J & J Snack Foods Corp (JJSF) 2012 Q1 法說會逐字稿

Welcome to the J&J Snack Foods first quarter earnings conference call. My name is Monica 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 turn the call over to Gerry Shreiber. Mr. Shreiber, you may begin.

Thank you, Monica, and welcome to the J&J conference call.

Let me start out 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 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 the forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operations. Net sales increased 11% for the quarter. Excluding sales resulting from the acquisition of the frozen handheld business of ConAgra Foods in May 2011, sales increased 3% for the quarter. For the quarter our net earnings decreased by 23% to $5.5 million, or $0.29 a share, from $7.1 million or $0.38 a share a year ago. Our EBITDA earnings before interest, taxes depreciation and amortization and also before bargain gain from the past 12 months was $105.4 million.

Food service. Sales of food service customers increased 7% for the quarter. Without sales of handheld, sales increased 1% for the quarter. Soft pretzel sales, however, were up 5%. Italian ice and frozen juice bar and dessert sales increased 3%for the quarter. Churros sales were up 3% in the quarter. Bakery sales up 4% in the quarter. A significant drop in funnel cake sales -- Funnel Fries -- to two customers of $2.9 million in the quarter had a large negative impact on food service sales.

Retail supermarkets. Sales of products to retail supermarkets were up 48% for the quarter. Without sales of handhelds, sales were up 6% for the quarter. Soft pretzel sales were up 4% for the quarter despite having a small case decline. Sales of our frozen juice bar and Italian ices were up 9% in the quarter on a case volume increase of 4%.

ICEE and frozen beverages. Frozen beverages including ICEE, Arctic Blast, Slush Puppie and now Mix It Up and related product sales were up 7% in the quarter. Beverage related sales alone were up 1% in the quarter. Domestic gallon sales were down 4% in our base ICEE business in the quarter.

Service revenues for others was up 18% in the quarter, following an 18% increase in the fourth quarter of last year.

Consolidated. Gross profit as a percentage of sales in the quarter decreased to 26.9% from 29.6% last year.

We were impacted by about $5 million of a higher ingredient and packaging cost in the quarter. Repeat, we were impacted by about $5 million of higher ingredient and packaging costs in the quarter. 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 ingredients and packaging over the past 18 months. We have implemented price increases to defray the impact of a portion or all of the cost increases we anticipate over the balance of this fiscal year. Additionally our overall gross profit percentage was impacted by the mid single gross profit margins of the handheld business.

Total operating expense as a percentage of sales was 0.6 percentage points lower in the quarter because of our overall 11% sales increase. Our operating income was impacted $800,000 of costs for a sales and management meeting held in October. Historically we hold this company-wide meeting every five years.

Capital spending and cash flow. Cash and investment securities balance increased $10.7 million in the quarter to $165.7 million. We continue to look for acquisitions as a use of our cash. Our capital spending was $8.9 million in the quarter as we continue to invest in plant efficiencies and growing our business. We are presently estimating capital spending for this year to be $25 million to $30 million.

A cash dividend of $0.13 a share was declared by the Board of Directors and paid on January 5, 2012. This was a 10.6% increase from the previous dividends. We did not buy back any of our stock in the quarter.

Commentary. Our sales growth of 3% this quarter before acquisitions was generally in line with the last two quarters. Sales of soft pretzels and food service were strong as we continue to make progress and inroads into the chain restaurant channel. Funnel cake product sales to two customers were down $2.9 million in the quarter, and we expect sales to these customers to be down another $3.5 million through the balance of the year.

Unit sales of soft pretzels in our retail supermarket segment were down for the quarter. Case sales of frozen ices and juice bars were up 4% in the quarter. We did not run any significant advertising programs during the quarter.

In ICEE and frozen beverages, service revenues to others was up a strong 18% 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 to be impacted going forward. Prudent expense management combined with strong service revenue growth resulted in a $1.6 million decrease in operating loss for ICEE in this seasonally money losing quarter.

Our estimated income tax rate was at 38% for the quarter. We are estimating a rate of between 37.5% and 38.5% for next year.

As previously reported, we do not expect the acquired handheld business to contribute operating income to the Company over the short-term. At this point, we have stabilized the business at an annual sales rate of approximately $50 million. Improvements in operating income will come only as we grow sales and continue to move efficiencies in the plants. We have some potential sales in the pipeline, but nothing confirmed that will move the needle.

I thank you for your continued interest, and I just realized I did not introduce my team that is with me. Bob Radano, our Senior Vice President and COO. Dennis Moore, our Chief Financial Officer and Senior Vice President. [Ted Shepherd] our CED. Bob Pape, our Senior Vice President of Sales. And Jerry Law, Senior Vice President of Sales and Personal Assistant to me.

And now I will move it back to the listeners for any questions or comments.

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Akshay Jagdale. Please go ahead.

Thank you, good morning.

Good morning, Akshay.

How are you doing, Gerry?

I'm going good. How are you doing?

Hanging in there. I just wanted to talk a little bit about -- obviously growth in the quarter was not that great. Can you put into perspective this quarter in terms of how you feel about it? Obviously the stocks down a bit, because you -- itwas a disappointing quarter in my opinion. So can you put that into perspective and how you are managing the Company through what I would call difficult times for the food industry in genera, l but certainly for J&J?

Well, we want to keep and remain our are focus on the long view for J&J and its shareholders. Quite frankly, I didn't look at the stock. I'm not surprised that it may adjust down,but we have a lot of good things happening in our business. There is nothing fundamentally that has changed, and quite frankly -- and I'm not saying this because Bob Pape is here, but we remain bullish on our company for this year and beyond.

Okay. And can you talk a little bit about your balance sheet?Obviously you continued to accumulate cash. I know your tendency or your preference is to invest back into the business through acquisitions, but have you given more thought to maybe paying a special dividend or anything of that sort? And if not, can you just give your latest thoughts on the acquisition environment for you guys?

Well, let me answer these questions in part. Every dividend we pay is special, and we are happy to pay it, and we have been increasing --we started paying it I think seven years ago, and we consistently paid it and consistently increased it, and that is a pretty good track record. Yes, we are accumulating cash. Yes, we are looking for things. Be patient. And I know all of you have been patient. We are all long-term investors, including everybody with me in this room. But we are seeking things. We are not going to -- we have been very careful and prudent. We are going to continue to be careful and prudent, but just be a little more patient with us and we'll see what happens.

Okay. And just focusing more then on the organic growth. I thought -- I think your pretzel business looks like it is gaining some momentum, but yet the overall food service volume was pretty weak. I know part of that is related to the Funnel Fries business at Burger King, but you guys make no excuses. So what are you doing differently now, or what is the plan? Can you help understand strategically what you are doing such that volume growth -- we see the start to see in volume growth in the food service business, because I may be wrong but I think that is what is going to drive at least the organic growth in your business.

Well, you are right about that. You are essentially right. And soft pretzels have been growing in the mid single digits now for the last couple quarters in food service, and that is fairly significant. So we are going to continue to put the emphasis on that and continue to broaden its business base, which includes the fast food and restaurant channels. And we are looking at other strategies to excite the rest of the business.

We lost a fair amount of business with the specialty Funnel Fries that were sold to two significant customers, not because the product was bad, not because there was any issues with it, but just because for one reason or the other, whether it was an in and out volume or the company was sold and they had a different marketing type of strategy, but it was -- we just didn't pick that up right away. But we are -- and our team is out there thinking our products and developing our products every day, and we are hopeful of getting back to satisfactory sales step gains very quickly.

And one last one on costs. I mean is there -- I know you have been a very lean company throughout, but is there any special programs or anything you are doing on the cost side to maybe reduce your costs even more, given that in the short-term you really aren't -- your business is not showing much in terms of organic growth? I mean a lot of other are companies are restructuring, cost savings programs, et cetera. How are you attacking the cost side any differently, if at all?

Well, we have always been -- I believe we have always been running lean and hungry and mean. And I think it would be premature to talk about any carving into our substance here. I think we are more confident that we can certainly grow the business, and I don't want to create artificial share improvement by reducing head count -- no matter how big the head -- and body count.

Okay. Well, I will get back in line. Thank you for taking my questions.

The next question comes from Mitchell Pinheiro. Please go ahead.

Good morning, everyone.

Good morning, Mitch.

So, Gerry, you mentioned there is -- you have a lot of things happening in your business. Could you just give us an example of one or two that you are about, things that you see that maybe we can't see?

Well, first of all, I have to be -- I [can] -- but second -- we are expanding our St. Louis plant. It will be done the end of February, and we expect to hit the ground rolling with what is being done in there. That is all I can say at this point. And we have been very, very busy over this year, which doesn't show yet in new products and R&D coming out of different facilities, and we have a horizon of perhaps early summer, late summer of these products coming to fruition.

Okay. In terms of pricing, which are the segments or lines that you are having maybe the most difficulty in achieving higher prices?

Well, , the handheld -- when we made the handheld acquisition in May -- middle of May, we knew that it would not be accretive for a while. We tried to make everybody aware of that. And a business that was large any ignored and had some issues in the field -- our first -- we thought that our first duty was to stabilize it, make nice-nice to the customers, improve the logistic routes, which ranged anywhere from didn't get there to Pony Express. So we have absorbed some of the costs and pitfalls with that.

Now, we are going to be taking some of -- we are going to be taking a look at some of that pricing and margins, and that has been a little bit more difficult for -- not more difficult than what we assumed, but it takes a little bit more work because it had other priorities first in front of it. But we have taken some pricing very, very recently, which as we sit here have gone into effect, and that is across the food service and retail, and we will -- and in-store bakery -- and you will probably see the benefits of that in early Q3.

Was that a mid single digit type of increase?

It ranged from low single digits up to mid single digits.

Okay. So there isn't one area, one channel -- whether it be club stores, food service operators, restaurants -- that are problematic in terms of pricing? Is it just general pressure among all those channels?

Well, nobody presents us with a pink bouquet when we walk in with price, all right. And the overall economy sets up some at least freezes and barriers to that. But fundamentally, Mitch, there is -- fundamentally there is nothing that has changed with the business. Our marketing remains substantial. Our team is certainly capable and committed.

Okay. Just another question on the handhelds. What -- so obviously you are getting your arms around the business. You are making the right -- whatever changes you had to make. Where -- if you look out three years, five years, I mean, should the handheld business achieve a gross margin in line with your other operations? Or is there a challenge to that?

Well, you say to the other operations. Probably not going to achieve a gross margin that we may get in some of the other areas in there. But we expect, if we wanted to say three years, we can be a $75 million to $85 million business there, with lots of potential and throwing off contributions to the bottom line -- operating income.

Okay. In terms of the mild winter we are having, has that helped your [FCB] business at all? Or has it had a tangible impact?

Well, since winter just began on December 21 and we don't -- FCB has -- first of all, they had a good year and they had an excellent quarter, even though it is a losing quarter for them. But we haven't seen any strong volume gains in that business in there. SoI don't think it has been -- it's significant in one way or the other. What we really want is a nice spring and summer, and then we can rejoice in the weather.

Just two more quick questions. Advertising and marketing expense, was that -- that was up in the quarter?And if so, by how much? Pure advertising.

Insignificant. We are doing some billboards. We are doing some outdoor advertising. But it is insignificant.

Okay. And then how would you characterize your acquisition pipeline? Is it full? Is it -- are there quality potential ideas out there?

Mitch, are we close? I can't say that, all right? We are busy working at it. We have made acquisitions in the past. I would say there is -- we will probably be making acquisitions in the future. But apart from that, no comment.

Okay. All right. Well, thank you.

Thank you, Mitch.

(Operator Instructions). Our next question comes from [Bob Costello's] line. Please go ahead.

Hello, Gerry.

Hey, Bob, how are you?

Good. I have a couple of questions. I read about [Wala] going into Florida. Are you going to be following them or no?

We are engaged in conversation with Wala, and there will be a few stores in 2012 and more stores beyond that, and we hope to be part of that.

Trying to get a parallel here. You made the acquisition of California Churros a couple of years ago.

A year and a half ago.

Right. Since the acquisition, how have sales done relative to your expectations of what you thought you could do with the business?

They have done fine. They have done well. Sales are (inaudible -- multiple speakers) --

Do you see -- I see a lot of opportunities for, like, food service sales in that business that I just don't see distribution with the ethnic product out there, like with Starbucks or what not. What do you see as the opportunity going forward with that product?

We have lots of potential opportunities with Churros, and keep in mind the restaurant industry and fast food industry, with very, very few exceptions, is not exactly robust right now. And even though we are presenting Churros to the users and to the restaurants and -- it is not an automatic. We have grown that business in strong single digits over the past several years, so it is still a growing part of our business, and hopefully it will be expanding more and more with fast food restaurants.

Right. Do We see the product being introduced in it the club stores more, because I have yet to see it where I see your frozen food, right next to the -- for instance, in BJ's. It is not in there.

Well, it is in the food court. You are aware of that?

Right, but I can't buy it --

And the food court --

And I can't take it home, and that is what I want to do. That is my question.

So you are talking about a freezer --

Frozen products you can put in the toaster oven and use them for breakfast.

Well, if truth be known, we were assessing that product for take-home consumption in the West Coast with some retailers, and we had a test back East. And it didn't -- it didn't meet the velocity or threshold to stay. Our people are looking at it, again, to see what we can do for price point and graphics to reintroduce it this spring.

All right. Two other questions. Your tax rate. It is lower than it has been, say, historically in the last five years. Do you expect it to stay there?

I think it is roughly the same, isn't it, Dennis?

Well, it's perhaps (inaudible -- multiple speakers) --

Wasn't it over 40%.

Yes, we would expect it to stay at this level as long as there are no tax law changes.

The equipment sales. How are you getting these increases at the growth rates you are doing? Obviously the comparison's lower, but whathave you been able to implement to get the sales -- the numbers up so much?

You're talking about sales -- you talking about our sale increase?

Yes, you mentioned an 18% increase in this quarter versus an -- a couple quarters in a row. On equipment sales?

Oh, I'm sorry. I see. I'm sorry. I wasn't following you, Bob. Just how things fall sometimes. And our people at ICEE have been involved in this managed service part of the business now going on ten years, and they continue to perform. They have good reputation -- as a matter of fact, I will change that -- they have an excellent reputation, and we continue to examine that -- we continue to expand that portion of the business.

If you subtract the cash out of the business off the -- and divide the shares outstanding into your current stock price today, you are selling at one of the lowest valuations just on a pure earnings basis that is out there. I know you are a big shareholder in the Company, and that has been the barrier to anybody trying to look at you, but it has got to be an issue from time to time that you confront. Would that be fair to say? I mean now with $165 million, and you take it off the stock price, you are selling at maybe --

Bob, if anybody has been an investor with J&J -- and I don't know what the stock price is. Somebody said it went down today. But if you look at it overall, we went public at a split adjusted number of $4. Today would be close it would be close to $300 in there. We pay a dividend, all right? We have an impeccable, a sterling reputation in there. I don't know if our shareholders -- or our long time shareholders are looking to see if the Company can be acquired by somebody else to make maybe a stipend more than what they have been making over the years. And I'm certainly not interested in doing that, and we are not going to let --

No, I'm not saying that. I'm saying the stock is so undervalued because of the cash on the balance sheet relative to what the earnings the Company is throwing off.

Right.

And I think it's amazing that --

Well, we certainly (inaudible -- multiple speakers) cash, and our EBITDA is excellent, and even this quarter was close to $106 million. But I will take your statement, and I will applaud you for having the insight to bring that up, but let's move on to something else.

All right. Thanks.

Thank you, Robert.

(Operator Instructions). Our next question comes from Darrin MainstainPlease go ahead.

Hi --

I'm sorry --

Thank you for taking the call -- I'm sorry.

I'm sorry, I didn't get your name?

My name is Darrin Mainstain.

Okay,Darrin.

My question --

Are you an analyst?

Yes, I'm an analyst at AMI Asset Management. My question centers around your gross margin line. It looks like aside from your ingredient inflation, gross margins are significant little impacted by this ConAgra acquisition. You said in the Q it was a mid single digit gross margin business. Are there any one time integration charges this there, or is this a margin we can look to settle into for the short run, and then look to expand like you said in the three and five year time frame?

Dennis --

Yes, this is Dennis. The margin is in the mid single digits, and that will increase primarily as sales volume increases. So --

Okay. So there is no one time integration charges in there that are -- I'm sorry?

No, there's no one-time integration issues. It's just a matter of that is where the number is, and the way to increase that is by increasing sales volume.

Okay.

And we start increasing sales and galloping into the sunset, those will go up too.

Okay. Thank you.

(Operator Instructions). Our next question comes from [Tim Urquhart]'s line. Please go ahead.

Good morning, thanks for taking the call.

Hi.

Hi. A question on pricing, and I apologize if I missed this earlier. Was pricing positive, or was it down in the quarter, and can you talk about any competitive pressures in that area -- maybe they're one time -- or any structural changes?

Well, when you say was pricing positive, what exactly do you mean?

Were -- are you able to push through pricing to your customers, given any higher input costs you have?

Yes (inaudible -- multiple speakers) you're right, and there is a price going through right as we speak right now.

Okay. And are you passing it on dollar for dollar, the increased input costs, or is it less than dollar for dollar or more?

Well, it varies a little bit by business sector. When we were originally passing it on, we thought we had certainly enough to cover dollar for dollar plus a margin in there. And sometimes that doesn't always work out as commodities start running ahead.

Okay, great. And are you able -- are you hedging your input costs, or is it all spot market?

We buy out as far as six months, sometimes a little bit longer in there. But we don't go into a what we call a AHP, an absolute hedging program. We buy 90 and (inaudible -- mic dropped out).

Okay. Okay. Thank you.

Thank you.

(Operator Instructions). I'm showing no further questions in queue at this time. I will now turn the call over to the speakers.

Well, I want to thank everybody for participating in the call, and we look forward to having you all on the call next quarter, too. Thank you. Bye.

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