J & J Snack Foods Corp (JJSF) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the J&J Snack Foods earnings conference call. (OPERATOR INSTRUCTIONS) Later, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS)

I will now turn is call over to Mr. Gerald Shreiber, President and CEO.

Good morning, and thank you for joining us today. I am Jerry Schreiber, and with me today is Dennis Moore, our Senior Vice President and Chief Financial Officer, and Bob Radano, our Senior Vice President, and Vince Melchiorre, our Executive Vice President of Sales and Marketing. I'll begin with the 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 revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operations. Net sales increased 11% for quarter and 13% for the six months. Adjusting for sales related to acquisitions we have made over the past year, sales increased approximately 9% for the quarter and 5% for the six months. For the quarter, our net earnings decreased by 25% to $4 million, $0.21 a share, from $5.3 million, or $0.28 a year ago a year ago. For the six months, our net earnings decreased 35% to $0.31 to $0.48 a year ago period. EBITDA for the past 12 months was $73.5 million.

Food service. Sales to food service customers increased 12% for the quarter and 15% for the six months. Without sales of Hom/Ade Foods, Daddy Ray's, Whole Fruit and Fruit-a-Freeze acquisitions made a year ago, sales were still up 9% for the quarter and 4% for the six months. Soft pretzel sales were up about 4% for the quarter and 2% for the six months. Italian Ice and frozen juice bars and desert sales increased 6% for the quarter and six months, but were flat without the acquisitions of Whole Fruit and Fruit-a-Freeze. Churros sales were up a strong 19% in the quarter and 12% for the six months as this product continues to expand and be accepted in Middle America. Bakery sales, excluding Hom/Ade and Daddy Ray's, were up 16% in the quarter and 6% for the six months.

Retail supermarkets. Sales of products to supermarkets were up 12% for the quarter and up 19% for the six months. Our core product, soft pretzel sales, were up 7% for the quarter and 16% for the six months. Sales of our frozen juice and Italian Ices were up 19% for the quarter and 27% for the six half.

ICEE and frozen beverages. Frozen beverages and related product sales were up 9% in the second quarter and 6% in the six months. Beverage sales were alone up 3% for the quarter and 1% for the six months. Service revenue for others was up 14% in the quarter and 18% in the six months. Sales of frozen carbonated beverage machines were up $944,000 in the quarter and $483,000 for the first half.

Consolidated Gross profit as a percentage of sales in the quarter decreased to 28% from 32.6% last year and to 27.5% in the six months from 31.8% a year ago. All of this due to input costs, particularly commodities. We were impacted by over $8 million of higher commodity costs in the quarter and $13 million for the six months, and we expect a similar impact in our third quarter. We are cautiously optimistic that the year-over-year increase in costs may start to stabilize and perhaps decline in our fourth quarter. Total operating expense as a percentage of sales was 2.1% lower in the quarter and 1.7% lower in the six months due to higher sales volume and controlled expenses. Last year, we spent $600,000 on a national sales meeting in the first quarter, which we did not repeat this year. Additionally, advertising expense in our retail supermarket business was lower by about $1 million in the second quarter.

Spending and cash flow. Our cash and investment securities balance decreased about $6.3 million in the quarter because of increased working capital needs and stock buy-backs of $1.8 million. Our capital spending was $5.4 million for the quarter, and we estimate it to be in the range of $21 to $23 million for the year. Cash dividend of $0.925 as share was declared by our Board of Directors and paid on April 3. Our Board of Directors authorized $1 million share buy-back in February. And in the quarter, we bought back and retired 74,000 shares. At the end of the quarter, we held $45.2 million of auction market preferred stocks known as AMPs. As you may know, the market for this type of asset failed beginning in February. With the result, we do not know when we will be able to access our holdings. We have re-classed these investments to long-term on our balance sheet. But, we do expect that we will be eventually paid out at par at 100%, and we continue to receive dividend payments at regular intervals ranging from seven to 35 days.

One of the issuers of stock that we own announced that they will be redeeming the stock, of which we own $5 million on or about May 23. You'll note 10 to our 10(q) contain detailed discussions of these investments, why we are treating them servably as long-term and why we expect to be paid out at par.

Commentary. Our internal sales growth, 9% this quarter, improved significantly over recent quarters due to improved volume and some pricing initiatives. And food service, our churros and special niche bakery products, showed good percentage volume growth this quarter. The Fruit-a-Freeze and Whole Fruit brands acquired last April should add incremental strength to our frozen desert sales efforts. Luigi's Sherbet Cups continue to show impressive growth in school food service and in our initiative to expand into the health services sector. We anticipate continued growth in our retail supermarket channel. We expect Fruit-a-Freeze and Whole Fruit to gain significant distribution in 2008. We have reduced our advertising budget for our retail supermarket SUPERPRETZEL brands from $2 million in 2007 to about $500,000 this year with an initiative currently planned for our first quarter of fiscal year 2009. I would be on or about September or October.

Our frozen beverage segment continues to experience challenging gallon sales in our base ICEE business. We expect to be challenged for our major customers as they make changes to their food service operations. Our service revenue to others continues to grow impressively up 14% in the quarter and 18% in the six months following a 23% increase from last year as this is a key component of our growth plans presently and going forward. We have recently begun small initiatives in the Middle East and in China. There are ICEE machines in Bahrain and ICEE machines in China. The big story of the last six months is higher commodity costs. During the quarter, wheat prices were more than double from the same time a year ago. The increase $8 million plus in cost increases from a year ago for the quarter and $13 million for the six month is unprecedented. We expect commodity costs of this magnitude, or possibly more, to impact us more in the third quarter. We implemented a second round of price increases, taking effect this month in an effort to recover the impact of the cost increases.

We will continue to balance what is beneficial for our business over the long-term. We expect our investment income will be higher over the near term as our balance of investment securities and cash equivalents is higher than a year ago. Our estimated income tax rate dropped to 37% in this year's quarter from 39% in last year's quarter due to recognition -- unrecognized tax benefits. Last quarter, I mentioned we had run into a storm, an ugly storm, a perfect storm, of unprecedented increases in our major commodities. And we caution, we recognize, warn the impact on our near-term earnings. I'm not saying that we are completely out of this climate, yet, but we feel the storm effect is somewhat stabilizing. Still raining, but it's doable and dealable for us. We have successfully implemented broad across the board pricing initiatives. We aggressively continue to develop products through the pipeline, both new and from acquisition, that will serve to innovate and further grow our initiatives. Our business is healthy and fertile. Our balance sheet is pristine. We have no debt. Our team is capable, experienced and energized. We're equal to all of the challenges that we are facing. I thank you for your time today. I'm open to any questions or comments.

We'll now begin the question and answer session. (OPERATOR INSTRUCTIONS) Our first question is from Mitch Pinheiro. Please go ahead.

Who?

Mitch Pinheiro with Janney Montgomery Scott.

Good morning, Mitch, how are you?

Good. How are you doing?

Good.

So, couple of questions So, specifically how much pricing do you think you got in the quarter on average?

Well, we had a range from it could have been as high as 10% to 12%. But, roughly, it's balanced -- our sales gain was roughly 50% between volume and pricing.

Okay. If I -- so $8 million of higher ingredient costs would take about a 6% increase to offset if you had the pricing fully in place for the quarter. So -- I guess, you didn't guess -- it wasn't a full -- was the quarter -- did the price increase come halfway through the quarter? Is that --?

It didn't jump out of bed on the first day of January and suddenly get a 6% increase from everybody. Some of these things have to -- they take a little bit of time to engage and distribute here.

So -- so if for the next quarter, with the full impact of our price increases plus a second round --?

This is Dennis. Let me interrupt for a second. When he said half, he was referring to the increase organic growth increase full increase.

Right.

So, the increase would be 4% to 5% from -- on sales price increase, not 6%.

Right. I know. I understand. But the next quarter, next quarter we should see maybe better than 4.5% or in pricing. Is that fair?

That's reasonable.

Okay. Have you seen any elasticity issues?

Well, we worry about these things, and we're watching. Let's say that our people are closely monitoring this to make sure that we don't experience any issues with volume.

Have you seen any impact in any of your sort of end channels relating to the consumer, pressures here. I've heard and seen that transactions are lower in the C-store business I'm seen the ring is lower in the C store. So is there -- are you seeing that as well? Or can you comment as to what you are seeing in your various end markets?

It's really a little bit too early for us to be able to really measure that. We hear some of the same things that you're referring to. We're just re-doubling our marketing and sales efforts in there so that we can lessen the blows.

Okay. In terms of your commodity buying, can you talk about what kind of coverage you might have for this upcoming quarter and/or for the remainder of the year?

Well, we're going out between periods of 45 to 90 days. And we continue to watch closely the flour and egg and other commodity markets. And we've designated a person to control that for as the lead person on all of our base commodities.

Okay. So there's no -- the good news is is that wheat has come down --

It has not come down. Wheat is still double what it was a year ago. It's come down from the shoot-to-the-moon prices back in February. Which we really hadn't booked that either.

So in -- but in the first quarter you were buying a lot of wheat at the -- when wheat was trading at well over $10 a bushel. Now it's come down under $9. I know, there's basis and all the other premiums and you can't hedge and you have to factor in. But it seems like, if you're buying sort of on a spot basis, it's becoming a little bit more favorable than it was in Q1. It seems to me. I know you bought back in Q1, but going forward like maybe in Q3 you start to have -- later Q3, you start to have a positive year-over-year, not year-over-year --?

We see the one thing that's predictable about what's happened is that it's totally unpredictable.

Okay. Yes, right. Okay.

Another question on sort of the top line, have -- did you have any buy-in because of your price increases in the first quarter? Did buy-ins help you?

Your bigger retailers will buy in or want to get some, particularly in the supermarket chain, they'll get a little buy in or want to get some protection. But, there's a little bit of that. But , nothing so significant that it would make the numbers --

Okay.

big headed or lopsided.

Okay. And in terms of if you look at the marketing decline, I realize it looks like marketing was down about three -- marketing -- well, I think you said you took $1 million dollars out of ads for that Internet campaign you did last year, which didn't seem to benefit you much so that's an OK drop. But is it -- are we -- should I be concerned at all that you're investing less in marketing?

Interesting, Vince has some great ideas and concepts that we plan on initiating there, and we realize the importance of investing in our sales or marketing efforts for the future, and we're going to do that. I'm not so sure our campaign last year was the best use of our marketing dollars. And I think we'll have a little bit better control and direction on future spending.

So if -- so the cut in marketing, obviously, you can look at it and say your cut marketing out to make the numbers look better.

That's not what we're doing.

So.

Rest assured that I am not looking to cut out muscle or, for that matter, fat in marketing area to improve numbers over the short term. That is not the direction that our management and company is going.

And I'm not saying it is. I'm just looking at so what was cut? And I totally, I'm on board with the TV, Internet campaign.

The only thing that was cut was the viral campaign that went on You Tube in there with the wrestlers that I know three people in the country watched after I told six people about it.

Okay, okay. And then last thing is on SCB. You talked about the challenge -- challenging environment there. So what's going -- what are you doing in the back half, your strong SCBs to try to shake things up?

Well, ICEE, the ICEE group has its best year ever last year in '07, and we expected to beat that this year. So we continue to be -- to look at different ways that we can develop its growth. The managed service -- managed service continues to grow double digits and strongly. But the numbers from ICEE were probably a little bit better than what might have been reported on the Q2 because there was a higher energy -- there was higher fuel costs and there was a one time write-off on some inventory.

Okay. One time write-off on inventory -- was that in the Q?

I believe, yes.

Okay. I'll look for that. All right. I will yield the floor. Thank you, Jerry.

Thank you.

Thank you, Dennis.

Our next question is from Robert Costello. Please go ahead.

Hi, I had two questions. One, was there any new restaurants that you signed up during the quarter? What's the outlook for the year with market expansion? And I had a question about the Dip and Dots brand regarding your -- I see there's a new company out there, a new brand Itsy Bits. And what's going on with that?

Bob, let me answer your questions first. Let me deal with the first part last. We expect to introduce a product line called ICEE Bits, which are kind of similar to Dip and Dots, little bits of ice pieces.

the kids love them.

Itsy Bits label, and we expect to introduce this at the NRA show in a couple of weeks. So far our, early interest has been positive. And we are excited about this opportunity.

With respect to any new restaurants, we have various tests going on right now with several chains, including a couple of our core products. And we're hopeful that by the first quarter of next year, that we will be going from a controlled test perhaps into some limited expansion. But some of these things take years, and we're tracking into the -- going from the product being developed and accepted into going from the test kitchen into some store testing.

Alright. Are you going to be manufacturing the ICEE Bits or is somebody else?

Somebody is manufacturing it for us on a co-pack arrangement. It's one of the premiere --

Right.

dairy companies in the country.

Right. Last question, the Whole Fruit, I saw you had some couponing in the paper on Sunday. What do you anticipate for the year for that product since you bought it a year ago?

We have resurrected it. We have brought it back from the dead.

No, it's a great product. I agree.

We have given it some life. And, it is doing better than projected. We expect to have good sales this year and better sales next year.

Is it mostly going to be sold through the C store or the supermarket?

Mostly being sold for the supermarkets. Although, we have gotten interest in the Club Channel and from some other mass merchandisers, too.

Right. And how is it going to be distributed in the supermarkets? By you or by another?

It's going to be going ex-warehouse, right, and to some limited extent using independent --

No, you gave it out at the annual meeting It's a great product. So keep up with it. Thank you.

Your next question is from Sarah Lester. Please go ahead.

Good morning.

Good morning, Sara, how are you?

I'm good. How are you? I wanted to ask -- could your just talk about more some of your new products coming up? I think you might have some things coming out and some mass merchandisers. Any more of new products? And also talk about the -- how far you've gotten along into the quick-serve restaurants?

It's Vince. You will see us debut some new things at NRA. You'll a couple of new pretzel products from us at NRA --

Okay.

as well as a few others. There are some things coming very quick in the pipeline . You'll also see us fall season introduces some new school products and frozen novelty and cup products. So there's a lot coming.

And the bite size --

the churros as well. There will be bite-sized churros introduced at NRA. You'll see us introduce a lot of new things in the next few weeks.

Okay, that's great. Thank you.

Our next question is from Cheryl Cortez. Please go ahead.

Hello.

Hello, Cheryl.

I had a quick question if you were doing any sort of strategic planning on the additional rebate checks that all the taxpayers might be getting, talking to some groceries. They're doing some things there. Is that on your radar?

I didn't get a check. You know, that's an interesting question. And I'm wondering perhaps we can look into that.

Okay. Well, thanks a lot.

Thank you.

(OPERATOR INSTRUCTIONS)

Before we move on, I just want to clarify a statement I made with respect to our ICEE company's earnings. Even though their earnings were down about $1.8 million for the six months, we do expect to have a much better second half, and it will be challenging for us to beat last year's considering that. But, we do expect to have a good second half with ICEE. And we're continuing to expand our efforts in managed service for others, which is growing at a double-digit rate and has been for several years.

We a have a question from Mitch Pinheiro.

Just a follow-up, Gerry. I looked through the queue and couldn't find the asset write-off on the SCD. Was that another, Dennis, was that another in the cash flow statement? Was that what that was?

Yes.

Where do I find the write-off?

That would just be in operating income.

Okay, about how much was it?

About it was several adjustments. Not necessarily all write-offs. I think we said, approximately for the six month period totaling about $900,000 for the six months?

For the six months?

Right.

Okay. And so was it about half and half?

Yes.

Okay. My final question just getting back to SCB. If I go back five years to 2002, you had EBITDA of SCB $26.6 million. And then in 2007, it was a good year for you. It recovered back to $25.9 million. So in five years it was basically flat, down slightly. So , clearly it's been challenging over the last five years with the carbonated soft drink declines, probably, paralleling or mirroring FCD. But, I'm just concerned that all the growth in beverage is non-carb. And it's all the alternative water and the juices and teas. What can you do? Is SCB going to separate itself from CSD as far as the growth pattern? Or are you going to start to get into -- put more barrels in your FCB to do Monsters and Red Bulls, etc.

We've looked at these things from time-to-time, and it's true that we at ICEE are experiencing some of the same challenges and difficulties that the major beverage players, Coca-Cola, Pepsi Cola, are experiencing with regular cola sales. It's one of the reasons we expanded. We acquired Slush Puppy. And we're looking at other possibilities. We will continue to seek out new products and selective acquisitions in there. To maintain its growth and profitability.

Okay. I mean it just -- it just-- and then on an operating -- even EBIT market basis -- it's gone from 23% to 16% during that same time period. So you held dollars, but it's less profitable sales dollars. And your ROA has kind of held. So, I was just wondering if you're going to continue to invest in SCB and try to grow the business? Or is it going to be a cash, or kind of hold onto the current level. I just don't know where it's heading.

I hear your point, and it's still generating cash and very profitable cash. So we're going to continue to keep that in the flow.

Okay. Thanks.

Thank you. Any other questions or comments?

At this time we have no further questions.

Thank you for participating in the conference call. And I look forward to talking to all of you again in our next quarter. Bye, now.

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