J & J Snack Foods Corp (JJSF) 2011 Q1 法說會逐字稿

Welcome to the J&J Snack Foods first-quarter earnings conference call. My name is John, and I will be your operator for today's 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 the call over to Mr. Gerry Shreiber. Mr. Schreiber, you may begin.

Good morning, everyone, and welcome to our conference call for January 21, 2011. I'm Gerry Shreiber, and with me today is Bob Radano; [Theodore Sheppard], our CED; Dennis Moore, our CFO; and Bob Pape, our Senior VP of Sales and Marketing. I have neglected to say that Bob Radano is our Senior Vice President and COO.

I will begin with the forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties and 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 or circumstances that arise after the date hereof.

Results of operations -- net sales increased 4% for the quarter. Excluding sales from the acquisition of Parrot Ice in February 2010 and California Churros in June 2010, sales increased 2% for the quarter.

For the quarter, our net earnings were basically unchanged at $7.1 million, or $0.38 a share from a year ago. Actually, it was a couple of dollars, up a couple of thousand dollars up, but we are basically unchanged. Our EBITDA, earnings before interest, taxes, depreciation and amortization for the past 12 months, was $108 million.

Food service -- sales to food service customers increased 4% for the quarter. Without sales of California Churros, sales increased 1%. Soft pretzel sales were up 1% in the quarter, Italian Ice and frozen juice bar and dessert sales decreased 1% for the quarter. Churros sales were up 49% in the quarter, benefiting from the acquisition of California Churros. Without sales from California Churros, churros sales were still up a strong 7%. Bakery sales, excluding biscuit and dumplings sales and fruit and fig bar sales, were up 4% in the quarter. Biscuit and dumpling sales were up 2% in the quarter, and fruit and fig bar sales were down 12% with sales generally down across the board.

Retail supermarkets -- sales of products to retail supermarkets were up 12% for the quarter. Soft pretzel sales were up 2% on a case volume decrease of 1% for the quarter. Sales of our frozen juice bar and Italian Ices were up 18% on a case volume increase of 24% in the quarter.

ICEE and frozen beverages -- frozen beverage and related product sales were up 4% in the quarter, although we had anticipated more. Beverage sales alone were up 6% in the quarter. Gallon sales were up 3% in our base ICEE business in the quarter, driven by increased sales to one customer. Service revenue for others was down 1% in the quarter, even though expenses related to service revenue to others was up. Sales of frozen beverage machines were up $235,000 for the quarter.

Consolidated -- gross profit as a percentage of sales in the quarter decreased to 29.62% from 30.86%, for the same period last year. We were impacted by about $2.3 million of higher ingredient and package costs in the quarter. We cannot reject the impact or benefit of changes in ingredient and packaging cost going forward. However, there has been a very significant increase in the market cost of flour since June, and the cost of our other ingredients. Although we are implementing price increases, we expect our margins to be pressured for at least the balance of our fiscal year.

Total operating expense as a percentage of sales was 0.6 percentage points lower in the quarter. Capital spending and cash flow -- our cash and investment securities balance increased $9.7 million in the quarter to $126 million. We continued to look for acquisitions as a use of our cash. Our capital spending was $5.1 million in the quarter as we continue to invest in plant efficiencies and growing our business. We are presently estimating capital spending for the year to be between $25 million and $30 million, which includes $8 million for the expansion of our Midwest bakery manufacturing facility.

A cash dividend of $0.1175 a share was declared by our Board of Directors and paid on January 5, 2011. During the quarter, we did not buy back any of our stock.

Commentary -- our sales growth of 2% this quarter before acquisitions was lower than what we would have liked. Organic sales growth in food service of 1% was lower yet. Sales in soft pretzels and food service continue to be marginally up, and frozen juice bars and ices continue to be marginally down. Churros sales were up strong, aside from the benefit of the acquisition of California Churros. Our fig and fruit bars businesses had two consecutive quarters of double-digit sales decline. Funnel cake sales to our largest customer were down 30%, and we expect the sales decline to continue.

Unit sales of soft pretzels in our retail supermarket segment were down 1% in the quarter, continuing a trend of the recent past. Case sales of frozen ices and juices were up 24% in the quarter, likewise continuing a positive trend. We plan to introduce a new item, pretzel dogs, in our second quarter to expand our line of retail supermarket pretzel products. Additionally, we are exploring a line of protein-filled pretzel appetizer type products which would compete in the hot appetizer snack category.

Our frozen beverage segment has begun to lap strong gallon sales growth in our base ICEE business. Our service revenue to others was down 1% in the quarter, but we hope to get the revenue line to begin showing growth again in the near future. We were impacted by significantly higher expenses in the ICEE group this quarter, many directly related to service business and parts usage, which we have taken steps to address.

Our estimated income tax rate was at 37% for the quarter. We're estimating a rate of between 38% and 39% for the full year.

I thank you for your continued interest and I would turn the conference call back to you for any questions and comments.

(Operator instructions) Akshay Jagdale.

I wanted to start off with a few questions on sales and then hit the margin line as well. But first, on volume growth -- and again, everything I'm asking is just to get a sense of organic growth and to see if there's any pickup that you are expecting. So first, if you can just talk about the pretzel dogs and protein-filled appetizers, how long have you been working on this? What are your expectations near-term, longer-term? What kind of opportunity does it present?

Well, let me answer. I'm going to put them both together. We have been working on these products for the better part of a year, or close to a year. One is being tested in food service as we speak, the Pretzel Hot Dogs. People are excited about it, they like it, they've tasted it, it's big. It will be at hundreds of special little football and Super Bowl parties, and we've had about a half a dozen acceptances from major retailers. We are expecting this product to start to have what we hope for our meaningful sales towards the end of our second quarter, which would mean February and March. The protein products -- it's probably not going to happen until quarter three. But we are expecting, between both of them, Bob, would you say, $5 million to $7 million in annual revenue?

So $5 million to $7 million in annual revenues combined in fiscal 2011?

No, $5 million-$7 million annualized.

Annualized, okay; and that's for the first year. And beyond that, you'd expect it to grow, but you are not -- I'm assuming you are not willing to say how much more beyond that. Right? So you are saying first -- so annual, meaning first annual sales $5 million to $7 million. Did I interpret that correctly?

That's correct, Akshay.

And then, just on pricing, can you -- I know you said you're going to take pricing. Can you give us a sense of magnitude and how you came about that decision of taking pricing?

Well, the average will come out to about 3.5% to 4%. And as you can imagine, Akshay, there seems to be certain levels of resistance by major retailers on pricing. But we have initiated all of our pricing, and with the exception of a few accounts, a few stragglers, as we would say, we expect to have them all done in the next couple of weeks and implemented.

And just in terms of the magnitude, how did you come about 3% to 4%? I'm trying to understand your thought process in terms of elasticity and how you're thinking of pricing relative to cost, which will lead me into my next question on margin.

[A combination] all these things. We've seen our input costs go up a certain amount. We want to protect margins within reason, and we looked at numbers that were north of that, up to 5%. And quite frankly, we follow what some of the other good companies and the big companies did. If this commodity turmoil that we are in continues or gets much worse, we might have to look about doing something again later on in the year.

That's helpful. And then just leading into the next question, on gross margin, you didn't quantify what the impact could be on commodities, and I understand why. But can you just give us a sense of how much of a gross margin hit you're expecting over the remainder of the year? Just give us some relative sense. This quarter, we know what it was; it was higher than we had expected and, I think, higher than most analysts had expected. So just trying to get a sense of magnitude in terms of gross margin pressure that (multiple speakers).

That's a good question; maybe not, maybe not. And I know we lost 1 and 3 or 4 basis points during the first quarter. But keep in mind that we had not affected our price increase in that period, but maybe not, hopefully not. But we'll keep our fingers crossed and we'll watch what happens.

So you are saying maybe gross margins will remain stable year-over-year? Is that your hope?

Dollars.

Dollars, gross profit dollars flat year-over-year is what you are hoping for? Is that fair?

That's fair.

Okay, and then just any comments on the beverage business? You mentioned it was a little bit weaker than you had expected. Why did that happen and what are you doing to fix it?

Well, some of our expenses got out of line, no one single reason -- fuel, we moved into a new building, we geared up for additional business, both in the service revenue business and both in the sale of our beverage products. And although we had a nice sales increase, we were really expecting a few points more. So the end result is that we probably had a little bit of surplus in the areas of parts and labor and some point-of-sale and overtime, and getting things done. We have started to trim that -- as a matter of fact, we have attacked it with a vengeance. And certainly by the end of the second quarter, things will be back in line.

And just on that line, G&A -- SG&A as a percentage of sales was 50 basis points, I think, lower than a year ago. Do you expect a similar trajectory for the remainder of the year, or could it even get better?

I don't know if it's going to get much better. We're pretty skinny right there.

But you could see 50 basis points or so of leverage there, as we saw in Q1, for the remainder of the year?

That's the goal.

Okay, and then just the last one -- anything on -- can you help us on what you are seeing there in the M&A space? You were very close last quarter, it seems like, an acquisition. We've heard suddenly there's some assets out there, like [Tasty Baking]. But if you could just, generally on what you are seeing, what's kept you on the sidelines despite having the firepower to make an acquisition, etc., that would be very helpful.

No comment. We are looking for opportunities to utilize our growing surplus of cash. Beyond that, no comment.

Mitch Pinheiro.

Actually, this is [Brian] stepping in for Mitch; he's on the West Coast this week. I just wanted to hit on a couple of things. Akshay hit on a lot of the questions we were focused on. I just wanted to clarify. I think we were a bit surprised to see lack of pricing in the quarter. Were we just off there, that maybe you guys were taking -- we thought maybe you were taking pricing already, but that's starting -- maybe we were just off on the timing there?

No, no, you guys were off. I think -- I'm looking at the quarter notes at the end of the year, we spoke about taking pricing January. (Multiple speakers).

That's fair; I think that's what you said earlier in the call. I just wanted to clarify that. And then, again, just thinking about the pricing actions, you are talking about 3% to 4%, I believe. With the degree in which commodities are moving and thinking about the impact this year, do you see the impact of commodities -- I guess it went negative $2.3 million for this quarter -- sort of what you are seeing in commodities and what you are anticipating taking in pricing. Do you still think we'll get a larger negative impact before it gets better here in the second quarter and maybe looking out for the next three to six months?

Yes.

And then just thinking about the organic growth in the business, obviously new products are going to help. Where do you see the most -- where do you feel like you are under the most pressure here, or maybe organically where -- maybe what segment, if there's one that you could call out, is struggling the most here, and how you view it in the next -- over the near and maybe intermediate-term as far as maybe how you can improve it and how we should think about it?

Well, we worry about sales across our whole portfolio. Interestingly enough, two years ago I was very concerned with the C-store business, which had seemed to have gone through some recessionary adjustments. That seems to have recovered, and as a matter of fact, its week-over-week of sales increases is pretty good. But we are still focusing on all of our portfolio to increase sales. And, recession aside, we believe that our product line is still fertile and we are still looking to grow organically.

I'll jump back in the queue. Thanks for your time.

Brian Rafn.

Give me a sense on the ingredients side. Is there anything -- eggs, flour, shortening -- is there anything that has more, by magnitude, inflation versus some other commodity/feedstock ingredient?

Flour and oils. When I say oils, I'm not talking about what you would pump into your SUV or economy car; I'm talking about shortening and oils for baking/frying.

Okay, by magnitude, Gerry, what might they be up year-over-year? Would they be up 30%, 20%, 50% -- what?

Actually, flour is up a very, very strong 50% from a year ago.

Okay, let me ask from the standpoint -- the FDA just came out with their brand-new Food Modernization Act, talking about inspections and food safety and shielding against food-borne illnesses. How does that impact J&J Snack Foods?

Well, we've had systems and people in place to -- I guess the best way I could describe it, to upgrade our plants and operations and safeties and product quality. So we are certainly equal to the curve, if not ahead of the curve.

Okay, Is that for you, Gerry, a regulatory annoyance, or is it because you run state-of-the-art plants, it's a nonevent for you?

Well, I won't comment on whether it's regulatory annoyance, all right? Obviously, there's a lot of things that you want to do and you have to do in business. And I'm very, very proud of what our people have done. It's nice that we can get people, big-name people, whether it be a Burger King or a McDonald's or the military -- they can come to our plant and silica labs and we get ratings of 97% and 98%, without cheating. So that's pretty good, so I'm very proud of our plants and our people.

Okay, relative to your raising prices, ratcheting up prices 3.5%, 4%, is that in tandem, Gerry, with any dialing back on any of your couponing efforts?

Not really very.

Not really? So the couponing and promotion should be about the same, then? You're not drawing anything back?

If anything, Brian, every once in a while, where we have something that is dragging, we will want to kind of like goose it a bit in there so that we can get a little bit more sales in there. We look for opportunities -- we were talking yesterday with our pretzel dogs that's (inaudible) how do we goose it in there? And we are doing a mustard promotion in there. But anything that we can do to improve sales in there, we do it and we do it on a cost-conscious basis, too.

Okay, from the tax standpoint, the accelerated depreciation schedules in the new tax bill -- does that, for you, change your CapEx program of $25 million to $30 million? Does that change any timing, or is your CapEx budget the same regardless of what's going on in Washington?

I've always believed in investing in our business, in our plants, in our portfolio, all on a continual basis. That really doesn't change it. It makes it nice with respect to the amortization and depreciation. But there was no make or buy or a decision that was being held up waiting for Washington to pass on a tax bill.

Okay, and on the ingredients side, have you guys done anything as you perceive more pressure throughout the balance of 2011, any forward buying, any stockpiling of commodity ingredients?

We buy out -- sometimes we are out as far as six, seven, eight months, and we've been consistent with that. And to the extent that something would change dramatically in the future, we would look at it. But we've been pretty consistent with our planning.

Okay, let me ask you, in the supermarket channel last couple of quarters, what's your sense on the mix in consumer elasticity from national brands to private label? Is national brands coming back a little? Is private label still strong? What's your anecdotal view on that?

We're seeing -- Bob, why don't you answer that? Bob is here. Bob is responsible for that grocery channel.

Overall, in our categories, we're seeing a shift back to the branded products in both categories, perhaps some of which is just the natural order of things. We had it swing heavily to the private-label products, and now we are seeing that stabilize a little bit.

Okay, what's your demand, Bob, for -- because you guys do private label for grocery stores. Has the demand for you launching more private-label products, more specific vendors -- has that plateaued? Is it still increasing? Is it fits and starts? How volatile is that?

It helps us coordinate our total leverage [set] to customers that we sell both branded and private label. So actually, we have not seen a decline in some of those initiatives.

Okay, what specifically -- can you give me a sense on some of the snack food sell-through at the dollar stores? Any initiatives there, any traffic, units sales, volume. Give me a sense what you see.

(multiple speakers) (inaudible) our branded products, but right now, we are doing a fair amount of business with our fig and our fruit bars. We also now have pretzels and especially packed in the dollar stores, and we have some of our juice bar and ices also in a reduced size and weight pack so they can go through an economy channel at $1. But we have been both creative and quick to capture a piece of that market.

You guys have done real well on the ices and the juice bar side. What do you attribute to that kind of growth?

Having the product available in a market segment that is interested in it and filling their needs quickly. And it's the quality of the product. It tastes good and it's low-calorie and --

I'm amazed here. I know you can sell that, certainly, when you get a summer and you have heat waves and that. But that's fairly nice volume for a winter sale. So obviously, is -- I would think there would be more seasonality to that product.

Well, there is seasonality to it. But there are -- ice cream is sold in the winter, too. All right? It's (multiple speakers) (technical difficulty) in the summer months. But okay.

Let me ask you, Gerry, on the M&A side, you guys got into fig bars and fruit bars, biscuits -- are there any specific categories that you would not evolve the base of products of J&J into? Would you say you would stay out of the candy area? Are there any specific product categories that you would stay away from?

I'm not going to go into the business of slaughtering of animals.

Slaughtering of animals? Okay. That's good for me. Thanks much.

(Operator instructions) [Michael Leverty]

I just had a real quick one; pretty much everything has been asked here already. Just on the tax rate, it came in a little bit low. I know you had to use some of your tax benefits. So the 38% to 39% that you're guiding for for the full year, am I right in assuming that does not contemplate any additional use of unrecognized tax benefits?

That's pretty much correct, yes.

Okay, that's all I had. Thanks, guys.

And at this time, I show no questions.

I thought Blake had a question before. Is Blake on the phone? I guess not. Okay, all right. I want to thank everybody for attending the conference call. We look forward to you all participating again during the next quarter.

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