J & J Snack Foods Corp (JJSF) 2012 Q3 法說會逐字稿

Welcome to the J & J Snack Foods third-quarter earnings conference call. My name is Sandra 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. Shreiber, please go ahead.

Good morning and welcome everybody to the J & J Snack Foods third-quarter conference call. I will begin with the obligatory statements and then I will continue on reviewing our operations and I'll be happy to field questions and commentary from everybody.

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. We had a pretty good quarter again. Net sales increased 10% for the quarter and 12% for the nine months. Excluding sales, post 12 months resulting from the acquisitions of the frozen handheld business of ConAgra Foods acquired last May and Kim & Scott's Gourmet Pretzels acquired in June of 2012, sales increased 6% for the quarter and 6% for the nine months.

After adjusting out the positive effect of the bargain gain on last year's earnings for the quarter, our net earnings increased by 12% to $18.7 million or $0.99 a share from $16.7 million or $0.89 a share a year ago. For the nine months our net earnings increased by 6% to $34.6 million or $1.83 per share from $32.5 million, $1.73 a share from a year ago.

Our EBITDA -- earnings before interest, taxes, depreciation and amortization -- before the bargain gain for the past 12 months was $111.2 million.

Food service. Sales to food service customers increased 14% for the quarter and 12% for the nine months. Adjusting for handhelds and Kim & Scott's as noted above, sales nevertheless increased 10% for the quarter and 7% for the nine months. Soft pretzel sales were up 11% for the quarter. Let me repeat that line. Core products of soft pretzel sales were up 11% for the quarter and 8% for the nine months. Italian Ice and frozen juice street and dessert sales increased 15% for the quarter and 9% for the nine months. Churros sales were up 12% in the quarter and 10% for the nine months. Bakery sales were up 15% for the quarter and 11% for the nine months.

A drop in Funnel Cake sales to two customers of $2.6 million in the quarter and to three customers of $8 million in the nine months had a negative impact on food service sales.

Retail, grocery and supermarkets. Sales of products to retail supermarkets were up 7% for the quarter and 25% for the nine months. Adjusting for handhelds, sales were down 2% for the quarter and 1% for the nine months. Soft pretzel sales were up 1% in the quarter and up 1% in the nine months on flat case volume for the quarter and down 2% for the nine months.

Sales of our frozen juice and Italian Ices were down 2% in the quarter and up 2% in the nine months, on case volume decrease of 2% for the quarter and an increase of 1% in the nine months.

ICEE and frozen beverages. ICEE including ICEE Arctic Blast, SLUSH PUPPIE and PARROT ICE frozen beverage and related product sales were up 2% in the quarter and 6% for the nine months. Beverage-related sales alone were essentially unchanged in the quarter and up 2% for the nine months.

Domestic gallon sales were down 5% in our base ICEE business in the quarter and down 2% for the nine months. Service revenue for others was up 12% in the quarter and 16% for the nine months. Gross profit as a percentage of sales in the quarter decreased to 32% from 32.7% last year and for the nine months decreased to 29.4% from 31.0% a year ago. Almost all of the gross profit percentage decrease in the quarter resulted from the lower margins of the handheld business. Last year, we did not own the handheld for the entire quarter.

We were impacted by about $1.5 million of higher ingredient and packaging costs in the quarter. We cannot project the impact on benefits 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 24 months.

We have implemented price increases to defray the impact of a portion or all of the net cost increases we may incur over the balance of this fiscal year.

Total operating expenses as a percentage of sales was 0.8 percentage points lower in the quarter and 0.9% percentage points lower in the nine months mainly because of substantial sales increases and continued good management of cost.

Capital spending and cash flow. Our cash and investment securities balance increased $2.8 million in the quarter to $164.4 million. We continue to look for acquisitions as a smart use of our cash. Our capital spending was a heavy $9 million in the quarter as we continue to invest in plant efficiencies and growing our business. We mentioned last quarter we completed the expansion of our St. Louis bakery building and added a line at our Carrollton -- near Dallas, Texas -- pretzel manufacturing facility, essentially doubling that. We are presently estimating capital spending for this year to be about $40 million or so, but we are confident that it will pay off.

A cash dividend of $0.13 a share was declared by our Board of Directors and paid on July 5, 2012. We did not buy back any of our stock in third quarter.

Commentary. Our sales growth of 6% this quarter before acquisitions marks our second straight quarter of strong organic growth following 8% growth last quarter. Sales of soft pretzels and food service were very strong and include new pretzel products such as rolls, sticks, pretzel dogs, soft breads and soft pretzel buds to casual dining restaurants and club stores. Frozen juices and ices in food service have hit their stride again, up 15% in the quarter after being up 4% in the first six months.

Churros and bakery products had very sharp sales increases of 12% and 15% as we generated sales increases spread across our customer base. Funnel cake product sales to two customers as mentioned before were down in the quarter. A decline in funnel cake sales has just about run its course.

Unit sales of soft pretzels and frozen juice and ices in our retail supermarket segment were relatively flat again for the quarter. In ICEE and frozen beverages, gallon sales were weak which we believe was an aberration. And service revenue to others was up a very strong 12% in the quarter as this area of our business has performed extremely well. Prudent expense management combined with strong service revenue growth resulted in a $932,000 increase in operating income in the quarter for ICEE, and an almost incredible $4.3 million increase for the nine months.

Regarding the acquired handheld business sales after a modest decline initially have flattened out at roughly $50 million annual rate, and the business has begun to contribute to operating income. We are cautiously optimistic that we can continue that trend. We are working diligently to get the topline increasing.

Our estimated income taxed rate was at 38% for the quarter. And we are estimating a rate of between 37.5% and 38.5% for the year.

I thank you for your continued interest and now I'll turn it back to the listening audience for questions and [prognosis].

(Operator Instructions). Akshay Jagdale.

Good morning. Congratulations. It was a very good quarter on the topline at least.

Well, thank you. We were pleased with the quarter overall.

So, my question was just the topline was very strong especially in food service, as you highlighted, and I was a bit surprised that the EPS and margin performance wasn't better. My guess is there was some one-time issues there in terms of perhaps acquisition costs and new products not being as profitable as they will be maybe a few months out.

Am I right in thinking that way or can you just tell me understand why with a 10% organic growth number in food service your margin performance wasn't better than it was?

Well, you are right on all counts. We did develop several new products or we completed the development of them and we expanded our plant in Dallas. We had literally doubled its capacity and often times when this is done you are done but you're not done, if you know what I mean. And then it is getting them online and getting the wrinkles out.

But we are pleased that we are on the right path to getting the benefits of the plant in Texas and the plant DADDY RAY'S in Missouri as well as some of the other things we are doing. I would concentrate on looking at our sales increase and our overall bottom-line increase, if I would be taking full measurement of the quarter.

That's helpful. But do you expect some of these issues -- when should we expect these issues to sort themselves out on the profitability side? So underutilization of your plant I guess, the new products not being as profitable as they will be eventually, et cetera. How long does they usually take?

Well, with us, speed is of the essence but we are not talking anything beyond a quarter or two. So we are in that mode now. So you can look forward to improved performance.

Okay, that's helpful. Just talk to us a little bit about the -- on the acquisition front. You have been making some small tuck-in type deals here that -- obviously quite a bit of dry powder on your balance sheet for a while and your cash position gets better -- it's getting better despite the fact that you have increased your CapEx spending.

So can you just help me? I mean, what do you see out there? What are you waiting for? What has kept you on the sidelines from doing something perhaps a little bit larger?

Well, we made a small acquisition this quarter and it's -- of course it is a fit with us. We have looked at some things, but for one reason or another they were found that they didn't meet all of the criteria that we have established. We are not going to be -- we're certainly not going to be bullish with our investment, our money and we will continue to sort things through and look for acquisitions that fit our criteria. We have made them in the past. Chances are we are going to make them in the future and we are going to continue the proper due diligence so that we don't do anything that is transformational or sloppy.

And then more broadly on the topic of commodities. Obviously wheat have skyrocketed in the last month or so. I know it is not the only commodity you buy, but you have tremendous momentum, the most I have seen I guess since I have started covering the Company on organic growth.

What holistically, I mean how are you thinking about your margin, your percentage margin going into next year in light of the recent increase in wheat prices? I mean, is it -- do you think it is still possible to have a margin increase next year?

We look at that very closely, we are looking at the possible pricing of opportunities now. We are going to be a little bit more leaning forward to bounce with this. We will buy forward when some of these prices come back. But something that we have gone through several times in the past. Heck, I don't know, six, eight, 10 years -- and hopefully we will be better experienced for it.

Let's give somebody else a chance and then we will go back to you because you are --

Mitch Pinheiro.

First of all, I want to talk about the frozen carbonated beverages. You said that the gallon decline in the quarter a little weak was an aberration. What was it and why do you think it is an aberration?

Couple of things. One -- a couple of our big retailers slowed. You have seen some of the census reports in there. Some of the retailers had slowed down. We did lose a major C store that opted to have its own -- its own, let's say, frozen beverage. And this has happened in the past. That was Thornton Oil but we think we have seen a sharp rebound in July and we will probably be hopefully will be close to the plus side or on the plus side for the year.

And how is pricing in that channel? Did you take any price increases in the last 12 months in [SCB]?

We did.

And then relative to SCB, any -- to be flat is probably a pretty good thing considering that carbonated soft drinks are in a slow and steady decline, and coffee and other alternative beverages are on the upswing. Can you talk about whether any of these trends have changed and what you guys are doing strategically to get into the faster growing segments?

Well, to begin with, you are right on. These trends have not changed then to be flat even though it is nothing to really crow about. It is like -- it is holding onto your volume that you have. We have been expanding just like our pretzel business has been expanding into the fast food and casual dining restaurants. Similarly I see us starting to do some of the same things with the buffets international and the hometown buffet and more recently some preliminary tests going on with Chuck E. Cheese. But gallon per outlet and volume per outlet has been -- needs to be strengthened. It has been flat for some time.

But ICEE overall -- (multiple speakers) its sales increase every year. Its contribution to EBITDA increase every year. Its management is sharp, honed, enthusiastic and energized. So that is performing well for us overall.

And then back to Akshay's question on commodities. Does -- so we have seen a sharp spike in -- we even saw the commodities. In the past, when there's sort of temporary shocks or if you view them as temporary, you have tended -- at least my recollection is you've tended to hold back on increasing prices, absorb a little bit yourself if you think it is temporary and then so when it becomes somewhat more systemic you will raise prices like you've done over the last 12 months. How -- what is the strategy right now with the spike in wheat and other ag? What -- has anything changed?

Well, besides us watching it every day and buying it on dips, there is nothing that really has changed. And incidentally, I forgot to induce everybody before. You all know Dennis Moore, our CFO, Teddy Shepherd, our CED. Bob Radano is here, Jerry Law and Bob Pape, who is in charge of sales for food service and retail.

We will not be as -- what is the best word way to describe this? We will not be, we are going to be a little bit more aggressive is that the right way and taking price as each sometimes you go through these little experiences and you get the confidence. It is like watching a little boy swim. He can swim out to there and then, he can swim further and further. We were all bit hesitant a few years ago in taking prices but now we can swim out there and come back in here, and we are just going to protect the business and make sure we don't impact volume, but where we have to take price so that we can certainly maintain our margins and where we can to even improve it we are going to look at.

And so, just one last follow-up to that. In the past if you take -- I'll make up a number, but if you take soft pretzel prices to food-service up $0.05 the operator moves it up $0.50 and obviously that could have an impact on how the consumer makes their choice at the snack bar. Do you think -- ?

It is true, it has an impact and then we have got to balance it with our what we call our marketing and our allowances and our people are pretty good at that, but it does have an impact.

Would you think given the general state of the consumer and maybe a little pushback on prices that perhaps this time if you do raise $0.05 you might not see the operator raise $0.50 they may only raise a $0.10? I mean do you think you'll still see these accelerated pass-throughs or do you think there will be more -- not respectful, but more aware of the pressures on the consumer and maybe won't see as much negative volume?

To answer your question, no. But some operators are a lot more sensitive with the pricing to consumers than others. Certainly -- and I am not singling anybody out, but certainly Costco and Sam's and Wal-Mart and Wegman and Breese outlet stores, they are a lot more sensitive to raising prices to others. Maybe that will help.

The overall supermarket industry is not in really great shape, and to some degree some of the food service customers are still digging out from the last couple of years of recession. But it is a two-way approach between us, the customer partner and the retailer.

Thank you. I'll get back in the queue.

(Operator Instructions). Michael Lavery.

Good morning. One question really remaining as it relates to the soft pretzel sales and the food-service market which obviously were quite impressive. Just if you break out that 75% number that you throw out that were sales to one customer. That is a pretty big number north of $2 million or really about more than 10% of your total consolidated sales increase. So what I am trying to get at is obviously that was an impressive number for you. How can you talk a little bit about how good of a number that is or how good those sales are or meaningful to that customer?

In other words what I am trying to get at is how the potential there for it being a recurring revenue stream.

Well, I don't know what the real potential there is for recurring revenue stream. We hope it will be, but we have a lot of our new products. We have a lot of our new products, products that we weren't making three or four years ago that are getting out into the food-service field now. Pretzel sticks, pretzel buns, different kind of encapsulated pretzels with hot dogs. Pretzel rolls. We have customers from the largest like Wal-Mart and Costco's down to some of the fast food restaurants like Buffalo Wild Wings, Hee Hee McGee's, and Fridays.

We have a lot of people now that are trying these for the first time in here and we are looking at an overall base probably up $20 million to $25 million on annualized for next year in sales and revenue which, perhaps, didn't even exist three or four years ago. So and you have been to some of our sessions where we talked about our targeting of fast food restaurants. And it is a target that now we have not only identified, but we have started to make some progress.

We are hopefully cautiously optimistic that we will be continuing to make this kind of progress over the next, over the near term certainly, and over the long term too.

That is helpful and certainly the trend looks really good there. Just I guess one other one real quick on retail supermarkets. Just given that I know it is a smaller piece of your business, but given the tough comps you have for the next several quarters here, is there anything on the product innovation side that you have to to kind of --?

There is, and let me turn you over to Bob Pape to comment on that. Bob.

We are looking at the value-added protein products which we have added to the mix which would be our pretzel dog products. And we have also launched a sweet cinnamon product that is doing well in our retail environment. And also our introduction of the handheld products that will help us as well that we are executing the corporate brand side for the customers for their private label. So, those three things we will be adding some new innovation and the volume that goes along with it as we move forward.

We are looking for a strong single-digit growth perhaps even low double-digit growth retail alone for next year.

That's great color. Thanks, guys. That is all I had.

Akshay Jagdale.

I couldn't say no to the opportunity, so I just wanted to ask about the same issue. The growth initiatives, the expansion of the planned and new products. Roughly how much did that depress margins by say, this quarter? Any sense?

I don't have the figure on the top of my head. Dennis?

Okay, while -- maybe we can follow up on that off-line. But --. Okay so the other question I had was related to what you just said which is the growth prospects in retail. Can you elaborate on that? You said high single-digits to double-digit if I heard you right. What would be driving that? It's just the meat filled pretzels in retail stores?

All of our handheld products, where -- there is no guarantee that what we have on the R&D table on the new product entry is going to be a success. But if a fair amount of them are, then our new pretzel products, we think, that we will have another good year in retail.

All right. That is all I had. I'll pass it on. Thank you.

Brian Rafn.

Good morning. Let me ask you on the commodity prices, with the hottest summer, the driest summer since 1956, given the fact that you got drought across the United States. Given the fact that this is kind of a universal perception with the consumer -- hot summers, everybody is basing it across the US. Other maybe in the Deep South. Does that allow you the ability to raise prices and maybe have a consumer not be so elastic because they understand the predicament?

Is this really the hottest summer since 1956?

That's what the weather service says.

I was just a kid then. I remember the Yankees beating the Dodgers four games to three, all right? That I can remember, but I can't predict what is going to happen here.

But suffice to say our management team, your management team -- all right? We care, we work hard, we are experienced. We are smart and we are going to do everything we can to get in front of these things with the exception of beating up somebody in the parking lot.

Okay. Let me ask you if you have a long protracted 18-month run up in commodity cost, corn at $9 a bushel. Does that maybe make -- does that squeeze the margins for everybody across packaged foods. Does that make your ability to make acquisitions any easier? Now maybe pressuring some guys (multiple speakers) ?

It might but we would have to leave no doubt we would probably have to look at pricing and do something. And no doubt in doing that, that creates with it a little bit of ripples, not breezes, but a little bit of ripples along the way. It might make acquisitions easier but who knows?

Okay. And then the third question pivoting off that is, if again we see longer protracted commodity run, lot more pressures, do you see any more business from maybe the grocery store chains asking you for more private-label product?

We have seen in the past, I will say two years perhaps three years, we have seen a little more shift to that. Yes, get Bob. I will let you comment on that.

We do have a strategy to execute private-label products with our customers. We have, as you know industrywide, we have seen private-label brand shares increase. So, we want to be a player in that and have a good balance between our branded products and the private-label products as we manage our product portfolio.

Have you guys seen in the old -- you talk about national brands, talk about private-label. The old kind of generic, the really low end stuff and this kind of 2007, 2009 mortgage crisis weak economy. Is the generics a category at all or is it really more just branded and private-label?

Generics as a general rule still don't -- aren't a very predominant product execution out there right now. Customers are getting behind their own brands or obviously relying on nationally branded products. Those are the two main figures of the volumes.

Okay. I missed your opening comments, Gerry, of the first four minutes. Has the weather patterns in the summer whether it be drought or whether it be hot or depending on where you are regionally, have those at all affected because I think you talked a little bit about some of the frozen bars and the LUIGI'S, MAMA TISH'S were a little flat. Did weather help you at all in any category?

We always like -- weather is certainly helpful for our beverage business and ICEE is clicking on all cylinders when the weather is 85 to 93, say. But when it gets to be 98 to 100 and you have all of that humidity, people don't go out as much. They are certainly not eating foodstuffs as much. So we might have had a little bit if just a little bit twist of negative impact from the very, very hot weather. But in the long run it equals out. And so, I am not going to blame. I am not going to get too excited over perfect weather and I am not going to blame any kind of performance for what we call raindrops and clouds.

Okay. Your distribution for some of these hot weather products whether they be beverage or frozen, certainly you guys have the stadiums, the ballparks, baseball, you have got the smaller -- the little carts, stuff like that for Little League and that type of thing. You have it at the cinema.

How prolific is the waterpark, the amusement park, maybe the snack shop at the local municipal swimming pool. Is that a channel or is that really not a channel you participate in?

Channel. That goes into our, what we call overall our leisure and theme, and although it is still early to get any kind of accurate numbers it appears to be having a decent season.

And then what was your overall CapEx budget for the year, Dennis?

We are saying it did [about] $40 million.

About $40 million. And how much of that would be maintenance, Dennis?

Well --

[5 to 10].

It is probably [$10 million to $15 million] or so. A lot of what is happening is we are getting these new opportunities for growing the business so we have been adding on to our CapEx brand as we have been moving along.

Superb job. Keep it up. You're the best.

Thank you, thank you.

(Operator Instructions). [Robert Costello].

Hello. Quick question. Question regarding that acquisition and some of those product varieties in the pretzel in the Chicago business. What is the timetable for expansion of those varieties in the -- with SUPERPRETZEL going out in the retail end. Is it something you would consider near term or something more long term?

Let me make sure I understand the question. Kim & Scott's Gourmet is their own brand and it is kind of like a cachet brand with very limited distribution. We are studying our options right now which would include both expanding the brand and its presence and we will be able to comment on that better in the next 60 days.

Right. But my question is like a lot of your acquisitions you typically, like you are doing this summer with the fruit, Whole Fruit, now you have it in the -- in BJs in a product category that it wasn't sold in before. Is that your game plan like this with your other acquisitions to take it and obviously that is the sellers ambition as well. To take it and (multiple speakers) more mass distributed?

Yes we are going to be expanding the brand, but like you know. and we have chatted about this before, to extend their brand in retail or in grocery takes a long time. What we have going for us with his brand is they have been around a while and they are in a couple of key accounts like Whole Foods. And even though their sales had been stalled for the past couple of years, we are looking for ways that we can mode of sales and extend the cachet.

Right. Right. I think the varieties they offer is something that can jumpstart the demand side of the business beyond what it normally would be. And that is obviously something you are interested in.

We are looking at all these things.

Right. Right. On the club store side, when you put in the Whole Fruit and you don't see Welch's there any more and your margin obviously on the Whole Fruit is better per pound wherever you look at it, what do you -- how do you go about because you are limited to the amount of frozen products you can get in there. What's the decision you are making to do that. It is a margin basis. How do you look at it?

Hard decision (multiple speakers)

Because I don't see Welch's in the case anymore (multiple speakers).

They have got a limited number of shelf space there. Our goal is to get as many SKUs, pieces on that shelf as possible. My people, our people do a terrific job giving the size that we are still basically a small company with a limited number of SKUs. We are competing against people like Unilever, like Nestle's, like (technical difficulty). We are competing with a lot of big, big giants in there.

Now what do we do? We think we make better products. We know we move faster and execute faster and we certainly follow up with a customer. So we have a basic sales philosophy that we want it all and we keep trying to get there as quick as we can. So we are not (multiple speakers).

All right. Thanks.

At this time there are no further questions.

All right. I want to thank everybody for their participation and we look forward to our next quarter's conference call and having good news to report again. Thank you.

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