J & J Snack Foods Corp (JJSF) 2019 Q1 法說會逐字稿

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

My name is James.

I'll be your operator for today's call.

(Operator Instructions) Also note, this conference is being recorded.

I now like to turn the call over to Gerry Shreiber.

Gerry, you may begin.

Thank you, and welcome, everybody.

I know you're from all over the country, but it's really cold here.

So -- but this is not a contest on what's the coldest and what's the warmest.

So let me begin 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're 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.

I'm Gerry Shreiber, I will lead this conference call from my end, but with me today is Gerry Law, our Senior Vice President and my assistant; Dennis Moore, Senior Vice President in charge of finance and administration; Bob Radano, our COO; Bob Pape, Senior Vice President in charge of sales; and Marjorie Shreiber Roshkoff who is in charge of legal.

And so let me begin.

Results of operations.

Net sales increased 2% for the quarter.

Our EBITDA, earnings before interest, taxes, depreciation and amortization, for the past 12 months was $164.3 million.

Food Service.

Sales to Food Service customers increased 3% for the quarter.

Our sales increase was due to increased sales of frozen juice bars and ices up 5%, Churros up 4%; Funnel cake up 3%; and bakery sales up 8%.

Sales of soft pretzels were essentially flat and handheld sales were down.

Retail Supermarkets, which is grocery.

Sales of products to retail supermarkets were up 1% for the quarter.

Soft pretzel sales were down 3% for the quarter and sales of frozen juice bars and Italian ices were up 13%.

Handheld sales were down 15% for the quarter.

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

Frozen beverage and related product sales were up 1% in the quarter.

Beverage related sales were down 5% in the quarter compared to being up 21% in the year-ago quarter.

Service revenue for others was up 4% as this category for us continues to grow quarter-after-quarter.

Machine sales, that's the beverage machines, were up $7.7 million, up $6.3 million last year.

No significant reason for that, but that is a harbinger of what will happen in the future putting those machines -- having a machine sales has a tendency to increase beverage sales.

Consolidated.

Gross profit as a percentage of sales was up -- was 28.3% in the 3-month period this year, up from 27.6% last year.

Gross profit increased because of improved operations at several of our manufacturing facilities, especially at our Labriola production facility and because last year we had the burden of shutting down an older plant in Chambersburg, PA, and moving its production to other facilities where it is more efficient.

Operating income at our Food Service segment increased to 18.46 -- $18,461,000 from $17,054,000 in the quarter for -- and for these reasons and higher bakery sales, even though distribution expenses continued to be a burden, there were about $2 million as a percentage of sales and we continue to be impacted by a recall in our biscuit business a year ago in January.

Total operating expenses as a percentage of sales was 20.2% in the quarter, up from last year's 19.6%.

The increase was due primarily to higher distribution costs.

Capital spending and cash flow.

Our cash and investment securities balance of $288 million was up $12 million from our September year-end.

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

$143 million of our investments are in corporate bonds with a purchase price yield to maturity of 2.6%.

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

We estimate our spending for the year to be about $55 million to [$6 million] as several onetime manufacturing projects are in progress and turning towards home for completion.

A cash dividend of $0.50 a share was declared by our Board of Directors and paid on January 4. This was an 11.1% increase to the dividend.

We did not buy back any shares of our stock during the quarter.

Commentary.

Our overall sales increase of 2% this quarter was largely from the 8% sales increase in our Food Service business.

We're expecting to improve upon this as the year moves along.

Although operating income in our Retail Supermarkets and Frozen Beverage segments were down from a year ago, against very strong comparison numbers from a year ago, we're pleased our overall operating income has increased this year, especially considering sharply higher distribution expenses.

And as I mentioned, significant manufacturing improvements and higher pricing benefited this quarter and will more -- will likely affect the rest of the year too in a positive way.

Our investment income this year was $449,000 less than last year because in accordance with new accounting regulations, we recognized over a $1 million unrealized investment losses this quarter.

So half of these losses have reversed already in January.

Because of the various adjustments due to income tax changes, we had income tax expenses of $5.6 million this year compared to a $13 million benefit last year.

We anticipate an effective tax rate of 28% going forward.

I want to thank you for your continued interest and now I'll turn it back to your end for questions and comments.

(Operator Instructions) Our first question is from Michael Gallo.

Couple of questions Gerry, with team.

This is the first quarter, you really started to see some meaningful price realizations, look like it was up 1.7% in Food Service, a little better than that in the Retail.

As I recall, like pricing kind of went in as the quarter progressed.

So I guess, as we think about pricing 1 -- how much do you expect that to be stronger Q2, 3 and 4 versus Q1?

And would seem so far it's generally being fairly well received?

Well, let's just say that we're getting it through.

We have good relationships with our customers both in the Food Service and grocery business.

But -- and I might have mentioned this before, it's always a process to take pricing, but we seem to be -- with very, very few exceptions, we seem to be doing okay with that.

All right.

Great.

Gerry, logistics cost still pretty big headwind.

I think, couple of million dollar headwind year-over-year.

There's been some anecdotal signs that perhaps this should start to level off going forward.

I was wondering as we think about the rest of fiscal '19, it'll start to lap, obviously, the big increase.

Do you see it continuing to increase?

Do you see it continuing to increase, but at a low rate?

Or do you see it signs that as we kind of go through this year that we can finally see -- start to see some leveling off?

And then from your own logistics cost standpoint, as you move things around, do you think you can start to see a better impact from mitigation strategy?

We believe that the worst is over and with very, very few exceptions, there may be some future adjustments, but the worst is over.

Next question from Brian Holland.

First question on maybe the top line.

Just curious if you could kind of give us an overview of what the pipeline looks like?

Not just only for new product rollouts in 2019, but also on the M&A, which as you wrapped other acquisitions, if you don't -- not necessarily or you don't have a catalyst in place right now.

So just curious about the pipeline on M&A, the new products, especially on the retail side I know you're lapping a few things with Auntie Anne's and the Sour Patch Kids novelties.

So just curious how we follow-up?

What was really nice contribution in 2018?

Well, that's true what -- you just outlined it.

We're also doing very well in the fast food and casual dining segment of our business.

And as I mentioned before that was a blank slate for us about 6 years ago, and it quickly went to $40 million, $50 million and then we backed off a little bit as it dropped.

But we have reasons to be excited as we have a couple of new products going into new and existing chains in there and we've got -- we've been through the R&D and approval process and we'll have these 2 major change.

We'll be realizing these sales from the second quarter onwards.

And then just, on the M&A front sort of what are you seeing out there as far as a pipeline for assets?

So there are lot of assets out there.

How are multiples -- how do multiples look relative to sort of what your historical discipline has been?

Well, we're always looking.

And when we do execute, we integrate real quick and make sure that we have everything in place, and we're still looking.

And we have a slight war chest in there, but for some reason or other everything that we looked at, we have decided against or it's on a -- it's on a hold.

And I don't want to make -- and even though we have a war chest for acquisitions and we're always looking, I don't want to bring in things if that are going to not have benefit.

Of course.

Understood.

Last question from me.

Just on the margin side.

Obviously, nice margin reflection in the quarter.

Mike asked about some of the logistics' possibilities that could add to the tailwinds as we go over the balance of the year.

Obviously, the acquired facility last year seems to be sort of running as you like it to or at least closer to that.

The other projects you had going on or that I understood you had in place as far as plant automation, SKU rationalization across the broader footprint.

Any update or color you can give us with respect to how you expect those to come along and potentially further benefit gross margin over the balance of '19?

Sure.

Gerry Law is sitting right next to me here and Gerry is my guy for all these operations or our guy, but we still expect to get marginal -- margin improvements in some of these projects.

And Gerry, why don't you comment on the churro line that just got done in there and...

Yes.

I mean, we're through this.

The big line starting off and we continue to have a pipeline of projects to offset labor pressure that we're having and increase our yields.

And throughout the year, we'll continue to see those come online.

Next question from Jon Andersen.

You guys are not horsing around, you have a lot to [crawl] about here.

You're right.

We're not horsing around.

But I appreciate the way you led me into that comment, Jon.

Very good.

My first question is on -- well, it's on cost pressure that you've experienced over the past 3 or 4 quarters.

I think the majority of that cost pressure, as you mentioned, has been 2 things, one is distribution or transportation costs.

And then I think you also bore some cost pressure or margin pressure due to the, I think, it was a biscuit recall.

And I'm wondering if you can quantify that a little bit for us?

How much those 2 things have pressured your operating income?

And whether we're at a point now where that pressure kind of reverses or goes away as you move through 2019?

Well, we had an experience at biscuit recall.

And that's a -- even though it's a minor part of our business, we still had to execute on the recall, take the product back and make nice, nice with the customers and whatnot.

It affected a smaller business of ours on the biscuit and it's essentially done.

Now we got to work to get back the sales and the momentum that was lost.

Dennis, what effect did that have on...

Yes.

It was, actually, we would say roughly about $500,000 hit to operating income each quarter for the past 4 quarters, although we did have a recovery offset back in one -- in the fourth quarter last year.

But that's just about over now, so we should not be seeing any pressure on that in this quarter and going forward.

And on the transportation cost pressure?

If you look at our transportation costs as a percent of sales, if you do your calculation in that way, we're talking about -- that's roughly $2 million a quarter with higher last year than -- this year than last year and we think that should be leveling off.

And perhaps, it's too early to really tell, but we may have no increase in that regard starting with this quarter that we're in.

Okay.

On the product pipeline, it sounds like there are a couple of new things that are happening to help drive the restaurant business.

Are you able to talk, with a little more specificity, about what those are?

And are they kind of LTO, limited time offer, situations?

Or do you think they're more permanent placement or yet to be determined, I guess?

Well, as I mentioned before, we always have a bunch of products in the funnel.

Every once in a while they get clogged up in there, they take a little longer.

But every once in a while, 1 or 2 come out together and we're sitting in the catbird position right now, managing this, which will add several thousand point-of-sale locations as well as some existing product and a new product.

We think that it's going to -- we're going to have a very good year when we spec them.

Gerry, you want to comment further?

These are LTOs, Jon, so we don't know whether they will roll on, if they perform well as they could continue.

But right now, they're fixed duration.

And one of them has already begun.

Correct?

Yes, January.

That would be Burger King with funnel fries.

And what it is Jon, believe it or not, if you recall, we were doing the funnel fries with Burger King about 4, 5 years ago -- 10 years ago.

And then they were acquired and they sliced and diced the menu, but now they're back with this very same product, packaged in a different way.

And the early, early promise -- or the early, early results are really promising.

So before I bring out the flags and wave the band in there, let's make sure that we have another quarter or 2 under our belt.

Okay.

And last question.

On the frozen beverage business, I thought it was interesting what you said about, I think, the machines sales grew at a strong double-digit rate in the quarter.

I understand that, that is hard to predict, but are there some specific I mean, is there anything specific that you can point to in terms of upgrade activity that's going on, that's driving that?

And then, should we really view that as a leading indicator of maybe future gallon or beverage demand?

Well, we have Dan Fachner on the phone in the remote location.

Dan is the very active President of our ICEE group.

Dan, what caused the big increase in machine sales this year or this quarter?

And what does that reflect for the future in gallon sales?

Yes, Jon, we had a really nice quarter with machine sales.

As you know, those can be cyclical but we had a great quarter that included some big sales through our quick serve restaurants, to the theaters and to the convenience stores.

So a nice spread across the different categories, and any machine sales has absolutely the tendency to grow gallons in the future.

So hopefully, that's a good trend.

As you know, they've being down for a past few quarters and we look to see that up this year.

Next question from Akshay Jagdale.

So I wanted to ask about the bakery.

The bakery business drove significant -- I mean, almost all of the growth this quarter.

So can you talk about what drove that and how sustainable that is?

It looks like some co-packing business might have played a role, but can you give us a little more color on that -- on the growth that we saw?

It came from a lot of directions.

As you know, Food Service is our largest segment.

But everybody in Food Service does something in Bakery, whether it's a cookie or whether it's a special roll and whatnot, and we've gotten our sales team in high gear.

The R&D effort that we have within the company has grown significantly the last 3 or 4 years, and we've just been recipient of a lot of these things coming home.

So is it -- how sustainable is the growth rate that we saw?

This is Dennis.

The increase in the quarter, probably half of that is a bump, a onetime bump that's not going to continue.

There's a large club rotation with that co-pack customer.

So...

And one of our customers as well.

So...

Right.

So there's 2 factors in there like 1 club looks like promotion and 1 co-packer related -- co-packing business related bump up that you don't think will repeat, am I understanding that correctly?

Yes.

Yes.

Okay.

And that's roughly half of the growth?

Yes.

Maybe a little bit more than that.

Got it.

And the other thing that was -- so first, I mean, congratulations on getting the margins to inflect.

So I had 2 questions related to that.

Number one, I believe you have these sales meetings every, whatever, 3, 4 years, I don't know how often and then we see a bump up in...

We had that big gala that you referred to 5 years there.

We have one every year.

Yes, but there's -- apparently, there was a similar margin related meeting, I don't know how big a gala that was, but recently...

Well, the margin meetings was not a gala.

Gerry Law initiated these meetings and he had all of our production and management teams from all of our plants at 2 different locations, and we were driving home the projects and the test that needed to be done to not only control our cost, but to seek some margin improvements across the board.

And guess what, Akshay, it seemed to be working.

Can we call it a boot camp maybe?

Yes, yes, because there were some -- there are several boots kicking a** if they didn't achieve it.

All right.

So my question related to that is, so the margin performance so this quarter was better than we've seen in several quarters.

So that's good news.

So where -- so this -- in the context of the initiatives that have just begun in this boot camp, I mean, how far are we down the road on that?

And how much of that is what we're seeing in the numbers?

And then I have a follow-up.

You're seeing very little in the numbers right now with respect to efficiencies, but even though there was 60 basis points improvement in manufacturing, we certainly expect that to continue and there'll be some other improvements.

And you're seeing the benefits from Labriola being turned around.

We've had some improvements with our funnel cake and our true cost of goods as a result of new lines, so you're seeing some benefit.

I can't quantify right now.

But Akshay -- and Labriola, which we looked at about 5 years ago, 6 years ago, but it was too pricy for us.

By that, I mean, we bid on the business.

We didn't get it, it went to somebody else.

They struggled with it.

Finally, I think, at the risk of bankruptcy, they acquired.

They put it up for sale, and we wind up acquiring all of the assets for a fraction of the price that we were willing to pay 5 or 6 ago.

I think it was about $6 million.

Is that right, Dennis?

Yes.

And it's going to be a winner.

We made some improvements there.

We've transferred some product production into there.

We transferred some production out.

But we seem to be -- that seems to be working out and it'll continue to reflect in our performance for the balance of this year.

Got it.

And one -- just one last one, again on margins.

What was unique in the quarter and some of what I'm asking about, I guess, you just answered, but I'd like more color.

Usually, the mix of your products, if it's skewed more towards bakery like it was this quarter, you don't see a margin benefit, right?

I mean, usually, when I think about which products are the more profitable ones, obviously, I think about pretzels, I think about churros.

This quarter, obviously, bakery was leading the charts, yet your margins went up.

So how do I connect the dots?

And going back to the boot camp, how does mix play -- where does mix play a role in your overall margin progression plan?

I mean, if it's a benefit I wouldn't think about the mix, I would think about the change in efficiencies and what we've done at the plants to improve our performance.

That is where the bag of the bulk is coming from.

But how about -- have you talked about mix as a driver going forward because, I mean, not all products are equal margins, right?

So is that something we should expect?

The comment on Gerry Law's comment, he had his engineering and manufacturing people at these meetings in there.

And we were primarily talking about what we -- what are we running and how we make that better.

So I think that what we've achieved during this year-end and in this quarter, you could put a multiple on that for the balance of the year.

And a question from Brian Rafn.

Just a question.

What are you -- may be one for Dennis -- what are guys seeing on commodity feedstock pressures?

Eggs, butter, shortening, whole wheat, flour, sugar?

Pretty much flat right now.

Flat to moderately up, so not significant.

Don't count then.

Okay.

What -- you guys talk in the press release about sales from new products last 12 months, how is that -- how is relative to budgets on new product launches?

How is your versus budget?

How is kind of your reflection on how successful those new products have been?

Better than our projections and now to the point that we're taking a look at that and how can we make that even better, better to our projections.

Okay.

When you look at the new product pipeline, Gerry, is it spread across frozen beverages and churros and funnel cakes and bakery?

Or is it bulked?

Or is it consolidated in any one specific product area?

Most of them are coming into Food Service, which is our biggest group and where we have the most experience.

We -- with one exception we saw -- I think, we saw -- Dan, are you still on the line?

Yes, I am Gerry.

Wasn't Taco Bell a big buyer of machine -- beverage machines?

They were.

There were one of the largest in this past quarter and that will probably continue throughout this year.

Okay.

Good.

And some of these efforts began 3 and 4 years ago and it's satisfying to say that they're coming through now.

Okay.

When you look, you guys talked, you guys had a very, very nice quarter in machine sale installations in that.

Are a lot of those machine sales within new product areas were cinemas or convenience stores?

Or are you actually upgrading the technology of the machine and it's more of a technology retrofit?

Primarily, more of the former.

But with our ICEE group and our service group, we're getting specialty projects, some of which include something as mundane as flavor changes, and also some are design and engineering changes.

Got you.

Over on the grocery side, Gerry, when you see these consolidations, whether it be Albertsons or Safeway or Kroger, and you're making M&A, how tough is it in shelf space in that?

Do you lose shelf space when you see consolidations in the grocery industry?

Or is it really -- does it transition fairly smoothly when you see that, those transactions on the grocery side?

Well, you outlined some of the challenges in the retail grocery business for us.

Bob Pape is here, and although we didn't have a great quarter in our retail supermarkets, we seem to think that most of it has passed us now, right?

Bob, is that right?

You want to comment?

Yes, that's correct.

I mean, some of the softness on the pretzel category, we see some trending up in this quarter here.

And back to your question, it's really based on product performance and what you're adding to consumers as far as value-added.

So our products are well received by consumers and we think that we can hold our shelf space and continue to expand in certain product lines that are consumer friendly.

Got you.

Anything on kind of new product iterations, flavors?

And anything on the pretzel side, Gerry?

Well, yes.

Some of the new products in Food Service are taken while it was a regular soft pretzel in 3 loops and putting it in including some other flavors in there.

Some of it have a fried element to it and different taste, and we have a lot of these fast food and casual dining restaurants that are looking for a signature item that they can have, whether it be a pretzel or a different serving for churro and we're working with them very closely.

And they want a signature item, we'll get it down into a product form for them.

Got you.

And then, just on the M&A side.

Gerry, you've always been very disciplined with the war chest and that X multiples of EBITDA or cost of the transaction.

Are you seeing any differences in the scale and size of revenues or niche via products?

And do you have any aversion between making a small niche acquisition that you can organically grow versus something that may be on day 1 a much larger sales contribution?

I'd be happy to look at something in the early stages that would have a larger positive impact on our business.

I'm relatively risk-aversive.

I want to make sure that the product fits within our plethora of niche products and so we're not going to do anything that's stupid and we're not going to do anything that's too far out of our range, but we're constantly looking.

And hopefully, we will be continuing to add to our niche products.

Does that pipeline, Gerry, is that as robust as it's been in the past?

Or is it ebb and flow?

Where we are in the economy?

Just give me a sense as to where that is today versus may be in the past?

Every once in a while, I mentioned Labriola.

We looked at it 5 years ago.

We bought it 2 years ago after it had been through.

But a lot of the things that we've looked at are -- when I say, they repeat -- they're dressed a little bit differently, but they have the same negative possibilities that we looked at years ago.

They seem to come oftentimes in rushes and I'm content to continue to look.

And we have our own people to look at that, but again, I don't want to do anything that may be reckless or careless.

Yes.

With that comment, Gerry, do you see conversation that you might have had several years ago come back where maybe there is a death of the owner or the family or a transaction pressor?

Or were you on the cycle where they end up coming back and you'd see kind of a recycling of the conversation?

There is some, and we do look at the obituaries every day.

So our people -- no, I don't mean that.

But -- and there are people we have some scouts out there too, but I -- we don't waste a lot of time.

And I've mentioned this before, we're not going to go too far from our nucleus, the things that we do well.

(Operator Instructions)

Gerry, it looks like we have no more questions.

All right.

I want to thank everybody for their time today and participating.

Look forward to talking to you, again, after the results of our second quarter.

Stay warm.

Be well.

Be healthy.

Thank you very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.