J & J Snack Foods Corp (JJSF) 2021 Q4 法說會逐字稿

Welcome to the J&J Snack Foods Fourth Quarter Earnings Conference Call. My name is James, and I'll be your operator for today's call. (Operator Instructions) And also note, this conference is being recorded.

I'd now like to turn the call over to Norberto Aja, Investor Relations. Norberto, please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2021 Fourth Quarter Conference Call. We'll get started in just a minute with management's comments and your questions, but before doing so, let me take a minute to read the safe harbor language.

This call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements regarding management's plans, strategies, goals and objectives, our anticipated financial performance, industry-wide supply constraints and the expected impact of COVID-19 on the business. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors. They may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements (inaudible) forward-looking statements.

Factors discussed in our annual report on Form 10-K for the year-ended September 26, 2020, and other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates on the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cause our view to change.

In addition, we may also reference certain non-GAAP metrics including adjusted EBITDA, which is reconciled to the nearest GAAP metric in the company's earnings release, which can be found in the Investor Relations section of our website at jjsnack.com.

With us on the call today are Dan Fachner, Chief Executive Officer; Ken Plunk, Chief Financial Officer; (inaudible), our Chief Operations Officer of ICEE. Joining remotely today are Marjorie Roshkoff, our General Counsel; Lynwood Mallard, our Chief Marketing Officer; and James Hamill, Corporate Controller. Following management's prepared remarks, we will open the call for your questions and answers.

With that, I would now like to turn the call over to Dan Fachner, J&J Snack Foods' Chief Executive Officer. Please go ahead, Dan.

Thank you, Norberto, and good morning, everyone. Thank you for joining us today.

Let me first and foremost thank the entire J&J Snack Foods' team. We've all been through a lot these past 18 months, including on a personal level. And throughout it all, our team has delivered for our customers and partners. You've demonstrated dedication and resilience, and you're the reason for our success. So thank you very much.

Taking a quick look at our results. We are pleased with the strong finish to the year and the positive trends we see across our business, including exceeding pre-COVID sales levels in the fourth quarter. This was accomplished despite an incredibly challenging operating environment due to the rising costs across supply chain, including commodities, logistics and wages.

While fiscal 2019 was one of our strongest years, net sales for the fiscal '21 fourth quarter increased 4% compared to the same period in fiscal 2019 driven by a 6% rise in our Food Service segment and a 29% growth in our Retail segment, as traffic across many of our customers, venues and outlets continue to rebound. On a year-over-year basis, Q4 '21 net sales of $323.1 million increased 28%.

Gross profit as a percentage of sales was 28.4% in Q4 '21 compared to 21.4% in Q4 '20, reflecting the operating leverage benefit of increased sales, favorable product mix and corresponding margin efficiencies.

Despite industry-wide freight and distribution cost increases, strong top line growth drove a 543% rise in operating income, a 187% increase in net earnings and a 69% increase in adjusted EBITDA. And our adjusted EBITDA margin of approximately 12% improved 293 basis points over the prior year period.

As it relates to our 3 business segments, let me begin with Food Service. This segment represented approximately 62% of our total sales and experienced sales growth of over 35% compared to Q4 fiscal 2020 and 6% over Q4 of fiscal 2019. Sales accelerated through our key customer channels led by amusement, live sports, convenience, schools and restaurants. Soft pretzel sales increased 62% and frozen novelties or frozen juices and ices increased 39%. Churros sales and bakery products increased 121% and 10%, respectively. In addition, we are seeing growth of 36% in our handhelds, a subsegment that we are very pleased with and have great expectations for.

We are encouraged by our strong demand that we are seeing for our products across many customers within the Food Service segment as consumers begin to return to their favorite out-of-home activities. Consumers are spending more in many of these venues, with one of the largest movie theater chains reporting above-average ticket prices driven by a record level of concession per cap spending. In addition, one of our largest amusement park operators in the country and a client of ours recently reported that attendance during the July through September period indexed at 92% of 2019, while sales rebounded at 95% of the same period in 2019. And even better than that, our amusement park channel exceeded fiscal 2019.

Convenience stores and quick-serve customers are also benefiting from a greater consumer mobility with many of these establishments pursuing new initiatives to expand mobile dining and enhance their food and beverage offerings. Additionally, customers are incorporating a great presence of self-checkout to offset labor shortages, which could present an opportunity for J&J in the snack category given its portability and immediate availability for consumption.

While foot traffic continues to recover to pre-pandemic levels, many of our customers are seeing higher food and beverage spending per person, which should lead to higher average transactions or an even stronger appeal for many of our portable products that are easy to enjoy on the go. Overall, strong consumer spending should continue to benefit many of our key customer segments in 2022. As a result, we feel good about where we are and where we are headed in the Food Service segment and expect these positive trends to continue into the new year.

Moving to the Retail segment, which represents approximately 15% of our total Q4 sales, we saw healthy demand for our soft pretzels as well as our frozen novelties, which were relatively flat at down 1% and 3.4%, respectively, compared to the fourth quarter of fiscal 2020. This segment continued to see improvement, reflecting sustained consumer at-home consumption at higher than pre-pandemic levels while we also lapped the year ago elevated demand in the lockdown days of the pandemic. While sales for the segment were down 9% versus Q4 fiscal 2020, sales increased 29% when compared to the fourth quarter of fiscal 2019, which was a very strong quarter for us.

We believe the past 12 to 18 months will create a tailwind for us as people have discovered many of our products and will continue to enjoy and indulge in them going forward. At the same time, we see this segment as having significant runway and are making thoughtful sales and marketing investments to secure new customer wins and drive increased consumer and shopper interest of our products. Based on the above, we expect sales in our Retail segment to continue performing at above pre-COVID levels.

Frozen Beverages segment increased 46% year-over-year led by frozen beverages growing over 104%. Frozen beverage sales continued to approach pre-pandemic levels and came in at just 4% below the fourth quarter of 2019, led by strong growth across restaurant, convenience and amusement channels, and then partially offset by a slower recovery in our theater business.

The Frozen Beverages segment is approaching pre-COVID sales despite that slow recovering theater channel, yet we expect growth into this next year. We have very high hopes that we -- that as we expand the footprint of our Frozen Beverages segment across more customers and more channels, we will continue to be able to grow this business.

As an example, we recently introduced our ICEE products into Krystal restaurants across its 285-plus locations across the Southeastern United States and then also recently started our partnership with Golden Corral, which has over 380 locations across 40 states. And I am pleased to report that just in this short period of time, our customers are already seeing marked upticks in beverage incidence.

One thing that is impacting all 3 of the segments and many facets of our business is the margin pressures brought on by rising costs across ingredients and supply chain, including commodities, logistics and wages. In particular, we are seeing double-digit cost increases in ingredients such as oils, sweeteners and flour, while shipping costs continue their unprecedented escalation driven by diesel prices, carrier charges and a worsening driver shortage.

To offset these inflationary pressures, we have undertaken a number of actions which, in combination with the cost-saving initiatives, will help drive margin improvement as the lag between the impact of these operational pressures and the benefits of our actions goes away. Examples of some of the initiatives we have put forward include a more optimized geographic network of cold storage warehouses, centralizing a much greater percentage of our purchasing and procurement to achieve economic scale across our 16 facilities and investing in automation to improve efficiency and labor costs.

As it relates to our product pipeline, we continue to prioritize the development of new products, including product extensions from some of our more popular brands. We have over 10 iconic brands that are leaders in the segment, along with a number of additional brands and licensed brands. In some cases, these brands define this segment. So there are several significant opportunities for us to leverage the brands and expand their appeal.

We see tremendous opportunities to expand both the footprint and the reach of ICEE as well as the products we bring to market under the ICEE brand. And really, we are bullish on the whole frozen novelty category, which includes Luigi's, our Italian Ice, and Whole Fruit, our frozen fruit bars. In addition, we have had great success entering new markets, most recently reflected in our Dogsters novelty brand. We are also seeing significant opportunities in the SUPERPRETZEL brand, including bringing filled product versions to the market.

As it relates to inorganic growth, we continue to be very vigilant on this front and remain disciplined in our criteria and approach. We will not do acquisitions that are not accretive to our business, overpay for assets or buy something outside of our area of expertise. We have a long and successful track record on the acquisition front, and we intend for that to continue to be the case.

So in summary, our business is on a strong recovery trajectory from the impact of the pandemic. We are seeing very positive trends across the business and remain well positioned to address the challenges to leverage the opportunities in front of us. We are laser focused on achieving greater effectiveness and efficiencies across our operations, continuing to strategically invest to strengthen the relevance and leadership positions of our brands and in furthering the growth of our business, both organically and inorganically. And really, above all, we continue to invest in our most important assets, our people.

As we enter into fiscal 2022, we are excited about the opportunities ahead and remain confident in our ability to deliver profitable growth and create added value for our partners and shareholders.

I would now like to turn the call over to Ken Plunk to review our financial performance. Ken?

Thank you, Dan, and good morning. As Dan laid out, we delivered strong results in the fiscal fourth quarter which reflect the continued success of our operating strategies and the power of our unique brands as well as improving trends in the microeconomic environment and across the majority of our customer segments we serve.

Revenues for the fourth quarter of fiscal 2021 increased by a healthy 28% to $323.1 million, resulting in a 12% increase in full year fiscal 2021 revenue growth.

Breaking revenue down. Food Service revenue grew 35% to $199.8 million, led by 121% growth in churros, while the largest sales contributors in Food Service, bakery and soft pretzels, enjoyed a 10% and 62% growth, respectively, versus Q4 of fiscal 2020. Frozen novelties grew 39% for the quarter.

Retail supermarket revenue was down just over 9% as flattish soft pretzel sales were offset by low single-digit declines across frozen novelties and a 16% decline in biscuits. Retail was lapping a 41% sales growth in last year's fourth quarter as consumers stayed at home.

Regarding our third segment, Frozen Beverages, we saw revenue increase by 46% versus Q4 of fiscal 2020 as flattish sales in repair and maintenance and machine sales were bolstered by a 104% increase in beverage sales from $23.4 million to $47.8 million. This led to a gross profit of $91.7 million or an increase of over 70% compared to the previous year period, and a gross margin of 28.4%, an improvement of over 700 basis points over Q4 of fiscal 2020 and reflecting both a healthy top line growth as well as the leverage we are achieving across our cost of goods line.

Moving down the income statement. Total operating expenses increased $50 million -- sorry, increased from $50 million to $66.5 million, reflecting increases in marketing and selling expenses of 27% and distribution cost increases of 41% as well as a 34% increase in administrative costs, all of which reflect the inflationary pressures we are experiencing across our business that Dan referenced in his prepared remarks. As a percentage of sales, operating expenses were 20.6% versus 19.8% in Q4 of fiscal 2020.

Strong sales and gross profit resulted in almost 5.5x improvement in operating income from $3.9 million to $25.3 million, bringing full year fiscal 2020 (sic) [2021] operating income to $71.2 million compared to $17.2 million for full year fiscal 2020.

With income taxes of $6.8 million compared to an income tax allowance of $1 million in Q4 of 2020, net earnings increased by 187% to $18.9 million, resulting in diluted earnings per share of $0.98 per share compared to $0.35 per share in the prior period.

On an adjusted EBITDA basis, we saw an improvement of 69% in Q4 of fiscal 2021 versus Q4 of fiscal 2020, bringing the full year fiscal '21 adjusted EBITDA to $128 million compared to $90.4 million in the same period in 2020.

Taking a look at our balance sheet. We continue to have an extremely healthy balance sheet and overall liquidity that positions us well to weather any future disruptions as well as invest in the business and pursue various shareholder value-creating initiatives.

With $305 million in cash, marketable securities and cash equivalents, total assets of $584.8 million versus $167.6 million in current liabilities and 0 debt, we are confident we have the resources to invest in and leverage both internal as well as external opportunities.

Speaking of shareholder value, we announced on Friday a regular quarterly cash dividend of $0.633 per share of common stock, continuing our trend of annual dividend increases and returning value to our shareholders.

In closing, we are pleased with our results and excited about our opportunities. We have a lot going for us, terrific brands, great products, a very high level of customer satisfaction, a growing industry, a healthy consumer and, most important of all, some of the best people in the business. We are laser-focused on making sure that we utilize our resources and our advantages to benefit our shareholders, and I'm confident in our business and the growth opportunities as we look forward to 2022.

I would now like to open the call to questions.

(Operator Instructions) And our first question is from Ryan Felt.

Ryan Bell. Just a quick question. Growth during the fourth quarter came in strong and managed to exceed those seen during 4Q '19. Can you talk about your perspective about how you see each of the business units performing during fiscal 2022? Expecting some improvement for Food Service and Frozen Beverages. But could you also maybe touch on where the foot traffic is relative to historical levels?

Sure. Ryan, we feel really good about our momentum going into 2022. If you look at all 3 of the business units, the ICEE, the beverages side of it, I guess the ICEE side of it, we like what we have in the pipeline and what we've installed and some good ones right behind it. I might even mention one of them. We're in test with Moe's right now, and that looks really strong for us. So we like where that's heading. We like the recovery on the beverage side. In regards to the service, for a full year, where when we started off the year we were kind of cut off on the service side. And we like where the equipment piece is heading, with some potential new customers with that, too. So feeling good about the ICEE piece of it.

The Retail, we believe we'll have some really good momentum, like I said in my opening statement. We like some of the new products that we've released. We're encouraged by the growth in the Dogsters brand. The Luigi brand looks strong. And we have a couple of new product flavors coming out this year that we're really encouraged by. And the Whole Fruit continues to grow for us.

And then on the Food Service side, very pleased with that as we opened up that, to begin with. We have some really great new customers coming online, and we see the traffic continuing to come back. And some great growth in our core products, like churros and pretzels, which is nice to see, with some new customers coming up.

So we're feeling good about all 3 legs as we enter into 2022, with some chances for some opportunity sales, too, as the theaters continue to come back and look strong. For example, when you're talking to the theaters, they had a great October and believe that their best 6 weeks are yet to come. And so we're encouraged by what's happening there.

And do you have any insights that you could offer, what's happening quarter-to-date, specifically in Food Service and Frozen Beverages? Maybe sort of what happened in October. And if you had any information about where November is heading.

Ken, do you want to answer that?

Well, I think what I would say about October is, one of the things we were clear on in here is the theater industry is still recovering, Ryan. As we got out of Q3, COVID kind of bore itself a little bit again there for a few weeks. We're better off than we were back in early September. And the early indications in October, as we've seen better theater releases, is that business is starting to look a little bit more promising even than probably what we would have seen 30 to 45 days ago. And we had 2 meetings with leading theater companies in the last 30 days or so, and they were also very optimistic about that.

So think about -- I made the point that I think frozen continues to gain ground on pre-COVID levels. Really the only thing holding it back is theaters. We've gone and grabbed new business in QSR. As that theater business comes back, that's going to really enable us to really move frozen faster. And so I would say coming out of October, that is one area that we're very excited about.

And when you look at amusement, you look at QSR, convenience, sports arenas, people are getting out. They're getting out in droves, they're getting out in more volume and they're spending more. So October has us feeling pretty confident as we go forward into 2022.

Great. And in terms of some of the inflationary pressures and some of the potential offsets that you could do as a result of that, you'd alluded to taking some pricing. Any details you can provide on the pricing side in terms of magnitude and sort of...

I'll add a little color to it and then let Ken speak into it as well.

The inflationary pressures are real. When it comes to commodity and labor and distribution, they are real. And I know everybody on the call knows that we are working really diligently to keep up with those and to monitor those and make sure that we are doing the right things internally, so that we are making sure that we deliver the margins that are important to us.

So we feel like we've been out there with one price increase this year already. And we'll probably look at a secondary one coming up in our second quarter, our first quarter of this coming year.

Yes. I would add. I know those on the phone, Ryan, yourself, you read every day what the industry is facing. Two more articles I read this morning, somebody said they're taking significant price increase. Another one mentioned double-digit increases in distribution.

Our distribution costs have gone up over 30% since 2019. And they've gone up 20% on an equivalent basis since Q3 of this year. So that has everybody in the industry continuing to sharpen its pencil, and we're doing the same thing.

And we're looking at it really on both ends. We're looking at what we need to do in terms of price relative to each customer segment, relative to each channel. And then we're also looking on the cost side. And Dan alluded to various initiatives in logistics. And we talked about, even on this call before, the investments we're making in automation. We've invested in 6 or 7 new lines over the last year. Some of those are still being built out. But those will help us drive efficiency.

And then we've also centralized our procurement organization. And they've got a kind of go-get as it relates to cost savings. They're already starting to find $2 million, $3 million or $4 million in things like buying gloves centrally. So we've got a pretty hard press focused on both the pricing side and the cost side.

And the other thing Dan and I were talking about in this [analyst] meeting is the first thing we focus on, particularly coming out of COVID, is to get sales right, to make sure we got product, to make sure we can produce and provide for the demand out there. And we're obviously seeing that start to happen as sales start to exceed '19. That's going to put us in a really good position, as we drive through some of these margin initiatives, to really start to see that come to fruition probably later in Q1, early in Q2 of 2022.

And I'm sorry, we -- I dropped Ryan off the question queue. (Operator Instructions) We have Ryan here.

Ryan, did you hear that?

I did, I did hear that. Just overall, as we're balancing all the moving parts, obviously, there's a lot of them, more volumes coming back for Food Service, Frozen Beverages. How are you just thinking about overall gross margins for fiscal 2022? I know you normally don't provide guidance, but just given the full -- the degree to which there are so many moving parts in terms of all the cost impacts, parts of your business coming back online and sort of the moving parts there, would you be able to provide any context?

Yes. Only that, as we mentioned before, I mean, our goal is to run a business, kind of in that 30% range. I mean it does fluctuate for us based on seasonality in the quarter. But that's kind of what we've got our eye on. We've got to work through some of the things I just went through to grab some of that rate back. But we're going to get some of that leverage coming through higher sales as well.

But that's kind of the ultimate goal. And again, you'll see that if you look quarterly, seasonality plays a role in that. But that's what we're focused on.

(Operator Instructions) We have no more questions.

Okay. Well, listen, I want to thank everybody on the call. We appreciate your interest in the J&J Snack Foods Company. We are encouraged by our numbers and where we're heading. And we look forward to talking to you next quarter. Thank you very much, and you have a great day.

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