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

F2Q2014 Earnings Conference Call

April 29, 2014 10:00 AM ET

Executives

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

Dennis G. Moore – Chief Financial Officer, Senior Vice President, Secretary and Treasurer

Robert J. Pape – Senior Vice President-Sales

Analysts

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Akshay Jagdale – KeyBanc Capital Markets

Raman J. Ghei – Tower View Investment Management

Operator

Welcome to the J&J Snack Foods’ Second Quarter Earnings Conference Call. My name is Vivian, 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

Thank you, Vivian. I’m Gerry Shreiber, CEO of J&J Snack Foods’ and with me today are Bob Radano, our COO; Dennis Moore, our Senior Vice President and CFO; Ted Shepherd, our CED; and Robert Pape, our Vice President of Sales and Food Service and Grocery.

Now let me begin with the results of operations. Net sales increased 2% for the quarter and 4% for the six month. For the quarter, our net earnings increased by 7% to $13.5 million or $0.72 a share from $12.7 million or $0.67 a share a year ago. For the six months, our net earnings increased by 13% to $25.9 million, $1.38 a share from $22.29 million or $1.21 a share last year.

We believe, our sales and to a lesser extent our costs were impacted by the severe weather which occurred in many parts of the country during the current three-month period of January through March; although we are unable to quantify the impact on our operating income.

Most of our product sales are to consumers at snack bars and food stand locations, restaurants and schools. So to the extent the traffic rate was reduced at these locations, because of weather, our sales were affected. We stated in our press release that sales for the first three weeks in April were up significantly or 8% compared to last year. Our EBITDA, earnings before interest, taxes, depreciation, appreciation, and amortization for the past 12 months was $140.8 million, also a new record high.

Food service, sales to food service customers increased 2% for the quarter, and 4% for the six months, 1.5% and 4% without sales resulting from the acquisition of New York Pretzel in October 2013. Soft pretzel sales alone were up 10% for the quarter and 15% for the six months, 7% and 13% without New York Pretzel.

Italian Ice, and frozen juice bars, and dessert sales increased 17% for the quarter, and 14% for the six months. Churros sales were down 5% in the quarter, and 2% for the six months; and bakery sales were also down 1% in the quarter and flat for the six months.

Retail supermarkets; sales of products to retail supermarkets were down 2% for the quarter, and for the six months. Soft pretzel sales were up 3% for the quarter, and six months, and sales of frozen juices and Italian Ices were down 7% in the quarter; and 4% for the six months. Handheld sales decreased 6% in the quarter to $4.8 million; and 12% to $10.1 million for the six months.

ICEE and frozen beverages. Frozen beverage and related product sales, which include Arctic Blast, Slush Puppie and others; product sales were up 4% in the quarter and 7% in the six months. Beverage related sales alone were up 6% and 3%, with gallon sales up 5% in our base ICEE business in the quarter and 2% for the six months. Service revenue for others was up 3% in the quarter, and 9% for the six months.

Consolidated, Gross profit, as a percentage of sales in the quarter increased to 29.8% from 28.9% last year, and for the six months increased to 29.6% from 28.6%. The gross profit percentage increase in this year’s quarter resulted primarily from lower ingredient costs.

Total operating expense, as a percentage of sales increased to 19.9% from 19.4% in last year’s quarter. Higher group of the issuance costs accounted for about 60% of the percentage increase.

Capital spending and cash flow. Our cash in investment securities balance decreased $7.6 million in the quarter to $208 million. We continue to look for acquisitions as a use of our cash. We have invested $128.7 million in mutual funds that seek current income with an emphasis on maintaining low volatility, and overall moderate duration.

Presently, we estimate annual yield from these bonds to be about 3.5% to 3.75%. Our capital spending was $11.5 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 in the $40 million range or so. A cash dividend of $0.32 a share was declared by our board of directors, and paid on April 3, 2014. We did not repurchase any of our stock during the quarter.

Commentary, we are not satisfied, we’re not satisfied at all with our sales growth of 2% this quarter. As we have said, we believe some of this is related to the weather. Sales of soft pretzels and food service continue to be extremely strong, and include new pretzel products such as rolls, sticks, and soft pretzel buns to casual dining restaurants and club stores.

Our whole grain pretzel for schools is selling very well as we prepare for another round of changes in school for school food service regulation. Frozen juices and ice sales in food service were up, as we have at least stabilized our business in schools, and hope to begin some growth there as sales to club stores have been very strong.

Handheld sales in food service were down 18%. Churros sales were down 5% as we lapped a major rollout to a major fast food restaurant chain. Excluding the customer, sales were down 1%.

Unit sales of soft pretzels in our retail super market segment, were modestly higher in the quarter, but frozen juices and ices were down 8% in this quarter from last year, and were down 17% in the same quarter two years ago.

Handheld sales in retail supermarkets were down 6%, as some new products rolled out last year, have proved predominant and successful. In frozen beverages, gallon sales were up 5%, a significant improvement and service revenue to others was up 3% in this quarter, and 9% for the six months, as this area of our business continues to perform very well.

On another side with ICEE, ICEE is quickly becoming an iconic brand and it currently has 2.5 million Facebook fans. It also has been licensing, and we are building our royalties from licensing to where they’re becoming significant income numbers for ICEE. Our estimated income tax rate was at 36.5% for the quarter this year, and 36.8% last year. We’re estimating a rate of about 36% in fiscal 2014.

I thank you for your continued interest, and look forward to speaking to you all again next quarter. May I now turn it back to the group for questions?

Question-And-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from (Bob Schenchen) [ph]. Bob, please go ahead?

Bob, if you have a question, your line is now open. We have another question from Brian Rafn. Brian, please go ahead.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Good morning, Gerry. Gerry, can you kind of – maybe a question for Dennis or you. Can you talk a little bit about the trajectory of ingredient cost? What do you kind of see for the balance of the year or where you are right now?

Gerald B. Shreiber

Dennis?

Dennis G. Moore

For the balance of the year, we would expect the cost to be relatively benign...

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

And that’s good.

Dennis G. Moore

Regardless In terms of compared to last year. We are seeing a little bit of upward pressure, but which had – this was yet to any extent in wheat and sugar costs.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay. Give me a sense, you guys, look you talked about your capital budget for the year about $40 million, where are you guys adding capacity and what type of plants are looking at line expansions or new equipment or if you’re putting any new brick and mortar?

Dennis G. Moore

Not brick and mortar, but we’re going to be – our personal category is experiencing significant growth and we’re going to be adding lines in existing plants, so that we’re able to handle this growth efficiently. The worst thing we could do, is to do all this sowing and not be able to produce those products we are distributing, then we’ll be in a position where that we have to get compelling here.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay. Gerry, when you talk about adding some capacity on the pretzel side, is that for your kind of core legacy pretzels that everyone knows J&J for or is this primarily for all the new formulations, the rolls, the sticks, the pretzel buns, some of the new products?

Gerald B. Shreiber

Brain, good question, it’s both. All right. And we’ve been able to work with the technology that not only gets us this new product in there, but it will make our mainstay too. So, we get the best of worlds through this.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Let me ask you Gerald. You guys – you have been known, you’ve done an absolute superb job over the last 20 years on acquisitions. If the acquisitions – the environment is either too expensive or you don’t really find the type of thing you want, how – from the standpoint of your own internal budget, how much reliance can you maintain on the development of internal organic products on line extensions, new flavorings, new formulations, new recipes of what you already have?

Gerald B. Shreiber

We’re doing some, all right. And there is no question we’d like to grow nice and balance both by acquisition with new products and generate new products out of our R&D and marketing. Jerry Law, who is not here today, has the responsibility for all of our R&D and marketing nationally. I feel real good about our abilities and I feel real good about our abilities to develop new products, but at the same time, I’m pressing hard to look for acquisitions, not just anything, not just something it’s going to be transformational, but things that we can fit, and we can apply our resources and talents to growing it.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay. I’d just ask one more question and I’ll get back in line. Gerry, you talked a little bit about weather. There is with some of your boots a spoilage factor. If you had a slacken period of demand at the consumer level, how much is demand picks-up, what might be some forward inventory filling in the pipeline, restocking at grocery restores, or arenas or stadiums, or is that really not a factor in your business?

Gerald B. Shreiber

We really did not have product that went big. The only fresh roots we have or in our connection with Wawa and we have a close relationship with them that we can almost stop production on a dime and filter through the distribution. The main issue we had schools were closed, shopping centers were closed, consumption was off, people didn’t go out and that impacted us significantly during the quarter. Saying that, it’s nice to see that at least in the early period of April that we have bounced back sharply and if we could have any kind of real benefit during the summer months in the year, we will pick this up with a vengeance.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

All right. I’ll get back in line. Thanks, Gerry.

Gerald B. Shreiber

Thank you.

Operator

And we have a question from Akshay Jagdale. Please go ahead.

Gerald B. Shreiber

Akshay?

Akshay Jagdale – KeyBanc Capital Markets

Hi, good morning. Can you hear me?

Gerald B. Shreiber

Good morning, Akshay.

Akshay Jagdale – KeyBanc Capital Markets

Good morning, and I apologize, I just jumped on the call, I’m on the road. So I probably missed the lot like I always do, but I wanted to ask...

Gerald B. Shreiber

Akshay, you never miss a lot.

Akshay Jagdale – KeyBanc Capital Markets

I wanted to ask about the hand-held business, okay? Can you just update us on, Gerald, where we stand at? It just looks like not a – and you have in fairness, I mean you have said this when you bought the business, this is not your typical acquisition, but it’s been painful and in this quarter was, seems like there was no exception, so what’s the plan there? Are we hitting another reset button or is there just weather, can you recall those.

Gerald B. Shreiber

For you what’s going on with the hand-held, it’s not weather, although we have some nice wins there with fried pies and some specialty accounts, the bulk of the business, particularly in the grocery end of it has been a little bit disappointing. And to the extent, yeah, we like hitting some things reset. We finally gotten the product line down to where it is profitable, marginally profitable, and we’ve been able to make some inroads into certain customers, but we’re still getting our arms around this Akshay, I’d be less than candid with you, as I told you it was running smooth, we will solve it, all right, it was the right opportunity at the right price, we got the right people on it, we’ve made a little bit of a cosmetic change, very recently in order to get more feet on the street in certain areas in there, so we’re doing almost, we’re doing everything we can to turn this around.

Akshay Jagdale – KeyBanc Capital Markets

Okay. All right. And then just related to the weather impact, I’m sure you talked about it. So, forgive me if you’re hitting yourselves, but what I’m really interested in knowing is the strength in April, can you give us some color on categories, so the two most interested in are pretzels and churros, right, I mean churros specifically this quarter were down in total as a product group from a sales perspective. So how much of that was weather and why, perhaps April numbers to churros make you feel that way, right, so, can you give us some color on product level in April, like 8% growth for the business, but how are churros doing in April?

Gerald B. Shreiber

Well. Let me ask you, let me answer the first question, or the last question first. We have across the board sharp increases in all of our products, particularly pretzels and Dennis you had commented on churros.

Dennis G. Moore

Well, Akshay as you know year ago, little more than a year ago, we went to – and we have lapped that business and second year go around sales are always lower than they were – from the first year. So we’re suffering from that right now and that may continue to be sort of a dampening effect on the tour sales.

Akshay Jagdale – KeyBanc Capital Markets

Okay. But do we still – so I know last time I believe if I remember correctly Gary, had said, you still expect that business to grow, right. I know you’re lapping to taco bell launch, and so that’s a tough comparison, but you are still hoping that growth with this quarter and the weather impact, is that still a reasonable expectation or should we expect a slide decline this year?

Dennis G. Moore

Without this one restaurant chain, our sales were up 7% in the first quarter and are pretty much flattish in the second quarter. So how much of that is related to the weather impact, we don’t know, but we certainly at this point don’t expect sales to be down from the other accounts as they were in the little – we would expect sales to be…

Akshay Jagdale – KeyBanc Capital Markets

Okay. And then profitability was a real positive this quarter. So if you just look at marginal profits, this quarter was probably one of the best quarters I can remember despite this weakness on the top line. Am I reading into that too much? Was that an issue on mix like because the beverage business, which is a lower margin business not a strong quarter obviously seasonally, is that the issue here or is that really also good underlying takeaway that the profitability is a real positive standup?

Gerald B. Shreiber

It might have been a little bit of mix. We’re not ready to encroach on our profits that we just shared.

Akshay Jagdale – KeyBanc Capital Markets

Okay, great. Well, I will pass it along. Thank you for the color.

Gerald B. Shreiber

Sure.

Dennis G. Moore

It’s great. Perfect, Doug.

Operator

And our next question comes from Raman Ghei. Raman, please go ahead.

Gerald B. Shreiber

Hi, Raman.

Raman J. Ghei – Tower View Investment Management

Hi, I am with Tower View Investment Management in Milwaukee. I just had a couple of quick question. Obviously you still have quite a bit of cash on the balance sheet and I was just wondering if you can sort of outline maybe just how you’re seeing the M&A market that looking price here or whatever and maybe give a little color on splitting that cash between hanging on do it M&A, dividends, share repurchases and so on.

And then secondly, obviously you had a strong April with quite a bit of acceleration versus what you reported in the quarter. Are you seeing that as mostly weather or is there something else going on to that you’re just seeing a better tone to the business?

Gerald B. Shreiber

Well, I’m not going to look a gift towards in the mouth and if April was this good, it will be far (free) [ph] for me to find out where the weak points were. So we like April I don’t want to let to get force about. But yes we do have cash. The best use with the cash is an expanding our business of acquisitions. We have been paying dividends for seven years and increasing at every year, last year we doubled it and we generally buy enough stock back every year to cover our options. So we’re not going at the cash burn a hole in our pocket, but meanwhile we want to be frugal and look at these opportunities and we have been frugal in the past. We will continue to use our good sense and our good business sense in and applying these measures.

We’ve made a couple of small acquisitions in the past two years and those somewhere to kind of like paved the road for our pretzel product line. As of this stage right now, we have some 500 to 600 cards on the streets of New York, which we didn’t have a couple of years ago and they sell pretzels and other items, and we’re looking to put another item on there and even though that is a existing and a minor operation, we think that it could provide good possibilities. So with respect to April, it was a nice spread. It was a nice mix and I don’t want to lift – look a gift horse into the mouth.

Raman J. Ghei – Tower View Investment Management

Okay. Sounds good. Thank you.

Gerald B. Shreiber

Thanks.

Operator

And our next question comes from Brian Rafn. Brian, please go ahead.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Yeah, Gerry, you mentioned with the schools closed and that with some of the bad weather, here in Milwaukee, when we get a blizzard, parents send their kids to the movie theatres and I was wondering in the cinema theatre chain Hollywood has over the last couple of years put more emphasis on rolling out blockbuster films what used to be a graveyard period of time January, February, March and I’m wondering if you saw any stability or strength in your snack sales through the cinema theatre chains?

Gerald B. Shreiber

Yeah. We did and that’s an interesting point. Parents or mothers will send their kids to school, but they still kind of be able to get there through a foot or two of snub. Our two major movie theater chains AMC and Regal were both up.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay. Okay. Alright. Any developments kind of ease of business, Gerry in the dollar chains, kind of the small, single serving product?

Gerald B. Shreiber

We are into dollar chains and we keep kind of like tuning and polishing our efforts there, so that we will be – so that we will remain there, we’re fairly highly penetrated, and we enjoy the benefit of those sales. We got to be careful, with respect to pricing that we don’t go beyond that number, because once you get beyond that dollar, whether it’s a $1.10, $1.15 you have to reduce the size in there, then it creates a whole different metrics of problems for everybody who just goes.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay. Alright. Gerry, you mentioned you got $500, $600 Pretzel cards on the streets of New York City. Is that New York Pretzel acquisition?

Gerald B. Shreiber

Yes.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay.

Gerald B. Shreiber

We don’t know. Yes.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay. Let me ask you, you also have a business, I believe Slush Puppie that uses that kind of Pretzel cards, but it’s more for Little League Baseball and some of those type of things. Is that something if you are successful with the Pretzel thing, that you could do something off that or is that really not something for (indiscernible).

Gerald B. Shreiber

I don’t think that, but it’s interesting that you bring up Slush Puppie, because we’ve gotten some unusual interest in licensing for them in the last six months.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Okay. Alright. Okay. And then one final, Gerry, anything on the private label side, what’s the trend of business there?

Gerald B. Shreiber

It’s there. And we compete in that. Speak up. (Bull) [ph] wants to say something.

Dennis G. Moore

Private label will continue now, we will be driven by as we talk about with handhelds, we have a little bit of a rough ride, but we’re not giving it up on that. We’re going to continue to grab to those opportunities on the handheld business. And we would expect the private label sales to be positive as it is throughout the industry.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Right. And I just wanted a comment, Gerry, you guys ever done an analyst day or you have planned for us?

Gerald B. Shreiber

Not as a planned event. When analysts come in here, we’re happy to host them. We welcome, which were plan, we sit down, we chat, but it’s not an exact day for analysts. Have you been here?

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

No. I haven’t, Gerry. We’ve known you guys for about 18 years, but I just wanted to...

Gerald B. Shreiber

Come on in.

Brian Gary Rafn – Morgan Dempsey Capital Management LLC

Alright. I will put that on the schedule. Alright. I’ll get back to you. Thanks.

Gerald B. Shreiber

Great.

Operator

And our next question comes from John Anderson. John, please go ahead.

Gerald B. Shreiber

Hi, John.

Unidentified Analyst

Good morning, everybody.

Gerald B. Shreiber

Good morning.

Unidentified Analyst

Thanks for taking the questions. Gerry, I guess, in your prepared comments you mentioned weather having an impact on sales, but you also called out weather having an impact at least to a lesser extent on costs and I’m wondering if you could talk a little bit more about what you meant by that and maybe the magnitude that have caused impact and where that showed up in the P&L?

Gerald B. Shreiber

Dennis.

Dennis G. Moore

It’s not significant, but we had two or three plans that were dampened weeks at a time, we’ve had some damages because of ice breaking pipes etc. So I mean the numbers were not significant, but they did have some impact.

Unidentified Analyst

Okay. Coming back to the churros business, which you talked a little bit about earlier. Given that you’ve anniversaried or annualize the Taco Bell relationship, are there new business opportunities and I’m thinking the KFC funnel fry opportunity or partnerships or other things that you’re focused on there that you think could get that business back on a positive growth trajectory even with the impact of Taco Bell?

Gerald B. Shreiber

John, the KFC and I’ve realized we were together (indiscernible) we couldn’t help but chat about that and even look at what, that is still might be cash and we’ve really not talking about too much so we get results in with the test, but I appreciate how you asked it and I am like overwhelmed how you’re remembering.

Unidentified Analyst

Okay.

Gerald B. Shreiber

We have a lot these things going on from time to time, whether it’s been, whether it’s a KFC, whether it’s special snack bar, Wal-Mart, but we have a lot of these things going on from time-to-time. But, we’ll know more about that KFC has probably comes June or July.

Unidentified Analyst

Fair enough. Last question, just on schools. Can you give little more color on where you are with the schools business now, and from your expectations, I guess as you – we get closer to more significant shipment activity, I would guess for the start of the – in the August timeframe of the new school season?

Gerald B. Shreiber

Let me give it to Bob Pape.

Robert J. Pape

Generally, our school food service business, once we had negotiated through some of the regulations, and now we’ve converted the predominance of our items into wholegrain. We’re seeing our sales started to trend positively, we hope that continues, and we will be responsive to whatever regulations, changes are made. Moving forward, we’re connected in terms of understanding what the USDA regulations will be, and we will respond as necessary.

Gerald B. Shreiber

John, in short, we feel better about our school food service business than we have in the last couple of years. We have met all of their guidelines and references, we’ve developed some new products, they appear to be well-received. There is a – and our team is excited, and we are excited, and we think there are good days ahead for us in the school food service business.

Unidentified Analyst

That’s terrific. Thanks for the color guys.

Operator

And I’m not showing any further questions at this time.

Gerald B. Shreiber

Okay. I will pause for a deep breath, and if somebody wants a question, they can hit the button and if not, I will look forward to talking to you all in our next quarter conference call. Thank you very much.

Operator

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

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