J & J Snack Foods Corp (JJSF) 2014 Q2 法說會逐字稿

(Technical difficulty - begins in progress) -- and hope to begin some growth there in sales to club stores have been very strong. Hand-held sales and food service were down 18%. Churros sales were down 5%, as we lapped a major rollout to a major fast food restaurant chain. Excluding the customer, sales were down 1%.

Unit sales of soft pretzels in our retail supermarket segment were modestly higher in the quarter, but frozen juices and ices were down 8% in this quarter from last year and were down 17% from the same quarter two years ago.

Hand-held sales in retail supermarkets were down 6%, as some new products rolled out last year have proved glum and unsuccessful. In frozen beverages, gallon sales were up 5%, a significant improvement and service revenue to others was up 3% in this quarter and 9% for the six months, as this area of our business continues to form very well.

On another side with ICEE, ICEE is quickly becoming an iconic brand and it currently has 2.5 million FaceBook friends. It also has been licensing and we are building our royalties from licensing to where there are becoming significant income numbers for ICEE.

Our estimated income tax rate was at 36.5% for the quarter this year and 36.8% last year. We're estimating a rate of about 36% in fiscal 2014. I thank you for your continued interest and look forward to speaking to you all again next quarter.

I'll now turn it back to the group for questions.

(Operator Instructions) Brian Rafn.

Gerry, it may be a question for Dennis or for you; can you talk a little bit about the trajectory of ingredient costs? What do you kind of see for the balance of the year or where you are right now?

The balance of the year, we would expect the cost to be relatively benign in terms of compared to last year. We are seeing a little bit of upward pressure which (inaudible) yet to any extent in wheat and sugar costs.

Give me a sense, as you guys look, you talked about your capital budget for the year about 40 million. Where are you guys adding capacity and what type of plants are looking at either line expansions or new equipment or if you're putting in any new brick and mortar?

Not brick and mortar, but we're going to be -- our pretzel category is experiencing significant growth and we're going to be adding lines in existing plants so that we're able to handle this growth sufficiently. The worst thing we could do is to do all this selling and not be able to produce the product or distribute it. Then we'd be in a position that we'd have to get Uncle Bill in here.

Gerry, when you talk about adding some capacity on the pretzel side, is that for your kind of core legacy pretzels that everyone knows J&J for or is this primarily for all the new formulations, the rolls, the sticks, the pretzel bun, some of the new products?

Brian, good question. It's both, alright and we've been able to work with the technology that not only gets us this new product in there, but it will make our mainstay too, so we get the best of both worlds with this.

Let me ask you, Gerry, you guys have been known -- you've done an absolute superb job over the last 20 years on acquisitions. If the acquisition environment is either too expensive or you don't really find the type of thing you want, from the standpoint of your own internal budgets, how much reliance can you maintain on the development of internal organic products, on line extensions, new flavorings, new formulations, new recipes of what you already have?

Well we're doing some and there's no question, we'd like to grow nice and balanced, both by acquisition with new products and generate new products out of our R&D and marketing. Jerry Law, who's not here today, has the responsibility for all of our R&D and marketing nationally. I feel real good about our abilities and I feel real good about our abilities to develop new product, but at the same time, I am pressing hard to look for acquisitions -- not just anything. Not just something that's going to be transformational, but things that we can fit, that we can apply our resources and talents to, to growing it.

I'll just ask one more question and I'll get back in line. Gerry, you talked a little bit about weather. There is, with some of your foods, a spoilage factor. If you had a slacken period of demand at the consumer level, how much -- as demand picks up, what might be some forward inventory filling in the pipeline, restocking at grocery stores or arenas or stadiums or is that really not a factor in your business?

We really did not have product that went bad. The only fresh fruits we have are in connection with Wawa and we have a very close relationship with them that we can almost stop production on a dime and filter through the distribution. The main issue we had, schools were closed, shopping centers were closed, consumption was off; people didn't go out. And that impacted us significantly during the quarter.

Saying that, it's nice to see that, at least in the early period of April, that we have bounced back sharply and if we could have any kind of real benefit during the summer months in there, we will pick this up with a vengeance.

[Ashay Dugali].

I apologize; I just jumped on the call. I'm on the road, so I probably missed a lot like I always do. I wanted to ask about the hand-held business. Can you just update us on where we stand? In fairness, you had said this when you bought the business; they're not your typical acquisition, but it's been painful and this quarter seems that it was no exception. So what's the plan there? Are we hitting another reset button or this is just weather? Can you recalibrate --?

[I can assure] you, what's going on with the hand-held, it's not weather. Although we have some nice wins there with fried pies and some specialty accounts, the bulk of the business, particularly in the grocery end of it, has been a little bit disappointing. And to the extent, yes, we are getting some things reset. We've finally gotten the product line down to where it is profitable -- marginally profitable and we've been able to make some inroads into certain customers, but we're still getting our arms around this Ashay.

I'd be less than candid with you if I told you it was running smooth. We will solve it. It was the right opportunity at the right price. We've got the right people on it. We made a little bit of a cosmetic change very recently in order to get more feet on the street in certain areas in there. So we're doing everything we can to turn this around.

Then just related to the weather impact, I'm sure you talked about it, so forgive me if you're repeating yourselves. But what I'm really interested in knowing is the strength in April, can you give us some color on categories? So the two I'm most interested in are pretzels and churros. In churros specifically, this quarter were down in total as a product group from a sales perspective. So how much of that was weather and perhaps April numbers in churros makes you feel that way. So can you give us some color on product level in April, like 8% growth for the business but how are churros doing in April?

Well, let me answer the last question first. We had across the board sharp increases in all our bread products, particularly pretzels. And Dennis, you had a comment on churros?

Well Ashay, as you know, a little more than a year ago, we had went into (inaudible) and we had lapped that business and second year go around, they're always lower than they were the first year. So we're suffering from that right now. They continue to be (inaudible) a dampening effect on the churros sales.

I know last time, if I remember correctly, Gerry had said you still expect that business to grow, right? I know you're lapping the Taco Bell launch and so that the (inaudible) but you are still hoping to have growth. With this quarter and the weather in act, is that still a reasonable expectation or should we expect a slight decline this year?

Without this one restaurant chain, our sales were up 7% in the first quarter and are pretty much flattish in the second quarter. So how much of that is related to the weather impact, we don't know. But we certainly at this point don't expect sales to be down from the other accounts as they were in the (inaudible). We would expect sales to be (inaudible).

Profitability was a real positive this quarter. If you just look at marginal profits, this quarter was probably one of the best quarters I can remember, despite this weakness on the top line. Am I reading into that too much? Was that an issue on mix? Because the beverage business, which is a lower margin business, not a strong quarter, obviously seasonally; is that the issue here or is that really also flow down the line takeaway that the profitability is a real positive standout?

It might have been a little bit of mix. We're not ready to crow about our profits on (inaudible) yet.

Well, I will pass it along. Thank you for the color.

Roman [Gave].

I'm with [Tarview] Investment Management in Milwaukee. I just had a couple of quick questions. Obviously, you still have quite a bit of cash on the balance sheet and I was just wondering if you can sort of outline maybe just how you're seeing the M&A market, if it's looking pricier or whatever and maybe give a little color on splitting that cash between hanging onto it, M&A, dividends, share repurchases and so on?

And then secondly, obviously you had a strong April with quite a bit of acceleration versus what you reported in the quarter; are you seeing that as mostly weather or is there something else going on too that you're just seeing a better tone to the business?

Well, I'm not going to look a gift horse in the mouth and if April was this good, far be it for me to find out where the weak points were. So we like April; I don't want to look a gift horse in the mouth. But yes, we do have cash. The best use for the cash is in expanding our business and acquisitions. We've been paying dividends for seven years and increasing it every year. Last year we doubled it and we generally buy enough stock back every year to cover our options. So we're not going to let the cash burn a hole in our pocket, but meanwhile we're going to be frugal and looking at these opportunities. We have been frugal in the past. We will continue to use our good sense and our good business sense in applying these measures.

We made a couple of small acquisitions in the past two years and most of them were to kind of pave the road for our pretzel product line. As of this date right now, we have some 500 to 600 carts on the streets of New York, which we didn't have a couple of years ago and they sell pretzels and other items and we're looking to put another item on there. And even though that is an existing and minor operation, we think that it could provide good possibilities.

So with respect to April, it was a nice spread, there was a nice mix and I don't want to look a gift horse into the mouth.

Brian Rafn.

Gerry, you mentioned with the schools closed and that with some of the bad weather, here in Milwaukee, when we get a blizzard, parents send their kids to the movie theaters and I was wondering in the cinema theater chain, Hollywood has over the last couple of years, put more emphasis on rolling out blockbuster films in what used to be a graveyard period of time; January, February, March. And I'm wondering if you saw any stability or strength in your snack sales through the cinema and theater chains?

We did and that's an interesting point. Parents or mothers will send their kids to the school, but they've still got to be able to get there through a foot or two of snow. Our two major movie theater chains, AMC and Regal were both up.

Any developments, kind of pace of business, Gerry, in the dollar chains, kind of the small single-serving product?

We're in the dollar chains and we keep kind of like tuning and polishing our efforts there so that we will remain there. We're fairly highly penetrated and we enjoy the benefit of those sales. We've got to be careful with respect to pricing that we don't go beyond that number, because once you get beyond that dollar, whether it's $1.10, $1.15 or you have to reduce the size in there, then it creates a whole different matrix of problems where everybody just goes (inaudible).

Gerry, you mentioned you've got 500 to 600 pretzel carts on the streets of New York City; is that the New York pretzel acquisition?

Yes. We don't (inaudible). Yes.

Let me ask you, you also have a business, I believe Slush Puppy, that uses that kind of pretzel cart but it's more for little league baseball and some of those type of things. Is that something if you are successful with the pretzel thing that you could do something off that or is that really not something for (inaudible)?

I don't think that (inaudible) but it's interesting that you bring up Slush Puppy, because we've gotten some unusual interest in licensing for them in the last six months.

Okay. And then one final, Gerry. Anything on the private label side and what's the trend of business there?

It's fair. We compete in that. [Moore] wants to say something.

Private label will continue now. We will be driven by -- as we talked about with hand-helds, we had a little bit of a rough ride. But we're not giving up on that. We're going to continue to go after those opportunities on the hand-held business. And we would expect the private label sales to be positive, as it is throughout the industry.

One other comment, Gerry. Have you guys ever done an analyst day, where you have plant tours?

Not as a planned event. When analysts come in here, we're happy to host them. We tour the plant, we sit down, we chat, but it's not an exact day for analysts. Have you been here? Have you been here?

No, I haven't, Gerry. We've owned you guys for about 18 years, but I just wondered if you --?

Come on in!

Alright, I will put that on the schedule. I'll get back to you. Thanks.

John Anderson.

Gerry, I guess in your prepared comments you mentioned weather having an impact on sales, but you also culled out weather having an impact, at least to a lesser extent, on costs and I'm wondering if you can talk a little bit more about what you meant by that and maybe the magnitude of the cost impact and where that showed up in the P&L?

Well, Dennis?

We had two or three plants that were down for weeks at a time. We've had some damages because of ice breaking pipes, etc. So the numbers were not significant but they did have some impact.

Coming back to the churros business, which you talked a little bit about earlier, given that you've anniversaried or annualized the Taco Bell relationship, are there other new business opportunities -- I'm thinking the KFC funnel fry opportunity or partnerships or other things that you're focused on there that you think could get that business back on a positive growth trajectory, even with the impact of Taco Bell?

John, the KFC -- and I realize we were together in Baltimore and we couldn't help but chat about that and even looking at what -- that is still like a test. We're really not talking about it too much until we get the results in for the test, but I appreciate how you asked it and I am overwhelmed how you remember it.

We have a lot of these things going on from time to time, whether it's a KFC, whether it's a special snack bar, in a Walmart, but we have a lot of these things going on from time to time. We'll know more about that KFC test probably come June or July.

Fair enough. Last question, just on schools; can you give a little more color on where you are with the schools business now and your expectations I guess as we get closer to more significant shipment activity I would guess for the start in the August time frame of the new school season?

Let me give you to Bob Pape.

Generally, our school food service business, once we had negotiated through some of the regulations and now we've converted the predominance of our items into whole grain, we're seeing our sales start to trend positively. We hope that continues and we will be responsive to whatever regulation changes are made moving forward. We're connected, in terms of understanding what the USDA regulations will be and we will respond as necessary.

John, in short, we feel better about our school food service business than we have in the last couple of years. We have met all of their guidelines and references, we've developed some new products; they appear to be well received. Our team is excited and we are excited and we think there are good days ahead for us in the school food service business.

That's terrific. Thanks for the color, guys.

I'm not showing any further questions at this time.

I will pause for a deep breath and if somebody wants a question, they can hit the button. And if not, I will look forward to talking to you all at our next quarter conference call. Thank you very much.

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