J & J Snack Foods Corp (JJSF) 2013 Q4 法說會逐字稿

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  • Operator

  • Welcome to the J&J Snack Foods fourth-quarter earnings conference call. My name is Hilda and I will be your operator for today.

  • (Operator Instructions)

  • Please note that this conference is being recorded. I will now turn the call over to Mr. Gerry Shreiber. Mr. Shreiber you may begin.

  • - President and CEO

  • Good morning, and welcome to our fourth-quarter conference call. I'm Gerry Shreiber. I am President and CEO of the Company, and the other people with me today are Dennis Moore, Senior Vice President and Chief Financial Officer; Bob Radano, Senior Vice President and COO; Jerry Law; Senior Vice President and a special assistant to me; and Robert Pape, Senior Vice President in charge of retail sales and food service sales.

  • I will begin 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 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. This year's fourth quarter had 13 weeks, compared to 14 weeks last year. And the year had 52 weeks this year, compared to 53 last year.

  • The one less week lowered comparative sales about 7% for the quarter and 2% for the year. Net sales decreased because of the quarter weekly adjustment. Net sales decreased 2% for the quarter and increased 4% for the year.

  • Excluding sales post-12 months resulting from the acquisition of Kim and Scott's Gourmet Pretzels in June 2012, and adjusting for one less week in 2013, sales increased 5% for the quarter and 6.5% for the year. For the quarter, our net earnings increased by 4% to $20.3 million, or $1.08 a share, from $19.5 million, or $1.03 a share, a year ago. For the year, our net earnings increased by 19% to $64.3 million, or $3.41 per share, from $54.2 million, or $2.86 a share, a year ago.

  • Our EBITDA, earnings before interest taxes depreciation and amortization, for the past 12 months, was $134.3 million -- a record -- up 15% from 2012.

  • Food service. Sales to food service customers increased 3% for the quarter and 8% for the year. Adjusting for Kim & Scott's, as noted before, and the one less week, sales increased 11% for the quarter and 10% for the year.

  • Soft pretzel sales, our core product, were up 16% for the quarter, and 23% for the year. Without Kim & Scott's, soft pretzel sales were up 20% for the year.

  • Italian Ice and frozen juice treat and dessert sales were flat for the quarter, and were down 9% for the year. Churro sales were up 15% in the quarter, and 22% for the year. Bakery sales were down 4% for the quarter and up 3% for the year. Hand-held product sales were down 2% in the quarter, and 4.5% for the year.

  • Retail supermarkets. Sales of products to retail supermarkets were down 24% for the quarter and 7% for the year. Adjusting for Kim & Scott's and the one less week, sales were down 18% in the quarter and 5% for the year.

  • Soft pretzel sales were down 23% for the quarter and up 2% for the year. Without Kim & Scott's, pretzel sales would have been flat for the year.

  • Sales of our frozen juices and Italian Ice were down 26% in the quarter, and down 10% in the year on a case volume decrease of 17% for the quarter and 9% for the year. Most of this was attributable to the cool spring and summer seasons. Hand-held sales decreased 19% for the quarter and 8% for the year.

  • ICEE and frozen beverages. Frozen beverage and related product sales were flat in the quarter and up 2% for the year. Adjusting for the one less week, sales were up 5% for the quarter and 4% for the year. Beverage-related sales alone were down 7% in the quarter and down 2% in the year.

  • Gallon sales were down about 10% in our base ICEE business in the quarter and 4% for the year. Our managed-service revenue for others was up 9% in the quarter and 8% for the year.

  • Consolidated. Gross profit as a percentage of sales in the quarter decreased slightly to 31.8% from 31.9% last year. And for the year increased to 30.3% from 30.1% a year ago. The gross profit percentage increase in the year resulted primarily from higher volume in our food service segment.

  • We benefited by lowering ingredient and packaging costs in the year of about $2.5 million and about $900,000 for the quarter. We cannot project the impact or benefit of changes in ingredient and packaging costs going forward.

  • Total operating expense as a percentage of sales, dropped to 18.9% this year from 19.4% in the quarter, and dropped 0.8 percentage points in the year mainly because of sales increases and carefully managed expenses.

  • Capital spending and cash flow. Our cash and investment securities balance increased $15 million in the quarter to $207.3 million. We continue to look for acquisitions, but the right acquisitions, as a use of our cash. Our capital spending was $8.9 million in the quarter, and $35.8 million for the year as we continue to invest in plant efficiencies and expansions, and growing our business.

  • During the year we essentially completed the expansion of our St. Louis bakery. We are presently estimating capital spending for next year to be $35 million or so. A cash dividend of $0.16 a share was declared by our Board of Directors and paid on October 2, last.

  • We bought 97,302 shares -- repeat, we bought back 97,302 shares of our common stock at an aggregate cost of $7.3 million in the fourth quarter and 204,397 shares at a cost of $14.5 million for the year.

  • Commentary. Our sales growth of 5% this quarter, adjusted for the one less week, was okay, but was driven down by the 18% adjusted sales decline in retail supermarket sales.

  • Sales of soft pretzels and food service were up a very strong adjusted 23% and include new pretzel products such as rolls, sticks, soft pretzel buns, to casual dining restaurants and club stores. Frozen juice and ices sales and food service on an adjusted weekly basis were up about 7% this quarter, as we have lapped the changes in connection with the USDA School Food Service Program in this area of our business.

  • Churros continue to do very well, with an adjusted sales increase of about 22% resulting from sales to a major fast-food restaurant chain, and adjusted bakery sales increased approximately 3%. Hand-held sales were up an adjusted 5%; hand-held sales overall continued to run at about a $50 million annual rate.

  • Soft pretzel sales, and frozen juice and ices sales, in our retail segment were down an adjusted 16% and 19%, respectively, in the quarter. Combined with increased trade spending to move the frozen juice bars and ices, the result was a $4 million lower operating income in the fourth quarter this year, compared to a year ago.

  • In ICEE and frozen beverages, gallon sales were down an adjusted 3%, and service revenue to others was up an adjusted 16% in the quarter, as this area of our business continues to perform well year after year.

  • Our estimated income tax rate was at 36% for the quarter, both this year and last year. We are estimating a rate of about 36.5% to 37% in FY14.

  • I thank you for your continued interest. And I will now turn it back to the listeners for their comments and (spoken in Spanish).

  • Operator

  • Thank you.

  • (Operator Instructions)

  • Akshay Jagdale.

  • - Analyst

  • Gerry, can you talk about, as we look into next year, how should we think of churros? You've obviously had a really good year on both churros and pretzels. From where I sit, it looks like the pretzel gains, if I may, or growth, has come from a number of different customers and perhaps different variations; whereas on the churros side, it might be skewed more towards one large customer.

  • So can you help us understand how are you thinking about food service churro growth next year? How should we be thinking about that?

  • - President and CEO

  • Well, Akshay, you're right. Certainly, we have something to crow about with our pretzel sales in fast-food restaurant chains and casual dining.

  • And our churros sales -- and again, they were up a very, very strong 22% -- we continue to push new avenues, new opportunities with churros. But I cannot project that we are going to be reaching those strong double-digit growth with churros for next year. Although we are looking at some opportunities, both around the country and internationally, so we expect to have continued growth in churros. But we think that the food service pretzels and the new varieties will outpace that, percentage-wise.

  • - Analyst

  • But is it fair -- should we still think of growth there? It's not going to be like funnel fries. We haven't heard about a discontinuation, by any means. But similarly, in its next quarter or so, we're going to start lapping the launch. Maybe a tough comp there? But beyond that, should we still expect decent growth out of churros?

  • - President and CEO

  • Let me answer your question. No, it's not going to be like funnel fries, where we had the big blip in the one year, and then we were kind of disappointed like the little [kid]. But we will continue to grow in food service.

  • We're confident that if we look at our Company as a three-legged stool, at least, we certainly have pretzels, then we have ICEE. And we think churros will be that other leg.

  • - Analyst

  • Okay. Good.

  • And then just in terms of the product line that held you back this year -- you had frozen juices and ices related to schools, as well as on the retail side, seems like the school issue has been fixed, if I may, at least for now? But we're still seeing some major challenges in retail. And hand-held -- would love to get an update on sales, and also your longer-term margin or accretion projection for that and where we stand.

  • So the bottom line question there is, are we going to see less of a negative on top line from frozen juices and ices and hand-helds? And, perhaps, maybe, could we even see positive growth from both of those product lines next year?

  • - President and CEO

  • [We] are projecting growth for next year in all of these areas. We believe, and we're hopeful, that the changes to the USDA programs in school food service, that our sales have bottomed out and now we can begin to get a bounce back.

  • Certainly, we expect to have a better year in the grocery and supermarkets, weather permitting, than we did the past year. And even though we lost a couple of customers that had channeled out in the hand-held business, we think too, that the business for us has bottomed out and we will be making significant gains.

  • We've hired a person who's very experienced in that, and we brought him on about May. And we're hopeful that by concentrating -- keep in mind that, when we picked this up, we integrated with our sales department. We had nobody concentrating on it other than our regular sales staff. So we're hopeful that all three of the categories that you mentioned will be contributors to both sales and earnings in the next 12 months.

  • - Analyst

  • Okay. And just one two-part question on capital allocation. So first -- obviously, the facts are that you continue to accumulate cash, which is like you said in the past, not a bad problem to have. But what do you do with the cash?

  • You made a small acquisition in the quarter, or in October. Talk about that. It seems like a strategic move there, so maybe talk a little bit about acquisitions, and, maybe, just broadly, on your dividend. Your yield is below 1% right now. Perhaps you can increase that significantly.

  • It was good to see you buy back shares -- but again, you have a lot of dry powder here. And just wondering how you're thinking about that now that you continue to accumulate more dry powder, if I may.

  • - President and CEO

  • Good comments. Let me comment on your question, and then we're going to let somebody else ask a question, Akshay.

  • Yes, we made a small strategic acquisition. And sometimes these things will have more lasting benefit than the size and analysis will, when you look at it in the beginning.

  • Two, we had some cash -- we have a lot of cash. We're investing that cash; we are putting it in about three or four new lines to keep up with what we project is going to be increased pretzel demand, and a category that we have targeted some years ago, and that's working out well.

  • We're also looking at some other things in there. The only thing that worse than not making an acquisition would be to make one or two that takes our management time and it doesn't work out. And we're very conservative with that. But there are things that were looking at. And hopefully, we'll be able to talk about these in the next couple quarters.

  • And yes, we're looking at our dividend -- our dividend which started out, I think, at what, Dennis, $0.15? $0.20?

  • - CFO and SVP

  • $0.25.

  • - President and CEO

  • $0.25, has gone up by 250% over the past seven years. I would expect to have a significant increase in our dividend announced shortly.

  • But we will continue to accumulate some cash, maybe a lot of cash. And even though we're taking care of all of our needs including expansion and acquisitions. So I hope I answered your questions.

  • - Analyst

  • You did. I'll get back in queue. Thank you.

  • Operator

  • Jonathan Feeney.

  • - Analyst

  • I want to follow up on something Akshay asked. You're projecting growth in the school channel next year, is that right? If so, about what portion of the business is now the school channel, would you say?

  • - President and CEO

  • Probably less than 10%. We had a couple of bad years in a row, and then -- not because necessarily we did something bad, but because of the changes in the USDA program, our base -- we had to reduce sugar products, our base pretzel business had to be reformulated, cookies were more or less out. So we're expecting growth compared to the year we just had.

  • - Analyst

  • Got you. Thank you.

  • And I guess turning to the retail channel, where it was a tough year in a couple of pockets, is there anything in terms of sales and distribution, strategy-wise, that you're doing differently next year? Are you projecting growth in that channel specifically next year?

  • - President and CEO

  • Well, we're projecting a better year than what we had this year in the retail and grocery channel. But let me give this to Bob Pape, who has been chomping at the bit to add his comments, because Bob runs retail and he runs it with a strong hand, and he was really disappointed in the results this year. And a lot of it was weather and some of it was some other reasons. Go ahead, Bob.

  • - SVP, Retail Sales and Food Service Sales

  • Really, we faced some challenges as far as the novelty category. We turned it pretty well, but inventories in general in the industry were heavy going into the season. The category was somewhat sluggish, and, obviously, the poor summer weather did not help us very much. And as a result, as we tried to ratchet up and get our products out the door, as far as our customers were concerned, that provided a challenge and some disappointing results for this quarter.

  • - President and CEO

  • Retail was nothing to crow about this year. And hopefully it's going to have a much better year next year.

  • - SVP, Retail Sales and Food Service Sales

  • What we saw this year, from a seasonal standpoint.

  • - Analyst

  • Thank you. Just one last one.

  • The pretzel bun rage that's going on -- we heard a lot about menu wins recently; clearly looks like that was a strength for you this quarter, and for the past couple quarters. Can you update us, either Bob or Gerry, on what customers are thinking about that? Do you expect more introductions of pretzel-based products and pretzel buns on restaurant menus? Or are there any in the pipeline? And how is the sell-through going with the customers we know you do have?

  • - President and CEO

  • Yes, yes, and yes. I don't like to name specific customers in there, but we're selling some majors, and we have interest from other majors, and it's not just pretzel buns, it's something called pretzel sticks. And now, customers want special sizes of pretzel sticks and special sizes of pretzel buns.

  • In the last, maybe, three months, we have refitted our -- we have added pretzel productivity to our plant in western Oregon. And we have added a full line to our Belmar plant, which is about 15 minutes from here, and we have added a line converted at our Chambersburg plant. So we have all this firepower out there, and we're loading it up now.

  • - Analyst

  • And has it been capacity constraints -- obviously, you feel capacity-constrained. Have you been moderated you're selling as a result of that?

  • - President and CEO

  • I don't know if we've been moderating our selling, because I push our people to sell, all right; but we had we've had capacity constraints. And we have, essentially, caught up with them.

  • And it's not just the pretzel, but pretzel products. We introduced a hotdog -- pretzel dog -- a couple years ago; and after a slow start, it, too, has caught fire. And so we had to have that productivity available.

  • So we expect to be fully up to efficiency before the end of this month.

  • - Analyst

  • Great. Thank you very much.

  • Operator

  • Jon Andersen.

  • - Analyst

  • I wanted to ask also about the restaurant initiative. And I know it's clearly something you've been working on for some time now. It's clearly bearing fruit for you. And I'm wondering, Gerry, if you could characterize the restaurant opportunity in terms of how big it is today; where you view it in terms of what inning you're in; and how large that business could get over the next few years?

  • - President and CEO

  • Well, it's running at an annualized rate of $40 million to $50 million now but showing real growth opportunities. What inning are we in? Believe it or not, it's pretty early. It's not in the eighth inning; it's pretty early. And the more that we're into it, the better handle we're getting on it. And we think that -- I think a year or so ago, I said this could be potentially a $100 million category for us. I have seen nothing to back away from that number yet.

  • Our people did a good job all the way through from R&Ding it, both on the West Coast and here. A couple of people that we had dedicated to sales, Robin Shreiber, Jughead, and Joe Wilk, have done a real good job in getting it out there. With the exception of lengthening our delivery times and whatnot, in there -- which now we're catching up -- we are real excited about this opportunity, what we are doing with it, and what's going to happen next year.

  • - Analyst

  • Terrific. That's helpful.

  • I wanted to come back to churros for a minute, as well. I know in the release, the growth there, 22%, has been terrific this year, absolutely. A lot of that growth, as was mentioned earlier, has been centered around one particular customer. As you look at the pipeline of opportunities within that business specifically, are you anticipating another year of growth, albeit not at those kinds of levels; but, a year of growth in 2014, on the churro business?

  • - President and CEO

  • We are. And hopefully, some of these opportunities that we have before us, which are some other change, not all as big as a Taco Bell, we'll be able to convert, while we retain and maintain the business that we're doing. And I'm not saying it's going to be a strong double-digit growth, but this is a business that started off tiny with us, and it has been growing double-digits for us for some five to six years now.

  • And we're filling them, making them in different sizes, we've got them double-twisted. We like the category; we dominate the category; we're the most efficient producer; and we have strong marketing and distribution channels. So we think we're in a pretty good position there.

  • - Analyst

  • Great. One more.

  • It wasn't that many years ago where the gross margins in the business were 300-plus basis points higher than they are today. And I know there are a lot of things that influence that -- product mix, acquisitions that you've done, et cetera. But I'm just wondering if you could talk broadly about leverage points in the model -- maybe the pricing and commodity environment? And maybe where the main leverage points are, and do you see an opportunity to take gross margins over time higher from current levels? Thanks.

  • - President and CEO

  • Let me give that to Dennis and the bull here.

  • - CFO and SVP

  • I think your point is valid and accurate, that a lot of the margin decline has to do with mix. And in particular, we bought the hand-held business from ConAgra back in 2012, a little more than two years-plus. And that margin is very low compared to our overall margin, so that's driven down the margin, and that is all mix. And some of the bakery products where we have had growth is also lower margin than the average, so that would drive it down as well. However, as we continue to grow, some of the other product lines -- and hand-held, which we hope to start getting growth -- should help the margin go up.

  • But the key is volume. We need the volume growth. If we get the volume growth, it would drive the margins up.

  • - Analyst

  • Terrific. Thanks, guys. Congratulations on a great year.

  • Operator

  • Brian Rafn.

  • - Analyst

  • Give me a sense -- you talked some about some of the weakness in the grocery chain channel. As you look at 2014, there looked to be a little less marketing in that channel this year. Do you look at throwing some more advertising dollars in there? Or do you just see the market naturally coming back? And you talked about issues like weather on that?

  • - President and CEO

  • Well, we're really not sure. There's been some major consolidation of the retailers that we have to work our way through. There is some -- we had probably the roughest summer season weather-wise that we've had in years and years. We don't expect that to be like next year, but who knows? We may wind up -- but, we're looking at all areas in retail -- grocery and supermarkets -- because that's an important business to us. It had been sailing along pretty good, and we're not used to this, and we're going to change it.

  • Bob Pape has assured me, short of committing, what they call, harakiri, that we will not have another year like this. Didn't you say that, Bob?

  • - SVP, Retail Sales and Food Service Sales

  • Yes.

  • - Analyst

  • Okay. In that channel, Gerry, have you seen any difference between the mix of national brands or private labels in the grocery store channel?

  • - President and CEO

  • Bob?

  • - SVP, Retail Sales and Food Service Sales

  • I think that it's remained relatively stable and obviously our brands are very important to us. We've used some corporate-branded and private label products strategically with some of our customers to drive our overall business.

  • - Analyst

  • Okay. One of the things that you've talked about over the years here is the whole USDA reformulations. And because Michelle Obama wants to have kids eat frozen broccoli on a stick, that's all fine and well, but the kids don't eat it. So you can be successful at reformulating your recipes, but you look at the movie exhibitor channels -- the AMCs, the Marquees, the Regal Cinema -- you don't see any salads in their channel. I mean, it's big Slurpees and lots of popcorn.

  • What is the conundrum for you guys relative to finding a reformulated recipe? But then you just don't -- the kids don't buy it. How do you get around that?

  • - President and CEO

  • We've been there, and we're still there to some degree. We have reformulated all of our sweet products, all of our pretzel products, to get whole grains, and that appears to be making some progress. We've taken all the sugar out of juice bars and made it 100% juice, and we really, truly believe that we have bottomed out in there. And all the mandatory requirements that the USDA has made, that we are not only in compliance with, but new products are being accepted. And we think we're going to have a better year, perhaps a much better year, in 2014 than we had the last two years in schools.

  • - Analyst

  • Okay. And just one more. Gerry, when you look at ICEE and Paradise and Slush Puppie, what is your sense of the maturity, the infield machine installations, the flavor changes -- how do you see that market going forward? You've had pretzels for a long time, and you've done a great job in driving the organic growth in pretzels. But on that frozen Slurpee -- whatever you called it, ICEEs and that type of thing -- how do you see that for the next, say, two to three years?

  • - President and CEO

  • We see that slow growth in overall volume and case sales. However, ICEE has gone from a smallish $13 million a year company to over $207 million today. And it's able to take pricing, just like others in the beverage business -- the Coca-Colas and the Pepsi-Colas -- they, too, are impacted by overall beverage sales being down.

  • ICEE has been growing its business rather stout-heartedly, with 8% and 10% gains, 6% gains, in the service revenue end. And ICEE has, what, approximately 50,000 machines of its own, that it touches in one way or another? So that's been a good business for us. And ICEE continues to grow overall.

  • - Analyst

  • Thanks, Gerry.

  • - President and CEO

  • We also have some opportunities. We've done well in Mexico. We had some other opportunities in the Dominican Republic, which it's too early to put a label on it yet. But we may have-- we have been in China for a few years, and it looks like this year we have a major growth opportunity with the movie systems in there. And we're looking to take advantage of that opportunity in the second quarter of 2014.

  • - Analyst

  • Thanks.

  • Operator

  • At this moment we show no further questions.

  • - President and CEO

  • I want to thank everybody for joining me on the call today. And I look forward to having you all again in the first quarter of 2014. Thank you and goodbye.

  • Operator

  • Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.