J & J Snack Foods Corp (JJSF) 2012 Q2 法說會逐字稿

Welcome to the J&J Snack Foods second-quarter earnings conference call. My name is John and I'll 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 and thank you and I apologize to everybody in advance; I've got a slight -- almost a cold. But I hope to have it beaten out of my system by the end of today. I'm Gerry Shreiber and with me today, left to right, is Bob Radano, our COO; [Ted Shepherd], our CED; Dennis Moore, our Senior Vice President; Jerry Law, our Senior Vice President; and Bob Pape, Senior Vice President in Charge of Sales.

I will begin with the obligatory statement. The forward-looking statements contained herein are subject to certain risk 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're going to take 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 -- we had a pretty good quarter, net sales increased 16% for the quarter and 14% for the six months. Excluding sales resulting from the acquisition of the frozen handheld business of ConAgra Foods in May of 2011, sales increased 8% for the quarter and 6% for the six months.

For the quarter our net earnings increased by 20% to $10.4 million or $0.55 a share from $8.7 million or $0.46 a share a year ago. This probably reflects a record second quarter in our history. For the six months our net earnings increased by 1% to $15.9 million, $0.84 a share, from $15.8 million or $0.84 a share a year ago. So in essence we made up all of our shortfall from the first three months.

Our EBITDA, earnings before interest, taxes, depreciation and amortization, before bargain gain for the past 12 months was $107.9 million.

Foodservice -- sales to foodservice customers increased 15% for the quarter and 11% for the six months. Without sales of handhelds, sales increased 8% for the quarter and 5% for six months. Soft pretzel sales were up 8% for the quarter and 7% for the six months. Italian ice and frozen juice bar dessert sales increased 4% for the quarter and 4% for the six months.

Churros sales were up a very strong 14% in the quarter and 8% for the six months. Bakery sales were up 13% for the quarter and 9% for the six months. A drop in funnel cake sales to two customers of $2.2 million in the quarter and $5.1 million in the six months had a large negative impact on food service sales.

Retail grocery and supermarkets -- sales of products to retail supermarkets were up 36% for the quarter and 41% for the six months. Without sales on handhelds sales were up 3% for the quarter, 4% for the six months. Soft pretzel sales were down 2% for the quarter and up 1% for the six months on a case volume decrease of 3% for both periods. Sales of our frozen juice bars and Italian ice were up 6% in the quarter and 7% the first half on a case volume increase of 4% for both periods.

ICEE and frozen beverages -- frozen beverage and related product sales were up 11% in the quarter and 9% for the six months. Beverage-related sales alone were up 6% in the quarter and 4% in the first half. Domestic gallon sales were up 5% in our base ICEE business in the quarter and up 1% for the six months. Service revenue for others was up a strong 20% in the quarter following two consecutive quarters of 18% year-over-year increases.

Consolidated -- gross profit as a percentage of sales in the quarter decreased to 28.5% from 30.1% last year and for the six months decreased to 27.7% from 29.9% a year ago. Over 80% of the gross profit percentage decreased in the quarter resulted from the lower margins of the handheld business. We're impacted by about $4 million of higher ingredients 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 costs over the past 21 months. We implemented pricing increases to defray the impact of a portion or all of the cost increases we anticipate over the balance of the year.

Total operating expense as a percentage of sales was 1.6 points lower in the quarter and 1.2 percentage points lower in the six months mainly because of substantial sales increases.

Capital spending and cash flow -- our cash and investment securities balance decreased $4.1 million in the quarter to $161.6 million. We continue to look for acquisitions and opportunities as a use of our cash. Our capital spending was a little heavier than usual to $12.2 million in the quarter as we continue to invest in plant efficiencies and growing our business.

During the quarter we completed the expansion of our St. Louis bakery building and added a line at our Carrollton, near Dallas, Texas, facility. That's a pretzel manufacturing facility. We are presently estimating capital spending for the year to be in the $30 million to $35 million range. A cash dividend of $0.13 a share was declared by our Board of Directors and paid on April 4, 2012. We did not buy back any of our stock in the quarter.

Commentary -- our sales growth of 8% this quarter before acquisitions was a huge improvement over our recent past. Sales of soft pretzels and food service were very strong as we continue to make progress and inroads into the chain restaurant channel and other venues. Churros and bakery products had whopping sales increases of 14% and 13% respectively as we generated sales increases spread across our customer base.

As stated before, funnel cake product sales to two customers were down $2.2 million in the quarter and we expect sales to them to be down another $1.3 billion through the balance of the year.

Muted sales of soft pretzels in our retail supermarket segment were down. Case sales of frozen ice and juices were up 4% in the quarter driven by new product introductions. We did not run any significant advertising programs during the quarter.

In ICEE and frozen beverages gallons growth was strong and service revenue to others was up a very strong 20% in the quarter and we hope to continue to show growth in this area. We were impacted by higher gasoline costs in the quarter and we expect to be impacted going forward.

Prudent expense management combined with strong beverage volume growth and strong service revenue growth resulted in a $1.8 million increase in operating income in the quarter for ICEE.

Regarding the acquired handheld business, sales increased over $1 million to $13,366,000 in the March quarter from $12,295,000 in the December quarter. As we have stated previously, improvements in operating income will come as we increase sales. So we are moving in the right direction and we believe the wisdom of our efforts will begin paying off soon.

Our estimated income tax rate was at 37% for the quarter having benefited from refunds during the period. We are estimating a rate of between 37.5% and 38.5% for next year. I want to thank you for your continued interest and let me turn you back to the moderator for any questions and comments.

(Operator Instructions). Akshay Jagdale.

Good morning. Congratulations on a good quarter.

Thank you. Good morning to you, Akshay.

So, Gerry, just can you talk a little bit about the sustainability of your earnings here or your earnings growth, specifically the volume? I just wanted to get your thoughts on that?

Well, I'm very hopeful that we have some wind behind our sails and this momentum will continue forward. I'm hopeful but I'm always a little bit cautiously guarded, but I am pleased with the quarter and we think we have some winds behind our sails. We can measure some things that are happening, will be happening that's going to affect us for the rest of this year and beyond.

Just a little bit more on that. You know we've talked about this with our clients and I believe with you guys. There's been in our opinion a shift in consumer spending on food towards -- away from home channels, which would benefit you. So I'm just trying to -- and obviously that's not a proven fact, that's just a theory from us. So I'm trying to understand the growth, the volume growth in this quarter.

Can you help me -- how do you think of the volume growth in this quarter in terms of how much of it was driven by Company specific issues and how much of it you think was driven by industry-wide traffic increases, for example? I mean, does it feel like it's more Company specific or do you think there was some industry specific stuff that also helped you quite a bit this quarter?

Well, a couple of years ago we targeted, as an expansion, some of the fast food restaurants and channels and we are making progress, careful progress but very good progress. And as a result we can -- we're getting some commitments to this volume, which is affecting both directly pretzel sales and some of our other products. So to the extent that's away from home as opposed to supermarket, yes. So we are part of the little bit of wave with that, but we happen to have a real good surfboard too.

That's a good analogy. So -- but again, you feel -- and why now then? Like why it was it this quarter that you started to gain momentum versus a year ago? Because you started this initiative a couple years ago. I know you have some new energized people as well that are driving that and you had the sales meeting not too long ago which probably helped. But why now? Why this quarter have we seen a sudden sort of improvement in volumes?

It's like watching your kids grow up and you go over their school lessons with them and you drum them into them every night, and all of a sudden something magical happens, perhaps at age five or six or maybe at eight -- we're in the beginning of magic.

Sorry, so you think that this is sustainable Company specific that's just starting right now, correct?

I am very -- hopefully, albeit cautiously optimistic we think we're on to some long-term sustainability. Our core pretzel products have been inching up quarter after quarter the past year and (multiple speakers).

And just on that, I mean the pretzel growth was good, but I mean we've seen that the last couple of quarters. I was really surprised by bakery which you highlighted; up I think 13% or something. Are you just -- I mean, what's happening there? Are you selling more in the same customer -- at the same customer base, people are eating more? I mean, give me some color on that because that was a really outstanding quarter for bakery products.

Well, a combination of things. One, the economy seems to be inching towards a turnaround. And two, we've expanded our bakery presence both within DADDY RAY'S and our California bakery and we're just doing better with it.

Okay. And just one last one. On acquisitions, as always, I mean it looks like you invested some of your money back into PP&E this quarter. I know those projects are probably ongoing for a while, but you're adding significant it looks like pretzel capacity. But can you just help us with the landscape on M&A, what you're seeing, how you would characterize the activities that you have there? Obviously you can't tell us what's coming, but just give us a sense as to why it's taking a little bit longer than perhaps impatient people like me would expect?

Well, you ask a question in a very professional and very detailed way. I have been -- and it's not been -- we're very conservative and we are reasonably constrained and I and Dennis are spending a good fair amount of time and we're hopeful to be harvesting some fruit in that area in the near-term.

And just one follow-up on that. I mean what are you seeing in the landscape? I mean are you just seeing assets that have -- the valuations are too high? Are you not seeing quality assets? Has it been fit? I mean what's been the issue or you think it's --?

I think we're (technical difficulty) this is all I'll comment. Everything we're looking at now, which we've gone from an original suspect into a prospect, everything we're looking at now is -- could be labeled a quality asset. And if we are able to act on them we will be pleased. But that's all I want to say about acquisitions, suffice to say we've made some in the past and hopefully we're going to be making some in the future.

Perfect. Thank you. I'll get back in queue. Thanks.

Robert Costello. Your line is now open. If your phone is on mute please un-mute it.

A question on the restaurant side. A year ago you had the waffle fries. What specifically product did you add or the sales growth came from on the restaurant sales?

A combination of products both in the pretzel variety, pretzel rolls, pretzel sticks (multiple speakers).

And these are all in national chains like Burger King like you had before or are they with a new customer, existing customer?

[Mall] in both casual dining and fast food restaurants. And I guess anybody that has more than ex-number of stores could be considered national, but we think we have a great big yard to now develop and we're anxious to develop that.

The WHOLE FRUIT came out -- I saw you advertising with a new product there. You're coming out in a small cup variety.

We've taken that product and we're doing well with WHOLE FRUIT and we've been able to resuscitate that brand. But now we've taken it to another level and watching the smoothie development back-and-forth we (technical difficulty) decided to get on board that horse too and we developed a smoothie -- (inaudible) Bob, why don't you comment on that?

Just, they're ready to eat smoothies, they're better (multiple speakers) products, controlled serving size and it obviously appeals to consumers at this point in terms of the product execution.

Right. Where are you going to be selling them, retail or restaurant for this year?

Grocery. Although there's been some discussion, we're not there yet, but we're going to be selling them into retail grocery channel. Although some of our people have talked about perhaps putting them in a more sizable container so that you can dip it (inaudible).

Right. In the frozen novelty case, if you go into the BJ's, to the left of it is the frozen cake products like cheesecake and whatnot. Is that an area that you would look into or no?

That's an area that I would enjoy having a slice, but I don't know if --.

Well, it fits the novelty desert area, but I don't see you with a lot of penetration. It's just a question. DADDY RAY'S, a question on there. You talked about the sales growth. What specifically was it? What product category?

Bakery goods, selling more products to more customers. We expended DADDY RAY'S to take advantage of our strategic locations with respect to transit and logistics, (technical difficulty) some of our production from the West Coast which is out there back into DADDY RAY'S into the central part of the US. Now it gives us a little bit of transit -- what they call TA, transit advantage.

Right. Last question. You talked about the 14% increase in churros sales. I've always thought that category for you has a tremendous growth opportunity. What specifically brought that growth, was it new customers, existing ones?

It's new customers and continued penetration into these existing markets. It's no longer -- nobody knows about it. You and I had a conversation a couple of weeks ago, but we continue to further to develop and increase their points of sale locations all around the country.

So you do have the capacity now for churros throughout the US if you've got a national chain customer?

Yes, yes.

All right, thank you.

(Technical difficulty) churros in three locations, two in the West Coast, one of our locations here in the East Coast that we could expand that rather quickly too if we had the opportunity.

Thank you.

Thank you, Bob.

Mitchell Pinheiro.

So hey, I wanted to talk about your frozen carbonated beverage segment. It looked like earnings were up nearly $2 million. And just curious, I mean so I noticed that your FCB dispenser locations were up about 4%; you said gallons were up I think 5%. Is that what was driving the business new location growth, did you get help? I know you always talk about weather, but did you sense any warm weather help in various geographies in that segment?

Well, beverage and related product sales were up 11% in the quarter and beverage sales, which have been strong over the recent past, was up too. The fact that we had a mild winter certainly did not hurt us. But ICEE, under Dan Fachner and his team, has done a very good job, as a matter-of-fact a remarkable job in controlling their cost and managing their cost. And they're really operating -- I mean I think they're a 12 cylinder engine, but they're operating on eight or nine of them right now.

So the 4% increase in dispenser locations, own locations, are they new accounts, growth within existing accounts? How is that --?

It's a combination of both, Mitch. We picked up a major chain in the Midwest that we had sold to in the past many years ago; for one reason or the other they stopped buying them, but we got in there. There's always some gains and pluses, people go out of business, (inaudible) stop selling and whatnot, but in the overall big picture of things our team was successful in adding a net number of locations.

When you do your projections do you -- what type of sort of dispenser growth would be reasonable to expect?

(Technical difficulty).

I'm sorry you broke up there, Gerry.

Modeling this 5% to 6%.

Okay. And is that growth like as the Wawa chain expands is that how you -- is that where you see it? Are you in most of the major -- other than 7-Eleven are you in most of the major like C store and appropriate locations?

Well, we're in quite a few of them, I don't know if I would use the word most of. But we've been able to expand the ICEE business outside of its strong C store support and into the mass merchandisers. We're into the drug channels now, we're in Walgreens, we're in the leisure and theme parks, but (technical difficulty).

I've seen more of those frozen frappuccino, cappuccino, whatever you want to call them, dispensers in more and more locations. Are you -- I know you were in that business with Java Freeze and I don't know what other brands you may have there, but can you talk about what you're doing in the frozen coffee side?

Yes, we're not doing much. And although we've had some efforts in the past, it really hasn't worked out for us. We are selling a frozen beverage in a different type of machine, a non-carbonated machine. But our coffee business and smoothie business from a frozen beverage business has not really added anything incrementally.

Okay. And have you seen -- you don't talk much about Paradise and SLUSH PUPPIE, but how have they done for you since you've acquired them?

Well collectively in the aggregate they've done well, they've added two additional brands and we've integrated them into our system and there's no special reason that we're not talking about them other than Paradise is no longer new news, and certainly SLUSH PUPPIE has been successfully integrated now for about five years.

Are they growing?

They're growing marginally.

Okay. Last question. On the service revenue, are you still -- are margins in the service revenue segment still close to your corporate average? Is that --?

They appear to be, we're pleased with the margins.

Okay.

You know, Mitch, getting back to the comment -- maybe I wasn't fair about before with SLUSH PUPPIE and Paradise and to a lesser extent Arctic Blast, they have more strategic value when looked at as a view of the whole as opposed to individual pieces and components and I know you can understand that.

Yes. Understand it. Thank you very much.

Brian Rafn.

Give me a sense, Gerry, as you start seeing the tepid recovery in the consumer, certainly is an offset in gasoline prices, we're looking at a big tax hike here in 2013. Give me a sense overall across your brands, what is the price sensitivity or elasticity of your consumer? Price hikes, you know -- you always talk about making sure you don't get over $3 or so, $4 in the frozen area in cases. And give me a sense as to what the sensitivity of the (inaudible) shopper?

Well, whatever happens we're going to have to deal with it. And I think as we go through some of these adjustments -- but I think that was a two-part question, wasn't it?

Right, right.

Fuel is going to have its impact on us from a cost standpoint. However, we have enough locations in and around all over the country, if somebody is not driving from here to there, but if we are well placed in both here and there we're going to get business, both there and here.

Okay, okay. Let me ask the same question a little different way. Does the sensitivity or elasticity of the consumer, does that force you guys to create new flavor formulations, maybe shrinking packaging a little bit size, kind of price quality? Or is it about different channels, I mean what -- or perhaps more couponing or discounts? Give me a sense as to the type of variables that you can play around with.

Well, we want to be real careful about shrinking our size and our consumer packaging size. We've been through some of that particularly on some of our private label where we do with others, and what we generally see is not real good results.

In the last few years we've had a huge -- we developed opportunities with the dollar channels by putting specialty products at specialty sizes and cost in there, we've been able to grow those sales. But as far as price elasticity, every time we have a price adjustment we see a little bit of a dip in sales, but by and large we appear to be -- we appear to benefit from being a good value and a properly priced item. So (multiple speakers).

Okay, well, my kids eat a lot of your frozen stuff, so you guys (inaudible) hold onto sizes. You guys have always been superb on that and not cheating the customer, even though the ingredients are going up.

Give me a sense, Gerry, you talked about $4 million in commodity and ingredient. What are you seeing, are you seeing a sense of a plateauing or are there specific ingredients flour or shortening versus fructose corn syrup? Is there anything that's up and continuing to be up? Give me a sense of the delta change in some of your ingredients?

Well, flour seems to have eased, but I'll let Dennis comment on --.

Brian, this is Dennis and, as you know, flour is -- or wheat-based ingredients are our largest component of the ingredients. However, probably in this quarter they accounted for roughly 20% of the overall increase of $4 million. So that has been trending downward, but the others like you say sugar -- or Gerry said sugar and corn syrup and nuts in particular have been increasing. So it's kind of an offset. So while the trend in flour is clearly down the others are not yet at this point.

But we're a lot better off I think today than we were a year ago hence.

Okay, okay, that's fair enough. Talk a little bit about -- we haven't spoken about your -- you've done some certainly some cold branding in the frozen novelty are in the past -- Minute Maid, juice bars and BARQ'S root beer bars. Is -- are those type of deals somewhat infrequent or episodic or is that something you're always working on, those kind of joint ventures?

Well, we are reasonably happy with what we've done in the past and we're always looking for new opportunities there too. But we have not dismissed co-branding and licensing and we're going to continue to evaluate and press for new opportunities there. But sometimes they just -- it's not like they automatically come up and get thrown into our ear.

Yes, right. Would you say, Gerry, that today versus say five to 10 years ago given the shoe size in the ever changing snack foods that you are really now a known brand and it's not like you -- you would have to relinquish anything going to the Coke's or Pepsi's or Minute Maid or some of these larger companies? I mean you really have a sizable presence in that area. Does that make it easier for you today or is it just that there just aren't that many frequent opportunities?

You mentioned two companies and I respect the heck out of both of them, both Coke and Pepsi. And even though our Company is better known and more widely known, we're certainly not resting on our laurels.

Okay. Let me ask -- any comments specifically in the Dollar Store area? Is it -- new products -- I'm just asking about the dollar store? Any new developments --?

We're making inroads there. We have a wide variety of products that range from a soft pretzel into a fig and fruit bar and now all of a sudden a fruits and juice bar and frozen novelties. So a few years ago if we had this conversation I might have been at a disadvantage, I'm going to say what's a dollar store? Now we're in most of them with one or several products.

Okay, okay. And then just specifically, the (inaudible) assault against in kind of the cafeteria, the school section, vending machines, that type of thing. What's been your sense, Gerry, on your success in somewhat mitigating the whole anti-fat, anti-sugar, in the K-12 school cafeteria area?

It's an issue and they're restricting what the children, particularly K-12, can have on the menu. We've developed products that are more favorably looked at by the school foodservice group like a whole-wheat, whole grains pretzels. I don't know if they're more favorably looked at by the students.

Okay.

As far as them taking all of this sugar out and made them 100% juice and we have a new special product (inaudible) in there that we're working on to get them to try otherwise whole grains and berries.

Okay, okay. And then the comment on SLUSH PUPPIE, Paradise, Arctic Blast, how dynamic have you been from where you purchased those products in actually developing new flavors, new formulations, the distribution type thing? I guess I'm asking as to how much restructuring, how much have you had to kind of put into those brands.

Well, because of the SLUSH PUPPIE, and to a lesser extent some of our other experiences, we have a new brand that's called MIX IT UP, where they literally mix up a variety of colors and greens, reds, blues and all these different colors and it becomes literally fun for the children and the consumers and where MIX IT UP has become almost a brand.

Okay, okay. And one last one, Gerry. You talk about $30 million to $35 million -- maybe one for Dennis on CapEx. Is that more putting in line this productivity, efficiency or are you actually doing any physical footprint plant expansion?

Well we expanded two plant --.

Go ahead.

Now we expanded two plants, but I'll give it to Dennis -- we expanded --.

Probably of the $12 million that we spent over the past six to nine months, that has gone into expansion of two facilities, one in St. Louis bakery manufacturing facility, another in Texas where we essentially doubled that capacity over relatively small size plant.

All right, guys. Thanks as always. You guys are doing a fabulous job. Keep it up.

(Operator Instructions). [Joseph Petrowski].

Congratulations on another fabulous year.

Well, thank you (technical difficulty). But we're on our way to hopefully making it a fabulous year.

Oh you will, I have faith in you like always. All right. Gerry, what kind of -- do you see any growth in the foodservice part of the business, especially with the change you're making with the USDA label on the packaging?

Did you say foodservice? You mean the overall -- the overall foodservice business?

Overall foodservice, but a lot to do with the juice bar business and cup business that goes to the schools.

Well, we see overall growth opportunities in the US -- in the foodservice business and there's always little bits of regulation and challenges where you take the pieces and sometimes they're a little bit more challenged. But our foodservice business was up strong for the quarter.

How do you see it growing from this point on?

With increased sales.

Nothing to do with any new products at all?

Products, increased sales, expansion of all products, Joe, expansion of the same.

Do you think making that change with the USDA is going to affect business at all, schools?

Making that change? Is there a specific change that I'm not privy to?

As far as -- oh, changing the labeling [with regard to] nutrition?

Oh, well --.

Not having the USDA anymore.

Well, this is a regulation that -- no, I don't think that's going to impact sales. I think the bigger change there was the nutritional regulation, what we had to go through.

Okay, Gerry. Stay well. Dennis, Bob, take care.

You too, Joe.

And at this time I show no questions.

I want to thank everybody for their time today and I look forward to all of you on our next quarterly conference call and hopefully we'll have continued good results to report. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating, you may now disconnect.