J & J Snack Foods Corp (JJSF) 2011 Q2 法說會逐字稿

Welcome to the J&J Snack Foods second quarter earnings conference call. My name is Christine, and I will be your operator for today's conference. 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 I hope everybody had a nice holiday. This is Gerry Shreiber, and with me today is Dennis Moore, our Senior Vice President and CFO; Ted Shepherd, our CED; Bob Radano, our Senior Vice President; and we're also pleased to have Alissa Davis, who is our Director of Marketing for Retail, and she is sitting in for Bob Pape, who's taking a much-deserved couple of days off.

I will begin with the customary statements. 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 3% for the quarter and 4% for the six months, excluding sales from the acquisition of Parrot Ice, which we acquired in February of 2010, and California Churro, which we acquired in June of 2010. Sales increased 1% for the quarter and 2% for the six months.

For the quarter, our net earnings decreased by 4% to $8.7 million, or $0.46 a share, from $9.0 million, or $0.48 a share, a year ago. That was a $300,000 drop. For the six months, our earnings decreased by 2% to $15.8 million, $0.84 a share, from $16.1 million, or $0.86 a share, a year ago. And again, that represents a $300,000 net (inaudible) drop.

Our EBITDA for the past 12 months was $107.2 million. Let me repeat that. Our earnings before interest, taxes, depreciation, and amortization for the past 12 months was $107.2 million.

Food service -- sales to food service customers increased 2% in the quarter and 3% for the six months. Soft pretzel sales were down less than 1% in both periods. Italian ice and frozen juice bar and dessert sales increased 15% for the quarter and 8% for the six months due to higher sales to school food service segments.

Churro sales were up 42% in the quarter and 46% for the six months, benefiting from the acquisition of California Churros. Without the sales from California Churros, churro sales were down 5% for the quarter and 1% for the six months.

Bakery sales, excluding biscuit and dumpling sales and fruit and fig bar sales, were up 3% in the quarter and six months. Biscuit and dumpling sales were up 4% in the quarter and 3% for the six months, and fruit and fig bar sales were down 15% in the quarter and 14% for the six months, with sales generally down across the board.

A drop in funnel cake sales due to a menu change to one customer of $3.3 million in the quarter and $4.2 million in the six months had a large negative impact on food service sales for this period.

Retail and grocery supermarkets -- sales of products to retail supermarkets were up 14% for the quarter and 13% for the six months. Soft pretzel sales were up 5% for the quarter and 3% for the six months on a case volume increase of less than 1% for both periods. Sales of our frozen juice and Italian ices were up 23% in the quarter and 21% for the six months on case volume increases of 22% and 20%. We continue to remain very bullish on this product line and category.

ICEE and frozen beverages -- ICEE and frozen beverages, including Arctic Blast, Slush Puppie, and Parrot Ice, sales were up 2% in the quarter and 3% in the six months. Beverage sales alone were down 1% in the quarter and up 2% in the six months. Gallon sales were down 7% in our base ICEE business in the quarter and down 2% for the six months. A lot of that was due to inclement weather during the early winter, particularly in January and February. Service revenue for others was up 3% in the quarter and 1% for the six months.

Consolidated -- gross profit as a percentage of sales in the quarter decreased to 30.1% from 31.7% last year, and for the six months decreased to 29.9% from 31.3% a year ago. We were impacted by about $2.9 million and $5.2 million of higher input costs, including ingredient and packaging costs in the quarter and six months.

We cannot project the impact or benefit of changes in ingredient and packaging costs going forward. However, there has been a very significant increase in the market cost of flour since June 2010. And the cost of our other ingredients, on a net basis, has increased as well over the past year. Although we have implemented price increases, we expect our margins to be under some pressure, at least for the balance of the year.

Total operating expense as a percentage of sales was 0.7 percentage points lower in the quarter and 0.6 percentage points lower in the six months.

Capital spending and cash flow -- our cash and investment security balance increased $6.9 million in the quarter to $133 million. We continue to look for acquisitions as a use of our cash that we have been building up for some time.

Our capital spending was $5.5 million in the quarter as we continued 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 share was declared by our Board of Directors and paid on April the 6th, 2011. We did not buy back any of our stock this year.

Commentary -- our sales growth of 1% this quarter before acquisitions was lower than what we would have liked. Organic sales decline in food service of 1% was even more disappointing. Sales of soft pretzels in food service continue to be marginally down. Frozen juice bars, juices, and ICEE showed strength as we were able to pick up added school food service accounts. Our fig and fruit bar business has had three consecutive quarters of double-digit sales declines. We are looking to remedy this.

Funnel cake sales to our largest customer were down 77%, as the product is being discontinued for at least the near term. We expect no sales to this customer the balance of the year compared to $5.3 million in the last six months of last year.

Unit sales of soft pretzels in our retail supermarket segment were up slightly in the quarter, hopefully reversing the trend of the recent past. Case sales of frozen ices and juice bars were up 22% in the quarter, continuing a recent trend. We introduced Pretzel Dogs and Super Pretzel Dogs, in our second quarter to expand our line of retail supermarket pretzel products. We are projecting sales of $2 million of Pretzel Dogs this year.

We have replaced our TV advertising this year with a billboard and mass transit campaign in several of our key pretzel markets. So far, it looks promising.

Our ICEE frozen beverage segment is lapping strong sap gallon sales growth in our base ICEE business. Our service revenue to others was up 3% in the quarter, and we hope to continue to show growth in this area.

We were impacted by significantly higher gasoline costs in the quarter, and we expect the impact to be even greater over the remaining six months of our year.

Our estimated income tax rate was at 39% for the quarter, and we are estimating a rate of between 38% and 39% for the year.

On April 15, we entered into an agreement to acquire the frozen hand-held business of ConAgra Foods. This business sells enrobed products sold under the Patio, Hands Full, Holly Ridge Bakery, Villa Taliano, Top Picks, including sandwiches and burritos, fruit and pie turnovers, and protein-filled enrobed products. As well, it makes private label for the supermarket industry. This group has plants in Holly Ridge, North Carolina, and Weston, Oregon, both of them efficient USDA plants.

This product line will fill in our portfolio of offerings for early a.m. and fast-food restaurants. The business is presently generating sales at an annual rate of approximately $50 million. Closing of the transaction is expected to be in May 2011, and we are hopeful that this business will add some contributions in the long term. We are paying $10 million for the entire business.

I thank you for your continued interest, and I will turn it back to the audience now for any questions.

Thank you. (Operator Instructions.) Akshay Jagdale.

So I wanted to talk about the acquisition first. Thanks for giving out how much you spent on it. That's helpful in trying to analyze how you're going to create value here. Obviously, you didn't pay too much for it at all. So can you just, from your point of view --

Akshay, I always think I pay too much.

That's good. Can you just help us understand this acquisition better from your perspective? It's a little bit different in that you've come out and said it's not going to be accretive in the short term. From what I know, most of your acquisitions have been accretive very soon -- in the first quarter, usually. But this one's not going to be, it seems like. And from what I understand, the sales growth trends haven't been that impressive on this business. So can you just help us understand what you envision for this particular acquisition and how it's going to help you grow sales, if not in the next six months, but over the next year or two?

It adds to our portfolio of products and brands as well as new offerings, and it gives us a protein-based as well as some dessert items that heretofore we did not have. We've been looking to enter this category for some time. As a matter of fact, we've had some earlier R&D attempts on our own. And we believe, for what we're getting here, and including the plants and the production personnel -- which are very, very efficient -- we think we have a huge opportunity.

We're just being a little bit conservative in our views inasmuch as that we're conservative in our views. We think that in the long term, it's going to be very beneficial to us, and we are just going slow with our initial strategic planning and our estimates.

So just how about give us some perspective? If you were to compare this to any of the acquisitions you've done in the past, does it come close to anything that you've done in the past in terms of being successful or not? Is it similar, dissimilar? I'm just trying to get -- and more directly, when you say "huge opportunity," what do you mean by that? Do you see this as a $100 million to $200 million business five years out or something like that? Help me understand how big this opportunity could be, and also compare it to the acquisitions you've made in the past.

Let me take the second part of the question first. In 1998, we bought a large territory of ICEE and added $50 million of sales to our existing $50 million in sales. And we had a quarter where it was essentially dilutive because of the timing and what-not. I think, overall, after a year, the overall ICEE business was accretive, and today ICEE is sailing along at close to $190 million a year in revenues. I'm not making any kind of bold predictions for this hand-held, but we were looking to enter that business anyhow. Our encased Super Pretzel hot dogs, which we initiated early in the winter, was a case in point.

We had about five or six items that were going through our R&D process, and we knew to launch them, it was going to take a significant investment in marketing and slotting dollars. This opportunity was presented to us, we looked at it, it became part of the process, we visited the plants, we saw that the internal capabilities were not just decent, they were terrific.

At some point, ConAgra, which is a fine, fine company, thought that these product lines didn't fit in with its strategic purpose. We think they do fit in with ours. Our people are excited about it. We think that it will expand our offerings, not only to the breakfast menu, not only to dessert menus, but to restaurants and fast-food restaurants as well as our food service.

We're having some meetings here in a week or so where we're all going to try and hit the deck running in there. We're combining our resources, sales and marketing, together with their key plant people. So we're excited about this, and we think we got real good value here. And the plants not only make these products well, but they may be able to do some other things for us, too.

We don't give guidance, but a year from now, I think that we're all going to be very pleased.

Okay, that's helpful. One last one on the hand-held business. So am I right in saying -- can you help us with the sales trends on this business? I was under the impression that there was some decline in sales, but I may be wrong. So if you can help me with that, that would be great. And if they are in fact declining, the sales, what is it that you are going to do differently? And what is it that makes you believe that you can reverse those trends, if in fact they were declining?

Let me just limit my reply. Yes, the sales were declining and yes, ConAgra decided it did not fit into its long-term strategy. We are cautiously optimistic that we're going to reverse that -- stabilize it and then reverse it. And I guess the proof will be in the pudding, but I think for the value that we're getting for the investment that we're making in there, we're excited about this opportunity.

Great. And just in terms of future opportunities, it certainly is one of the larger -- was the largest acquisition you've made, I guess. That's what I thought in terms of sales. But you still have a lot of cash on the balance sheet. So can you help us just in terms of level of activity, the kind of opportunities you're looking at? Just update us on that, and then I have one on organic growth, and then I'll pass it along.

We have some other things that we're looking at, nothing that I care to comment on directly. But suffice to say that we have made some acquisitions in the past, and we continue to look at some things -- some bigger than this, some smaller. In the past year we made two acquisitions. They're both fitting in. Three years ago we made three, so yes, we're looking at some things, and I think it was at one of the conferences -- it might have been yours, Akshay -- because as recently as March, I said something like be in tune, stay tuned.

Okay. And just on organic growth, you talked about not being happy with the sales trends. And you also talked, you mentioned some advertising campaign, but it seemed like you're just going with a different approach rather than spending more. But can you just help me understand how you're addressing the slowdown in organic growth? Investors are used to a pretty strong clip on organic growth for your company, and clearly over the last few quarters, it's come down. So just in that context, help us understand how you're managing through it and if your own expectations have come down at all, given where the economy is. We've certainly seen organic sales growth trends slow down for all food companies, but I don't know if that's going to matter to you in terms of your expectations.

I'm not trying to duck your question in there, but in the past couple of years, we have, even though we're kind of recession-resistant, there has been a recession around, and it's impacted everybody. As a matter of fact, I'm concerned right now with gas prices. I guess the best way I could answer that is no, we were not happy with our organic sales growth and yes, we are looking at different things to see how we can goose it to getting on. And whether that's the advertising campaign that we're doing, and right now for retail supermarkets, it seems to be giving us, at least on the short term, a little bit of lift.

And certainly, we need more successes like our frozen juice bar and desserts. In both of those businesses, there are new products out of R&D, and they were acquisitions of two years ago. We're also looking at different strategies to increase our basic soft pretzel sales. Churro sales have been strong, and this acquisition of these other products and other brands will give us an opportunity to enrobe and encase a lot of protein-type products that we didn't have before. And there seems to be some demand. There seems to be some growth out there for them.

Perfect. I'll pass it on. Thanks a lot, Gerry.

Mitchell Pinheiro.

So it looked like you took about 1.5% pricing, on average, in the quarter. Is that about right?

Maybe that's what it reflects now. Some of it takes a little longer to get some of it. You're in the middle of either a school year or a contract year. But we expect, when all is said and done, it will be more than that --you know, you start with a number higher.

Okay. So maybe this quarter saw half the impact or some fraction of the impact, and you expect it to come through here in the next couple of quarters. Is that about right?

That's about right.

Okay. And so as that foots against the input cost inflation, do you expect it to match? Your 10-Q talked about, and you had mentioned on the call here, certainly you're going to have some challenging second half with input costs. So does pricing match, or are you going to have to work harder and squeeze out whatever you can squeeze out to mitigate the impact?

Who knows? When I say, "Who knows," I mean the input costs have been rising dramatically. We took pricing, which really went into effect January, late January and February, and some of it is still coming through. Not like a fierce wind, but like a gentle breeze in there, and it takes a little bit longer to implement. Mitch, we earned $0.46, not $0.26, so I think we've dealt with the issues of economy and sluggish sales and input costs reasonably well.

Sure. Just trying to anticipate, though. Not commentary on what you've done, but trying to figure out which way we're going here in the next two quarters. How about as it relates to gas prices? You mentioned gas prices, and it's certainly going to have, if it stays where it is, going to have an impact on convenience store traffic. Have you seen anything like that start? Any impact on your bigger convenience store customers or any other traffic issues?

Actually, we were just noticing and enjoying an upward-ticking trend for the last couple of months. And this most recent escalation of fuel energy costs cannot be good, cannot be good for anybody. It takes $30, $40, to $50 a week out of everybody's pocket. But as long as the economy's moving -- if you get a double dose, slowdown in the economy, construction in there, and then the higher energy prices in there, those are all things that can make for what they call another recession, or a double dip. Hopefully not. We were just -- we seemed like we were at least enjoying a little bit of uptick with our C-store business, and I would hate to see it go the other way, but I just don't know.

Our business and our business segments is almost beautifully balanced. We do a lot of school business, and that runs from October through the end of May. We do a lot of sports and leisure and theme parks from April all the way through October. Our food service business is out there all the time, although it was disappointing to see when some of the bigger chains had softer sales, including Wal-Mart and Target. Our healthcare business has been growing very, very nicely for the past two years. And we've made, notwithstanding the recent disappointment with the menu change with Burger King, we've made some, we believe, significant strides with the fast-food restaurant group in there. And that's what gives us some of this cautious optimism on the whole ConAgra hand-held group.

Okay. And thank you. And then this last question on FCB, frozen carbonated beverages. Can you talk about the outlook for frozen carbonated beverages over the next six months, maybe year? Any trends happening in there? It's been somewhat stagnant, I guess, related to the slowdown in regular carbonated soft drinks. But I was wondering if you could talk about that a little bit.

Our overall beverage sales have been showing some strong growth, particularly over the past year. This is the first quarter that beverage sales alone were down, and I could really point to it, and it's not like me to find excuses, but we had a couple of major retailers -- a movie group that was down significantly and one of our bigger mass merchandisers. But by the same token, we've driven new business, and we expect ICEE and the other brands to continue to grow. We're also picking up some benefits -- modest benefits so far -- but from licensing on the ICEE and the Slush Puppie brands. So overall -- .

What's driving the growth? What's driving the growth? It's not a healthy thing. Is it just -- is there more promotion? Is there better merchandising? Is there better price points? Why the growth in FCB?

It is a good product. It is nutritious, all right? It makes people happy. The retailers like it. It meets their profit objectives. We have one hell of a program. We provide equipment, lots of different styles of equipment. We provide a distribution system and marketing.

You could take apart any of the restaurant groups that are out there, and you can say McDonald's, well, they're not helping. Yes, I know. They come out with something that says they're going to do this and tofu and salads. But basically, we're talking hamburgers and French fries and Coca-Cola and what-not in there. So ICEE is a good, nutritious drink, and it makes people happy. You eat it with a spoon or sip it with a straw, and it is part of our everyday American food process.

Okay. Hey, one last thing. This morning's news notwithstanding on the NFL lockout, but if there were to be a lockout, does that have a meaningful impact on your business?

The key word is "meaningful." Certainly it will have an impact, because it's 16 dates, all right, that we won't be selling pretzels in NFL, in National Football League stadiums. However, however, of all -- and I'm not trying to deprecate football -- of all of the sports venues that we sell to, with baseball being the best because of the 3.5 hours and the nine innings and all the changes, football represents the smallest part of our sports business.

We don't want to see that. I, as a fan, don't want to see it. And certainly, from a business standpoint, I don't want to see a season lost. And I also get a kick out of when I go to a game in there, when I can see our product being vended and displayed right. Now, I'd like to get a kick. If something's wrong, my people get a kick the next day.

But no, I don't want to see it happen, but if it happens, I guess people will do other things, right? And maybe other things include supermarket. Maybe they'll stay in church longer, go to church longer, and we'll start to set up some kind of selling with churches.

But yes, we worry about these things. We've got a good marketing group in there, and they're already being challenged on what can we do better now? What can we do better next year? I don't want to see a football strike, but Mitch, we've had two football strikes, or three football strikes, over the years. We lost a whole hockey season. We had a baseball strike and a baseball walkout. We're going to survive all these things, and maybe it represents little -- not storm winds, not storm winds or a perfect storm -- but little hiccoughs.

Okay. All right, thanks for your time.

Bob Costello.

I've got a couple of quick questions, one on the churros. When are we going to see that in supermarkets, with your distribution expansion that you talked about when you made the acquisition? Because I haven't seen them yet.

Don't get shop fright. We're testing right now in a number of stores.

How about your PJs account and stuff like that, that I've talked about? Because as you know, there's a big change underway. There's more people going to the club stores, especially in the downturn, as they are to the supermarkets. I know there's more supermarkets, but the volume is the issue.

Right. But there's also less space in these club stores.

Right, right, I know.

We are selling churros in the club stores, but generally in the snack bars. We haven't been able to make that threshold loop into getting it into the freezer section. And as you know, their freezer sections are very, very limited, they have very few items in there, and we'll keep working on it.

All right. It's to the left of the freezer space, where you have the frozen juice bars. As you know, I analyze it pretty closely, and they have too much space for the waffles, and no churros. So talk to them.

And I'm going to make that call right after we're done today.

No, no. I've just been on your tail for a year and a half, because it just seems like it's a huge opportunity with a lot of volume, and every time you go in there, it's empty.

Commodity prices -- what's the lag if we see a strong crop in the corn market in the US for this summer? What's your lag in changes on -- how forward do you buy, that if we saw a drop-off, you would benefit?

We're probably out six months, longer on some things.

So if I see a strong summer, the lag's going to be until January, February, or March of this time next year?

If you say a strong summer, if you see prices escalate sharply?

No. Down, down. They drop because we have a strong crop and we see a pullback in prices from the run-up. Say corn drops down to the sixes or the fives instead of seven.

Yes, you're about right. It would be upwards of six months until we would see it.

Right. It helps us estimate your flexibility, your changes in the benefit on the bottom line.

All right. On the fig bars, what happened there? Is it because of loss of accounts or just overall volume drop in existing accounts?

Overall volume just dropped in existing accounts. And part of it was, quite frankly, part of it was really unknown. And we had to get back --

So it's unknown in the Dollar Stores?

Pretty much. We had to get back on our horses in there and make sure that we got our coverage. And one of the other issues that we had in selling in the Dollar Stores, as ingredients went up and you had to either price it or package it differently so that you can stay in that threshold, it created some issues for us.

Pushback.

Pushback, and it's not something we could just charge in there and just change where you had enough branding power. But it appears like the worst is behind us, and we're now on the --

Last question. Some corporations have had the ability to raise prices here with very little market share change. In your case, you sell your ICEE for $1.09, approximately, in BJ's. It seems to me that you have the ability to raise the price there with not that much incremental change in volume, given the price point is still considered inexpensive for housewives running out to the store and they pass by it every day. Do you feel that that's the case currently?

First of all, I'm impressed you notice what the small ICEE is selling for in BJ's. I can tell you that it used to sell for $0.89 and $0.99, and we sold more ICEEs then as far as units. But ICEE, as a great, great brand, does have pricing power. And we think Super Pretzel does, too.

But there's a big difference between what we're selling the concentrate, the syrup for, and what the retailer is getting. And you know what the profits are on drinks in there. I don't know what the rate that hike is, but the program and the system that we provide, we can put somebody in business where it's costing them roughly $0.02 an ounce to make that drink -- so yes, there is a cup, yes, there is a straw, yes, there is labor -- but one of the reasons ICEE does so well is it meets all of the profit objectives of the retailer.

Right. Now, you're also, I noticed locally, you're in the Rita's chain, which has hundreds of stores. And you've replaced locally what they used to get from, I guess, one of the competitors. So they use the frozen product now on the pretzel side.

We're in a lot of them. It's not all of them.

Is there further opportunities for further penetration with that in more areas of distribution than you currently have?

There's further opportunities for us all over the country in further penetration, and we use some of the successes that we have here locally to grab a foothold for these out-of-state areas. There's a chain called -- what is it, Bob Wild? Buffalo Wild Wings, which is a few-hundred-store chain, and we were testing a product in a small Texas operation called Big Head Cafe. We put that in there, and now suddenly we're going to be in about 400 -- how many Wild Wing stores, about? 700 stores. It's just starting. When I say it's just starting, it started this month. But early indications are they like the product and they've expanded what was a small test into 700 stores, and we think it's going to go --

You could sell them the protein product, right?

No, no, this is just a regular pretzel product.

Right. But there's opportunities to sell them that as well, isn't there?

There's opportunities to sell protein product everywhere.

Right. No, I think it's a great idea. Thanks again.

Thanks, Bob. Thanks for keeping in touch.

(Operator Instructions.) There are no additional questions at this time. Please go ahead with any final remarks.

I want to thank everybody for participating in the call, and look forward to sharing our next quarter with you, too. Thank you and 'bye.

Thank you for participating in the J&J Snack Foods second quarter earnings conference call. This concludes the conference for today. You may all disconnect at this time.