Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

J&J Snack Foods Corp. (NASDAQ:JJSF)

F2Q13 Earnings Conference Call

April 30, 2013 10:00 am ET

Executives

Gerald B. Shreiber - Chairman, President and Chief Executive Officer

Dennis G. Moore - SVP, Chief Financial Officer, Secretary and Treasurer

Analysts

Akshay Jagdale - KeyBanc Capital Markets

Jon Andersen - William Blair & Company

Jonathan Feeney - Janney Montgomery Scott

Brian Rafn - Morgan Dempsey Capital Management

Robert Costello - Costello Asset Management

Operator

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

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

Gerald B. Shreiber

Good morning Richard and good morning attendees. Richard, how many people do we have on the call?

Operator

Right now, I see we have 71 participants dialled in.

Gerald B. Shreiber

Great. I want to apologize to everybody. I know we had a little bit of technical difficulty in getting connected but welcome to the call and welcome to our second quarter conference call. I am Gerry Shreiber, President and CEO of J&J Snack Foods and with me today is Bob Radano, our COO; Dennis Moore, our CFO and Senior Vice President; Ted Shepherd, our CED; Bob Pape, Senior Vice President of Sales; and Steve J. Taylor, our Vice President of Sales, Food Service.

Let me begin with the obligatory 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 forward-looking statements to reflect events or circumstances that arise after the date hereof.

Results of operations. We had a record quarter in both sales and earnings. Net sales increased 6% for the quarter and 8% for the six months. Excluding sales resulting from the acquisition of Kim & Scott’s Gourmet Pretzels in June of 2012, sales increased 5% for the quarter and 8% for the six months. For the quarter, our net earnings increased by 21% to $12.7 million or $0.67 a share from $10.4 million or $0.55 a share a year ago. For the six months, our net earnings increased by 44% to $22.9 million or $1.21 a share from $15.9 million or $0.84 a share a year ago. Our EBITDA, earnings before interest, taxes, depreciation and amortization, for the past 12 months was $128.9 million, also a new record.

Food service, sales to food service customers increased 9% in the quarter and 8% without Kim & Scott’s. Soft pretzel sales alone were up 29% for the quarter and 28% for the six months, 24% without Kim & Scott’s for both periods. Italian ices and frozen juice bars and dessert sales decreased 30% for the quarter and 9% for the six months, mostly attributable to this weather. Churros sales were up 22% in the quarter and 27% for the six months and bakery sales were up 4% in the quarter and 8% for the six months.

Retail grocery and supermarkets, sales of products to retail supermarkets were up less than 1% for the quarter and flat for the six months. Adjusting for Kim & Scott’s, sales were down 1% for both periods. Soft pretzel sales alone were up 19% for the quarter and that's something we're proud of and we (indiscernible), 15% without Kim & Scott’s, and were up 12% for the six months, 9% without Kim & Scott’s.

Unit volume of pretzels was up 18% for the quarter. Sales of our frozen juice bars and Italian ices were down 5% in the quarter on a case volume decrease of 14% and down 7% for the six months. Handheld sales in the quarter decreased 12% to $5.1 million for the quarter and were down 2% for the six months.

ICEE and frozen beverages. Frozen beverages and related products sales were up 1% in the quarter and 3% for the six months. Beverage related sales alone were down about 5% in the Quartet and flat for the six months. Domestic gallons sales were down 10% in our base ICEE business in the quarter and down 4% for the six months. Service revenue for others was up 6% for the quarter and 5% for the six months.

Consolidated, gross profit as a percentage of sales in the quarter increased to 28.9% from 28.5% last year and increased from 27.7% to 28.6% for the six months. The gross profit percentage increases this year resulted primarily from higher volume in our Food Service segment. Ingredient and packaging costs in the quarter were down about $700,000 from a year ago. We cannot project the impact or benefit of changes in ingredients and packaging costs going forward.

Total operating expense as a percentage of sales dropped to 19.4%, that's 50 basis points, from 19.9% in last year's quarter and dropped from 20.9% to 19.9% in the six months, mainly because of sales increases and continually, carefully managed expenses.

Capital spending and cash flow. Our cash investments securities balance increased $2.5 million in the quarter to $188.7 million. Our capital spending was $8.1 million in the quarter as we continue to invest in plant efficiencies and growing our business. We are presently estimating capital spending for the year to be $30 million or so. A cash dividend of $0.16 a share was declined by our Board of Directors and paid on April 3, 2013. We did not buy back any shares of our common stock this quarter.

Additional commentary. Our sales growth of 5% this quarter before the benefit of acquisitions was strong, but concentrated on food service. Sales of soft pretzels in food service were extremely strong and include new pretzel products such as rolls, sticks, soft pretzel buns to casual dinings, restaurant, and others. Frozen juice bars and ice sales in food services were down as we continue to be impacted by our school food service business and the elimination of the USDA's school food service program in this area of our business. We are still looking for traction in handheld sales in food service where sales were down 8% in the quarter. Churros also did exceptionally well as we began selling to a major fast food restaurant chain in the December quarter. Bakery sales were up only 4% as compared to 12% in the first quarter as we have lost some business and were impacted by lower sales to schools.

Unit sales of soft pretzels in our Retail Supermarket segment were significantly higher in the quarter as newer products performed well but frozen juice bars and ices had a significant drop in this slow season, although some lost distribution and weather were factors in the drop. Handheld sales in retail supermarket were down 12%, mostly related to one customer, as they processed through a change in packaging. In ICEE and frozen beverages, gallon sales were down dramatically while service revenues to others was up 6% in the quarter, as this area of our business continues to perform well. In this traditionally slow quarter, gallon movements one way or the other are not necessarily indicative of gallon movements for the balance of the year. Obviously, we are looking forward to a change in weather and hot weather will help us catch up with this in a hurry.

As we mentioned in our 10-Q, our sales increase in February and March of 3.5% was lower than our sales increase in January and in the first quarter. Some of the reasons for this slowdown in growth are explainable, such as continuing drops in school food service sales due to changes in state and government programs and lost sales for other specific and varied reasons. We are continuing to work diligently to improve our performance.

Our estimated income tax rate was at 36.8% for the quarter compared to 37.4% last year. We are estimating a rate of about 36.5% to 37% in fiscal year 2013. I would be remiss if I did not note that this is the 166th straight quarter of sales increases and 166 straight quarters of profitability. I thank you for your confidence in us and I thank you for your continued interest. I will now turn it back to the audience for their questions and comments.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question on line comes from Akshay Jagdale. Please go ahead.

Akshay Jagdale - KeyBanc Capital Markets

Congratulations on a very strong quarter, especially on the pretzel and churros sales, very strong, congratulations.

Gerald B. Shreiber

Thank you. Our staff did a great job not only for this quarter but on an ongoing basis and we're looking bullishly at these two categories going forward.

Akshay Jagdale - KeyBanc Capital Markets

Okay, so just on the weather related weakness, I mean I know that it's hard to quantify exactly, but you went from a double-digit increase in sales in January to a low single-digit increase in February and March, I mean would you say a majority of that you feel like is related to warm weather?

Gerald B. Shreiber

It's hard to quantify and I won't use that as a reason or an excuse. There were a couple of factors. One, there was a little bit of a pricing and a load-in, and part of it may just be an aberration. We think that it's looking better in this, our third quarter, and with any kind of breaks in weather, we will be back on target and on schedule in our frozen juice bars, ICEE and Italian ices.

Akshay Jagdale - KeyBanc Capital Markets

Okay, and then just a broader question on M&A, but specifically first on handhelds. Obviously you made that acquisition. In fairness, you said that it was going to be a little bit more difficult one to handle than ones that you've done in the past, and this quarter seems to basically validate that. So can you give us a little more insight into what's sort of causing the weakness in the handheld business and does that in any way change your longer-term stance on what this business is going to add to your portfolio? And then just secondly, give us a sense of what's going on from your vantage point on the M&A environment, multiples, what you're seeing in terms of valuations and just opportunities out there? Thank you.

Gerald B. Shreiber

Let me take your first part of your question first. We still remain bullish on our handheld business and we have several multiple things happening just to give us that kind of confidence. We're not exactly roaring out right now with that but we are confident with some of the new formulations, new products and the new packaging in there that we're going to have in food results for quarter three and quarter four.

As far as mergers and acquisitions, we continue to look at things occasionally, and as you know Akshay, we have a very, very careful criteria, and although there are some things that we're looking at and we'll continue to look at, it has to be the right fit for us, both business-wise, both culturally, together with both synergies and economies of scale. But we have this, we won't call it hoards of cash, but we are prepared to move forward and we will continue to look at things and evaluate them in an effort to move forward.

Akshay Jagdale - KeyBanc Capital Markets

Okay, I will pass it on and get back in line.

Gerald B. Shreiber

Thank you. Thank you very much and thank you for your insights.

Operator

Our next question on line comes from Jon Andersen. Please go ahead.

Jon Andersen - William Blair & Company

I do congratulate you on the nice quarter and terrific long-term track record.

Gerald B. Shreiber

Thank you, Jon.

Jon Andersen - William Blair & Company

I guess I just wanted to start with the deceleration you saw from January to February and March, and I think Gerry, you did a nice job kind of calling out some of the components and the drivers of that. Is there anything that you'd be willing to say about the trends you've seen so far in April within the various businesses and whether there's been a bit of a recovery from what you saw in February and March?

Gerald B. Shreiber

Well, I would want to specifically point out a trend based on a couple of weeks in April, and four weeks in April, but we are obviously optimistic, we are obviously confident, and again, some parts of our business, we need a little bit of break, not much, we need a little bit of break with weather, and so this long winter is over and this slow spring is beginning to improve. So, we are confident that we'll be running on all cylinders.

Jon Andersen - William Blair & Company

Terrific. The next question on the frozen juice and ice business, I guess specifically within the Retail Supermarket segment, I think you pointed out that trade spend was lower in the quarter, you moved some dollars away from that. Is that something that's more structural in nature, a change in your approach, or kind of a promotional intensity in that part of the business, or was that more of a tactical decision in the quarter, given weather?

Gerald B. Shreiber

I don't think it was really tactical, it might have been just the way it's done. I know we have some major, we have some significant ads coming forward, over Memorial Day, July 4, over the summer season, but that might have been just the way it kind of fell in.

Jon Andersen - William Blair & Company

Okay. Shifting gears to the schools business, as you know I'm a bit newer to the story, so any kind of an update on that business, kind of bigger picture would be helpful, and what I'm thinking is, how big is that schools business, what kind of drag in aggregate did it have in the quarter and are we kind of approaching what you think to be a bottoming in that business, should we look a few more quarters to kind of work that through?

Gerald B. Shreiber

First of all, we think we are hopeful we are approaching a bottoming, and the school food service business, this has been actually on the horizon for us for the last couple of years. It began with simple things like formulation, revisions and changes because you have to take trades [fast] (ph) out, you had to make sure there were – the sugars, and we have really been on top of all the reformulations, we've been there quick, we've been there prompt, and we've been there efficiently, and it's not like we've lost any significant parts over our school food service business, but this business which is $60 million or so, a lot of our items are being restricted or are not on the menus because of one reason or the other, and there's even been a little bit of confusion within the education system on what they can sell and what they can't sell. That coupled with the budget constraints in there caused us to be off rather significantly about the last year. We think we have bottomed out, we hope we have, and so we're looking for that to hopefully improve.

Jon Andersen - William Blair & Company

Great. I just have one more on the gross margin in the quarter. You had I think you said $700,000 benefit from commodities, couple [of pennies] (ph). If you kind of back that out, the gross margin looks like it's been flat year-over-year, and I know you have higher volumes, you had some higher pricing, lower trade promotion, so I'm just kind of wondering what may be some of the other areas of pressure on margin are in the business at the moment and what sort of the opportunities are going forward perhaps to drive the gross margin rate higher, if you see that happening?

Gerald B. Shreiber

I'm going to hand that one to Dennis Moore, our CFO, who is staring across the room intently.

Dennis G. Moore

Jon, I think for the issue with the narrow increase in the margin in the quarter, that's still more with some of the growth where we actually had down volumes, we had down volumes at ICEE and we had down volumes in retail supermarkets. So it's a matter of volume growth more than anything else that would drive the margins up higher.

Jon Andersen - William Blair & Company

Thanks guys, and again, congrats on a nice quarter.

Operator

Our next question on line comes from Jonathan Feeney. Please go ahead.

Jonathan Feeney - Janney Montgomery Scott

I wanted to ask about this food service business, general (indiscernible), you talked about 50% of your increase coming from three customers, but I guess across the book, do you feel like things are getting better among your food service customers or is it more that you're getting new business win, because I'm guessing those three food service customers that are 50% of your increase, you have some new products with them, and I'm just trying to get out what's your same-store sales for existing products across your food service customers?

Gerald B. Shreiber

Most of the increase is coming from our additional products in some of these restaurant chains that we've spoken about, and as you know Jonathan, we've been working on that for a few years, and now we can see coming up the ramp, little trees bearing fruit, and we're going to take care of them (indiscernible) and they're going to be around for a long time. Saying that, some of the traditional retailers that we've counted on for years, that are terrific customers, be their name Kmart, be their name Target, retail counts have been a little bit slow, we're impacted by a lack of people in there, the shopping centers have been a little bit off, movie theater's attendance has been down, and of all things, this was not the best sport season for basketball and hockey in there. So given there has been a little bit of an impact on our traditional food service business and customers, I am enthused with what the potential that we've been able to develop alongside of it and how it's going to continue to grow.

Jonathan Feeney - Janney Montgomery Scott

Thanks, and just one other question, Gerry. When you think about pricing versus cost, and we've all seen some release in the grain complex in terms of what spot prices are and we don't know how that will be in the future but at least for the moment, at some point, you'll be getting grains a little bit less expensively, so how are you then relatively planning through at lower prices than say they were six or nine months ago, does that tend to expand your margins temporarily given that it's a food service business and there's some contract aspect to it?

Gerald B. Shreiber

That's a good point and a good comment. However, we're probably booked about six months out, alright, and as a result, we're going to be locked in at pricing that was maybe a little bit higher than what spot might be right now, but given our business and given our track record, we think that's what's best for us now, and if the market drops more, I think it will be a benefit for us and for the business.

Jonathan Feeney - Janney Montgomery Scott

But really six months from now?

Gerald B. Shreiber

Yes, plus or minus, maybe five or something, maybe seven or eight or something, but we're roughly about six months out. I think sugar we're out, [that should help us] (ph) for a year. Dennis is giving me, Dennis just corrected me, we're out 11.5 months. Thank you, Dennis.

Jonathan Feeney - Janney Montgomery Scott

Great, thank you very much.

Operator

Our next question comes from Brian Rafn. Please go ahead.

Brian Rafn - Morgan Dempsey Capital Management

Can you talk a little bit more, kind of the deflation in the ingredient prices? If you look across sugar, eggs, shortening flour, fructose, corn syrup, are there any spots, maybe diesel fuel in transit, are there any things that are systematically down more than others or is it kind of a broad, broad decline?

Gerald B. Shreiber

Dennis?

Dennis G. Moore

Sugar is down percentagewise larger but everything is not down. Packaging, which is paper and pulp, those costs are higher and they are a significant portion of our overall cost to stay out at roughly 10%, and as you know, flour even though it has dipped recently, we're booked out, so as Gerry said, we're booked out six months or so, so we are still carrying the higher cost of flour going forward. So overall, while we may be down a little bit, overall commodity basket is not down as much as you might think.

Gerald B. Shreiber

And this is Gerry again. Hopefully by the fall, by late fall, we'll be in a position to get a little bit more excited to tell about our price of commodities, but right now, we watch it but we're about six months out on average.

Brian Rafn - Morgan Dempsey Capital Management

Alright. Gerry, what are you seeing from the standpoint of price elasticity with the consumer, maybe competitors pricing in the supermarket channel, maybe the encroachment of private label, what's kind of your shelf wars relative to kind of the supermarket grocery chain relative to your products?

Gerald B. Shreiber

In some ways, if you had asked me a couple of years ago, I might have said that we have adequate elasticity. Over the past six months or a year or so, some of that elasticity may have been stretched or used up, if you will, and the supermarkets, you know we compete with a lot of products in the frozen snack category. So we have to be sensitive to the price per unit, to the alternative products that are like a soft pretzel or like a juice bar but I would say that it's been, notwithstanding the supermarket's own dilemma, and some of them are not doing as well as others, it's been – we're equal to it but it's been challenging.

Brian Rafn - Morgan Dempsey Capital Management

Yes, okay. From the grocer side, Gerry, how much demand is there for you guys to do private label from the supermarkets?

Gerald B. Shreiber

We do some with our core products, pretzels, and we've done some with our novelties, and I guess I am like kind of bipartisan, partisan, I can make an argument for both, and as I continue, as we guide this Company in there, we're a real strong share in a couple of these categories and one of the reasons we're a real strong share is because we are in most cases the low-cost producer with efficient distribution system. So we kind of balance the private label out there and we're like an 80% share of pretzels and we're probably about an 85% share in the private label market. So that's the balance that I know how to steer the wheel.

Brian Rafn - Morgan Dempsey Capital Management

Yes, okay. You talked Gerry in the grocery channel, the juice bars, some of the frozen novelties being weak and weather, we've all had this kind of wet, rainy or snowy weather, as you get into the summer period, seasonality the better period for that, are you doing any changes in formulations, doing any changes in flavor launchings or anything, or are you just looking for kind of a resurrection in some of the standard frozen ices and those type of things?

Gerald B. Shreiber

Whenever we have done any flavor changes, it was planned in advance, and so we're pretty much committed to this year's novelty launch, and we're hopefully anticipating good weather and a good holiday season. Can we allow somebody else to come in now?

Brian Rafn - Morgan Dempsey Capital Management

Sure, thanks Gerry.

Operator

We have a follow-up question from Akshay Jagdale. Please go ahead.

Akshay Jagdale – KeyBanc Capital Markets

Thank you for taking the follow-up. So I wanted to ask on the M&A. Your comments before were helpful but can you just help us understand is valuations – what are the factors that are keeping you from buying another company, is it more valuation right now, is it a lack of good opportunities, meaning fit-wise, what is it? I mean obviously you have the financial wherewithal to do an acquisition of any size but can you help me understand whether it's just the quality of assets that you're seeing on it has more to do with valuation given that valuation seems to have run up at least in the public equity side?

Gerald B. Shreiber

Well, it has not been valuation and we are looking for again the right fit, the right product line, hopefully with the right kind of people. We're in a position now that we don't have to buy broken down jalopies and repair them as we're running. We've gone through that phase, we're looking for better companies. CALIFORNIA CHURROS, two years ago we acquired that and we probably you might say even overpaid for that given our history and our history of acquisitions. However, that was the right company at the right time with the right fit and it has worked out very, very well for us. It's allowed us to significantly expand that niche product in that niche category. There are a lot of things that we're looking at but we haven't walked away from something because of valuation, and we're going to continue to look for something, we've made acquisitions in the past, we're going to continue to grow our business organically and by acquisitions.

Akshay Jagdale – KeyBanc Capital Markets

That's helpful, and then another strategic long-term type of question. In the context of the really amazing job you guys are doing on the restaurant side, with the pretzels and churros, first, can you give us some context on what aiming we are in terms of penetrating that channel just field wise, and then what's the next channel that you think presents the best opportunity, maybe channel is not the right way to look at it, maybe it's the product. So, maybe three, five years out, what do you think that what are you looking at next as being next pretzels, churros and restaurant type of opportunity?

Gerald B. Shreiber

To begin with, we plan a year or two out and we look at things very, very closely. We don't really plan five years out although we may staff ourselves and build plans for five years out, but too often a strategy, the best laid plans, have to change and we pride ourselves in being able to turn quickly and move into infield. The restaurant channel is something that we noted about four years ago and we provided some resources, people, heads and product lines in there to expand it and grow it, we added R&D and development groups across the country, North Carolina, here in Pennsauken, Bellmore, in California, in Georgia, and we've now funnelled down where they all report into a single person, Gerry Law, who is in charge of multiple plants and marketing in there. So we have that protected funnel, kind of honed and it's being sharpened daily, but – years ago, we made a traditional soft pretzel which everybody is familiar with, and over the past number of years, we've expanded that into different sizes, filled them with different products and we've got a few products coming out in retail soon.

Additionally, we saw the dramatic rise of yogurt and Greek yogurt and we've developed the product that's going to be in one of the club stores about right now, a frozen Greek yogurt under our WHOLE FRUIT brands, and we're looking to perhaps launch a retail churro for supermarkets and we're still developing that product, so it's going to be bulletproof for home use and something that the consumers will enjoy preparing and eating in there. So, is there any next specific product line that maybe we're not even making today? Maybe, but generally I would look as them being a proliferation and extension of our frozen novelties, of our core business of soft pretzels and ICEE and churros, and we will continue to grow them and we think that there's plenty of room to push the envelope.

Akshay Jagdale – KeyBanc Capital Markets

Just one last follow-up on the same topic, so how big can the restaurant channel be for you and how big is it today?

Gerald B. Shreiber

It's about a $20 million piece for us today and I may be a little conservative, it may be $7 million or $8 million at the rate of higher. We think it can certainly double and perhaps triple or quadruple over the next five years.

Operator

We have a follow-up question from Brian Rafn. Please go ahead.

Brian Rafn - Morgan Dempsey Capital Management

Yes, Gerry, you mentioned relative to your M&A activity, you have been the master over the years in buying some of these bankruptcies, I think the original pretzel company was that way, and kind of resurrecting that. Is the opportunities for these stress companies less available or are you getting tired of the resurrection process or what's – because you kind of made a statement that we're looking for better quality business, is that something that you've kind of done over the last couple of years, or is that something just in the last six months or kind of what's been the timeline?

Gerald B. Shreiber

That's a good point, Brian. As we continue to grow, we're looking for something that can hopefully move the needle. I mean we have bought the COUNTRY HOME, the Snack Works, the Mazzone, and the Mama Tish's companies that for one reason or another were in financial trouble or in other troubles in there and my team has done a terrific job of improving them and growing them. This team now that I have, they are well positioned, they are sharp, they've got plenty of experience and they are complemented by young tigers in there, and I want to give them every opportunity to help this Company grow over the next few years.

There's still the small things that we look at. We bought a small little company in Texas about two years ago called Paradise. Why, because they were there, they were kind of in the way, and it was a nice little fit in, tuck-in for our ICEE business. So we're still looking at both, but sometimes it takes the same amount of energy and due diligence to look at a business that's doing a couple of million dollars as opposed to somebody who is doing $50 million in there that can perhaps move the needle. So, kind of looking for both, we're not changing our culture, the people that we have are certainly committed to their jobs and they are getting better all the time too.

Brian Rafn - Morgan Dempsey Capital Management

Yes, when you look at that process, Gerry, how has that evolved over the years? Is it when you buy some of these M&A targets, is it you going in and reformulating flavors, kind of dormant products that haven't been maybe invested in, is it your distribution network and the breadth of that or is it your cost productivity from your state-of-the-art factories, kind of where do you bring that resurrection for some of these smaller acquisitions?

Gerald B. Shreiber

Yes, it's on every single one of them. There's been cases that we bought little companies where we've closed one plant and put them together with one of our plants, we've relocated, we've built a state-of-the-art juice bar and water based facility in Scranton, PA that now is second to none as far as in the USA and North America for processing juice bars and Italian ices, so there were all of these factors. And a couple of them, we got some very, very good people that have joined us. So we will probably continue to do all that but I would say from a Company standpoint in there, we're looking at things that perhaps can move the needle without wasting our dollars.

Brian Rafn - Morgan Dempsey Capital Management

Yes, okay. You mentioned $30 million in CapEx, Gerry, how much of that is maintenance and kind of where is that being directed in 2013?

Gerald B. Shreiber

About half is maintenance, Dennis, and about half of it would be ICEE equipment and installs, that would be roughly. We're also going to invest a little bit in an older facility that needed kind of like a groom job in there to make it more, I'm talking about our accounting and administration offices, but that's a small amount, about $400,000.

Brian Rafn - Morgan Dempsey Capital Management

Okay, just one last question, Gerry. When you look at that whole USDA program and that reformulation of trans-fats in the sugars with cookies, when you come out with a new reformulation product and you do get it back on the menu, what's been kind of the demand elasticity with kids? You know you hear all this dietary stuff on your pretzels, you look at the movie cinema chain, I mean you can't find more fat and sugar in that channel, and what's your sense of the school channel when you come out with a reformulated product, is it as viable, is it as in demand with kids, or is that a difficult issue once you get back on the menu?

Gerald B. Shreiber

It is an issue once we get back on the menu. In some cases, we never leave the menu but you wind up changing the flavor profile if not the actual taste, and as a result there, sometimes less participation by the breakfast and lunch menus. And again, we have been at the forefront of being able to act quickly and efficiently in changing our formulations and product lines, and it's really been well received by the school food service management group. They are very happy with what we've done and in the time frame, and our people out there that are dedicated to that team, Mimi Ford and her people are working really hard, harder than ever to get our products back in. But you're right, the kids have to like it in there, and I don't know, I don't think kids are going to vote for Brussels sprouts and carrots as their snack but maybe they're getting used to it, maybe we'll develop something along the lines that will help them.

Brian Rafn - Morgan Dempsey Capital Management

Alright, Gerry, great job as always. Thanks so much.

Operator

We have a question from Robert Costello. Please go ahead.

Robert Costello - Costello Asset Management

Two quick questions, one on the food service. Do you anticipate these customer contracts, what's the typical term that you are seeing because we had the Burger King contract that you had and then it went away. What do you see normally that these introduced products are staying?

Gerald B. Shreiber

Not to correct you, but the Burger King, I don't think we ever had a contract, alright, and the Burger King in some ways, although we really enjoyed that business opportunity and we're still talking to the Burger King management group about other ideas, but the Burger King, what happened there is we had a product that we developed churros fries for them that was really a disconnect, tasted good and once it was delivered, and I mean delivered from the store to the person in there, it was fine but it was a little bit overpriced and the stores were going through kind of adjustment first of all with sales and secondly by new management and new ownership, and if you've read anything about the group in there, they literally terminated half of their internal force in there. So that's probably not a real good example.

With the other people, with the other customers, we really don't have a long-term formal agreement. Our products are selling, the churros are selling well and this one restaurant chain, our pretzel sticks are selling well in a couple of restaurant chains, and as long as the product is popular on the menu, and we continue to perform, we expect to stay them. I'm sure the first French fries people, whoever it was, whether it was Lamb Weston or heads of French fries didn't have a formal contract (indiscernible) on the menu, and I might add, they catch more hell than anybody because of the fact and how they've grown and whatnot in there and the fries, but we expect that business to be a significant part of our growth.

Robert Costello - Costello Asset Management

So, I was in Red Robin two weeks ago and there was a pretzel product sold in there that I don't think was there before. Is that the type of product the way it's presented that it was the small, it was like a big product, is that what you're trying to market with one of them?

Gerald B. Shreiber

That's a pretzel bite. That's something that he had, even though we've had in retail since about 1989 and it's been expanded into food service, it's been in the movies, but this is another chain that belongs to our National Accounts group, but this is another example of a small chain that we've gone to test with and it seems to be performing well. There's several, several more of these and I hesitate to name names in there, because one, I don't want to do anything to jinx ourselves there but we have a lot of these opportunities that are developing right now as we speak.

Robert Costello - Costello Asset Management

Last question, on the government programs, is there anything in the next 12 months, any changes that are anticipated with the program that would impact you negatively or positively?

Gerald B. Shreiber

I don't think there's going to be anything more negatively, alright. I know the schools are facing increased dilemma with budgets, constraints and whatnot, but that will have a lesser effect on us because we're talking about schools, still this being transferred, but we think with respect to the requirements and the reformulations, we think and believe, hopefully believe, that the worst is over.

Robert Costello - Costello Asset Management

Right, is there any cases where states are going back to what they sold before, because I know in one district, they had wheat peaches, the kids don't eat it, and they went back to the regular peaches and now they're back eating them again.

Gerald B. Shreiber

I applaud that state, that school and those kids, but to answer your question, I don't think so because they're not getting participation from the states and the federal government if they don't comply.

Robert Costello - Costello Asset Management

Okay. Thank you very much.

Operator

I'm showing no further questions at this time.

Gerald B. Shreiber

I want to thank everybody for their participation today and we look forward to having you next quarter on our quarter three conference call. Thank you and have a good day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: J&J Snack Foods' CEO Discusses F2Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts