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

F1Q 2014 Earnings Conference Call

January 28, 2014 10:00 AM ET

Executives

Jerry Shreiber - President and CEO

Dennis Moore - SVP and CFO

Analysts

Jonathan Feeney

Brian Rafn

Lubi Kutua - KeyBanc Capital Markets

Operator

Welcome to the J&J Snack Foods First Quarter Earnings Conference Call. My name is Clifford and I will be your operator for today. [Operator Instructions]. I’ll now like to turn the call over to Mr. Jerry Shreiber. Mr. Shreiber you may begin.

Jerry Shreiber

Thank you and good morning to our conference call. I’m Jerry Shreiber and with me today is Bob Radano our Senior Vice President and Chief Operating Officer; Dennis Moore our Senior Vice President and Chief Financial Officer, Ted E. Shepherd our CED; Jerry Law, our Senior Vice President and Steve Taylor, Vice President of Sales.

I'd like to begin the conference call with an obligatory statement. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You 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 the events or circumstances that arise after the date hereof.

Results of operations, we had a good quarter, a very good quarter. Net sales increased 6% for the quarter. For the quarter our net earnings increased by 22% to $12.4 million or $0.66 a share, a record, less from $ 10.2 million, $0.54 a share a year ago.

Our EBITDA, earnings before interest taxes depreciation and amortization for the past 12 months was a $138.7 million, also a record.

Food Service, sales to food service customers increased 7% for the quarter, 6% without sales resulting from the recent accusation of New York pretzel in October. Soft pretzels sales were up 21% for the quarter, 19% without New York pretzel. Italian ice and frozen juice bar desserts sales increased 9% for the quarter. Churro sales were up 1% in the quarter and bakery sales were also up 1%.

Retail supermarkets, sales of product to retail supermarkets were down 3% for the quarter. Soft pretzel sales however were up 4% for the quarter and sales of frozen juice bars and Italian ices were down less than 1% in the quarter. Handheld sales in the quarter decreased 16% to $ 5.3 million.

ICEE and frozen beverages which include ICEE Arctic Blast, Slush Puppie and Parrot Ice, frozen beverage and related product sales were up 10% in the quarter. Beverage related sales alone were down less than 1% with Gallon sales down 3% in our ICEE business in the quarter. Service revenues for others was up 15%.

Consolidated, gross profit as a percentage of sales in the quarter increased to 29.4% from 28.3% last year. The gross profit percentage increased this year resulted primarily from higher volume, price increases and lower ingredient cost.

Total operating expense as a percentage of sales increased to 20.6% from 20.4% in last year’s quarter, primarily because of the charge for shutdown cost of our Norwood California manufacturing facility. Absent that charge, operating expenses dropped to 20.2%.

Capital spending and cash flow; our cash and investment securities balance increased $8.3 million in the quarter to $215.6 million. We continue to look for acquisitions as a use of our cash. We have invested $107.9 million in mutual funds that seek current income with an emphasis on maintain low volatility and overall moderate duration. Presently we estimate annual yield from these funds to be about 3.5% to 3.75%. Our capital spending was $9.3 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 $35 million or so. A cash dividend of $32 a share, doubling of the prior rate was declared by our Board of Directors and paid on January 7, 2014. We did not repurchase any of our stock during this quarter.

Commentary, we are satisfied with our sales growth of 6% this quarter. Sales of soft pretzel and food service continued to be extremely strong and include new pretzel products such as rolls, sticks and soft pretzel buns to casual dining restaurants and in clubs stores. Additionally our whole grain pretzel for schools is selling very well as we prepare for another round of changes in school food regulations. Frozen juices and ice sales and food service were up as it appears we have at least stabilized our business in schools and hope to begin to see some growth.

Handheld sales in food service were relatively okay, as we continue to make inroads with new customers. Churro sales were up only 1% as we lapped a major roll out to a major fast food restaurant chain last year. Excluding that customer sales were up 8%. Unit sales of soft pretzels in our retail supermarket segment were modestly higher in the quarter but frozen juice bars and ICEEs were down 4% in this the slow season.

Handheld sales in retail supermarkets were down 16% as some new products rolled out in the year ago period had proven unsuccessful. In ICEE and frozen beverages Gallon sales were down modestly but service revenue to others was up 15% in the quarter as this area of our business continues to perform very well. Our estimated income tax rate was 35% both this year and lasted a quarter, we’re estimating a rate of about 36% for fiscal year 2014.

I thank you for your continued interest and support, and now I’ll turn it back to our listening audience for going through some questions.

Question-and-Answer Session

Operator

We’ll now begin the question and answer session, [Operator instructions]. Our first question comes from Jonathan Feeney, you may go ahead.

Jonathan Feeney

I wanted to ask about the margin expansion on the quarter. Was it primarily driven by costs coming down or what role did costs coming down play both in this quarter and looking forward for the rest of the year, what role do you think -- looks to me like are costs are -- certain of your inputs are down significantly from their peak and have cranked it down consistently over the past year, what role would you expect those to play going forward in margins.

Jerry Shreiber

Well, we improved our margins and part of it was increasing sales and of course, we did benefit from certain ingredients stabilizing or in fact going down. As we look ahead in there we’re fairly comfortable with our positioning going forward.

Jonathan Feeney

Would you say, I don’t know, I mean, where are you protected or hedged for the rest of the year if anywhere, it's that something you care to talk about.

Jerry Shreiber

We purchase our major ingredients out as far as six to nine months so we’re really somewhere protected on flour and in sugar and Dennis is there --

Dennis Moore

Those are the primary areas where we have bought out. We don’t really kind of hedge per se but we’ll buy out certainly three to six months, if the price drops, we’ll buy some more, sometimes the markets get a little volatile and they jump up in there but we’ve been doing a satisfactory job in protecting our major ingredients.

Jonathan Feeney

Thanks, just two other questions. First would be, we’ve heard a lot about headlines about the food service world and now you have a lot of food service customers. Have you felt any weakness with your food service restaurant or convenience store customers for that matter, just over the past holiday season given the headlines about it.

Jerry Shreiber

Jonathan I read what you read, all right, and sometimes I am like…

Jonathan Feeney

You probably read better things than that.

Jerry Shreiber

But I’m rooting for them and I’m rooting for the economy, we at J&J, we always found ways in the 42 years which I might add, its 42 straight years of 100 and 68 straight quarters of sales growth, we always found ways to push and edge and grow our business in there and we expect to continue to do so. I think if gas prices remain low and if we can keep some of the other considerations at the lower level of the worry, the economy will improve and we will continue to boost results that we have been doing.

Jonathan Feeney

Great thank you, and just finally the acquisition environment, I know you made your pretzel acquisition relatively recently, can you comment on the types of opportunities that are out there, what sort of environment it is to look for deals and how interested you are? Thanks.

Jerry Shreiber

We are obviously interested and over the years we have made and tucked in little neat fitting acquisitions. We're looking for some of the same things and some things that are bigger and we have -- I won't call it a war chest but we have resources and they are not going to burn a hole in our pocket. We're very, very frugal with what we are looking at but we are looking at things and we've made acquisitions in the past and I would guess one could project what if we are going to make acquisitions in the future. We are looking to continue to have significant growth and part of that growth is going to come organic as we develop new products and part of the growth is going to come from acquisitions.

Operator

Your next question comes from [John Andersen]. You may go ahead.

Jerry Shreiber

Hi, John.

John Andersen

Hi, Jerry, hi everybody. Congratulations on a fair quarter.

Jerry Shreiber

Thank you. Are you in Chicago?

John Andersen

I am.

Jerry Shreiber

I am seeing numbers on the front of your city and state that are scary.

John Andersen

Yes, you it made for a couple of interesting commutes this week for sure. I guess I wanted to ask to begin with about the pretzel business. Quite strong in mid quarter and I believe you have similarly to the Churros business you have left some rollouts to some casual dining change there. Can you talk a little bit about that business today, are you adding new customers and kind of the sustainability of the kind of mid-teen 20% kind of growth that you have been putting up recently?

Jerry Shreiber

Yes, we are adding new customers, we are adding new segments. We are developing new products, some of them are brand new like our pret soufflé, some of them are variations of all product sticks and we are getting trial. We have people in our food service that are dedicated to these restaurants, Steven Taylor, Robyn Shreiber, Joe Wilk. And we have been working on this for really about three years and it’s almost like planning a good tree and harvest it year-over-year, we are beginning to bloom. Now we hope that this will continue but meanwhile we are developing further products in our R&D section, so that we can keep this momentum.

We haven’t, I mean we’ve had kind of gentle breeze behind our efforts getting it done. I just hope we don’t run into any headwinds.

John Andersen

You are not seeing any headwinds currently.

Jerry Shreiber

No, we are not.

John Andersen

Okay.

Jerry Shreiber

But I have a high degree of capacity to worry.

John Andersen

That’s probably an enviable quality in your position. The handheld business, I know it’s a smaller part of the business, not as meaningful overall in sales or earnings but it was down in the quarter and I guess I was thinking this might be a year where we saw some stabilization there in terms of sales. Can you talk a little bit about what you are seeing there right now, what your focus is and kind of expectations as you move forward?

Jerry Shreiber

Well, the good news is that it’s profitable, modestly profitable. The bad news is that some of the efforts we made last year with some of the major chains in retail and we did get trial here they did not sell. So, we are going ahead with a redesign of some of the packaging and some of the products. We like the business. We have two great facilities, matter of fact we have added pretzels to one of the facilities out in Oregon and it was a nice fit. It’s still running at the rate of about $55 million to $58 million and now it’s modestly profitable. I am a little bit disappointed it’s taken a little bit longer than what we had hoped but it’s not because of deferred and our people are moving on a base track. And hopefully this time next year we'll have better results to report.

John Andersen

Terrific. Last question just on the charge for the shutdown cost for the Norwalk, California plant, will there be additional charges or was that all encapsulated within the first quarter? Thanks guys.

Jerry Shreiber

That’s probably all encapsulated and that will have some long term benefit to us by the ways of freight and storage too. About 85% to 90% of our business was on the East Coast that plan came along with the WHOLE FRUIT about six years ago and we were never quite able to develop those sales out in the West Coast for whatever reason but it just made a lot of sense to do what we did with the East Coast packer and run the operation out of here.

John Andersen

Is that part of the margin benefit you saw in the quarter or is that to come?

Jerry Shreiber

Part of margin benefit yes, because those sales will come beginning April all the way through August. So, that is not the margin benefit yet but that is something that we hope to be picking up, some significant margin benefit.

Operator

Our next question comes from Brian Rafn. You may go ahead.

Brian Rafn

Good morning Jerry.

Jerry Shreiber

Good morning Brain, how are you?

Brian Rafn

I’m pretty good. Thank you. Give me a sense -- I heard your comments Jerry, on kind of ingredients and flour and Churro. How do you see the year relative kind of to the trajectory of overall ingredients? You see a [platform] a stability, sideways grind, well how do you kind of achieve the overall trajectory of ingredients?

Jerry Shreiber

I’m going to give that question together with its dangling possible to my expert in this room Dennis Moore because I followed my people and the information we get -- Dennis, you care to comment on it?

Dennis Moore

Brain, we see that -- yes, I would say they have – this is kind of plateaued off to use your term. Obviously, we can’t [indiscernible] what's going to happen down the road but we will not anticipate cost would be going higher this year.

Brian Rafn

Okay. How do you look -- if you look across your kind of property plant and equipment, Jerry, relative to capacity utilization, where might you be adding CapEx, in what plans and then in what product lines?

Dennis Moore

You know, that’s a terrific question, Brain. In the last let’s say since July, August, we have added and I’m going count these out. Jerry help me -- we have added Chambersburg, Bellmawr, Vernon, Western and Pennsauken. We have added five lines and our engineering and manufacturing people did it in record time. We got them all running, almost, almost simultaneously, we think we’re good for the year. However, we’re projecting another line and another big line in the hopeful anticipation that this way that we're following or this gentle breeze that behind our back will continue.

Brian Rafn

Okay. That sounds good. Given the storms, blizzards, the polar vortex, does the ice cause weather. Do you guys have any disruption in deliveries, obviously you kind of talked about because of frozen ICEEs and that type of thing or the frozen -- that friezes stuff in the growth production obviously is not going to consult well when its 40 below. So what's your sense of the weather in fact in the first quarter.

Jerry Shreiber

In the first quarter is done and over with it and we met our goals. January hasn’t exactly been a walk in the sun either. Alright, so, we had a couple of snow days here in the Northeast. I know our St. Louise plant where we make our thinking fruit bars was down and of course weather in California has been wonderful and what not in there. So, it kind of balances out and we’re in a business 42 years, alright, that is 365 days a year and 12 months. We’ll have a little bit of these ups and downs in there. We have to be equal to the challenge and not let either, [102 or minus 2]

Brian Rafn

All right. Let me add Jerry, as you look across your product lines, carried from a strategic standpoint, given the product lines you have today, what is your sense of the organic growth and the things that you can do whether it be flavouring, formulations, new ideas of the current products skews that you have for future growth or what is your sense that they’ve somewhat matured maybe a little more population growth and you really need to make some acquisitions to kind of that you guys been fabulous at signing these little local niche brands that you roll out and turn them into regional and national brands. What is your sense on that balance when you look at the entire product line of J&J?

Jerry Shreiber

Well, to begin with it’s going to be too transformational. But I think that we can between organic and acquisitions, we can grow our business perhaps in the, what I'll call, serious single digit, 6% to 8% on a continued basis.

Brian Rafn

Okay. And then one more question Jerry, all those discussion about the Genetic Modified Foods, oversized resisting corns in that and then the on-going issue for somebody like yourself that might use the high fructose corn syrup or corn flour relative to package labelling. Is that a lot of nonsense or is that a real impact that you guys look at?

Jerry Shreiber

Well, we look at it and right now we’re really not being -- we’ve had to reformulate over the past five or six years with respect to schools and with respect to other what we call no-no ingredients. Obviously sugar and some of the comments even though it’s not happening particulate by some stakes on sugar might have an affect but most of the adjustments we’ve been through and we’ve seen our school business which got clobbered for about three years down 15%, 20% a year for three years running, then we ultimately, we ultimately reformulated, developed some new products whole grain in there and now for the first time in three years we’re seeing that business come back and it’s up. So I think we've met most of the serious challenges, we’ve got the trans-fat out, we have a 100% juice in our products. So I like our position where it now is, short of somebody -- some revelation that will come out of [somewhere] unknown, I have no light on our position of where we’re in.

Operator

Our next question comes from [David Saw], you may go ahead.

Unidentified Analyst

I was listening to all the questions I would sort of crack over that for the investment community involved in the call. On a more consumer level, given you mentioned to all those 365 days and 42 years. Do you ever see any kind of a spike in your numbers on a day like Sunday, meaning the Super Bowl where you may have a higher percentage than normal of humans consuming snack foods of all kinds? Do you ever see that in your numbers?

Jerry Shreiber

Well interesting, we’ll see little bits of spikes but it just won’t really fit a day because people have to get supply and build it, we'll see particular spikes, seasonal spikes in the summer but hopefully there will be a lot of soft pretzels and Churros eaten from Thursday to Sunday and Monday and we’ll be able to tell you about the results of that next week, even if I can’t tell you who won the game.

Unidentified Analyst

Thank you. Sorry, can I follow up with one question? You mentioned that you are extending the lines of production. Can you tell me where you are in either adding or I suppose decreasing employment jobs in those facilities?

Jerry Shreiber

We have had a net increase in jobs this past year. As a matter of fact we have had a net increase in jobs for 42 years. We don’t farm out overseas for the technology or for phone services. This little company started with eight people back in 1971 and that eight has grown to 3,300 and we have a special culture here and we expect to continue to grow this company with these people.

Operator

[Operator Instructions]. Our next question comes from Akshay Jagdale.

Lubi Kutua - KeyBanc Capital Markets

This is actually Lubi on for Akshay.

Jerry Shreiber

Hello. I was going say I thought but Akshay was talking in India or something, wasn’t he?

Lubi Kutua - KeyBanc Capital Markets

Yes, he’s still away on vacation so he won’t be back until next week. Anyway I wanted to -- first off congratulations on what looked like a really good quarter. I was a little bit late on the call so I apologize if you’ve already spoken to some of the questions I have. Just in terms of big picture, so pretzel buns obviously has been a really hot category lately last couple of years. What are your thoughts on how that category sort of continues to progress over the next couple of quarters or years? Are you seeing any cooling off or are you still getting number of requests from restaurant chains, with regards to items like pretzel buns?

Jerry Shreiber

Steve Taylor Vice President of Sales is sitting in the meeting today because Bob Pape is travelling, but Steve do you want to comment on that?

Steve Taylor

Yes the pretzel roll trend still continues to grow; sales for first quarter were up in pretzel rolls over last year. So we don’t see that trend slowing down at all.

Jerry Shreiber

What Steve says he’s cautiously optimistic, fully confident because he knows his job is on the line if we don’t grow.

Lubi Kutua - KeyBanc Capital Markets

And then in terms of -- obviously in the fourth quarter on the calendar year, a lot of players kind of saw weaker holiday volumes than they were expecting. How did sort of volume in the holiday season measure up versus your own internal expectations? And did you see kind of heightened promotional activity, trade spend et cetera things like that?

Jerry Shreiber

Well, this is Jerry again, we do see and what we can track very quickly, are mall business, shopping centre business seem to have been trimmed. And by that I mean you have less people out and even if they do make up the day and go out and buy heavier online, they often eat two pretzels a day, they are not -- two pretzels on that trip. But again our business is nicely balanced between school food service, education channel, the mass merchandisers, the shopping centres and malls, sports and leisure, dollar stores, we have over the years, particularly in the last five to six years, balanced our business so that we don’t really get the ups and downs too badly. If you have bad weather, like what we’ve had in the last couple of days, sure, that’s going to put a little bit of a damper on sales in the year. But we’re very-very comfortable with the balance of our business.

Operator

Our next question comes from Ryan Rafn. You may go ahead.

Ryan Rafn

Yes. Jerry, I just had a follow-up. What are you seeing on kind of wage and salary inflation, and then the $64,000 question with the roll out of Obama Care Affordable Care Act, how is your health care cost? Can you put a -- maybe a number on the wage salary, I guess in low single digits maybe.

Jerry Shreiber

That’s fair.

Ryan Rafn

Okay. Okay, and then the healthcare unknown, or maybe a better question Jerry is that are you doing anything from a structural standpoint, catastrophic umbrella and you are funding healthcare cost, are you doing any structural changes maybe in the way you look at healthcare?

Dennis Moore

We have a good deal of -- or probably half of our insured fees or self-insured plans, about half of them are on probably take plans. At this point we’re not doing anything too different than what we’ve done in the past. Our benefit level is fairly strong in relation to other companies. In terms of what do we see for cost, well, for one there is a fee, an Obama Care fee, of $600,000 that we want to say impact us this year, which is $0.02 a share. And [you guys hits] by that over time costs are going to be more cost of healthcare are going to be paid by employers this year of the overall amount of healthcare because that’s the way the plan is structured and is one who can pay or once we’re going to see to be the one paying.

Jerry Shreiber

So what Dennis is saying yes, it’s going to go up and...

Operator

I am showing no further questions at this time. I’m sorry we do have someone queue up at the last moment. Did you want to take their question? Sorry, your line is open you may ask your question.

Unidentified Analyst

Hi. It’s [indiscernible] from Krueger Capital. Thank you for taking the question. Just going back to the pretzel business, I understand you have a pretty decent channel mix. I’m just wondering can you give us a little bit more granularity obviously because it’s a bigger growth part of your business.

Jerry Shreiber

Yes, our pretzel mix is probably divided and I’ll give you the big umbrella 80% food service, 20% what we call retail supermarket channel. In that 80% food service there be a bunch of bucket which include leisured theme like the stadiums indoor and outdoor arenas all across the country as well as movies, as well as amusement parks. But -- and we have nearly 60,000 locations out there that are selling one or more of our products.

Unidentified Analyst

Do you have the mall breakout specifically? Is it so small that it’s not even worth mentioning?

Jerry Shreiber

I really don’t have the mall breakout although we sell some changing malls and individuals. I would say that today that’s in the lower single digits, 4% maybe 5%. It’s not a big particular growth for products.

Unidentified Analyst

Great, and do you still expect it to be the fastest growing part of your business?

Jerry Shreiber

You mean food service or pretzels?

Unidentified Analyst

Pretzels.

Jerry Shreiber

Yes.

Unidentified Analyst

Okay. And then just lastly sorry I might have missed this. But just any update on the handheld business? I know a couple of quarters ago it’s been a struggle. I’m just curious to know what the status is currently.

Jerry Shreiber

Well, the handheld business is growing in food service and we have not yet experienced that growth in retail supermarkets as a result -- as a matter of fact that went the other way, but we have turned the handheld business that is now profitable, modestly profitable and we are cautiously optimistic about continuing its results in the future.

Unidentified Analyst

Can you give me by how much profitable percentage margin, anything?

Jerry Shreiber

Single digits.

Operator

And we have a follow up question from Ryan Rafn. You may go ahead.

Ryan Rafn

One more, Jerry, when you look at the size of M&A activity, what are you looking at from the standpoint of kind of a dollar range in sales and maybe a little commentary on how you see pricing as a multiple of EBITDA in this environment?

Jerry Shreiber

I’ll answer the last part first. There is no question that pricing as a multiple of EBITDA has gone up the last couple of years. Notwithstanding that, we’re looking across pricing to go all the way up into $100 million to $200 million all the way down. So, above all we want to continue to focus on what we have been doing, find niche products that we -- quality niche products that we could become, be an efficient producer and then dominate the market and distribution channels.

Operator

There is a follow up question from John Anderson. You may go ahead.

John Anderson

Thanks for taking the follow up. Surprised nobody has asked about Churros which kind of plateaued in the quarter. I guess was up nicely ex the chain relationship, but how -- I mean should we be thinking about this business as kind of levelling off at this point Jerry or are there some initiatives underway to drive kind of another legged growth there?

Jerry Shreiber

There are initiatives to continue the growth, all right? But we had a major, major hit last year and we're looking at others to possibly to compliment that major hit. Sometimes it's like savouring good whiskey, the first two or three sips; they really give you that jolt. And then you got to get your head cleared to continue to still grow. But we're looking for ways to continue that dramatic growth we had last year.

Operator

I'm showing we have no further questions at this time.

Jerry Shreiber

All right, this is Jerry. I want to thank everybody for participating on our call, and we look forward to talking to you next quarter and hopefully we will have equal results to report to you. Take care and goodbye.

Operator

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

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