J & J Snack Foods Corp (JJSF) 2020 Q4 法說會逐字稿

Hello, and welcome to the J&J Snack Foods Fourth Quarter Earnings Conference Call. My name is Michelle, and I will be the operator for today's conference. (Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Mr. Gerry Shreiber, CEO and Founder. Mr. Shreiber, you may begin.

Thank you, Michelle. Good morning, participants, and welcome to our fourth quarter conference call. Here on the call today, we have Dan Fachner, who is President of J&J, recently named President, about 4 months ago. Is that right, Dan?

Yes.

Ken Plunk, who is a Senior Vice President and CFO; Dennis Moore, who is remote, but he's our Senior Vice President; and our soon to be retiring; Bob Radano, our COO; Bob Pape, our Senior Vice President of Sales; and Marjorie Roshkoff, Vice President and In-House Counsel.

I'll now begin with the opening of the forward-looking statements. 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 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 the date hereof.

Continuing, results of operations, and it's no secret that we had some difficulties to deal with in the last 3 to 6 months. Net sales decreased 19% for the quarter. Without sales from the recent acquisition of ICEE Distributors in October 2019 and BAMA, as in Alabama ICEE in February of 2020, sales decreased 20% for the quarter. We had operating income of $3.9 million in the quarter compared to operating income of $31.1 million a year ago. This was a significant improvement from our third quarter in which sales were down 34% from a year ago and which we had an operating loss of $19.4 million compared to operating income of $39 million a year ago.

Food Service. Sales to Food Service customers decreased 21% for the quarter and 16% for the year. Again, our sales decline was significantly less in quarter 4 than in our third quarter when sales were down 40% compared to a year ago. Our sales decreases for this quarter and for the third quarter where Soft Pretzels, down 38% and 62% in the third quarter. Frozen juice bars and Ice's sales down 25% versus 37%; churros down 48% versus 61%; Funnel Cake down 44% versus 57%. Handheld sales were up 121% versus being down 13%, and bakery sales were down 14% versus 23%. The increase in handheld sales was from a new item we began to sell to a warehouse club stores in August.

We had an operating loss of $1.3 million in quarter 4 compared to an $18.2 million operating loss in the third quarter compared to operating income of $18.6 million a year ago, primarily because of lower production and sales volume due to the effect of COVID-19.

This year's quarter included approximately $1 million of cost for employee safety and increased COVID-19 compensation compared to $5 million in the third quarter. Additionally, as we said previously, we closed a manufacturing facility in the Midwest during the quarter and recorded an impairment charge of $5.1 million in the third quarter and an additional $1.3 million in the fourth quarter. We expect to reduce manufacturing overhead and distribution costs by about $7 million to $8 million annually as a result of the plant closure.

Retail, supermarkets and grocery. We continue to have strong growth in retail supermarket as sales of products to retail supermarkets were up 41% for the quarter and up 23% for the year. About the same increase in the fourth quarter as in the third quarter. And sales have increased to supermarkets generally since mid-March of 2020 due to COVID-19. Soft Pretzels sales were up 79% for this quarter, that's in retail grocery, versus 74% for the third quarter. Sales of frozen juice bars and Italian Ices were up 37% versus 26%. Handheld sales were up 13% versus 6%, and biscuit sales were up 12% versus 56% in the third quarter.

We have introduced new products and programs intending to hold all to this growth and even to continue further growth. Operating income in our Retail Supermarket segment increased in the quarter to $8.7 million, up from $7.9 million in the third quarter and up from $1.4 million last year due to the much higher sales.

ICEE and frozen beverages, which include ARCTIC BLAST, SLUSH PUPPIE and related sales. Total frozen beverage segment sales were down 40% in the quarter and 26% for the year, with the fourth quarter sales improved moving down 56% from a year ago in the third quarter. Beverage sales were down 54% in the quarter, an improvement from being down 71% in the third quarter. Without the sales of ICEE Distributors and BAMA ICEE, beverage sales were down 62% versus being down 78% in the third quarter.

Service revenue for others was down just 4% in the quarter versus being down 23% in the third quarter as we have been able to pick up new business over the past several months. Machine revenue was $7.6 -- $6.7 million, down from $11.9 million last year as last year had 2 large installation projects. We've had an operating loss in our Frozen Beverage segment of $3.5 million in our fourth quarter, much improved from the operating loss of $9.1 million in our third quarter, but down from operating income of $11 million in last year's fourth quarter.

Consolidated. Gross profit as a percentage of sales was 21% in the fourth quarter, up from 17% in the third quarter, but down from 30% in last year's quarter. Gross profit percentage decreased from last year, primarily because of lower volume in our Food Service and Frozen Beverage segments. Higher costs relating to productive disruptions due to volume mix changes and expenses related to employee safety and increased COVID-19 compensation and additional reserves of approximately $2.4 million in dollars for inventory losses due to certain products not selling, products sold to schools, for example.

Total operating expenses decreased $11.9 million this quarter, a $13.2 million decrease, not including the plant shutdown and impairment charges. And operating expenses as a percentage of sales were 19.8% in both this year's quarter and last year's quarter, a significant achievement considering the sharply lower sales. Our EBITDA for the past 12 months was $75 million.

Capital spending and cash flow. Our cash and investment securities balance of $278 million was up $8 million from our June balance as our balance sheet remains -- continues to remain strong, and we have no liquidity issues during this COVID-19 period. $68 million of our investments are in corporate bonds with a purchase price yield to maturity of 2.8%, of which $58 million mature within the next year. Our bank preferred stock at mutual funds, which is $14 million, have stabilized in value since the drop in value at the end of March. We continue to look for acquisitions -- suitable acquisitions as a use of our cash.

Our capital spending was $10 million in the quarter and $58 million for the year, up slightly from last year as we continue to invest in plant improvements and efficiencies and growing our business and looking at further manufacturing projects to improve efficiencies on an ongoing basis. A cash dividend of $0.575 a share was declared by our Board of Directors and paid on October 13, a couple of weeks ago, in 2020.

We did not buy back any of our stock during the quarter. Our investment income in the quarter decreased from $2.0 million last year to $1.7 million this year, primarily as a function of lower interest rates and lower invested funds. Our net earnings for the quarter and the year benefited by a reduction of income tax expense of approximately $2 million related to state deferred income taxes. We expect to have an effective tax rate of 25% in 2021.

Regarding where we are now, although our sales have steadily improved compared to a year ago over the past 6 months or so, we cannot estimate whether our sales will continue to improve or we remain at present levels in comparison to last year, considering the uncertainties surrounding COVID-19 and continuing impact on the economy and on our customers.

As we have previously noted and have said, approximately 2/3 of our sales, that's 67% are to venues and locations that have either been shut down or sharply curtailed their food service operations. So we anticipate COVID-19 will continue to have a negative impact on our business. As we have $278 million of cash and marketable securities on our balance sheet, we do not expect to have any liquidity issues.

We have operated our businesses during this quarter, both with short-term consideration and the long-term as well. We have placed a high priority on continuing to keep our employees safe while looking for ways to improve our business going forward, including reviews of our manufacturing and distribution network. We closed a manufacturing facility in the Midwest, and we have worked with our customers developing significant new products to sell as they continue to open up. We continue to be optimistic about our future during these tough times.

Thank you for your continued interest, and I will now turn over the call to Dan Fachner, who was recently named President of the J&J Group. For those of you who may not be aware of Dan, Dan has been running our ICEE operations, first as a Vice President of sales for ICEE, then as President of Sales for ICEE, and he is a long-term employee. Go ahead, Dan?

Thank you, Gerry. We will now turn it over to any questions, Michelle?

(Operator Instructions)

The first question in the queue comes from Jon Andersen.

I guess I wanted to start -- maybe I'll ask about some of the trends you're seeing in the business, particularly Food Service and Frozen Beverages. The recovery this quarter, I guess, you call it some recovery -- significant recovery in the sales trends from Q3, where the business in aggregate was down, I think you said 34% to the current quarter, where sales were down 19%. What -- how are you thinking about the progression as we go forward from here into '20 -- fiscal 2021? Can we expect -- have we hit kind of a plateau in terms of recovery or narrowing the sales gap relative to historical trend? Or can we continue to see sequential improvement as we move forward from here? Could you just talk a little bit about that and some of the puts and takes and how you're thinking about it?

Well, this is Gerry, Jon. We believe that we have hit the bottom. And now we are bouncing back and notwithstanding any kind of sharp impact from COVID-19, we expect to bounce perhaps even all the way back in the next couple of quarters. Go ahead, Dan.

So good question, Jon. We have seen a progression in sales, as you saw in our release, and continue to see that both on the Food Service and the ICEE side. Those are the areas that were impacted the most during this COVID period of time. And we're seeing that progress back, but slowly. Some of the places that we do business with in both of those 2 categories will open up, but will continue to open up in a slow fashion, such like the theaters, ballparks, those types of -- amusement park type locations. But we are seeing them continue to grow. We do believe that we have hit the bottom, as Gerry said, and feel like we'll continue to see that come back over this quarter and then hopefully strongly in the third and fourth quarter of our coming year.

But -- this is Dennis. I mean, this is Dennis. Obviously, a lot of this is an unknown and depends on what opens up. I mean, as Dan has just said, locations are opening up such as movie theaters, schools to some extent, but it's a slow process. And now with the significant increase in cases that we're seeing across the country, we are hopeful for sure, that we're going to get back to new world in like third and fourth quarter of the next year. But certainly, it is an unknown, and I think everyone understands that it's an unknown.

Right. So using that kind of thought process even in a constructive scenario where you get back to maybe historical run rate level in the second half of fiscal 2021. We're really talking about fiscal 2022 on a full year basis, maybe getting back to where you were prior to kind of a COVID situation. So I mean this is going to be a process, and it's going to -- is that a fair statement that we're looking at, at least probably a couple of years here before you get back to kind of pre-COVID top line run rate levels, which would make a lot of sense given the current situation?

Jon, there's a lot of uncertainty out there. And so you don't know that for sure, but that would be our expectations as well, that by the time that we get to 2022 that business would be back to its normal basis of what you've seen prior or pre-COVID period of time.

Now in addition, having said that, we also are hopeful, and we have already picked up some business that we did not have pre-COVID. So that should help us to get closer, even prior to everything "back to normal".

Let's talk about that. So that's a great transition. So can you talk a little bit more, whoever is most appropriate to talk about it, some of the new business that you are picking up. Obviously, there's a lot happening in the retail supermarket channel and then it sounds like there's some other discrete business wins. Help us understand that a little bit.

You just answered that for us, Jon. Thank you. Look, we have -- when we close.

There's a lot more to it than that, Gerry.

Yes. When we slowed down in Food Service really across the board and when you think about that we lost all of spring training baseball, which is not -- it's not insignificant. I mean, everybody in Florida and Arizona would go to the games for nominal fee and in some cases, for free, and they would buy from the concessionaires, and we always had 1, 2 or even in some cases, 3 products in the concessionary.

So those sales were wiped off the books. And going back even a bit further, we had the slowdown in the other sports and near over 500 movie theaters that were closed. So these are all showing signs of creeping back, not necessarily jumping back, but like Dan said, in a year or so, we expect to be back to our previous levels.

In addition, our sales force and our marketing people were challenged to develop new products and sales, and we're starting to see some of the fruits of that labor now, including a recent launch of a product that the Costco asked us to make for them. And it's the chicken bake, which is being sold in several hundred of the Costco side bar cafes on the outskirts of the store. And we have really high hopes for that. That could be as much as somewhere between $10 million and $25 million netting to us in sales.

Jon, and as you mentioned, we've been really fortunate, the retail side of the business has continued to grow. We saw nice increases in the quarter and expect that to continue for a while. And as Gerry mentioned, we've been out there meeting with our strategic customers that we have and trying to grow the business and have had some really nice successes with that.

Great. That's helpful. One last one for me. So you closed the manufacturing plant in the Midwest during the quarter. I just want to make sure I understand. When did that close? And does that mean that the $7 million to $8 million of annual cost savings you referred to, do they kick in right now as of the close of that plant?

They will begin.

Yes, they -- somewhat -- to a very limited extent kicked in, in the quarter that you've finished, in our fourth quarter, but going forward, they should be there, starting October.

Okay. Okay. Great. And that's an annual number of $7 million to $8 million?

Correct.

It is.

The next question in the queue comes from Todd Brooks.

I'm with CL King & Associates., A few questions this morning. One, if we can talk about kind of manufacturing efficiency, how that worked out over the quarter? I know in Q3, there was some chasing and producing product where you had to, to meet the rise in retail demand. How did that smooth out over the quarter? Is there still inefficiency based on where you're producing versus where you're selling and opportunities for that to improve in fiscal '21?

We're pretty much on target.

It's a continual improvement for us, Todd. It's something that we're looking at each and every day. We have had a change in mix of products that we sell. And so it's put some stress on some of our plants, and we found ways to relieve that stress in some of the other plants. But it's something that we monitor on a daily basis.

Okay. Great. And then COVID -- total COVID costs in the quarter were $1 million or that was just the cost for safety-related COVID expenses?

Yes. That was for safety related.

Were there other COVID costs outside of that if we're looking to evaluate the margins?

No, there weren't really -- Dennis, correct me if I'm wrong, but there weren't really any other COVID-related expenses in this quarter.

That's correct.

Okay. Great. And then if you look to -- you talked about the 1 facility that closed at the end of the quarter and the savings from it, as you're getting more of a sense of the go-forward mix of your business, retail versus food service, thoughts on the current manufacturing footprint and further opportunities for consolidation in that footprint?

We're doing a lot of work on that. As you know, we're starting our new Year right now and have just gone through the budgeting process and the evaluation of our different plants and what we're producing out of each one and trying to gain as many efficiencies as we possibly can.

Today, there aren't any plans for any other consolidation. We feel like we probably got the right number for what we need today. There might be some rotation of different products in different plants. But we feel pretty comfortable with where we're at right now.

Okay. Great. And then just a final one for me. In looking at the marketing expenditure in the quarter down, it looks like a little over $10 million year-over-year down sequentially. Is this the reality in the environment, is you're able to sell as much as capacity constraints are allowing you to sell now so that you're not having to invest in marketing in the same way and thoughts for spending on marketing as we roll into fiscal '21?

Dennis, you want to touch on that?

Yes. Well, I don't know if you've noticed it, but we did change the cash on our income statement to say, marketing and selling expenses because it is -- it's been a little confusing. We used to say marketing, and it's really a combination of both. So -- and what people would traditionally think of as marketing, advertising, things like that, is a relatively small portion of that number. The bigger part of it is selling expenses such as our salespeople and commissions, demos and things like that. So yes, we have reached a point where in terms of the selling function, that has come down considerably to where it was and some marketing as well. And yes, we wouldn't expect it to improve from this level. I think that's what your question was.

Yes. So this kind of run rate is the right rate to annualize for fiscal '21?

Yes, in that area, yes. Well, but again, that number will be somewhat a function of sales as well since there are expenses in there, like broker commissions, for example, that are tied to sales levels.

Ok. Great. Dennis, good luck if this really is your retirement conference call here.

Thank you, Todd. I appreciate it.

And so we do have it looks like 3 more questions in the queue. The next one comes from Ryan Bell.

The retail business continues to stay pretty elevated . Would you be able to offer any perspective about the growth there in general, and maybe any potential to get incremental products on shelves? And then any commentary on supermarket inventories right now? And if there are any gaps between shipments and sellout?

Sure. Thank you for the question, Ryan. Our retail end does continue to grow, and we're really proud of what it's done. And we think we have some really good things in the hopper as well. Bob Pape, our Senior Vice President of Sales for that division is here today, and I'm going to let him go ahead and answer some of those questions.

Yes. And so as we see the retail business, there's really 3 things that are driving there. One is the continued strong performance of at-home consumption because of COVID-19. Additionally, we did grow our distribution base with some new products across both the snack as well as novelty categories; and thirdly, we received some strong support from some of our key customers who are in a position to promote during the fourth quarter and are looking to continue to do the same as we enter our new fiscal year.

Bob, do you want to touch on some of the new products as well?

Yes. New products really are the -- are under the SUPERPRETZEL brand, our Soft Filled Pretzel Bites, the N&Ns brand or Pretzel products continue to perform. And we've also added because of the ability for us to now add the ICEE brand to a national distribution model, we're able to gain some distribution there as well with several key retailers.

Okay. That's helpful. So I mean, it seems like you're able to lean a little bit harder into the retail space right now.

We think we are, and we anticipate that being strong for the next quarter as well. And so we're feeling good about that side of our business as it continues to grow. And think we have some really neat new products that will continue to gain some momentum.

Okay. And I know you touched on this a bit earlier, but you're talking about some of the intra-quarter improvements for Food Service and ICEE. I mean, are there any government policies or policies that the particular venues are taking that may be able to speed up any of the recovery in that part of the business? I know if you go to restaurants, they put up barriers at tables. Are there any ways that that can be, I guess, tweaked to see a greater level of improvement?

Well, that certainly is some of the issues in that sector of our business is there are some governmental restrictions in the theaters and restaurants across the country. As we see them start to lighten up, I think we'll see our sales continue to grow. I'm not sure that we can have much of an impact on the government as they make those decisions, but we are hopeful that they'll continue to open up from what we've seen today, and we'll see that business start to slowly come back as we've talked about.

Okay. And with respect to cost management policies that have already been instituted, are there any other details that you could provide? I know you closed the plant, and you provided some of that information. Are there any other incremental cost control measures that could be taken to shield some of the negative impacts from the fixed cost deleveraging over the next few months?

Again, that's something that we're taking a really hard look at. I kind of likened it to analogy of we're picking up rocks and looking up underneath them and seeing where we potentially could gain some efficiencies. And I would say we're looking at all angles of our business to be able to do that. One of the areas that we're focused on right now is distribution, and we think there's some potential savings on that side of it. And we're actively looking and seeing what we can do to do that.

Okay. And how does the M&A landscape look right now relative to the pre-COVID environment? And has it changed anything about your thinking with respect to strategies as we get into calendar 2021 and beyond?

This is Gerry. Let me comment on that rather quickly. We continue to look at possible acquisitions since we have accumulated all the cash that we have. And our process is still very stringent. The fit has to be right, the quality of the products, whether they be new products or something to support our current product line, has to fit. We've made acquisitions in the past. We continue to look for acquisitions as a good use of our cash and chances are, we will make acquisitions in the future, but there's nothing that is in line now for the immediate future.

And the next question comes from Chris .

One of the more striking things that I've noticed as it relates to your end markets is the great inconsistency as it relates to the protocols around self-service drink stations and convenience stores or similar venues. And I was wondering if you could kind of give us an idea of what percentage of your doors in the ICEE business are actually seeing replenishment right now.

Chris, I want to just make sure I understand your question. Are you asking the percentage of our business that is self-service compared to customer or crew served?

That would be helpful. But then within the convenience store channel, I mean, literally, as I travel the country, going 2 blocks, one guy could be fully open with no restrictions and then the next guy has everything shut down. So I was just trying to get a feel for the increases that we've seen in that business, is it -- how much of it is related to companies reopening those stations versus where we're actually seeing replenishment of people that have already been opened?

Right. Yes. So the ICEE business certainly has been affected with shutdowns. I don't know that it was -- or has been specifically focused on where it's self-serve and where it's not self-serve. That's been an issue for us from the time that COVID started, and we came up with a lot of different ways that the customer can use the product in a self-serve environment. But that really hasn't been the -- surprisingly, I guess, you could say, hasn't really been the focus of our customers.

Typically, it's whether they've just decided to open up that area or not. We have convenience stores across the country, like you said, that have been open now for 2 or 3 months in a self-serve environment. And we have some locations even today that are talking about moving the equipment to a self-serve environment. So it's a little bit all over the place with that, but that has not hampered it to date.

Okay. And then the success that you guys have had at retail has been pretty impressive, especially given that I'm sure everybody is trying to get entry into that channel. And so I was just wondering if the success there is kind of more a function that you guys just really didn't target that area too heavily in the past. Or was there some kind of a -- actually some strong demand that you guys witness when you started addressing that channel? It's just surprising that you've been so successful there so fast.

Well, the closure of the Food Service locations whether they'd be at a major mass merchandiser or elsewhere has kind of pushed like a creeping win the people into the supermarket. The supermarket growth, which has been significant this quarter, we hope it will continue, and it's caused a more dialogue with the management in the super market, and we're looking to put additional products in. And keep in mind, most of the products that we're making, we have a unique market share. And in some cases, it's in the 70% to 80% market share. And with some of our new products, it's going to be in that area in addition.

Addition to that, Chris. We have a great sales force out there who have been in constant contact with our customers, with our strategic customers and our large customers across the country and have been able to gain market share during this time.

If I could -- it's Bob, if I could add one other thing, I think it's also credit to our manufacturing and operations people who kept the supply chain open, kept running our plants and our customers relied on us, and that has paid off both now and moving into the future. So I need to give some credit to the folks that are in our manufacturing facilities.

Great point, Bob.

And the next question in the queue comes from [Chris Calvin].

I wanted to return to the sales and marketing expense, which had averaged about $24 million a quarter before the pandemic and it was only $16 million this past quarter. So I think you had said that, that $16 million is more the -- is the better starting point, but -- and will grow some with sales. But can you be more specific on how you were able to reduce sales and marketing costs so much?

Dennis, do you want to touch on that?

Well, the biggest drop, obviously, has to do with the drop in sales. And some of the expenses that we might have had in the past have not come back yet, such as doing demos at warehouse club stores, which have been eliminated since the beginning of the pandemic. We've also been able to reduce, obviously, some of the fixed costs that are in there. And -- but the number -- I guess, the number to look at is the number was 6.5% of sales in the quarter compared to, I think, is roughly running or ran about a little over 8% last year for the full year as a percent of sales.

So I think probably 6.5% is probably a little bit low, and we'll probably come back into the 7.5% to 8% range going forward.

And the last question in the queue comes from Jon Andersen.

I just wanted to ask about the schools part of your Food Service business. So last year, I think schools were over in the -- obviously, in the fall, that changed, I think, to some extent in the spring. But how much could that or should we be thinking about that weighing on the business as we move into the fiscal first quarter and -- or maybe the first half of fiscal 2021?

Well, those sales are roughly $70-plus million on an annual basis or were pre-COVID $70 million to $80 million and right now, they're running still less than half. And I think maybe closer to 1/3 of what they had been running a year ago at this time.

And that was the last question in the queue, gentlemen.

Great. Well, thank you very much, Michelle. Thank you for everybody listening in today. We appreciate you being a part of J&J Snack Foods, and we appreciate you being on the call today. And look forward to speaking with you in a quarter from now.

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

Thank you, Michelle.