J & J Snack Foods Corp (JJSF) 2014 Q1 法說會逐字稿

Welcome to the J&J Snack Foods first-quarter earnings conference call. My name is Clifford and I'll be your operator today.

(Operator Instructions)

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

Thank you and good morning to our conference call. I am Gerry Shreiber. And with me today is Bob Radano, our Senior Vice President and Chief Operating Officer; Dennis Moore, our Senior Vice President and Chief Financial Officer; Ted E. Shepherd our CED; Jerry Law, our Senior Vice President and Steve Taylor, Vice President of Sales.

I'd like to begin the conference call with an 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 of hereof.

Results of operations. We had a good quarter, a very good quarter. Net sales increased 6% for the quarter. For the quarter, our net earnings increased by 22% to $12.4 million or $0.66 a share -- a record -- from $10.2 million, $0.54 a share a year ago. Our EBITDA -- earnings before taxes, depreciation and amortization -- for the past 12 months was $138.7 million, also a record.

Food service. Sales to food service customers increased 7% for the quarter, 6% without sales resulting from the recent acquisition of New York Pretzel in October. Soft pretzel sales were up 21% for the quarter, 19% without New York Pretzel. Italian ice and frozen juice bar and dessert sales increased 9% for the quarter. Churros sales were up 1% in the quarter. And bakery sales were also 1%.

Retail supermarkets. Sales of products to retail supermarkets were down 3% for the quarter. Soft pretzel sales, however, were up 4% for the quarter. And sales of frozen juice bars and Italian ices were down less than 1% in the quarter. Hand-held sales in the quarter decreased 16% to $5.3 million.

ICEE and frozen beverages, which include ICEE, Arctic Blast, Slush Puppie and Parrot Ice. Frozen beverage and related product sales were up 10% in the quarter. Beverage-related sales alone were down less than 1%, with gallon sales down 3% in our ICEE business in the quarter. Service revenue for others was up 15%.

Consolidated gross profit as a percentage of sales in the quarter increased to 29.4% from 28.3% last year. The gross profit percentage increase this year resulted primarily from higher volume, price increases and lower ingredient costs. Total operating expense as a percentage of sales increased to 20.6% from 20.4% last year in last year's quarter, primarily because of a charge for shutdown costs of our Norwood, California manufacturing facility. Absent that charge, operating expenses dropped to 20.2%.

Capital spending and cash flow. Our cash and investment securities balance increased $8.3 million in the quarter to $215.6 million. We continue to look for acquisitions as a use of our cash. We have invested $107.9 million in mutual funds that seek current income with an emphasis on maintaining low volatility and overall moderate duration.

Presently we estimate annual yield from these funds to be about 3.5% to 3.75%. Our capital spending was $9.3 million in the quarter as we continued to invest in plant efficiencies and growing our business. We are presently estimating capital spending for the year to be $35 million or so. A cash dividend of $32 a share, doubling of the prior rate, was declared by our Board of Directors and paid on January 7, 2014. We did not repurchase any of our stock during this quarter.

Commentary. We are satisfied with our sales growth of 6% this quarter. Sales of soft pretzel 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. Additionally, our whole-grain pretzels for schools is selling very well as we prepare for another round of changes in school food regulations.

Frozen juices and ice sales in food service were up as it appears we have at least stabilized our business in schools, and hope to begin to see some growth. Hand-held sales include in food service were relatively okay as we continue to make inroads with new customers. Churro sales were up only 1% as we lapped a major rollout to a major fast food restaurant chain last year. Excluding that customer, sales were up 8%.

Unit sales of soft pretzels in our retail supermarket segment were modestly higher in the quarter. But frozen juice bars and ices were down 4% in this, the slow season. Hand-held sales in retail supermarkets were down 16% as some new products rolled out in the year-ago period have proven unsuccessful. In ICEE and frozen beverages gallon sales were down modestly, but service revenue to others was up 15% in the quarter as this area of our business continues to perform very well. Our estimated income tax rate was 35% both this year and last for the quarter. We're estimating a rate of about 36% in FY14.

I thank you for your continued interest and support. And now I'll turn it back to our listening audience for going to some questions.

(Operator Instructions)

Jonathan Feeney.

I wanted to ask about the margin expansion on the quarter. Was it primarily driven by costs coming down? Or what role did costs coming down play, both in this quarter and looking forward for the rest of the year?

What role do you think -- it looks to me like costs -- certain of your inputs are down significantly from their peak, and have trended down consistently over the past year. What role would you expect those to play going forward in margins?

We improved our margins. And part of it was increasing sales. And, of course, we did benefit from certain ingredients stabilizing or, in fact, going down. As we look ahead, we're fairly comfortable with our positioning going forward.

Where are you protected or hedged for the rest of the year, if anywhere -- if that's something you care to talk about?

We purchase our major ingredients out as far as six to nine months, so we're reasonably protected on flour and in sugar. And Dennis, is there

Those are the primary areas where we have bought out.

We don't really hedge per se, but we'll buy out certainly three to six months. If the price drops we'll buy some more.

Sometimes the market's getting a little volatile and they jump up in there. But we've been doing a satisfactory job in protecting our major ingredients.

Thanks. Just two other questions. First would be, we've heard a lot about headlines about the food service world. I know you have a lot of food service customers.

Have you felt any weakness with your food service, restaurant or, convenience store customers, for that matter, just over the past holiday season given the headlines about it?

I read what you read. And sometimes I'm like --.

You probably read better things than that. (laughter).

But I'm rooting for them and I'm rooting for the economy. We at J&J, we've always found ways in the 42 years -- which, I might add, is 42 straight years, 168 straight quarters of sales growth -- we always find ways to push and hedge and grow our business in there. And we expect to continue to do so.

I think if gas prices remain low, and if we can keep some of the other considerations at the lower level of the worry world, the economy will improve and we will continue to post the results that we have been doing.

Great. Thank you. And just, finally, the acquisition environment, I know you made your Pretzel acquisition relatively recently. Can you comment on the types of opportunities that are out there, what sort of environment it is to look for deals, and how interested you are? Thanks.

We are obviously interested. And over the years we have made and tucked in little neat-fitting acquisitions. We're looking for some of the same things and some things that are bigger.

And we have, I won't call it a war chest, but we have resources, and they're not going to burn a hole in our pocket. We're very frugal with what we're looking at. But we are looking at things.

We've made acquisitions in the past and I would guess one could project that we're going to make acquisitions in the future. We're looking to continue to have significant growth. And part of that growth is going to come organic as we develop new products, and part of the growth is going to come from acquisitions.

Great. Thank you very much.

John Anderson.

Congratulations on a great quarter.

Are you in Chicago?

I am.

I'm seeing numbers on the front of your city and state that are scary.

It's made for a couple of interesting commutes this week, for sure.

I wanted to ask, to begin with, about the pretzel business. Quite strong in the quarter. And I believe you've, similarly to the churro business, you have lapped some rollouts to some casual dining chains there.

Can you talk a little bit about that business today? Are you adding new customers? And the sustainability of the mid teens, 20% growth that you've been putting up recently?

Yes. We're adding new customers. We're adding new segments.

We're developing new products. Some of them are brand new like our pretzel twist. Some of them are variations of old product sticks. And we're getting trial.

We have people in our food service that are dedicated to these restaurants. Steve Taylor, Robyn Shreiber, Joe Wilk. And we've been working on this for really about three years. And it's almost like planting a good tree and harvesting every year.

We are beginning to bloom. Now, we hope that this will continue. But, meanwhile, we are developing further products in our R&D section so that we can keep this momentum.

We've had a gentle breeze behind our efforts getting it done. I just hope we don't run into any headwinds.

You're not seeing any headwinds currently?

No. We're not. But I have a high degree of capacity to worry.

That's probably an enviable quality in your position. The hand-held business, I know it's a smaller part of the business, not as meaningful overall to sales or earnings. But it was down in the quarter.

And I was thinking this might be a year where we saw some stabilization there in terms of sales. Can you talk a little bit about what you're seeing there right now, what your focus is and expectations as you move forward?

The good news is that it's profitable, modestly profitable. The bad news is that some of the efforts we made last year with some of the major chains in retail -- and we did get trial in there that did not sell. So, we're going ahead with a redesign of some of the packaging and some of the products.

We like the business. We have two great facilities. Matter of fact, we've added pretzels to one of the facilities out in Oregon and it was a nice fit.

It's still running at the rate of about $55 million to $58 million and now it's modestly profitable. I'm a little bit disappointed it's taken a little bit longer than what we had hoped, but it's not because of the effort. And our people are moving on a fast track and hopefully this time next year we'll have better results to report.

Terrific. Last question just on the charge for the shutdown costs, for the Norwalk, California plant. Will there be additional charges or was that all encapsulated within the first quarter? Thanks, guys.

That's probably all encapsulated. And that will have some long-term benefit to us, by the way, on freight, and storage too.

About 85% to 90% of our business was on the East Coast. That plant came along with whole fruit about six years ago. And we were never quite able to develop those sales out in the West Coast, for whatever reason. But it just made a lot of sense to do what we did with the East Coast packer and run the operation out of here.

Is that part of the margin benefit you saw in the quarter, or is that to come?

Part of the margin benefit, yes, because most of those sales will come beginning April all the way through August. So, that is not the margin benefit yet but it is something that we hope to be picking up some significant margin benefit.

Congrats again on a great quarter, and talk soon.

Brian Rafn.

Give me a sense -- I heard your comments, Gerry, on ingredients and flour and sugar. How do you see the year relative to the trajectory of overall ingredients? Do you see a plateauing, a stability, a sideways grind? How do you see the overall trajectory of ingredients?

I'm going to give that question, together with its dangling participle, to my expert in this room, Dennis Moore, because I follow my people and the information we get. Dennis, you care to comment on that?

Brian, we see that -- yes, I would say they have plateaued off, to use your term. Obviously we can't predict what's going to happen down the road but we would not anticipate costs would be going higher this year.

Okay. How do you look -- if you look across your property, plant and equipment, Gerry, relative to capacity utilization, where might you be adding CapEx? In what plants and then in what product lines?

That's a terrific question, Brian. In the last, let's say, since July, August, we have added -- I'm going to count these out -- Gerry, help me. We have added Chambersburg, Belmar, Vernon, Weston, and Pennsauken. We have added five lines.

And our engineering and manufacturing people did it in record time. We got them all running almost simultaneously. We think we're good for the year.

However, we're projecting another line and another big line in the hopeful anticipation that this wave that we're following, or this gentle breeze that's behind our back, will continue.

Okay. That sounds good. Given the storms, blizzards, the polar vortexes, the ice cold weather, did you guys have any disruption in deliveries? Obviously you talked about the frozen ICEEs and that type of thing, or the freezer stuff and in the grocery resection. Obviously it's not going to sell too well when it's 40 below. What's your sense of the weather impact in the first quarter?

In the first quarter it's done and over with and we met our goals. January hasn't exactly been a walk in the sun either. We had a couple of snow days here in the Northeast.

I know our St. Louis plant where we make our fig-and-fruit bars was down. Of course weather in California has been wonderful and whatnot in there so it kind of balances out. We're in business 42 years. There's 365 days a year and 12 months.

We'll have a little bit of these ups and downs in there. We have to be equal to the challenge and not let either 102 or minus 2 (inaudible).

All right. Let me ask, Gerry, as you look across your product lines, coming from a strategic standpoint, given the product lines that you have today, what is your sense of the organic growth and the things that you can do, whether it be flavorings, formulations, new ideas, of the current product SKUs that you have for future growth? Or what is your sense that they've somewhat matured, maybe a little bit more population growth, and you really need to make some acquisitions.

Because you guys have been fabulous at finding these little local niche brands that you roll out and turn them into regional and national brands. What is your sense in that balance when you look at the entire product line at J&J?

To begin with (inaudible) going to be too transformational. But I think that we can, between organic and acquisitions, we can grow our business perhaps in what I'll call serious single digits, 6% to 8%, on a continued basis.

Okay. All right. And then one more question, Gerry.

All this discussion about the genetic modified foods, herbicide-resistant corns and that, and then the ongoing issue for somebody like yourself that might use high fructose corn syrup or a corn flour relative to package labeling, is that a lot of nonsense? Or is that a real impact that you guys look at?

We look at it. And right now we're really not being too -- we've had to reformulate over the past five or six years with respect to schools, with respect to other what we call no-no ingredients.

Obviously sugar and some of the comments, even though it's not happening, particularly led by some states on sugar, might have an effect. But most of the adjustments we've been through.

We've seen our school business, which got clobbered for about three years down 15%, 20% a year for three years running. And then we ultimately reformulated, developed some new products, whole grain in there. And now for the first time in three years we're seeing that business come back and it's up.

So I think we've met most of the serious challenges. We've gotten trans fat out. We have 100% juice in our products.

So, I like our position right now. And short of some revelation that would come out of somewhere's unknown, I happen to like our position.

Excellent job, Gerry, as always. Thanks much.

David Sell.

David Sell. I'm with the Philadelphia Inquirer. I was listening to all the questions so I won't track over that for the investment community involved in the call.

On a more consumer level, given you mentioned all those 365 days and 42 years, do you ever see any spike in your numbers? On a day like Sunday, meaning the Super Bowl where you may have a higher percentage than normal of humans consuming snack foods of all kinds, do you ever see that in your numbers?

Interesting. We'll see little bit of spikes, but it just won't really hit a day because people have to get supply. We'll see particular spikes, seasonal spikes, and in the summer. But hopefully there'll be a lot of soft pretzels and churros eaten from Thursday to Sunday and Monday. And we'll be able to tell you about the results of that next week -- even if I can't tell you who wins the game.

Thank you. Can I follow-up with one question? You mentioned you were extending the lines of production. Can you tell me where you are on either adding or I suppose decreasing employment jobs in those facilities?

We have had a net increase in jobs this past year. As a matter of fact, we have had a net increase in jobs for 42 years. We don't farm out overseas for technology or for phone services.

This little Company started with eight people back in 1971. And that 8 has grown to 3,300. We have a special culture here. And we expect to continue to grow this Company with these people.

Thank you.

(Operator Instructions)

Akshay Jagdale.

This is Lou Bi on for Akshay.

I was going to say I thought Akshay was in India or something, wasn't he?

Yes, he's still away on vacation. He won't be back until next week.

I wanted to, first off, say congratulations on what looked like a really good quarter. I was a little bit late on the call so I apologize if you've already spoken to some of the questions I have.

It was a good quarter. We had something to Crow about.

Yes. In terms of the big picture, so, pretzel buns obviously has been a really hot category lately, last couple of years. What are your thoughts on how that category continues to progress over the next couple quarters or years?

Are you seeing any cooling off? Are you still getting a number of requests from restaurant chains with regards to items like pretzel buns?

Steve Taylor, our Vice President of Sales, is sitting in with the meeting today because Bob Pape is traveling. But, Steve, do you want to comment on that?

The pretzel roll trend still continues to grow. Sales for the first quarter were up in pretzel rolls over last year. So, we don't see that trend slowing down at all.

What Steve says -- he's cautiously optimistic. Fully confident because he knows his job is on the line if we don't grow.

(laughter) Okay. And then in terms of, obviously in the fourth quarter of the calendar year, a lot of players saw weaker holiday volumes than they were expecting. How did volumes in the holiday season measure up versus your own internal expectations? And did you see heightened promotional activity and trade spend, et cetera, things like that?

This is Gerry again. We do see, and what we can track very quickly, our mall business, shopping centers business, seems to have been trimmed. And that by that I mean you have less people out. And even if they do make up the day and go out and buy heavy or online, they're not going to eat two pretzels on that trip.

But, again, our business is nicely balanced between school food service, education channel, the mass merchandisers, the shopping centers and malls, sports and leisure, dollar stores. We have over the years, particularly in the last five to six years, balanced our business so that we don't really get the ups and downs too badly.

If you have bad weather like what we've had in the last couple days, sure, that's going to put a little bit of a damper on sales in there. But we're very comfortable with the balance of our business.

Okay. Thank you. I'll pass it on.

Brian Rafn.

Gerry, I just had a follow-up. What are you seeing on wage and salary inflation? And then the $64,000 question with the rollout of Obamacare Affordable Care Act, how is your healthcare costs?

Up.

(laughter) Can you put maybe a number on the wage salary? I'm guessing low single digits maybe?

That's fair.

Okay. And then the healthcare unknown? Or maybe a better question, Gerry, is, are you doing anything from a structural standpoint -- catastrophic umbrella in your funding healthcare costs? Or are you doing any structural changes maybe in the way you look at healthcare?

Dennis is going to answer that.

We have a good deal of our, probably half of our insured employees, are on a self-insured plan. About half of them are on fully paid plans. At this point we're not doing anything too different than what we've done in the past. Our benefit level is fairly strong in relation to other companies.

In terms of what do we see for costs? For one, there is a fee, and Obamacare fee, of $600,000 that's going to impact us this year, which is $0.02 a share.

And we do anticipate that over time costs are going to be -- more costs of healthcare are going to be paid by employers as a share of the overall amount of healthcare because that's the way the plan is structured. The ones who can pay are the ones who are going to be the ones paying.

So, what Dennis is saying -- yes, it's going to go up.

All right. Thanks, Gerry. Appreciate it.

Soraya, your line is open.

Hi, it's Soraya Benitez from Cougar Capital. Thank you for taking the question.

Just going back to the pretzel business, I understand you have a pretty decent channel mix. I'm just wondering if you can give us a little bit more granularity, obviously because it's a bigger growth part of your business.

Yes. Our pretzel mix is probably divided -- and I'll give you the big umbrella -- 80% food service, 20% what we call retail supermarket channel. In that 80% food service, there'd be a bunch of buckets which would include leisure theme, like the stadiums, indoor and outdoor arenas, all across the country, as well as movies, as well as amusement parks. And we have nearly 60,000 locations out there that are selling one or more of our products.

Got you. But do you have the mall breakdown specifically? Is it so small that it's not even worth mentioning?

I really don't have the mall breakdown although we sell some chains in malls and individuals. I would say that today that's in the lower single digits, 4%, maybe 5%. It's not a big particular growth for (inaudible) products.

Great. And do you still expect it to be the fastest-growing part of your business?

You mean food service or pretzels?

Pretzels.

Yes.

Okay. And then just lastly, I'm sorry, I might have missed this but just any update on the hand-held business? I know a couple quarters ago it's been a struggle. Just curious to know what the status is currently.

The hand-held business is growing in food service. And we have not yet experienced that growth in retail supermarkets as a result. As a matter of fact, it went the other way. But we have turned the hand-held business that is now profitable, modestly profitable, and we are cautiously optimistic about continuing its results in the future.

Can you give me by how much profitable -- percentage, margin, anything?

Single digits.

Great. Thank you.

Brian Rafn.

One more, Gerry. When you look at the size of M&A activity, what are you looking at from the standpoint of a dollar range in sales? And maybe a little commentary on how you see pricing as a multiple of EBITDA in this environment.

I'll answer the last part first. There's no question that pricing as a multiple of EBITDA has gone up the last couple years.

Notwithstanding that, we're looking across pricing that would go all the way up into $100 million to $200 million, all the way down. Above all we want to continue to focus on what we have been doing, find niche products, quality niche products, that we could become an efficient producer, and then dominate the marketing and distribution channels.

Sounds good. Thanks, Gerry.

John Anderson.

I'm surprised nobody's asked about churros, which plateaued in the quarter. Was up nicely ex the chain relationship. Should we be thinking about this business as leveling off at this point, Gerry, or are there some initiatives underway to drive another leg of growth there?

There are initiatives to continue the growth. But we had a major hit last year and we're looking at others to possibly complement that major hit.

Sometimes it's like savoring good whiskey, the first two or three sips really give you that jolt, and then you've got to get your head cleared to continue to grow. But we're looking for ways to continue that dramatic growth we had last year.

Thanks.

I'm showing we have no further questions at this time.

This is Gerry. I want to thank everybody for participating on our call. And we look forward to talking to you next quarter and hopefully we will have equal results to report to you. Take care and goodbye.

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