J & J Snack Foods Corp (JJSF) 2018 Q2 法說會逐字稿

Welcome to the J&J Snack Foods second quarter earnings conference call.

My name is John, and I will be your operator for today's call.

(Operator Instructions) Please note the conference is being recorded.

And now I will turn the call over to Gerry Shreiber.

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 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 statements to reflect events or circumstances that arise after this date.

Results of operations.

Net sales increased 8% for the quarter and 13% for the 6 months.

Excluding first 12 months sales from Hill & Valley, which was acquired in January 2017, and an ICEE distributor located in the Southeast acquired in June of 2017, and Labriola Bakery, which was acquired in August 2017, sales increased, nevertheless, approximately 6% for the quarter and a healthy 7% for the 6 months.

For the quarter, our net earnings increased by 12% to $17.8 million or $0.95 a share from $16 million or $0.85 a share a year ago.

For the 6 months, our net earnings were $54.1 million or $2.88 a share, an increase of 83% from $29.5 million or $1.57 a share from a year ago.

Our EBITDA -- that's earnings before interest, taxes, depreciation and amortization -- for the past 12 months was $170.1 million, another record.

Food Service.

Without Hill & Valley and Labriola, sales were up 7% for the quarter and 6 months.

Sales to Food Service customers increased 9% for the quarter.

Our sales increase of 7% without Hill & Valley and Labriola was due to increased sales of soft pretzels, up 8%, handhelds up 15%, churros up 4% and funnel cake up 26%.

Sales of frozen juices and ices were down 3% for the quarter and bakery sales without Hill & Valley were up 7%.

Sales to Food Service customers increased 15% for the 6 months.

Our sales increase of 7% without Hill & Valley and Labriola was due to increased sales of soft pretzels, up 9%, handhelds up 33%, churros and funnel cake up 25%.

Sales of frozen juice bars and ices were down 3% for the quarter and bakery sales without Hill & Valley were up 4%.

Retail Supermarkets.

Sales of products to Retail Supermarkets were up 10% for the quarter and 8% for the 6 months.

All of this in a tough environment.

Soft pretzel sales were up 10% for the quarter and 14% for the 6 months, and sales of frozen juice bars and Italian ices were up 17% for the quarter and 9% for the 6 months.

Handheld sales were down 18% in grocery and 15% for the 6 months.

Frozen beverages, which includes ICEE, Arctic Blast and Slush Puppie.

Frozen beverage and related product sales were up 3% in the quarter and 7% in the 6 months, 2% and 6% without the sales of the ICEE distributor acquired this past summer.

Beverage-related sales alone were up 8% in the quarter, 6% without the acquired ICEE distributor and 14% and 12%, respectively, for the 6 months.

Gallon sales were up 2% for the quarter and 8% for the 6 months in our base ICEE business.

Service revenue continues to grow and was up 9% in the quarter and 7% for the 6 months.

Consolidated.

Gross profit as a percentage of sales was 29.04% in the 3-month period this year and 29.54% last year.

The decrease resulted primarily from higher costs for payroll, insurance, product mix changes and significantly lower volume in specific locations.

Operating income in our Food Service segment decreased from $19,636,000 to $18,535,000 in the quarter for these reasons.

There was also a sharp increase in distribution expense and a decrease in operating income from our business -- from our biscuit business, because of a recall in January.

Total operating expense as a percentage of sales was 20.2% in the quarter, up from last year's 19.8%.

This increase was primarily due to higher logistic and distribution expense, as previously mentioned.

Capital spending and cash flow.

Our cash and investment securities balance is $142 million, down $1 million from our December balance.

We continue to look for acquisitions as a use of our cash.

$130 million of our investments are in corporate bonds with a yield to maturity of 2.3%.

Our capital spending in the quarter was $12 million as we continued to invest in plant efficiencies and growing our business.

We estimate our spending for the year to be about $50 million as several one-time plant and manufacturing projects have been completed or will be completed shortly.

A cash dividend of $0.45 a share was declared by our Board of Directors and paid on April 4. We did not buy back any shares of our stock during the quarter.

Some other commentary.

Sales of our Food Service products improved this quarter, with significant increased sales of soft pretzels in restaurants and movie theaters, funnel cakes in schools and handhelds to a handful of customers.

Bakery sales without Hill & Valley were improved this quarter as sales to private label business increased.

Sales of our new Brauhaus Pretzel have been very encouraging.

Handheld sales were up a strong 15% for the quarter as we have had increases to a handful of customers, existing and new.

Churro sales were up 4% even though sales of an LTO, limited time offer, churros were down $1.1 million.

This was to a couple of customers.

Soft pretzel sales in our Retail Supermarkets segment were up a strong 10% for the quarter with Auntie Anne's recently acquired license contributing.

Operating income was up modestly in the quarter.

Sales in our ICEE and frozen beverage segment were up a modest 2% for the quarter, backing off the benefit of sales on the acquired distributor.

Service revenue was up 9% in the quarter and this business continues to reflect strong sales growth.

But machine sales were down $2.3 million or 33% in the quarter.

These sales follow no specific pattern.

Operating income was up $451,000, which was good considering the drop in machine sales.

Overall consolidated operating income in the quarter was down $570,000.

We have reported an overall income tax benefit of $0.10 a share this quarter due to the lower tax rate.

On a going-forward basis, we expect an effective tax rate of 28% to 29% for the next 2 quarters of the year and 26% to 27% for our fiscal year 2019.

I want to thank you all for your continued interest.

Our company continues to grow with all of our products, new products and existing products contributing.

We have also -- we're in the process of completing several projects in our plants, which will improve efficiency and profitability.

I will now turn it back to you, the listening audience, for any questions or comments.

(Operator Instructions) And our first question is from Mike Gallo.

Gerry, obviously, logistics costs have been a significant headwind for you this year.

I was wondering if you could walk us through some of the steps you're taking to mitigate the impact of that going forward.

Well, we're re-examining all of our route transfers and whatnot so that we can get the benefit of the lowest cost of distribution.

During the year, we closed one plant and we shifted some production from that plant to one of our plants in the Midwest, and we've been moving some product shipments around.

And we had to kind of adjust that halfway through because we're -- to make sure we got the benefit of the distribution benefits that we hope to have.

We think we've, by and large, done that, although I noticed that there is -- the papers are writing about logistic costs and distribution costs going up everywhere.

We're aware of that.

We have people on that and we're going to do what we can to moderate that.

And then also with respect to pricing, I think you put through some pricing here late in the quarter.

How is that being accepted?

And do you expect to get better price realization in the second half?

They're doing somersaults and cheering us on.

However, our people are going to be equal to the task and we put together some modest price increases.

And because we are merchants and sales merchants in there, we -- it takes us a little bit longer to get the impact from it, but we expect all the pricing increases to benefit us starting in the third quarter.

Our next question is from Francesco Pellegrino.

So during the quarter, how much of -- first off, your pretzel organic growth in Food Service, did you say 8%?

I believe so.

Okay.

That's a really nice number.

The organic growth was really strong, too, just overall for the business.

The $2 million in higher distribution expenses for the quarter, how much of that were you able to capture in price?

Not enough.

Okay.

We remain focused on that to pick that up very soon.

You incur that -- so the $2 million higher distribution expense, you incur that on your -- as an operating expense, but then it's also sort of offset -- should be offset theoretically if you get pricing out of $2 million increase in sales.

Right?

Just speaking theoretically right now.

Okay.

I'm not...

Is that correct, just when I think about modeling it?

Is that right, Dennis?

Well, there's a whole bunch of cost increases that need to be offset as well by price increases.

So what I mean is prices are up let's say 1% in the quarter, that may, to a large extent, offset the distribution expense, but it doesn't offset any of the other increases as well on top of that.

Let me phrase the question a different way.

For every dollar higher that your distribution expenses increase, how much of that do you think, theoretically, that you should be able to capture on the top line?

Because it seems as if there are other things that I'm not accounting for.

Time for time?

Yes.

So far, none.

Over time, yes, we'll see.

I mean, it's not an easy thing to do.

So is it fair to say that this should be -- distribution expenses should increase by $2 million quarterly for the rest of the year?

Without thinking about just if you're able to capture it or not on the top line or through price increase.

That would be fair.

Okay.

Also, just wanted to touch on some of the lower utilization or lower volume concentrated into specific facilities that you touched on briefly.

I think you closed a small plant somewhere in the Northeast during the first quarter.

Chambersburg.

Right.

What other facilities are we looking at?

What are we looking to do there?

Is it automation?

Is it looking to bring certain production into different facilities, close facilities?

What's exactly happening behind the scenes (multiple speakers)?

Well, we had a couple of lines here in Pennsauken, which is our main plant that were underutilized and they were older.

And we moved some production from Bellmawr, a nearby plant, and put -- and invested in 2 new lines here for churros and funnel cake, which are product lines that are growing.

So Bellmawr plant is probably right now underutilized.

Underutilized.

Right.

(multiple speakers) sales there.

Okay.

I think at the end of fiscal 2017, like 1/3 of your plants operated with utilization rates below 50%.

Two quarters from now, where do you think that number is going to be?

I'm sorry?

It'll be higher, but you said a couple of the plants were operating below 50%?

Yes.

It looked like 1/3 of your plants were operating below a 50% utilization.

(multiple speakers)

Based on 7-day week.

It might be some of the smaller plants too.

So I'm not talking about like based upon square footage.

I'm just talking about specific facilities.

Well, we closed one plant in Chambersburg, which was underutilized, all right?

But based on a 6-day week, 6-day workweek, you're right, that was about 55% to 60% of our plants were underutilized, which we will grow into, and the one thing we've had no problem doing is growing our Food Service and, to a lesser extent, retail sales in there with our core products and new products.

It's a double-edged sword -- while you utilized -- while you're underutilized initially it's always a great to have going forward as you can grow into the business.

Our next question is from Akshay Jagdale.

I wanted to -- so the organic growth in the quarter is outstanding.

So, congrats on that, another really good quarter.

I think I always call out the sales meetings, which tend to have a very positive impact on the top line.

So that seems to have happened again, but maybe you should be having a meeting just on margins going forward as well.

So my...

We are in the process of that now.

It takes a long -- it's a lot easier for me to edict it than it is for us to get it all the way through the systems, but we're not exactly laying an egg here.

So...

In all seriousness, I wanted to focus a little bit on the margin side.

I mean, obviously the sales results, especially in light of what's happening in the industry, are outstanding.

But you take cash to the bank and historically your performance on the margin side was something we could always bank on, but in the last 5 quarters, that hasn't been the case.

So help me understand what you're doing differently, like strategically.

There's a lot of talk about utilization rates, et cetera.

But utilization rates should be getting better with sales growth the way it is, right?

It's not like you added 2 or 3 plants in the next -- in the last couple of years, right?

So help me understand what are you doing to, like, structurally improve margins?

Because sales growth is great.

It's just something is going on with mix.

Something is going on, on the operational side that's very different from what we're used to with the company over the last 5 quarters.

Gerry, you want to take that?

Akshay, we have a variety of initiatives going.

We have a pretty robust continuous improvement plan going in all the plants and they're focused on reducing their labor costs, their product costs through a variety of these changes that they're making.

We've had some of the new projects come online to reduce our operating costs to the plant and the third-party we touched on is there -- there is some mix in there as well that's causing degradation.

I think we saw the gap close from last quarter, this quarter as far as change year-over-year.

And we're very much -- this is Gerry again, Akshay.

We're very much focused on improving margins, particularly in Food Service there.

Right, but, I mean, I know historically you've been great at that.

So what's changed in the last -- over the last 5 quarters, the margins have not trended where we would expect them to, especially given the acceleration in top line, right?

So is there 1 or 2 things that you can point to that are causing that?

There's been a shift.

A lot of our product mix is bakery oriented now, and we're focused on what we can do to improve that product segment.

Pricing is going to be another -- well, we need to catch up on miscellaneous cost increases that we're absorbing and put that forth into pricing.

A recent analysis, and I don't want to be airing dirty laundry, but some of our customers resist pricing, but some of them have not had an adjustment in pricing in 4 or 5 years.

We're on to that now.

You might say that we oops-ed, right, and now we're going to attack it with a little better focus.

Okay.

So bakery as a percent of sales has gone from 30% to around 33%, 34%.

So you're saying that's a big deal, that's a big factor that's contributing to the margin shortfalls?

That's correct.

Okay.

All right.

And just, Gerry, on M&A.

I know, I feel like I ask you this every quarter, but...

You do.

It's okay.

What's -- valuations in the public market have come in quite a bit on the food side.

I'm sure that was holding you back historically from doing some deals that might have looked interesting, but can you give us your current thoughts on the environment and sort of the pipeline?

Is it more active, less active?

And are there any chances that you're going to...

You could always buy something and pay a questionable value in there that's going to take you a while to integrate.

We did make 3 acquisitions in 2017.

All of them small, all right, but all of them already integrated and all of them will be contributing profitability over the next several years.

One of them was a pretzel plant in the Midwest, and one of them was an ICEE distributor in the South.

And all of them fit within our core business and will complement existing and future product lines.

We're looking at some things.

There's nothing close enough that it's -- that we could say is going to happen this year or certainly not in this quarter.

But we're looking at things.

Our next question is from Jon Andersen.

Congrats on a nice organic growth number, something to crow about.

Thanks.

It certainly is.

Could you talk a little bit about the -- you mentioned the higher logistics and distribution expenses affecting margins in the quarter.

Is this more company-specific?

Is this just kind of the industry-wide inflation that many companies are talking about?

And how long do you think that will persist?

I know you don't have a crystal ball, but your thoughts on how long you might be dealing with higher logistics costs for the time being?

It's not going to go lower and almost every article I read, whether it's in the Wall Street Journal or -- everybody's talking about increased cost of distribution and shortage of drivers, but we think we are fairly up-to-date with our absorption process.

And even though -- what happens when you -- costs have been very stable and controlled for a couple of years and you get lulled into not -- you get lulled into a half sleepiness, all right?

We saw it affect us in 2017 and we saw it affecting everybody else, and we're taking steps.

The important thing is that our sales continue to grow throughout all of our product mix.

And as long as we have sales, and we do, and we expect to have it, you can always deal with the more or less the variables.

Makes sense.

On the pricing front -- I guess that's another thing.

If you don't kind of flex certain muscles often enough, you -- to your point, you kind of get lulled into a little bit of a slumber.

On a pricing side, how confident are you at this point that you're going to see the kind of price realization that you hoped for entering the calendar year?

And is it tougher to get price at this point for you?

Is that what's causing it to take longer or what's kind of the backdrop there?

Is it concentrated within a certain part of your business, Food Service versus Retail Supermarkets?

Any color around that would be helpful.

We expect to get past any and all pricing issues the balance of this year.

It's never easy.

Nobody likes to see when you're coming in with an increased bill, so to speak.

But the message has been sent.

Our people are bought in, and we expect that these price increases -- we expect to get the benefit of the pricing over the next 2 quarters and certainly into 2019.

And we're not talking about a heck of a lot.

It's not like things are going up double digits.

Or we're not increasing pricing double digit.

We're talking of some modest price increases, anywhere from 3% to 5%, 5.5%.

Okay.

Last one for me is the -- maybe if you could just comment on some of the segments within Food Service, specifically, it seems like the restaurant area is something that -- kind of the gift that keeps on giving.

You continue to grow strongly there.

Where are you in the development of that segment of your business, the restaurant segment, and what opportunities remain?

And then I think there were some newer channels you might have been looking to build out and you brought some resources on to explore those.

I think health care, maybe C store.

If you can talk a little bit about that as well.

I'm just trying to get a little bit better sense for how things are progressing in some of those segments.

Well, the fast-food restaurant and casual dining, and you're right, that has been like a star for us.

We went from almost 0 to $50 million in that segment, and then we backed off about $10 million as they went through their new product showings and -- but it's growing, and it's growing again.

Our school business continues to be healthy.

We went through a period of maybe 2 years where, because of challenges with nutrition, that -- we declined there for a little bit, but we're back on track.

Our C store business is growing nicely.

And we've added mid-single digits to low-double digits across all of our Food Service product, and we think that's a good sign.

Our next question is from Brian Rafn.

Give me a sense, maybe a question for Dennis.

What are you saying inflation, Dennis, eggs, shortening, cocoa, whole wheat, butter, flour?

Give me a sense as to what you see kind of going forward.

I think, overall, it's relatively modest at this point, the overall basket of commodities that we buy.

You doing any forward purchases, Dennis?

We always buy out 6 months to a year, 1.5 years, depending on which of the ingredients it is.

But then -- especially sugars and flour for the most part we're normally bought out a year or so on an average.

Okay.

All right.

Gerry, give me your sense of -- the economy's started to percolate, you're seeing much more positive, the tax package.

Donald Trump's rhetoric has been much better, more pro-business.

People are feeling better.

Do you still see a tenacious consumer elasticity relative to price?

Well, once we get all our pricing in, I can comment on that better.

Okay.

Organic.

You've done a great job, certainly on the soft pretzel side the last couple of quarters.

What -- what's your sense?

Is it mix?

Is it new ingredients, new flavors, new products?

Is it pretzel rolls?

Is it acquisitions?

What's been kind of the secret there?

Well, you answered your own question.

And we do those things well, and hopefully we'll continue to do them well.

All right.

Look at some of your most recent acquisitions, New York Pretzel, Labriola, Hill & Valley, Philly Swirl, Kim & Scott's.

How are those coming up relative to your ability to drive organic growth?

Are you adding new products to those areas?

Are you shifting production?

Are you bringing their recipes to different plants?

How are those acquisitions doing?

Gerry Law is responsible for all of our R&D and marketing.

And every time we make an acquisition, the best thing we can do and we have been doing as to what they're doing, continue to do that well, and what we can learn from them to spread that out through our other facilities.

But I'll take one of the plants that you mentioned, one of the product lines, Philly Swirl, they've had a kind of a slower time of it the last couple of years, but through some R&D efforts and a couple of new products, it seems like it's ready to -- it's going to be driving some growth there too.

We have a new product that came out of Philly Swirl, Sour Patch.

It's a license from Mondelez, Sour Patch, and it's the mix flavors in a ...

In our retail partners, the acceptance has been good so far.

Okay.

All right.

(multiple speakers) was instrumental in a couple of new pretzel product offerings, and New York Pretzel was key to, we'll say, settling down the Northeast Corridor with product and pricing.

Okay.

In the past, you guys have done a very good job in kind of co-branding.

You had in the frozen Italian -- or not maybe Italian ices, but kind of the Popsicle area, the Barq's, the Minute Maid Lemonade, your Oreo and churros.

How is that co-branded going forward for you guys?

Is it viable?

Is it one-off stuff?

Is it hit and miss?

Well, sometimes it's one-off stuff.

Sometimes it's permanent.

Certainly, Minute Maid is permanent.

And we're looking -- we're always looking for co-branding opportunities that make sense, all right?

Anything that we can do with a juice bar and a flavor or a pretzel and a special topping, those things make sense.

I'm always impressed when I get to our R&D centers and I see the things that they're working on.

I scratch my head and I'm saying, "Are people really going to buy that?" Well, guess what?

We come out with it.

We get some test markets, and we get some sales.

Okay.

Let me ask you a little bit on the M&A side, and I -- everybody but -- you guys have been absolutely unbelievably disciplined over the years with your cash, and that's a big testament to you, Gerry.

That's a very great discipline.

But if you look at your core bakery, snacks, pretzels, frozen Italian ices, handhelds, churros, it's a -- are there any areas, without mentioning what they are, that you would see at the periphery of that, maybe adjacent markets that you're not in, that would give you an ability to expand your product lines, line extensions or even new categories?

We're constantly looking for another pretzel post, another churro opportunity, which we have done a good job of integrating that and acquiring and expanding that business, and certainly, ICEE.

ICEE has done a great job in establishing and then managing their service revenue, which is really an offshoot of selling a regular ICEE.

And you end up, because the machines have to be maintained and that has led to great customer relationships, where we not only take care of the maintenance on our own machines, but do other things for these customers.

We talked just a little bit ago about the fast food restaurants and casual dining.

ICEE is -- has about 3 or 4 projects going on now.

They won't reflect in our business for this year, but it's with major fast-food companies where we're going to hopefully be installing one of our product lines in there, which will drive ICEE sales in 2019 and beyond.

Okay.

If you look at your product line, you look at just your kind of end markets, as you are going into 2018, Gerry, is there any end market, be it schools or movie cinemas or stadiums or athletic ballparks, are there any end markets or convenience stores that you're really seeing some demand?

Or are they all about kind of following their legacy growth?

Well, they're pretty much following their legacy growth.

But every time we make a concentrated effort in a new business segment, we get the benefit of that.

We've done exceedingly well in convenience stores in the past couple of years, because they've gone into food service and we've given them the products to help them complement their sales.

We expect to have reasonable to exciting growth in all of those segments.

And we keep looking for other opportunities.

All right.

And I'll ask just one more, Gerry.

With the Trump administration here and the Obamas gone and the whole things with reformulated recipes for schools and taking sugar and fat and all that stuff out, do you see any less pressure on that?

Or is that really, that school nutrition, that tighter menu away from vending machine food and that, is that really here to stay?

Well, I would think it's here to stay and it's okay when it's done right.

I think what we had a couple of years ago that the public school systems and to a lesser extent, colleges, they didn't know what to do so they did very little.

But where -- we have do feel good about all of those issues with ingredients.

Clean label is kind of a new buzzword and it's particularly important in grocery, but we have our Food Service customers too, when they are talking about a new product, they want to know what all the ingredients are going into them because they read and understand the issues even better than we do.

So we just have to adhere and we've done a good job with it.

Our next question is from Jonathan Feeney.

So a question with 2 implications.

Assuming for a second, as I do, that freight costs are elevated structurally and there's people -- whether it's Amazon or whatever, this driver shortage, whatever is driving it.

What -- on one hand, how does that change your ability to consolidate plants and take costs out?

Has that all changed your runway of plant closures?

When you close a plant, you add logistics costs necessarily and does that sort of block your path in any way of getting more efficient logistically?

And secondly, maybe more importantly, does it -- I would think it improves your M&A outlook just because somebody's going to be much more pressured than you are, particularly the kind of small acquisitions you've had success with in the past that won't be able to handle the somewhat meteoric increase in freight costs and total logistics.

So just some perspective on that I'd appreciate.

Well, we made 3 acquisitions a year ago.

Whether they were related to our mission on those business segments or whether they were related to some issues that these companies might have been having.

We had an older plant in Chambersburg, a smaller plant, that came by way of a pretzel acquisition maybe 10 years ago.

And try as we might, we just could not put efficiencies in there or new product development in there, but we did shift the production to an existing plant pretty much nearby.

I think any residual of the logistics cost in there is something that we can focus on and improve.

But no change recently, it doesn't sound like, Gerry?

Because since you did those deals, freight has gotten a lot worse and become a lot higher profile as you just -- I'm just talking the past 6 months.

Well, you're right, it has in the past 6 months.

Part of it is related to a specific acquisition in the Midwest, and then we moved some products from the Northwest into there and then had to move them back, all right?

So the integration there was well planned but not as well executed.

And at this time we have no further questions.

Okay.

I want to thank everybody for participating in the call.

And we look forward to talking to you again next quarter when we hopefully will continue our strong sales growth and our improved focus on cost.

Thank you.

Thank you, ladies and gentlemen.

That concludes today's call.

Thank you for participating and you may now disconnect.