J & J Snack Foods Corp (JJSF) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the J&J Snack Foods first-quarter earnings conference call. (Operator Instructions). Please note that this conference is being recorded.

I will now turn the call over to Mr. Gerry Schreiber.

Good morning everyone and thank you for attending the J&J first-quarter conference call. I would like to begin with the opening obligatory statements. And I will read this and then I will get into the meat of the substance.

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 the date hereof. We undertake no obligation to publicly reverse or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Result of operations. We had a good quarter, a very good quarter. Net sales increased 6% for the quarter, representing the 153rd consecutive quarter of sales increases. Approximately $3.1 million or 40% of the increased sales was a new product sales of funnel cake fries to one customer, Burger King.

For the quarter our net earnings increased by 64% to $7.1 million or $0.38 a share from $4.3 million or $0.23 a share one year ago. Our EBITDA for the past 12 months was over $101 million.

Food service. Sales to food service customers increased 4% for the quarter. Without the sales to Burger King, sales increased less than 1%. Soft pretzel sales were up less than 1% in the quarter. Italian ice and frozen juice and dessert sales decreased 7% for the quarter. Churros sales were down 8% for the quarter, but they were up against a 33% increase a year ago. All of this was attributable to lower sales to one or two customers.

Bakery sales, excluding biscuit and dumpling sales and fruit and fig bar sales, were up 3% in the quarter. MARY B's biscuit and dumpling sales were up less than 1% in the quarter, and fruit and fig bar sales were essentially unchanged.

Retail supermarkets and groceries. Sales of products to retail supermarkets were up sharply 26% for the quarter. Perhaps this is reflective of more people eating at home in today's economy. I think it behooves us to state that with our portfolio of products we are very, very well-balanced for consumption at home, consumption at ball games, consumption at school, consumption at [Piggly Wiggly], consumption at shopping centers and malls.

Soft pretzel sales were up 13% or a case volume increase of 8%. Sales of our frozen juice and Italian ices were up 54% on case volume increase of 52%. Again, we believe this is reflective of perhaps more snacking at home in today's economy.

ICEE and frozen beverages. Our ICEE and frozen beverage and [Ray too] product sales were up 5% in the quarter. This includes ICEE, Arctic Blast and Slush Puppie. Beverage sales alone were up 12%. Gallon sales were up 6% in our base ICEE business in the quarter. Two new customers accounted for approximately 80% of the gallon increase. Service revenue for others was down 6% in the quarter, however, it was up against a 30% increase a year ago. Sales of frozen carbonated beverage drink machines were essentially unchanged in the quarter.

Consolidated. Gross profit as a percentage of sales in the quarter increased by over 2 points from 28.8 to 30.9. We benefited by the over $3.5 million of lower ingredient and packaging costs in the quarter. We expect the benefit of lower ingredient and packaging costs compared to the prior year to decrease going forward.

Total operating expense as a percentage of sales was 0.8 percentage points lower in the quarter, primarily due to higher sales volume.

Capital spending and cash flow. Our cash investment securities balance increased $648,000 in the quarter to $119.6 million. We bought back -- purchased [five point million dollars] of our stock in the quarter. Our capital spending was $7.5 million in the quarter, and we estimate that capital spending for the year will be in the $25 million range.

Higher spending in this year's first quarter primarily related to the purchase of FCB machines. A cash dividend of $0.1075 a share was declared by our Board of Directors and paid on January 6, 2010. Our Board of Directors had previously authorized 1 million share buyback in February of 2008. We have since bought back and retired [739] shares through the end of December.

Our sales growth of 6% this quarter resulted primarily from unit volume increases and decreases. Sales of bakery products and funnel cake showed good growth.

Unit sales of soft pretzels in our retail supermarket segment were up 8% in the quarter. And case sales of frozen ices and juice bars were up 52% in the quarter. This marks the fourth consecutive quarter of strong volume increases of frozen ices and juice bars, and the third consecutive quarter in a row for soft pretzel increases.

Our frozen beverage segment had strong sales growth in our base ICEE business, primarily because of new customers. Our service revenue to others dropped this quarter, down 6% in the quarter following a 30% increase for last year. But we are optimistic we will continue to grow this niche service business from this niche business of ours going forward.

We expect our investment income will continue to be lower over the short term, even though our balance of investment securities and cash equivalents is higher than a year ago, as yields on short-term safe investments are pretty sparse.

Our estimated income tax rate was at 40% for this year, down from 41% last year. We are estimating a tax rate of 40% for the full year.

I want to thank you for your continued interest. And it is a pleasure for me to report this positive news to everyone. I know, Sarah, you had asked, you wanted to have a question early and first so you don't get backed up too much on that famous Mr. Pinheiro's book of questions. So Sarah, if you are online.

(Operator Instructions). Robert Costello.

I have a question on the balance sheet. With regards to the current marketable securities held to maturity and then the long-term marketable, can you explain what is in there, and what you are earning on that?

This is Dennis. This is a combination of CDs and several in agency securities and FDIC-backed corporate and securities. In general we are earning 1.5% or so on average in those investments.

The answer is we are in real safe (Expletive Deleted), but we are getting real low (Expletive Deleted) in coupon on it.

Right. Now the -- those auction rate securities, they are all gone?

Gone. Gone for three quarters now.

The new customers you mentioned, the two specific ones, are they retail customers that you could identify or, I mean, who is the end market for that product?

One of them is a premier company that operates in malls, and we are still in the middle of expanding with them. The other is a premier cafeteria, buffeteria company that operates all over the country. And I don't know if we are at liberty to disclose that. We would really have to check with them. But (inaudible) in there. We are enjoying positive sales and everything looks go, go, go.

Right. A question on your sales. Can you break out the -- maybe you have mentioned it -- how much did the sales, the 6%, was price and how much was units?

It looks to be all units.

Okay, thank you very much. Good luck.

Sarah Lester.

You're trying to cause trouble, Gerry.

Why am I trying to (technical difficulty) trouble? I'm trying to be fair.

Okay, thank you. My question -- I have a couple of questions. In the food service segment it looks like when you take out Burger King revenue was down 1%. I was wondering if you are seeing that same kind of trend so far this quarter or if you are maybe seeing a little bit of strengthening?

I am not sure how you are figuring food service, but from what we report the food service segment sales were up about a little less than 1%. But still not significantly positive.

Right. Is that what you're seeing so far for the second quarter? Have you seen any improvement?

(inaudible) because we are actually only one week into the quarter. The data we have as of today is only one week into the quarter. It would be better probably (technical difficulty) one week into the quarter.

What are you hearing from customers though? Are you hearing that things have gotten a little bit better for them or has there been much of a change?

I would say it is a mixed bag, but I don't think there has been a significant change.

Then for Burger King have you gotten any kind of -- I guess the product was launched in December. Have you gotten any kind of indication from Burger King, any kind of initial impressions from them on the success of that product?

Everybody appears to be satisfied.

Than my last question is on acquisitions. What are you seeing out there? Are you seeing -- I have heard from other sources evaluations are coming down a little bit. Is that what you are seeing or what are you seeing out there?

We are seeing some valuations coming down. We are seeing some valuations that are hard to justify. We are hopeful of -- we want to make the right acquisition. It would real easy to make an acquisition and then to be troubled with it for two, three or four years. Our name is not Mercedes or one of these other companies that buy things and never integrate it. So we are looking at things, and it has to be just about -- even with a lot of hard work and even with a fixer-upper we have to be real darn sure that we can integrate quickly, fully and it becomes a slam dunk for us.

All right. That sounds good. Thank you.

Margot Murtaugh.

Just a couple of questions. You mentioned the juice bars were up 52%. What is driving that growth and what is the outlook there?

Two things. One, more people are eating at home. And again our portfolio is very, very balanced. So even though there is less traffic at some of our traditional go to places, all right, with more people staying at home and perhaps renting a DV or doing something in the family, like they are eating more of our products at home.

Also, our juice bars, our new 100% juice bar, have been approved by the school lunch program, and we started launching them last year. Now that launch has been expanded and some of that product is being put into the club stores. Some of the smaller restaurants have been putting them in. And some of the organic and the kosher certified distribution arms are also leading with them. So we seem like we have a nice little niche there that is going to grow very nicely.

What kind of potential could there be? Any kind of growth rate or (multiple speakers)?

We had some (inaudible) growth rate this quarter on 26% and 50%. I will be real happy if we can continue with double digits.

Then on your commodity costs you said you benefited by $3.5 million this quarter, and you expect that benefit to be lower as the year went on. I wondered how far forward are you bought in wheat? How much of visibility do you have on wheat and other commodities?

We are out to early summer months. We are pretty good there. So we are kind of like in the -- I would say we are kind of in the catbird seat with wheat because we haven't bought [way at the end], and so we have plenty coverage.

Sugar seems to be a variable right now that is bouncing around a little bit -- and shortening. But over the years we have done -- we have managed (technical difficulty) and along the way we have been able to manage earnings. We are not going to manage earnings to manage the business.

On sugar, for example, do you have a contract on that or do you buy that on the spot or --?

We have contracts on sugar, but some of the future contracts have escalators in them. And I don't mean the escalators that take you upstairs.

Right, right.

(technical difficulty) problems.

On all of the commodities, how much visibility do you have? I mean, [is there any] -- I mean, how much are contracted (multiple speakers)?

We could project out to our fourth quarter this year.

Really? Okay.

The end of the quarter.

Thank you very much.

Mitch Pinheiro.

I decided to let everybody else did on first, then I will ask some questions. So just following up on Margot's question, the commodities -- you feel good that you have good visibility and you have enough pricing, I would presume, in your products that commodities really aren't an issue in fiscal '10? Is that fair?

(technical difficulty) better than we did two years ago. But to answer your question, yes, we feel good. But should something go awry or awack then Vince and his team will look at it. We will do what we have to.

But we are very sensitive about taking price. And we probably way back when we did take price a year and a half or so ago, we never took the full complement of pricing. So we have managed the business. We have gleaned some cost out of -- we have gleaned some fluff out of some of the other areas in manufacturing and whatnot. So we are confident and hopeful that this year that we can refrain from taking pricing as long as possible.

I was actually curious, if there -- we always worry about if there was meaningful commodity deflation -- that is not projected yet, but if there were, would you be at risk for having to give back price on product, or do you think you can hold prices where they are in your core areas?

Most of our products are brands and most of our brands are still popular priced leading brands in their category in a lot of niche markets. So I can answer that with I don't think so. But --.

Okay. How about Burger King, so clearly that was a nice new account win and helped the fourth quarter. As we look forward was there --?

(technical difficulty) not in the fourth quarter. I don't think we got anything in the fourth quarter.

Well, what I need is fourth calendar quarter, December quarter. Obviously, a channel [shell] there. Should we expect -- would the takeaway -- was the type of numbers you saw in December quarter, is that what we can project forward in March and June do you think?

We hope so. You know, and you know the Company as well as anybody, for years now we have talked about making inroads to the fast food and restaurant group. We had a couple of things out there that had gained traction, that were doing okay. We never thought we would get a home run or a triple right off the bat. I would certainly call the Burger King in that group.

A lot of people worked a long time during the summer months on this project. Knowing they were working on a project, and also knowing that it might not happen. But we got geared up. We established some lines here in California. We did it out of our normal running cash flow. We started the lines and we polished lines, and December it launched.

It gives us great promise and hope that similarly we can develop other product lines that would be offshoots of churros, offshoots of funnel cakes, offshoots of pretzels, offshoots of juice bars, offshoots of one of our bakery goods that we do well -- that we make well. We have tremendous R&D capacity and tremendous plant firepower.

So for the first time in years the mountain climbing that we have been looking at, we are getting some tractions. We have got the right spikes and the right steel on and we've got the right team, so we hope to be able to do more of these. And they are proprietary, so that helps too.

Could you talk about, perhaps list in terms of the food service segments the two or three best performing channels for you and the two or three weaker channels?

In food service?

Yes.

Well, obviously pretzels is the best.

In segments, like stadiums, theaters, snack bars or retail, if you could --.

We had a good year with theaters. Stadiums -- our school business has been a little bit squeezed -- budgets, monies. Our mall business, which we call our shopping center/mall business has been hurt. I am giving you the negative first. So food service has been -- if not quite a mixed bag, it has had more ups and downs than a monkey bar.

So the arena/stadium business, how would you characterize that?

Overall up.

What about C-stores?

Down.

Okay. (multiple speakers).

Dollar stores (multiple speakers) has been up. Again, that is a new segment for us. That came out of nowhere and in two years became a $30 million business for us. Not tremendous, but a nice little piece that we weren't in a couple of years ago.

How about club?

Clubs is doing fine.

When I look at IRI for the 12 weeks that ended December 27, your sales were up 37% in your frozen novelties, but you reported much stronger growth in the quarter. How do you explain the difference? Wal-Mart?

It is Vince. I would say we continue to have good growth in Whole Fruit, as we have built our [stick bar] business. And we also had good success in our core businesses, particularly with LUIGI'S and ICEE.

But our non-reporting club. That is only the supermarket. How about the nonreporting?

That is -- that is IRI, but some of that.

Sam's Club store sales.

There are some club stores sales in there too.

So you think club -- so club stores are in your retail supermarket line?

Club stores here for us are in food services, as we reported. So (multiple speakers) between IRI and what we reported, Mitch?

I just saw your sales in frozen novelties in the first quarter, I had calculated up 54%. And then when I look at IRI, I am looking it up 36%, 37%.

It is always hard to reconcile that. I would probably say Dollar stores and I would also save deeper penetration of LUIGI'S, and as we get in Whole Fruit bars in other locations.

How about the same for soft pretzels. Your soft pretzels were up about 13% in sales in the quarter, and IRI showed 12 week dollars sales up 6%. Usually I see companies underperform IRI, and there is always the Wal-Mart factor. In this case you guys have outperformed it, and I was just curious whether -- are you indexing at Wal-Mart?

It is mostly traditional retail. Some of it is like CNS. Some of it is Target, which you probably wouldn't get in your numbers. I don't know if Target is in your IRI or not.

This is [FBMX] so it does have mass, but ex Wal-Mart.

The foodies, Southern chain.

I think it is the Sherwood's and the Kroger's, and some of that deeper penetration that probably didn't get in IRI.

[Booties] in the South. There is a couple of these places in the South.

Okay. I was just curious. Then final question, if you look forward -- you don't give guidance, but looking at 6% sales growth in this quarter, is that something that might -- is that a good target for the rest of the year, or if you could give us any kind of color on the top line?

We would think 6% at a minimum. That doesn't mean 10%, but it certainly can mean 7% or 8%.

Thank you very much.

(Operator Instructions). Robert Costello.

A question on the club stores. Your price increases versus what the operators are passing on, has there been a different in the number? Because when I shop at the stores I notice that they had been pretty aggressively raising prices at will because of the consumer shopping there right now.

Where do you shop?

At BJ's.

BJ's. Well, (multiple speakers).

And you've got a lot of products in there.

I know. Sam's, Costco, BJ's. BJ's may be a little more aggressive with price than some of the others.

So the price increases you talk about, have you noticed that the retailers have been tacking on of late or no?

We haven't taken anything in well over a year so --.

Right, but obviously you track -- so I mean, what the consumer is paying is what I am trying to identify with, and how that will affect demand going forward.

You know what, give us something specific and we will track some of this, particularly as it affects to one of our core products. You don't have to do this now, you can give me a call or slip me a note or whatnot. But every once in a while we will see something that goes awry in there, and it is just stuck like that and we have to fix it. We will send somebody out there and --

Last question. On the Burger King account, how many stores are you in right now? Is there still more to go? How big in the country is it?

There is 7,000 stores in the country, I believe. At last count we were in over 6,000 of them, getting to the 7,000.

Going forward with other products do you anticipate -- as I said to you earlier, I remember seeing the product down in South Jersey and test marketed in smaller stores before it went nationwide, is that how you anticipate the rollout to be if you get any other products?

You never know. You never know. We had extensive tests at Richmond, Virginia, which was even kind of like shielded from us. There are some tests going on in the West Coast with another chain. But all we can do is what we do best every day, make a good product, provide it with good nutritional value and good pricing and good logistics, and work with the partners that we have. Hopefully we are going to be able to scratch gold now and then.

Right. Thanks for your time.

At this moment we are showing no further questions.

Well, I wanted to thank everybody for attending the conference call. And we look forward to talking to you next quarter, when hopefully we can share equally as good news. Bye now.

Thank you, ladies and gentlemen, this concludes your conference call. We thank you for your participating. You may now disconnect.