing differences.

Consolidated gross profit as a percentage of sales in the quarter dropped to 27% from 30.9% last year. We were impacted by over $5 million of higher commodity costs in the quarter and we expect to continue to be impacted going forward. Total operating expense as a percentage of sales was 1.1 percentage points lower in the quarter due to higher sales volume and controlled expenses. Approximately $812,000 of our net earnings for the quarter was directly attributable to acquisitions made last year, Hom/Ade and Daddy Ray's. Without Hom/Ade and Daddy Ray's our net earnings would have decreased by approximately 71%.

Capital spending and cash flow -- our cash and marketable securities balance increased $2.8 million in the quarter to $59.9 million at quarter end as we continue to generate strong free cash flow. Our capital spending was $6.5 million for the quarter and we estimate it to be in the range of $21 million to $24 million for the entire year. A cash dividend of $0.0925 was declared by our Board of Directors and paid on January 3, 2008.

Commentary -- our internal sales growth, 3% this quarter, is less than desired and needs improvement. In foodservice only our Churros sales showed good percentage growth this quarter. As stated previously, we're facing a challenge with cookies in our foodservice business in part because of nutritional concerns and requirements primarily in schools. We have made progress, substantial progress, with reformulated products for launch for this school year including to transfat free formulas. Additionally, we are restructuring our sales organization to take full advantage of our inherent strength in the foodservice channels.

The Fruit-a-Freeze and Whole Fruit brands acquired last April will add incremental strength to our frozen dessert sales efforts. Our Luigi's Sherbet cops continue to show strong growth in school foodservice and in health service. We anticipate continued growth in our retail supermarket channel. We expect Fruit-a-Freeze and Whole Fruit to gain significant distribution in 2008 and we expect to double sales of these brands in retail as well as foodservice.

We have reduced our advertising budget for our retail supermarket SUPERPRETZEL brands from $2 million in 2007 to less than $500,000 this year with an initiative currently planned for late summer or next fall. Our frozen beverage segment continues to experience down gallon sales in our base ICEE business. We expect to continue to be challenged by our major customers as they make changes to their foodservice operations. Our service revenues to others continues to grow, up 24% in the quarter following a 23% increase for last year as this is a key component of our growth plans going forward.

Additionally, we have recently begun small initiatives both in the Middle East and China. The big story the last six months in going forward is higher commodity costs. Wheat flour costs have doubled from this time a year ago. They increased $5 million plus in cost increases from a year ago compares to higher commodity costs of $8 million for all of last year and $3.5 million in the fourth quarter. We expect to continue to be impacted by higher commodity costs for the foreseeable future.

We have implemented price increases over the past quarter and we expect to see the benefit from them beginning in this, our second quarter. We will continue to balance what is beneficial for our business over the long term versus the impact of aggressive pricing over a very short period of time. Our investment income will be lower over the short-term because of the money we spent on acquisitions this past year and perhaps lower short-term interest rates. Our estimated income tax rate was at 39% this quarter, up from 38% in last year's quarter due to a lower tax rate benefit on stock based compensation.

Some additional commentary -- we ran into an ugly storm beginning in our fourth quarter, a perfect storm of unprecedented increases including wheat, flour and dairy products, cheese and eggs. While there is no doubt -- no doubt whatsoever we will ultimately adjust to this platform and environment, it may affect the near-term. As I stated before, we have and are implementing significant price increases across all of our business channels. We believe our niche products and brands are strong enough to support these initiatives.

With the exception of certain contractual and seasonal adjustment obligations all of this pricing will be effective during this, our second quarter. We are hopeful that the markets affecting commodities will act in a more calm and rationalized way. In the event that it does not, we may have to act accordingly with additional pricing.

Fundamentally, with the exception of our previous statement, our business remains healthy and fertile. I note again, our sales were up 15% for the quarter. The major initiatives are underway to continue to grow our business through innovation, efficiency and other methods of sales expansion. I thank you for your continued interest and I want to assure you that all of us at J&J are working very hard for the long-term interest and benefit of our shareholders. I will turn it back over to you for any questions.

(OPERATOR INSTRUCTIONS). Mitchell Pinheiro.

Good morning. So very interested in your pricing actions as we all are in this food industry here. First, within the quarter organic sales were up 3%. Can you break down what was pricing, volume or product mix of that group?

(multiple speakers), Mitch. None of it was really pricing in the first quarter. Although we began plans to take pricing, but until it gets out it's end of December, January -- most of it is effective January 1 to later.

So it was basically all volume, 3%?

Yes.

So as we look forward here, I know you have a difficult -- you have a number of different businesses with foodservice and third party and all the other and your branded business. Is there a way you can quantify either an average price that you'd expect to garner without -- or how -- or give me a price range that you were able to take in the various pieces of your business?

About 4%, Mitch. Now some of it was as low as 3'ish and some of it was higher, maybe about 4%.

In the quarter where you do take this pricing, so starting in this period now, is there a -- did you have to either soften the blow with either promotional dollars? Any sort of instruments that you're using to ease the price increase in or is it just going to start in full now?

The only softening of the blow we did, we announced this in let's say December, and I'm not sure of the exact dates. It may have been some allowance for timing, but we've done it and our people, Radano, Vince, (inaudible) -- everybody has just -- I mean we've done it, it's out there. So what can go right? This market can soften and we'll have perhaps some more --. But what can go wrong? It can turn around to you like Moby Dick and come at with you with a vengeance again in there like it did during the period of November when everybody thought there's no way it can go higher than $20 or $21 when we were booking last year for $13, ran up to close to $28, $29 a hundred weight.

Right. Two more questions, bug -- was there any -- the retail supermarket was up incredibly strong. Was there any buy-in?

Probably. Now why do I -- I know what the business is like. You've got a price increase that's coming up in January, buy in, buy in, so it's hard to quantify where to touch base -- everybody got an increase and I would expect that they would do what any good procurement group would do, that is buy in.

Okay. Let me ask you this, is there any -- just looking at the various channels that you participate in from retail all the way through with the restaurants, quick serve, casual to normal foodservice. Have you seen any sort of just -- can you talk about the macro factors affecting some of those channels? Mall traffic, theater traffic, theme park --?

Mall traffic has been down. It's a little bit early yet to talk about the arenas for both hockey and basketball. Hockey seems to be certainly back in Philadelphia with a vengeance, which is good, although it's a little bit soft with the guys in short pants into basketball (multiple speakers) attendance.

We are really well balanced within all of the groups. There are certainly indications that a recession is perhaps either looming or in the middle of one. When we hear that there's less traffic at shopping centers and at the big discount stores because of the price of gas, I don't know what kind of impact that may have on the price of a pretzel or a doughnut or a cookie or whatnot, but I really think that we are insulated more so by being a popular priced item and a comfort food and a snack food and a fun food.

Last question maybe to Vince. You restructured your sales organization last quarter or in the summer, I forget when that actually happened.

Last quarter, Mitch.

Okay. Any, A, cost benefits and, B, any positive synergies or whatever that came out of that that you can speak to?

Yes, it was not a cost benefit move, Mitch. The folks who worked in that organization were consolidated with the rest of our sales team and what we did was we basically recut the geography. So a lot of people had smaller geographies and they could focus more on selling across everything. So it was a benefit for our cookie business in that everybody is now carrying the bag for cookies and most everybody has a smaller piece of geography to run in.

So it was not about cutting cost at all. In terms of where we're going, I think we're -- I think leveraging those synergies within the J&J team is a lot stronger because we've got a very disciplined sales organization, they know how to talk to the customers, they know how to promote and how deep to promote. So I'm seeing good things so far.

All right, thank you.

Sarah Lester.

Good morning. I have a question about Daddy Ray's and Hom/Ade. You've owned them for just about a year now. How are their results versus your expectations when you purchased them?

Hom/Ade is performing per or above expectations. It has good management, it has a good productline and we are entirely pleased with that group under Greg Lowery, his staff, [Charlie Williamson] and [Tony Hess]. And Daddy Ray's with the exception of some contracts that we had to people for things and whatnot that they pulled force majeure on us, but they are performing also per expectations. Dennis, do you want to add?

I'm sorry?

Dennis is sitting next to me and -- they're both performing per expectations.

Okay. You now have about $60 million in cash. What are you going to do with that?

Well, what do you think we could do with it? We're not going to monkey around with it. We're looking to the way to invest it, acquisitions -- oftentimes the question of a stock buyback arises, but obviously we're looking for the best use of this cash. We will manage it with -- very carefully and look for opportunities.

What about acquisitions, do you see a lot out there? Is there anything in the works?

Interestingly there appears to be a little bit more out there than what we saw maybe this time a year ago. And even more interestingly, the pricing may have been -- may be coming down a bit.

For the frozen beverage segment, the operating income was down a little bit, but service contracts were up and I had thought those were higher operating margins. Can you just talk about the frozen beverage segment, what's going on there?

Sarah, this is Dennis. Not unfortunately, it's just the way it is -- that the frozen beverage business has pretty high fixed costs and they go up every year 3 to 4% just as a matter of course. And during a seasonally low period a lot of that just flows right to the bottom line in the spring and the summer we offset that.

Okay. That's all, thank you.

Philip Robert.

Can you give me some idea of price escalation within your contracts to -- whether foodservice or the like? We're seeing the data from Kellogg's and General Mills and the like that they're -- able to get some pricing. Can you walk me through your thoughts on that?

Well, I think I just commented on pricing. We are getting some pricing and we have increased our initiatives and efforts of getting this pricing during the quarter. We expect that we will get our -- with the exception of some seasonally required contracts and some other things in place because of a timing issue we'll get all of our pricing during the second quarter.

Right, okay. Let me look at it from a different perspective then. How much of your business would therefore be able to roll to new pricing? I.e., how much of your business is current contract that's not going to be available for repricing?

Most of our business, and I say most of it, substantially most of it will get this new pricing in this quarter.

Okay, all right. Great, thank you.

Mitchell Pinheiro.

Just a follow-up. Regarding your frozen beverage business, it seemed to have struggled with the exception of your managed service revenue which has done quite well and a good move as a way to offset some of the secular weakness in that area. How do you intend to drive the beverage piece of that business this year or next year? Because it seems to be following maybe the same pattern or the same trends that the carbonated soft drink business has where people are going to noncarbonated and I know you have Slush Puppy. But what else are you doing and is there any -- do you see an end in sight to the steady declines in the gallonage?

Good question, Mitch. Obviously the Pepsi's and the Coca-Cola's, if they sneeze it affects other people within the beverage volume. ICEE is looking at opportunities -- and incidently, ICEE is coming off 2007, the best year it ever had. And I think it's noteworthy to say that the challenges that we faced with ICEE over the years we have generated what amounts to about 20% of their volume now and a managed service for others we're using the infrastructures that we have.

So I think that they have done an excellent job, Dan Fachner and his group, in one, using their resources and leveraging their abilities. But we're looking at possible opportunities that would include creamers and some other dairy delivery systems being engineered and being able to be put in ICEE or like beverage machines. Maybe someday picture a trio or a quad set-up of ICEE machines, one for cherry, one for blue razz and maybe one for vanilla ice cream with cherry inclusion. So there are some things that we're working on long-term for the business in (inaudible) while we deal with the short-term [vagueracies].

In the business, and the same with ICEE, have dispenser placements -- how did dispenser placements do let's say year-over-year? Are they up, flat, down?

They're up slightly.

Up slightly. And where do you see getting sort of the new channel, the new placements?

Convenience and petroleum outlets have certainly been increasing as they are flush with Klondike, with money and they're expanding their snack bars. For the first time now we're putting some machines in China under a co-venture with us as the lead and we have some interest in the Middle East. There's a group there that we've been talking to for a year. Somebody on our staff, Lou -- we call him International Lou -- has been working with them.

The process has been painstaking, but we're happy to say that we just got an order in excess of $1 million, about $1.25 million, Dennis? And the machines will begin to be shipped or delivered during the late second quarter in there. They're going to be placed in movie theaters in Bahrain. So maybe one day we could even host an analyst conference in there in Bahrain and have an ICEE and a pretzel during the conference.

I can't wait. So the last thing I have to ask regarding ICEE is do you have -- when I went to the convenience store show I guess a year ago, looking at the machine manufacturers in the beverage business, and I thought that there might have been some progress made on some multi-port. So not only do you have your blue razz and your cherry and your Coke, but you might be able to add lower volume but maybe new usage customers in diets or energy drink flavors and so have an ICEE machine with maybe six to eight flavors with the same footprint as you have now with your two's and four's. It that anywhere near reality for the business or is that still longer-term?

More longer-term, although we do have units in test now, including with the high energy drink. And one of the chains has recently installed -- actually it's two tri-valve compartments in there where we have six valves devoted to ICEE and the like.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Bob [Churnow].

Two questions if I may. One, could you explain what has happened -- what your experience in the past has been when we've been in a recession and how that has affected the sales, especially in convenience stores? And my second question has to do with how you handle your research and development for new products. How much money do you put in it or do you outsource what you're doing?

Let me answer the first question and then I'm going to turn you over to Vince Melchiorre, he's also responsible for innovation. During a recession we have been affected less than the average producer because our products are popular priced and we're very sensitive to that and they seem to be in all of the locations that we get a balance there.

To the extent that gasoline would push well over the $3.50 to $4.00 range in there and people go out less it might have a little bit of an impact. But then again, people stay home more so they buy pretzels in the supermarket for home consumption.

So to answer your question -- we think that we'll be affected less and that we are certainly structured to be able to handle the negative impact of a recession without it impacting our sales too much. Vince will comment on the innovation and R&D efforts that (inaudible).

Yes, I can talk a little bit about innovation. There are two things we're working against right now. The first one is we've always been good with our innovation with customers. So specific customer requests, specific customers initiatives we've always been good at innovation. We're focused on two things right now. The first one is not only keeping our foot on the gas for customer innovation, but working hard against what the consumer wants too. So more long-term trends, palpable, quick serve -- those kinds of things now, we're working on those as well as working on customer initiatives.

We do most all of our innovation internally. We have R&D labs in at least three locations to do that. And then the other part of it for us is now building innovation across all the teams. So when we buy companies, whether it's biscuits or snack bars or whatever, what are we doing from an innovation standpoint with that company and where can we take it other places across our businesses?

So if our biscuit business is mostly retail today and it's mostly a couple of items what can we do to build on that and where can we take it in other channels. So for us there's a lot of opportunities because we make a lot of different products in many different companies and we're trying to pull those together and build ourselves a deeper innovation funnel.

Thank you. I have one other question if I could. One of the primary causes of the increases in most of your prices has to do with the fact that the government is subsidizing ethanol. Have you thought of lobbying for alternative areas for government support such as algae growth as an alternative or spring grass or [Jehaba] as a way of reducing that subsidy?

No, we haven't, but I would put together a bus trip. We could start with us four in this room and then add you to it if you're going to Washington. But no, we don't have or --

Thank you very much.

At this time there are no further questions.

Let me just close by saying again that we believe that we have sponsored initiatives to deal with the recent unprecedented increases in commodities. It may be necessary for us to be more assertive, but we believe in managing our business for the long-term. All of our people our shareholders and we're not happy with our results for this quarter and we're going to do everything possible to improve them and get them back to where they have been in that lofty style of the last 26 plus quarters. Look forward to talking to you again in a few months.

That concludes today's teleconference. You may all disconnect at this time. Thank you for participating.