J & J Snack Foods Corp (JJSF) 2013 Q3 法說會逐字稿

Welcome to the J&J Snack Foods Third Quarter Earnings Call. My name is Yolanda and I will be your operator for today's call. (Operator Instructions) I would now like to turn the call over to Mr. Gerry Shreiber. Mr. Shreiber, you may begin.

Thank you, Yolanda, and welcome everybody. Let me start by introducing my team that is with me today. We have Bob Radano, our Senior Vice President and COO, Dennis Moore, our Chief Financial Officer and Senior Vice President, Jerry Law, Senior Vice President and Assistant to me, Robert Pape, who is Senior Vice President of Sales, and Ted Shepherd, who is our CED.

Let me begin with the obligatory opening comments. 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 5% for the quarter and 7% for the nine months. Excluding sales resulting from the acquisition of Kim & Scott's Gourmet Pretzels in June 2012, sales increased 4% for the quarter and 6% for the nine months.

For the quarter, our net earnings increased by 13%, to $21.2 million, or $1.12 a share, from $18.7 million or $0.99 a share a year ago.

For the nine months, our net earnings increased by 27% to $44.1 million, or $2.33 a share, from $34.6 million or $1.83 a share a year ago.

Our EBITDA for the past 12 months was $132.7 million, also a record.

Food Service. Sales to food service customers increased 5% for the quarter and 4% without Kim & Scott's. Soft pretzel sales alone were up 22%, that's 22% for the quarter, and 26% for the nine months. 19% without Kim & Scott's in the quarter.

Italian ice and frozen juice bars and dessert sales decreased 16% for the quarter, and 13% for the nine months. Churro sales were up 20% in the quarter, and 24% for the nine months, and bakery sales were up 2% in the quarter and 6% for the nine months.

Retail and grocery supermarkets. Sales of products to retail supermarkets were up 4% for the quarter and 2% for the nine months. Adjusting for Kim & Scott's, sales were up 3% for the quarter and 1% for the nine months. Soft pretzel sales were up 12% for both periods, 9% without Kim & Scott's.

Unit volume of pretzels was up 6% for the quarter. Sales of our frozen juice and Italian ices were up 3% in the quarter, on a case volume increase of 34%. And --

4%.

Debt -- 4% what?

4% case volume increase.

I'm sorry, let me repeat that. Sales of our frozen juice and Italian ices were up 3% in the quarter on a case volume increase of 4%, and down 1% for the nine months.

Handheld sales in the quarter decreased 4% to $5.0 million in the4 quarter and were down 3% for the nine months, mostly due to one customer.

ICEE and frozen beverages. ICEE frozen beverages and related product sales were up 5% in the quarter and 4% for the nine month period. Beverage-related sales alone were down less than 1% in the quarter, and flat for the nine months, which is a significant uptick from the previous quarter's history.

Gallon sales were down 3% in our base ICEE business in the quarter and down 3% for the nine months. Service revenue for others was up 12% for the quarter and 7% for the nine months.

Consolidating. Gross profit as a percentage of sales in the quarter decreased to 31.8% from 32.0% last year. An increase from 29.4% to 29.8% for the nine months. The gross profit percentage increase for the nine months resulted primarily from higher volume in our food service segment. The decrease in the quarter resulted from a $1.1 million in insurance liability charges and a $500,000 product write-down from our Homemade business.

Ingredient and packaging costs in the quarter were down about $700,000 from a year ago. We cannot project the impact or benefit of changes in the ingredient and packaging costs going forward.

Total operating expense as a percentage of sales dropped to 18.1% from 18.8% in last year's quarter and dropped from 20.1% to 19.2% in the nine months, mainly because of sales increases and carefully-managed expenses. Our cash and investment securities balance increased $3.6 million in the quarter to $192.3 million.

Our capital spending was $11.4 million in the quarter as we continue to invest in plant efficiencies and growing our business. We are presently estimating capital spending for the year to be about $35 million or so.

A cash dividend of $0.16 a share declared by our Board of Directors was paid on July 3, 2013. We bought back 58,840 shares of our common stock this quarter at a cost of $4,435,000 or approximately $75.37 a share.

Commentary. Our sales growth of 4% this quarter before the benefit of acquisitions was spread throughout our business. Sales of soft pretzels and food service continued to be extremely strong and include new pretzel products such as rolls, sticks, and soft pretzel buns to casual dining restaurants and club stores. Frozen juice bars and ices sales in food service were down as we continued to be impacted by the elimination of the [USDA] school food sales. USDA school food service program in this area of our business.

Additionally, sales to warehouse club stores were down as weather played a role. We are still looking for tractions in handheld sales in food service, which sales were down 6% in the quarter and are down 6% for the nine months. Churros also did exceptionally well resulting from sales to a major fast food restaurant chain. Bakery sales were up only 2% as compared to 12% in the first quarter, and 4% in the second quarter, as we have lost some business and were impacted by lower sales to schools.

Unit sales of soft pretzels in our retail supermarket segment were significantly strong during the quarter as newer products perform well. Frozen juice and ices had a modest sales increase but increased trade spending and advertising expense impacted margins during this quarter. Handheld sales in retail supermarkets were down 4%, mostly related to one customer.

In frozen beverages, gallon sales were down 3% while service revenue to others was up 12% in the quarter, as this area of our business continues to perform well.

Our estimated income tax rate was at 36.3% for the quarter compared to a 38.4% last year. We are estimating a rate of about 36% to 36.5% fiscal year 2013.

I thank you for your continued interest, and now let me turn this back to Yolanda and the listeners for any comments.

(Operator Instructions) We have a question from [Bill Robulo], please state your question.

Can I have his name again? Bill?

Bill, your line is open, please state your question.

Didn't have one.

Okay.

We have a question from Brian Shea, please state your question.

Hi guys, this is Brian Shea speaking on behalf of Jon Andersen.

Good morning, Brian.

Morning. Morning. Just want to congratulate you guys real quickly on a nicer quarter, and just a few questions. First of all, I saw cash and securities building on the balance sheet. Basically, what do you foresee as the best use of that war chest, or rather how and might you put that to work in the future?

To begin with, we're not letting it burn a hole in our pocket and we will, you know -- it will grow until we use it primarily for acquisitions and we're very carefully studying the landscape. So, even though it continues to build because as you can tell we are generating excess cash flow for our needs, we're using that as a war chest so maybe we'll go on a good measured war path soon.

Okay, great. Also, another question regarding the contribution from new products. I noticed it was slightly lower in the quarter. Can you give us an update on the new product pipeline?

Well, we have a litany of new products that are, you might say jockeying and racing for the position for intros but by the same token we take measure of the things we've done in the past year, in the past two years, to make sure that we learn from some of our rollouts and some of our testing. But we do have some new products, some of our own, some we've been working in conjunction with customers, and we expect to be roaring out with this during the first and second quarter in 2014.

Okay, great. And then my final question is just regarding pretzel sales in food service. It looked like it remained pretty strong in the quarter, and I just wanted to know if you guys have added any major new customers or do you foresee adding any new customers near-term?

How about I answer you yes, and yes. (laughter) Have been very, very busy developing -- if you look back at our soft pretzel, it's a core product and over the years we've expanded it, filled it, put it in boxes, put it in cages, and made it twisted, and made it longer, and filled it. We continue to do these things, and every once in a while a customer will come with us and they'll want to have something that will be entirely different, you know, perhaps. And we're working on some of these things now, and you may see one or two of these things over the next three to six months throughout the landscape. We've done a terrific job, but by doing business with some of the fast food and restaurant chains, and when I say infiltrating -- getting our product, our people, accepted, and then we expect that we will continue to be hopefully stampeding with these products across the landscape.

Great, well, thanks again guys and good luck.

Our next question comes from Akshay Jagdale, please state your question.

Akshay, how are you?

Good, good morning. I thought it was a good quarter. It's interesting, to me the way I saw it was 80% of your business is doing great, and perhaps even better than my bullish expectations, especially churros and pretzels and obviously those products have a very good margin on them. But unfortunately, some of that is being masked by weather-related issues, frozen juice bars, this quarter, and then more importantly which is what I wanted to focus on, is hand held sales as well as some of the issues you've had with the school lunch program that have sort of [stalled on the shore] a little bit from these better performing products.

So, help me understand how you're thinking about the handout business. You've had it for a while now. I believe you're making some managerial changes there. What's the plan, what's the time line? I think when you first acquired it you had, in fairness you had said this was going to be a difficult one, but you'd said in two years it should be significantly accretive. So, relative to those expectations, where are you, what changes are you making, how are you thinking about that business differently if at all?

Okay. Good questions, and let me address the second part first. You're right. When we acquired this business, and you're familiar with the details, I said it would be at least two years until we would have a better understanding of how well it would be accretive. And quite frankly, it's been challenged.

Initially, we had, we integrated it with our sales force and our marketing team, but we've just recently maybe three months ago added a manager. What is his official title? Director of Handheld Sales, and he comes to us with 20 years experience. Matter of fact, he worked for Con-Agra and another company similar, and he's been on board for three months and his assigned task is to fix and grow. And it's too early to tell, but we like his hands-on style. He lives out in the farm, Midwest, and he's actively involved not only with our customer base but our people and the plant. And we still are, have, we're still very, very bullish on this category. We think we're in a good place there and Akshay, it has been marginally accretive. Not as much as any of us would like, but this is a business that is adding contribution.

With respect to school food service, this is something that we noted probably three years ago, maybe even three-and-a-half years ago, and unfortunately the signs that we saw and the changes that were being made by USDA are here. And it has impacted our business significantly in school food service. I think it's -- that's telling and perhaps a tribute to us that we have been able to reformulate our products, sugar out, this in, whole wheat, the 51% grain, 100% juice, we've been able to do this on the run and comply with all of the state and the Federal government standards, and I don't know if we've hit bottom yet with that. But we're looking for a bounce-back, and a lot of us believe that we are bottoming out. As a matter of fact, now it's too early to tell, but July seemed to indicate that there is a little bit of bounce. But if that business can stabilize, or even better yet bounce a little bit, it'll serve us well for 2014 and beyond.

That's helpful, and then just focusing on the positive aspects with --?

[It's nothing to crow about], it's nothing to crow about yet, but if we could stabilize the school food service business and we know we're going to fix the handhelds, that'll be two feathers in our cap.

So just you know, focusing on the part of the business which 80% of it, which is doing really well, and specifically if I can I'd like to call out churros and pretzels and just the whole restaurant initiative if I may. How would you frame the outlook for that in '14? I mean, obviously you've had 20%-ish growth in soft pretzels and churro sales, and you're going to lap that next year. But when I think about it, I think about restaurant opportunity if I may, and I feel like you're still highly under-penetrated there despite the significant growth we've seen in that business for you guys this year. So, help me understand that maybe longer-term, the restaurant opportunity, and then more specifically in 2014?

Well, as you say, both of these have been growing in the double-digit rates, 20%, 22%. We are cautiously optimistic that we can maintain that growth rate, or close to it, that we have established. So, obviously we are busy testing, going from Alpha test to McGee test to other tests with these chains and developing new products. The jury is still out but we think we have a lot of evidence on our side.

And now you, I mean are you exclusive at that one restaurant chain on churros? I mean obviously, it's been a huge success, but are you exclusive with that chain which is why you're not launching that particular product in other chains? Or it's just taking time to get it into other stores on churros?

We had, yes, we're exclusive with some of our chains. But yes, we're also introducing similar products to where the particular chain that you, I think that you're making reference to, there is a special application that we do only for them, and that we've been able to develop.

Perfect. I'll get back in line. Thank you, Gerry.

Thank you, Akshay.

Our next question comes from Jonathan Feeney, please state your question.

Hi, Jon.

Good morning. Actually this is Mark Williams on For Jonathan.

Oh, hi, Mark.

Hi. So, I wanted to ask about the cost outlook. I know you said that you can't predict what [hot spot] costs are going to do to you guys going forward, but I believe last quarter you spoke about contract pricing in the food service business being slightly behind spot costs, and since then we continue to see grain costs going down, specifically with expectations for this year's crop and next year's costs. So, I wanted to know what the outlook was for that I guess cost, pricing spread, and how that's changed from last quarter and what you believe the price, the cost is allocated and how that affects pricing in the channel.

Dennis, let me put that in your Yankee hat.

Well first of all, we -- as many of you know, we buy out six to nine months on a lot of our major commodities but we're still looking at higher prices on flour going forward for our own purchases over the next several quarters. Some of the other quantities that we're buying (multiple speakers) sugar has been down, so we'll be seeing the benefit of that. Overall, we're looking at neutral to probably slightly down, maybe slightly up, but we don't know what's going to be happening in some of the other areas where we are seeing, I think (inaudible).

In terms of pricing what we pass on, we do that once a year. Last time it was earlier I guess in January or so, and we'll be looking at it again come next January. And so at this point we can't really predict what we're going to be doing at that point.

Okay, and can you just talk about the I guess, the outside of the new business when it's just what kind of, what you're seeing in the food service channel in terms of growth? Have you seen that pick up at all?

Well, we read the same newspapers and listen to the same commentators that you guys do, and I don't think we're in an aggressive growth period yet. I think it's better than it was two years ago and obviously we've been able to move our business along at the mid single digits. That's what we're committed to and if we can get any kind of bumps that would give us a little higher ride, we're aggressively trying to include them too.

Okay. That's it for me. Thank you.

Thank you.

Our next question comes from Brian Rafn, please state your question.

Good morning, Gerry.

Good morning, Brian, how are you?

I'm good. You talked about CapEx, Gerry, $35 million. Kind of give us a sense how much of that is maintenance and what are any specific projects at any specific factories across your network.

Well, it can range from anything to replacing some mechanical salt machine in there to ICEE equipment, but about half of it, maybe about a third of it is maintenance and the other is just to make what are efficient plans even more efficient.

Okay. Any big projects, any special CapEx projects?

Not as of this time.

Yeah. Can you talk a little bit across some of your different factories, Gerry? What are you running maybe at capacity utilization, or what are you guys running on shifts just in a general comment? Labor shifts?

Well, that's a good question. Obviously, we have 15 factories and I would say that 11 or 12 of them are being utilized very, very efficiently. One or two of them you know, we were looking for more products to put in there and one of the product lines that's really growing for us of course is the soft pretzel, the entire category. We doubled our Texas plant about a year or so ago, a year-and-a-half ago. We're also looking for future expansion of our pretzel and pretzel-like products, and we think we have room within our headquarters here in Pennsauken and/or, our Bellmawr plant. So we have some ideas and thoughts on the table, but we're pretty good at building and refreshing on the run.

Okay. The cash reserves, Gerry, where are you guys investing that? We obviously went through the adjustable preferreds a few years back. What are you guys investing the cash reserves in?

I give you to Dennis.

Well, over the past year we've invested about, about $110 million in basically income fund.

Okay. What -- the, any initiatives in the dollar store channel, the dollar channels?

I'm sorry, the question again?

Yeah Gerry, any specific new products for the dollar, dollar store chains?

Not really. We have our pretzel line in there and we have some of our novelties, and the dollar channel which began for us about four or five years ago and expanded quickly, they have together with cost and with other factors in there, they've been a little bit challenging because it's real hard to get sometimes a price increase in there, particularly if it takes you over that magic $0.99 mark.

Okay, and I'll ask one more. Gerry, how's Daddy Ray's going?

Daddy Ray's is going well. We've expanded it. We're doing our own line of products under the Daddy Ray's label. We're doing co-packing for others. But we are pleased with its outlook.

Do you have a sales figure, nine months?

We really don't. We don't pull that out.

Okay. I'll get back in line. Thank you sir.

Thanks.

Our next question comes from Akshay Jagdale.

Thank you for taking the follow-up. Gerry, can you just expand a little bit on the new product commentary that you made initially on somebody else's question? I thought that was interesting, but if you can give us a little bit more details on that, that'd be great.

Well, we had some new pretzel products both in food service and in retail. And we have some interesting products that our R&D department are developing for future potential. So we think that we can build upon the food service business which as you know showed a 22% increase recently, and we think that it will help expand our retail supermarket business.

So in other words, maybe see similar type of products that we're seeing in food service, churros, pretzels, in the retail channel? Is that how I should think about that?

You can think about it that way but I would say the pretzel product expansion is going to come quicker than the churro product expansion in supermarket.

Okay, and so is supermarket going to be a big driver next year, you think? Of sales growth?

I don't know about a big driver but it continues to be a driver.

Okay. And just on acquisitions can you just give us the latest on what you're seeing out there and how you view the environment? Obviously you've been very patient so just wondering if things have changed at all, if you're just not finding the right fit.

I think well, thank you for at least acknowledging to people in this room sitting with me who think I have no patience, but yes. We have been patient and like I said, I'd rather -- we don't want to make the wrong acquisition. We want something that's not only going to be a fit with our culture but a fit with our product line. We're looking at things. Most things for one reason or another fail to pass what is our crucial J&J test. However, we've made acquisitions in the past. We've probably made five or six acquisitions over the past four or five years, and chances are we will make acquisitions in the future.

There are some things we're looking at right now, but there's nothing close enough for me to comment on a timeline for you. But like you said I'm patient. We want you guys to be patient too.

Thank you, I'll pass it on.

Akshay.

Our next question comes from [Robert Costello], please state your question.

Hi. Couple questions regarding spending and your marketing spend dollars in the quarter, was versus a year ago, was actually down -- but you had talked about the increased trade spend during the quarter. So what do you anticipate marketing spend going forward to be?

Bob, this is Gerry. One of the reasons that bad weather even though it has a dampening effect on sales, it winds up having a tickling effect on spend because you've got product and inventory so we probably spent a little bit more in the March-April-May period or the April-May-June period than what we had anticipated just to goose the sales in the supermarkets. Hopefully with good weather this thing will take on the life that it's supposed to have on its own but I think the number was something, 18.5% or what-not. We do a pretty good job managing our marketing expenses and we certainly don't want to starve the business, and I've got enough faith and trust in my people for them doing the right thing.

Right. Your tax rate, you mentioned it was down 1.7%, 38% to 36.3%. You've always had a higher rate so do you expect this rate to be at this level, and if it is, how come it's lower than it's been over the last couple years and it's trending lower?

I'm going to give it to Dennis, but I think there are a couple reasons. One is credits in there whether it be labor credits or a [cooey loo] credits, but Dennis, why don't you comment on it?

I would say the rate will be not as low as it's been, but lower than it has been over the past couple years going forward. You know, to an extent a lot of it has to do with estimates, and our liability overall for taxes is in the $70 million range when you include deferred taxes. So, if you're off a couple of million, or a couple million dollars, it will affect your tax rate and therefore adjusting it downward. So, I would say it'll be lower but not as -- it'll be lower than it has been but not as low probably as it is now.

Last question, Gerry. On the churros, the churros distribution that was asked earlier, could you break out like where the product's being distributed by channel, like what's the biggest, what's the smallest and talk about retail? Like maybe give us an education why it might be slower than people expect in growth relative to the dynamics of what's going on in retail?

Well, to begin with, churros are being distributed 99% in food service and in that 99% food service a big block of that, maybe 30%, is fast food restaurants. We expect that group to grow but then again we expect the overall category to grow, too.

Right. So on the retail end, what is the obstacles or barriers to spill over from your other product categories with the breakfast category?

Are you talking churros now, or are you talking --?

Yes, yes, no, churros.

We've had a project that we've been studying for a while now to introduce churros. One of the things that -- where do we put the plant? Where do we put the line? What do we call the product? And we're close to a go-system with that.

Okay, thank you very much.

Thank you, Bob, and I appreciated talking to you Sunday.

All right, good enough.

We have a question from Brian Rafn, please state your question.

Yes, I was just wondering Gerry, what -- I missed your first opening comments. What was kind of your weather comment relative to ICEE and Slush Puppie, Paradise, I just see across the US and the Great Lakes we had a very kind of a very cool May and June and then into July before it heated up. What did you see nationally, weather-wise?

Well, ICEE had a good quarter, a very good quarter, considering the impact and effect of the weather. As you, as I noted before, it continues to grow. It's managed service business at some pretty good rates, but ICEE had a strong June which helped make up for this rain-related and dampness that we experienced particularly in the Midwest and Northeast in there. And hopefully if we have decent weather -- not great, just decent weather for the rest of the summer -- ICEE will have contributed another strong showing.

Yeah. On the M&A front Gerry, as you look forward into 2014, have you changed at all? I mean obviously you have a much larger sales base than when you bought the pretzel bankruptcy back in 1970. Are there any changes as a strategic buyer for you where maybe you're not necessarily looking at acquisitions that are resuscitating a bankruptcy, or is there a minimum sale size? You put a lot of due diligence into a small acquisition, $5 million, $6 million. You can have kind of the same for something of a larger sales base. Have you changed at all the parameters of what you're looking at on an M&A front?

We are comfortable with making a decent-sized acquisition whether it be $50 million, $100 million, or a $200 million acquisition. We have gotten more comfortable in our understanding and abilities to integrate it. We are not comfortable with buying a loser that we can't fix immediately. Obviously we want something to be incremental and we look at these things very, very closely, and we will continue to look at them with our conservative experience and wisdom.

Let me ask you, Gerry, on the food service, the USDA front, you know, Michelle Obama, the President's wife, would like kids to have frozen broccoli on a stick. But they're not going to eat that. All you have to do is look at the Cinema movie chain. How much support do you get as you reformulate, you talked about 51% whole grain and taking sugar out and that type of thing. The kids still have to like it. How much benefit do you guys have in maybe the kids rejecting things that just you know, yeah, they may be very, very healthy, but they don't sell at all in the school.

You make a good point, all right, and even though it doesn't sell well in the school some of the force feeding which they have to have it on the school lunch program or on the breakfast program, pretty much limits the suppliers and the school partners like ourselves in there for a year or so which can be two years. We think that the trend is hopefully you know, will be swayed and it will turn. We invest a lot of money in our school food service business, both with people and in trade shows, and we think that we have -- we as a company may be nearing the bottom of our testing with this and we can look forward to it being stabilized and returning to a growth entity.

All right, one more question, Gerry. What is your head count, and kind of discuss a little bit, would you describe yourself as being stable relative to labor head count? Would you be adding people? Would you be looking for engineers? Is there any areas from a hiring standpoint? You hear a lot of that chatter. What's from a J&J Snack Foods standpoint? Where would you be on labor?

Now I'll just throw out a couple of quick things and you can take that up for what it means. Over the past year we've hired a couple of engineers and they have been located east coast and west coast, and part of it is to make what is already efficient operations even more efficient. Sometimes we bring on an engineer to look ahead for projects that could be six and nine months down the road. Our overall labor has been probably steady or even up a little bit even though we have implemented cost saving practices and efficiencies in the plant, through processes and through robotics. But overall, we're a company of 3,300 people. We don't send (expletive) overseas, to -- we do everything ourself and we employ our people here in our country and it works well for us.

Thanks Gerry, appreciate all the good job, thanks.

Thank you.

(Operator Instructions) There are no further questions at this time.

Thank you, Yolanda, and I thank everybody that participated in this call. We look forward to talking to you again next quarter. Bye now.

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