J & J Snack Foods Corp (JJSF) 2016 Q2 法說會逐字稿

Welcome to the J&J Snack Foods Second Quarter Earnings Conference Call. My name is Jason and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and please note that this conference is being recorded.

I will now turn the call over to Gerry Shreiber. Gerry, you may begin.

Thank you, Jason, and welcome everybody to the J&J Snack Foods' second quarter conference call. With me today is Bob Radano, our COO; Dennis Moore, our CFO; Jerry Law, my assistant and Senior Vice President; and Marjorie Roshkoff, our In-House Counsel. We're waiting for Ted E. Shepherd, who is running a little bit late. He is our CED and he'll be in momentarily.

Let me begin by the obligatory statement. The forward-looking statements contained herein are subject to certain risk 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 2% for the quarter and 3% for the six-month period. For the quarter, our net earnings increased by 6% to $15.6 million or $0.83 a share from $14.6 million or $0.78 a share, a year ago. For the six months, our net earnings were $28.6 million, $1.52 a share, an increase of 10% from $25 million or $1.38 a share a year ago. Our EBITDA, that's earnings before interest, taxes, depreciation and amortization for the past 12-months, was $153.9 million, again a record.

Food service; sales to food service customers increased 2% for the quarter due to increased sales of handhelds, funnel cakes and soft pretzels, which were up 4%. Sales of frozen juices and ices and bakery products were down 1% and churro sales were down 6%. For the six months, food service sales were also up 2% with increased sales of handhelds, up 31% for the six-month period and funnel cake, up 53%. Sales of soft pretzels, churros, and frozen juices and ices were essentially flat for the six months and bakery sales were up 1%.

Retail supermarkets; sales of products to retail supermarkets were down 6% for the quarter. Soft pretzels sales were down 10% for the quarter in the supermarkets segment and 8% for the six months. Sales of frozen juice and Italian ices were down 6% in the quarter and 4% for the six months. Handheld sales were down 23% for the quarter and six months respectively.

ICEE and frozen beverages; frozen beverage and related product sales were up 6% in the quarter and 11% for the six months. Beverage-related sales alone were up 6% in the quarter and 8% for the six months with gallon sales up 6% and 8% in our base ICEE drink business in the quarter and six months. Service revenue for others was up 8% for the quarter and 12% for six months.

Consolidated; gross profit as a percentage of sales in the quarter increased by better than 1 basis point to 29.93% from 29.75% last year and from 29.25% to 29.3% for the six months, essentially the same within margin of error. Gross margin benefited from lower ingredient cost, more favorable product mix, increased volume in our handheld business, and to a minor degree pricing. It was offset by higher costs in our frozen beverage business and approximately $1 million of spend of added costs related to the introduction of OREO churros and PILLSBURY mini dessert pies and new PHILLY SWIRL products.

Total operating expense as a percentage of sales decreased to 19.8% from 20.1% in last year's quarter, primarily because of lower distribution costs. For the six months, the decrease was 20.5% to 20.1%, primarily due to lower marketing expenses in our foodservice business in the first quarter.

Capital spending and cash flow; our cash and investment securities balance decreased to $17.6 million in the quarter to $219.6 million, let me repeat that, we are sitting on $219.6 million in cash. We continue to look for acquisitions as a use of our cash. [$97 million] of our investments are in corporate bonds with a yield to maturity of 2.2%.

Our capital spending was $23.8 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 approximately $40 million or so. A cash dividend of $0.39 a share was declared by our Board of Directors and paid on April 6, 2016. We bought back 80,565 shares of our stock during the quarter at a cost of $8.6 million, bringing our total repurchase for the six months to 107,648 shares at a cost of $11.8 million.

Commentary and other notes; sales of soft pretzels in food service improved this quarter as sales to restaurant chains declined marginally, an improvement from the 10% declines in the prior two quarters. Frozen juice bar and ices sales in food service were relatively flat. Handheld sales in food service were up significantly, led by sales to one customer.

Churro sales were down 6% as one customer discontinued the sale of a product, which contributed about one-half of the decrease. Our whole grains funnel cake product has been well received in schools and contributed significantly to our sales growth in this quarter and for the six months.

Sales of soft pretzels in our retail supermarket segment were weak in the quarter and first-half of the year as our BAVARIAN Soft Pretzel bread product was discontinue and sales to one customer were down substantially. Frozen juice and ices were down 6%, primarily related to increased trade spending to introduce new PHILLY SWIRL products and lower sales of existing PHILLY SWIRL products.

Handheld sales in retail supermarkets were down 25%, mainly due to lower sales to one customer and increased trade spending for the introduction of PILLSBURY mini desserts, a trio of licensed products. Overall, increased trade spending for new products including OREO Churros was about $1 million.

In frozen beverages, gallon sales were up 6% and service revenue to others was up 12% in the quarter, as this business continues to increase revenue, although earnings were down due to a combination of factors including higher medical insurance cost, a bad debt write-off and higher payroll costs.

Operating income in the quarter increased $1.5 million from a year ago, a 7% increase. Our estimated income tax rate was at 35.7% this year and 36.5% last year for the quarter and 34.7% and 36.8% for the six months. We are estimating a rate of about 35.5% in FY16. We have restated our statement of earnings for our December quarter, our first quarter upon the early adoption this quarter of the new accounting guidance, which resulted in a $499,000 decrease in income tax expense in the December quarter, as the treatment of income tax deductions related to the exercise of stock options has changed. We anticipate the full year impact of this change to result in lower income tax expense of about $800,000 compared to last year, of which $588,000 was reported in the first six months.

I thank you for your continued interest and I would like to turn it back to the listening audience for any questions and comments.

(Operator Instructions) Francisco Pellegrino.

Good morning Gerry. Want to start out with asking you about the soft pretzels at retail. It says lower sales for one customer, is this lower sales or is it a lost customer?

Actually lower sales to one customer would be C&S and it had to do with the bankruptcy of A&P and (inaudible) primarily.

When we start thinking maybe about where that business is going to be in the third and the fourth quarter, just given the fact that pretzels sales were down at retail 5% in the first quarter, 10% in the second quarter. So is that increasing fall off continue if we hold everything else constant?

We hope and we're working very hard to moderate that. So, although these stores have been closed, we're looking for other alternatives for our retail as well as other new channels. But when these stores close, we're pretty much limited to what we can do. There should be some pickup at corresponding competitive stores but it's not nearly enough.

Your food service operating margins looked really good this quarter and I know you have recently been investing a lot in upgrading your manufacturing facilities. Is the operating margin expansion and maybe the operating leverage that we're seeing, maybe a byproduct of all this capital investing that you guys have been doing.

Hope so.

Okay. That was nice and simple. Your other categories in retail and food service have been increasing pretty significantly, is there a product in there that's growing that we could potentially be seeing broken out in the future?

Well we mentioned that our funnel cake sales have been increasing and that's another one of our niche products that we have a major, major unusual share and I would look for that to have perhaps continued growth and significant growth in quarters three and four.

Is it doing about -- like during the quarter, was it like $600,000, $700,000?

I don't know exactly but that number will increase exponentially during quarters three and four.

So, is it the type of the thing if it increases to above maybe a $1 million, we could start seeing funnel cakes being broken out for retail supermarket?

Francesco are you taking about retail or food service.

Well, I notice both of them had pretty nice growth in the other. So, why don't you tell me?

Well in food service, it's primarily funnel cake and in retail it's primarily OREO churros.

Okay.

But in keeping with the former funnel cake, we've made inroads with a major chain and we would expect to see this product in 4000 to 5000 retailers in the next 60 to 90 days.

Okay. So, let me elaborate a little bit more. Could we see funnel cakes being broken out within food service and churros being broken out at retail?

Well Francesco, in the footnote we currently lists so many products and right now they are relatively small percentage, but we do mention them, significant increases in the MD&A.

And I would look upon those products both churros, funnel cake, and OREO churros as part of our fried foods.

Okay. That's all from me. Thanks again guys.

Jon Andersen.

Good morning, everybody. So, I guess I wanted to ask, first a little bit more on the comment you made Gerry about funnel cakes, I guess, growing exponentially in the second half of the year. What is driving that? Is it one customer relationship? Is it multiple customer relationships? And should we consider this more of a trial type of activity on the part of this customer or customers or is this more permanent businesses as you view it today?

We considered a trial a year ago and perhaps six months ago when we were testing. We've been told that this is going to be a PMI, permanent menu item and we've been gearing up, we expect to have it in 4,600 specialty locations.

Okay. And then sticking with food service for a minute, the performance of the soft pretzel business got better I guess in the quarter relative to the past couple of quarters. What are you seeing there? Is the menu fatigue you've talked about in the past kind of played itself out? Are you adding new business there? And what are your expectations for soft pretzels in the restaurants going forward?

Well, we did a little bit better in the restaurants. Keep in mind, in the restaurant segment we were on a fast track increasing 15% to 18% every quarter, and then it came to, not a screaming halt, but it slowed and then it declined 10% consecutively in two quarters. We think that the -- we're working on menu items and different items to regenerate that early success, but we believe that menu fatigue has slowed and hopefully we'll be the beneficiary of that going forward. We still have unbelievable market share and again, as I stated before, it's up to us to continue to grow our product presence.

Okay. And in churros at food service, I thought you had lapped the, I guess, the loss of the Taco Bell menu position. What happened within churros this quarter? is this another customer and is there kind of an opportunity to kind of back-fill for that customer going forward?

Well, I'll tell you what happened, Jon. Yes, we did lap the Taco Bell launch from two years ago and we had a major retailer that was selling the product, retailer and grocery selling the product in their in-store bakery, which translated into it food service for us. And I'll tell you who that customer was. The customer is Kroger and they discontinued it last quarter because and I won't call it menu fatigue but because of a decision made by their bakery department. We are working to get that reset, although there is no guarantee that's going to happen soon.

Okay. Last one from me is, Gerry you pointed out the warchest, kind of you have in terms of cash and investments on the balance sheet. You also mentioned you're looking for acquisitions. Is this a fertile time in terms of looking at acquisitions? Is it less so and then also what's on your wish list in terms of acquisitions? Is it same categories just kind of enhancing the existing categories? Is it new categories? What would be a really good fit for you?

Well, obviously, anything that's in our core product portfolio which would be soft pretzels, churro if there was another funnel cake producer, we're not going to do anything, Jon, that is transformational although we are looking to spread our areas of coverage. We've done more in the bakery end over the past 8 to 10 years. We filled in some niches with frozen juice bars. Actually our ICEE business continues to grow in both sales and managed service for others.

So obviously, we will look to continue to feed that, so to speak. But again, we're not going to do anything transformational. There's a lot of things that we're looking at it. So of them are worth a second look and some of them, we kind of halt really because the fit would not work and some of the businesses that we're looking into have a lot of fluff in there, if you know what I mean.

Okay, thank you. Good luck going forward.

Akshay Jagdale.

Good morning. So just a different way of asking question about your sales growth, so I apologize if I put you in a tough spot, but the beverage business really has been phenomenal and since I started covering your Company, certainly my view of that businesses changed dramatically, to be more positive.

But the beverage business has been on fire and consistently so for a while. So, if you leave that out, because I think that continues to be a positive standout, the food business, so everything else has really slowed, right. If you look at the last, I don't know six or seven quarters, like 1% growth in everything else. There is a lot of moving parts, but clearly as your food business is predicated on food service and we've seen a slowdown in organic sales growth there.

So, just give me some perspective because every time something like this happens, you guys have an internal meeting or something of this sort and you get the troops to really rally. Are we there yet? I mean, do you sense a slowdown and what are you doing to fix it? And then, I have some specific questions on some products.

Your sense of timing sometimes is ingenious. We just had a full week's worth of meetings with the purpose was to review and drive forward our food products. And to that end, we have several new products that we're launching. There has been increased emphasis on our core products and we've made a couple of -- well not really cosmetic changes, but we've reassigned and moved some responsibility. So, I would look for and we're certainly pushing for quicker and faster sales growth in across our food service items.

That's helpful. I think luck has a lot to do with that ingenious comment you mentioned. Anyways --

But, I know you and I've seen you work and we've known each other now five years or so?

Yeah maybe a little longer, but I appreciate it, thank you. So, just moving along, in retail, I was really surprised to see the overall -- I mean there is a lot of choppiness, but you've got these two big items going into or initiatives, I may say, going into retail. You did mention slotting fees. I was expecting to see not just slotting, but the positive sort of impact of that in your sales, is it taking longer to get the OREO churros on the shelves and to be selling or is this still on target because certainly from our modeling perspective, maybe we're being too optimistic timing wise, but the OREO churros and the PILLSBURY pies, I mean they should be a meaningful driver of your growth and we just haven't seen those numbers play through in retail, overall retail sales organic growth is down again pretty significantly this quarter. So help me put that all into perspective and when should we expect the retail segment to start to put up some significant growth?

Let's talk about OREO churros. First of all, again, your comment is right on. It's taken us longer and it's kind of like even though the applause and the overall enthusiasm, which came from everywhere was there in the beginning. It's kind of like going to a concert, right and the main act, it takes a long time for them to come on and there's a lot of applause. We think we're going to see this type of sales growth in our third and fourth quarter, particularly in the fourth quarter with OREO churros.

The PILLSBURY pies, the license pies is moving along at a little bit slower pace, but the season for that, generally speaking, starts in the fall, which should affect us with our August and September channels with the grocers, but we still have a high degree of enthusiasm and confidence in both of those products.

That's helpful. One for Dennis, I always appreciated reading the 10-Q, which comes out right when you release. There is a lot of good details there and probably I missed, as always some, but there has been more commentary and I don't know if you have a number in your head, Dennis, for this. But that's really what I'm asking is, there's been more, I would say, discontinuations of major items at major customers recently.

So the question really or just that's how it seems at least this quarter and maybe last few quarters. The new product introduction number that you put out every quarter, is that net of items discontinued?

Not net.

Okay. Would you say it's accurate, say that in recent quarters, the discontinuation of some relatively big products and big customers has been a bigger drag than we've seen historically?

It's been, yes, I would say more of a drag recently, although I wouldn't say it was significant either, but it has been more of a drag.

And with regard to new products we're kind of conservative in what we report as we do come up with new products that are variations of existing products that we don't necessarily or that we don't include in new product. So, it's kind of a little bit understating to some extent.

Okay and just one last one and thanks for taking all the questions. It's on capital allocation. Obviously, you're, as always, being very selective about M&A, but I think you did, at some point, mention looking for larger deals rather than smaller ones in the $100 million to $300 million range. So, can you please maybe talk to that?

And then, I saw you spent some money on buybacks this quarter, $7 million. Do you have any thoughts there? I mean, it's good to see that you're putting that cash to use. But at the same time, you still have a net cash position, so can you just put it into perspective or how should we think of the rate at which you're buying back your stock. And secondly, just in terms of your M&A pipeline, are you likely to do a larger deal and if so, what's a good sort of range to think about? Thanks

We've been buying back stock probably at the same rate for the past several years and generally, we buy back enough to cover the stock option awards that we've been giving out to our people and management. So that number might have ranged over the years from 140,000 up to 200,000. But there hasn't been a, what I would call a massive buyback or a Dutch auction or anything like that. So, I would expect that amount to stay steady and if you look at our overall float, since forever, our float has remained constant. Akshay, I'm going to turn you back to Dennis now for the first part of your question if Dennis can remember it.

Well, I thought the first part of the question had to do with buybacks, so I'm not --

The second part has to do with M&A, but yeah.

Well, we continue to look at things and we continue to look at things which significantly bigger than some of the deals we'd made in the past. Now, although it's true that we haven't made a deal in about a year and as far as or a year and a half in acquiring somebody, it is however, even more true that we're looking at several things and I would expect -- all I could say is, we made acquisitions in the past and it's our plan to grow business in the future. So, I would expect us to do something that would round off our portfolio and our business, keep in mind of our strengths was niche products and good distribution and some of the other strengths.

Thank you. I'll pass it on.

Brian Rafn.

Good morning, Gerry. Give me a sense Gerry, you talked a little bit. You've got a very kind of cost conscious frugal customer at retailer and supermarkets. Does that at all drive product reformulations or new flavoring? Is the product cycle -- you talked about the tired menus or stale menus, when you look on the grocery side, what's that frugal customer, does he have to be exciting more? Give me a sense of there's been any change in kind of the life cycle of product?

If we're talking about grocers, there is a comedy nominator that excites them, from coast-to-coast, from buyer-to-buyer, from store-to-store and that is spend like slotting and what not, that gets them excited. Then the hard labor comes into play, getting the product in there, pulling against a consumer in it. Keep in mind, we have several niches that we enjoy today and we want to keep expanding those niches and develop other products that will be sub-niches of the niches. It's not something that we could crow about yet, but we keep trying in there to grow that supermarket business.

Okay. Give me a sense Gerry as you look in that supermarket side, kind of the battle between national brands and private label. Has there been more demand from grocers to have you guys formulate private-label product for them or has it been about the same?

Law will comment on that, because Jerry is responsible for our marketing and our R&D and I'll let him comment, but yes there has been some increased degree that we have been developing products for people like Kraft and others.

But it's still a mixed bag, co-pack business is different than private label, but on the private label side, it continues to be a mixed bag as retailers change their directions or make up their mind as whether go into a branded option or private label option. There is no real rhyme or reason. I'd say two years or three years ago, you saw a definitive increase in private label, but now you see some retailers going back to branded item as well.

Okay.

There's no certain pattern either. I mean, in all honestly, we have been blindsided by some of these shifts where customers and I won't mention the change, alright, but there has been a driving message to not (inaudible) and come in and be this bright and then, two to three years later without warning and without a lot of explanation that there is a shift. Fortunately for us, it's a nice piece of business for and we do it well, but it's not a big percentage of our overall business.

Okay. And the area you guys have done really well, I assume the beverage area, when you look at SLUSH PUPPIE or PARROT ICE as a contribution versus ICEE, I am assuming ICEE is still a big [900 pound grower]. How are some of those niche like PARROT ICE and SLUSH PUPPIE performing?

Well, since Dan is on the call, SLUSH PUPPIE continues to perform well. As a matter of fact, there is a variation of that that we're putting in a bunch of products, but PARROT ICE has taken a back seat, but Den, why don't you comment on the growth of our ICEE business and the expected growth for the future?

Yes Brian, ICEE is really the driver in the beverage side of things, both SLUSH PUPPIE and PARROT ICE continue to grow, but at moderate rate. The SLUSH PUPPIE, we have some really good things coming up through the remainder of the year. And on the PARROT ICE side, we use that more of our higher end, maybe the smoothie end or the adult beverages. Both of those have done well for us and we'll continue to put emphasis behind them.

Brian, if you look back at it, it's like, we put together an overall game plan strategy. We bought ICEE in the west, (technical difficulty) developed a product line to compete against the other developers called Arctic Blast, filled it out with the SLUSH PUPPIE. One of the SLUSH PUPPIE products called Mix It Up, we are now expanding across our business, so it's kind of like putting together a good [broad] team in there and you get your starting 9 or 10 in there and then you're adding to your depth and you're adding to your position strength. So, ICEE continues to grow both in sales revenue and overall profits and we have a good team in place.

Let me ask you, you've borrowed a little bit of my next question. ICEE, and certainly in this sort of [fountain] in the soda area, there has been this rage with kids about blending flavors. You guys do that in ICEE. Can you do that blending of flavors with -- like a SLUSH PUPPIE?

And that's an underhand softball for you.

Yes, we absolutely do Brian. With SLUSH PUPPIE, we use the Mix It Up label and we use a neutral product or a lemonade product and then actually if you remember, the traditional SLUSH PUPPIE style machines, you squirt in syrups and so we really encourage what is called the Mix It Up around the SLUSH PUPPIE. In addition to that on the ICEE side, we're releasing a new machine this year, single barrel ICEE type machine that shoots flavor shots into a neutral base or a lemonade based or even a white cherry base to give it a true feel like that and that is exactly why we've done that. There is a real trend out there right now, especially among the millennial age group to make it their way and so we're trying to satisfy that.

Yes, I got two of those guys. So, yes that seems to be a big rage. Let me ask you guys, back in the grocery store side, you guys have over the years have done some pretty nice co-branding with Barq's and Minute Maid and that. How is that business and not just your brands (technical difficultly) these kind of co-brand? And then maybe also -- I've also noticed some J&J stuff licensed in the candy area. So, maybe talk a little bit about co-branding and then maybe licensing.

I'll answer this Brian and we got to give some other people chance. The ICEE licensing, which really Dan and his group developed a few years ago has gone from nothing to now it generates close to $1 million a year in revenue. So, we're watching that growth both with pride and conviction and it gives us a chance to expand on other licensing. Our Minute Maid sales have been solid. The Barq's even though that was a good product, root beer together with [dairy in there] has not done well and we need to take a look at that again.

Okay. I'll get back in line. Thanks.

(Operator Instructions) Brian Rafn.

Dennis, so a little bit on ingredients, egg, butter, sugar, flour, you guys I think had an opening comment about the trajectory was at, some of your raw materials were a little cheaper. You got any kind of trajectory going forward, how you see that?

Brain, some of our ingredient continue to be on lower than a year ago, but we're beginning to see some that are starting to go the other way. So we may see some leveling off of that as we move forward.

Anything that stands out Dennis as far as ingredients that, from an inflation standpoint, sugar versus shortening versus eggs or is that a mixed bag?

It's a mixed bag.

Okay. You talked CapEx is about $40 million. Expansions, can you give me a little flavor relative to maybe the plants you might be putting it in or is it in assembly line or manufacturing versus say freezers or warehousing, kind of where are you putting that CapEx?

Well, some of that CapEx went to this big opportunity that we're having on both the funnel cake and on some of the newer products, but we're constantly refreshing plants and looking to be more efficient and so we will continue to put our emphasis on that. We got a nice team of engineers who are familiar with our plants, and we want to be able to spread that knowledge and that talent around the 16 plants that we have.

Okay. M&A, Gerry, your area of expertise, you're probably one of the best if not the best in the packaged food area. When you look at acquisitions, Gerry, have you -- as you bought J&J for $72000 back in 1971 -

I thought, I paid too much.

If you look at going forward, would you see your sense of your target market is maybe less in the bankruptcy or restructuring area or is that still a viable area for you guys?

Well, we're not looking per se at that and we're not necessarily looking for things that are broken that we could fix up, even though we're very good at it. We're looking at solid companies in there that have anywhere from $50 million to $150 million in sales in there that we could add our personal strengths and complement what they're doing and perhaps learn some things too.

So, if along the way, we run across something and they're small that, I'd like to say, that's in the way that has potential, yes we'll pick it up and we'll bring it in. But if we're going to make -- we, I am looking to make more solid acquisitions together with a management staff on the other side to join our family. The years have been good to us. We went public in 1986, that's 30 years ago and we've grown every quarter.

We have no debt. We had a small float. We're sitting on good cash reserves. We started paying a dividend 10 years ago and now I'm proud to say we've done it for 40 straight quarters. So, all these things are what we call our neutral base, according Dan's words. We're going to build on that with added little diamonds whether they're diamonds we find in the rough and polished or existing businesses.

Let me ask you, when you're looking at -- you mentioned you do $150 million. When you're looking at going concern good solid businesses, what generally is your success? Is it that you bring those distribution to new markets? Are you adding new flavoring? You find that it's manufacturing efficiency side, where is kind of that secret that you could --?

Yes, yes and yes. Generally speaking, if we're looking at something that we think as a star power, we want to know what we can do to further enhance that.

Okay. And then one final question. Your multiples of EBITDA pricing, what is your sense, how expensive strategic buyers versus financial guys, what are you seeing?

Well, we would be the strategic buyer for some reason or the other the private equity groups and of course the money is cheap, which probably influences them. But multiples are up there, although they're not running away like they were a couple of years ago.

Okay. Alright, keep it up. Thanks so much.

Thank you. And we have no further questions in the queue.

Thank you. I want to thank everybody for joining us today and we look forward to you participating in our next quarter's conference call. Thank you and goodbye.

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