J&J Snack Foods Corporation Q1 2008 Earnings Call Transcript

Apr.25.08 | About: J & (JJSF)

J&J Snack Foods Corporation (NASDAQ:JJSF)

Q1 2008 Earnings Call

April 25, 2008 10:00 am

Executives

Gerald Shreiber - President and CEO

Dennis Moore – Senior Vice President and Chief Financial Officer

Bob Radano – Senior Vice President

Vincent Melchiorre – Executive Vice President

Analysts

Mitch Pinheiro - Janney Montgomery Scott, LLC

Robert Costello

Sarah Lester

Cheryl Cortes - Susquehanna Financial Group

Operator

Good morning ladies and gentlemen and welcome to the J&J Snack Foods Second Quarter 2008 Earnings Conference Call. (Operator Instructions) This conference is being recorded. I will now turn the call over to Mr. Gerald Shreiber, President and CEO. Mr. Shreiber, you may begin.

Gerald Shreiber

Good morning everybody, and thank you for joining us today. I am Gerry Shreiber, and with me today is Dennis Moore, our senior vice president and chief financial officer, Bob Radano, our senior vice president, and Vince Melchiorre, our executive vice president of sales and marketing.

I will begin with the 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 statement. 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: net sales increased 11% for the quarter at 13% for the six months. Adjusting for sales related to acquisitions we have made over the past year, sales increased approximately 9% for the quarter and 5% for the six months.

For the quarter, our net earnings decreased by 25% to $4 million, 21 cents a share, from 5.3 million, or 28 cents a share a year ago. For the six months, our net earnings decreased by 35% to 31 cents a share from 48 cents a share a year ago period. Our EBITDA for the past 12 months was $73.5 million.

Food service: sales to food service customers increased 12% for the quarter and 15% for the six months. Without sales of HOM/ADE foods, DADDY RAY’S and WHOLE FRUIT and FRUIT-A-FREEZE, acquisitions made a year ago, sales were still up 9% for the quarter and 4% for the six months.

Soft pretzel sales were up about 4% in the quarter and 2% for the six months. Italian ice and frozen juice bars and dessert sales increased 6% for the quarter and 6 months, but were flat without the acquisitions of WHOLE FRUIT and FRUIT-A-FREEZE. Churro sales were up a strong 19% in the quarter and 12% for the six months, as this product continues to expand and be accepted in Middle America. Bakery sales, excluding HOM/ADE and DADDY RAY’S, were up 16% for the quarter and 6% for the six months.

Retail supermarkets: sales of products to retail supermarkets were up 12% for the quarter and 19% for the six months. Our core product, soft pretzel sales, were up 7% for the quarter and 16% for the six months. Sales of our frozen juice and Italian ices were up 19% for the quarter and 27% for the first half.

ICEE and frozen beverages: frozen beverage and related product sales were up 9% in the second quarter, and 6% in the six months. Beverage sales alone were up 3% for the quarter and 1% for the six months. Service revenue for others was up 14% in the quarter, and 18% in the six months. Sales of frozen carbonated beverage machines were up $944,000 in the quarter, and $483,000 for the first half.

Consolidated: gross profit as a percentage of sales in the quarter decreased to 28% from 32.6% last year and to 27.5% in the six months from 31.8% a year ago. All of this due to input costs, particularly commodities. We were impacted by over $8 million in commodity costs in the quarter and $13 million for the six months. And we expect a similar impact in our third quarter.

We are cautiously optimistic that the year over year increase in costs may start to stabilize and perhaps decline in our fourth quarter.

Total operating expense as a percentage of sales was 2.1 percentage points lower in the quarter and 1.7% lower in the six months due to higher sales volume and controlled expenses. Last year, we spent $600,000 on a national sales meeting in our first quarter, which we did not repeat this year. Additionally, advertising expense in our retail supermarket business was lowered by about $1 million in the second quarter.

Spending and cash flow: our cash and investment securities balance decreased $6.3 million in the quarter because of increased working capital needs and stock buybacks of $1.8 million. Our capital spending was $5.4 million dollars for the quarter, and we estimate it to be in the range of 21 to $23 million for the year.

Cash dividend of 9 and a quarter cents a share was declared by our board of directors and paid on April third. Our board of directors authorized a million-share buyback in February; in the quarter, we bought back and retired $74,000 shares.

At the end of the quarter, we held $45. 2 million of auctioned market-preferred stocks, they are known as AMPS. As you may know, the market for this type of assets failed beginning in February, as a result of which we do not know when we will be able to access our holdings. We have re-classed these investments to long-term on our balance sheets, but we do expect that we will be eventually paid out at par, at 100%, and we continue to receive dividend payments at regular intervals ranging from 7 to 35 days.

One of the issuers of stock that we own announced that they will be redeeming the stock, of which we own $5 million, on or about May 23rd. You will note 10 to our 10-Q contains a detailed discussion of these investments, why we are treating them, conservatively, as long-term, and why we expect to be paid out at par.

Commentary: our internal sales growth: 9% this quarter, improved significantly over recent quarters due to improved volume and some pricing initiatives. In food service, our churros and special niche bakery products showed good percentage volume growth this quarter. The FRUIT-A-FREEZE and WHOLE FRUIT brands acquired last April should add incremental spread to our frozen dessert sales efforts. Our LUIGI’S sherbet cups continue to show impressive growth in school food service and in our initiative to expand into the health services sector.

We anticipate continued growth in our retail supermarket channel. We expect FRUIT-A-FREEZE and WHOLE FRUIT to gain significant distribution in 2008. We have reduced our advertising budget for our retail supermarket pretzel brands from $2 million in 2007 to about $500,000 this year, with an initiative currently planned for our first quarter fiscal year 2009. That would be on or about September or October.

Our frozen beverage segment continues to experience challenging gallon sales in our base ICEE business. We expect to continue to be challenged by our major customers as they make changes to their food service operations. Our service revenue to others continues to grow, impressively, up 14% in the quarter and 18% in the six months, following a 23% increase from last year, as this is a key component of our growth plans, presently and going forward.

We have recently begun small initiatives in the Middle East and in China. There are ICEE machines in Bahrain and ICEE machines in China.

The big story the last six months and going forward is higher commodity costs. During the quarter, wheat prices were more than double the same time a year ago. The increase, $8 million plus in cost increases from a year ago in the quarter, and $13 million dollars for the six month, is unprecedented. We expect commodity costs of this magnitude, or possibly more, to impact us in our third quarter. We implemented a second round of price increases, taking effect this month, in an effort to recover the impact of the cost increases.

We will continue to balance what is beneficial for our business over the long term. We expect our investment income will be higher, over the near term, as our balance of investments and cash equivalents is higher than a year ago. Our estimated income tax rate dropped to 37% in this year’s quarter, 39% in last year’s quarter, due to recognition of previously unrecognized tax benefits.

Last quarter I mentioned we had run into a storm, an ugly storm, a perfect storm of unprecedented increases in our major commodities. And we cautioned, we recognized and warned the impact on our near-term earnings. I am not saying that we are completely out of this climate yet, but we feel the storm effect is somewhat stabilizing. It is still raining, but it is do-able and deal-able for us.

We have successfully implemented broad, across the board pricing initiatives. We aggressively continue to develop products through the pipeline, both new and from acquisitions, that will serve to innovate and further grow our niches.

Our business is healthy and fertile, our balance sheet is pristine. We have no debt. Our team is capable, experienced and energized. We are equal to all of the challenges that we are facing. We thank you for your time today.

I am open to any questions or comments.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator instructions) Our first question is from Mitch Pinheiro; please go ahead?

Mitch Pinheiro - Janney Montgomery Scott, LLC

Yes, good morning.

Gerald Shreiber

Mitch who?

Mitch Pinheiro - Janney Montgomery Scott, LLC

Mitch Pinheiro with Janney Montgomery Scott.

Gerald Shreiber

Good morning, Mitch, how are you?

Mitch Pinheiro - Janney Montgomery Scott, LLC

Good, how are you doing?

Gerald Shreiber

Good.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Good. So, a couple of questions. So, specifically how much pricing do you think you got in the quarter? On average?

Gerald Shreiber

Well, we had a range from- it could have gone as high as 10 to 12% but roughly it is balanced- our sales game was roughly 50% between volume and pricing.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. If I- so $8 million of higher ingredient costs would take about a 6% increase to offset, if you had the pricing fully in place for the quarter. So, I guess you did not get- it was not a full- was the quarter- did the pricing increase come halfway through the quarter? Is that-

Gerald Shreiber

We did not jump out of bed on the first day of January and suddenly get a 6% increase from everybody. Some of these things have to- you know they take a bit of time to engage in distributor [Inaudible], but-

Mitch Pinheiro - Janney Montgomery Scott, LLC

So, if for the next quarter, with the full impact of your price increases plus the second round that is-

Dennis Moore

Mitch, this is Dennis. Just let me interrupt for a second. I think that when Gerry said half, he was referring to the increase, the organic growth increase-

Mitch Pinheiro - Janney Montgomery Scott, LLC

Right.

Dennis Moore

-the full increase. So the increase would be 4 to 5%, from sales having a price increase, not 6%.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Right. I know, I got it. Okay, I understand. But to next quarter we should see maybe better than 4.5% in pricing. Is that fair?

Gerald Shreiber

That is reasonable.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. Have you seen any elasticity issues?

Gerald Shreiber

Well, we worry about these things, and you know we are watching, but, let us say that our people are closely monitoring this to make sure that we do not experience any issues with volume.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Have you seen any impact in any of your in channels relating to the consumer pressures here? I have heard and seen that transactions are lower in the C-store business. I have seen the ring is lower in the C-store. So is there- are you seeing that as well, or can you comment as to what you are seeing in your various end markets?

Gerald Shreiber

It is really a little bit too early for us to be able to really measure that. We hear some of the same things that you are referring to. We are just redoubling our marketing and sales efforts in there so that we can lessen the blows.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. In terms of your commodity buying, can you talk about what kind of coverage you might have for this upcoming quarter and/or for the remainder of the year?

Gerald Shreiber

Well, we are going out between periods of 45 and 90 days, and we continue to watch closely the flour and Ag and other commodity markets, and we have designated a person to control that for- as the lead person on all of our basic commodities.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. So you are still- I mean, the good news is that wheat has come down lately.

Gerald Shreiber

Mitch, it has not come down. Wheat is still double what it was a year ago. It has come down from these shoot to the moon prices back in February, which we really had not booked that either.

Mitch Pinheiro - Janney Montgomery Scott, LLC

So- well, but in the first quarter you were buying a lot of wheat at the- when wheat was trading at well over $10 a bushel. Now it has come down under nine. I know that there is basis and all the other premiums, you can not hedge, and you have to factor in.

But it still seems like that if you are buying on a spot basis, it is becoming a little more favorable than it was in Q1, it seems to me. I know you bought back in Q1, so now- but going forward, it looks like maybe even in Q3 you start to have- later Q3 you start to have a positive year over- not year over year, but you will-

Gerald Shreiber

We will see. We will see. The one thing that is predictable about what has happened is that it is totally unpredictable.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. Yeah, right. (Laughter) Okay. Another question on the top line. Did you have any buy-in because of your price increases in the first quarter? Did buy-ins help you?

Gerald Shreiber

Your bigger retailers will buy in or want to get some- particularly in the supermarket chains, they will get a little buy-in or want to get some protection. But there is a little bit of that. But nothing so significant that it would make numbers-

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay

Gerald Shreiber

-big-headed or lopsided.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. And in terms of if you look at the marketing decline, I realize it looks like – it looks like marketing is down about – well marketing, I mean I think you said you took $1 million out of ads the TV, that internet campaign you did last year which did not seem to benefit you much. That’s an okay drop. But is it – are we – should I be concerned at all that you’re investing less than marketing here or –

Gerald Shreiber

Interesting. Vince has some great ideas and concepts that we plan on initiating there. And we realize the importance of investing in our sales or – and our marketing efforts for the future and we’re going to do that. I’m not so sure our campaign last year was the best use of our marketing dollars and I think that we’ll have a little bit better control and direction on future spending.

Mitch Pinheiro - Janney Montgomery Scott, LLC

So if – so the kind in marketing – obviously you can look at it and say jeez, he did not just cut marketing out to make the numbers look better –

Gerald Shreiber

That’s not what we’re doing.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. Yes, so –

Gerald Shreiber

Rest assured that I am not looking to cut out muscle or for that matter a fat in marketing area to improve numbers over the short-term. That is not the direction that our company – that our management and company is going.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Yes, and I’m not saying it is but I’m just looking at – so did – what was cut besides – and I totally, I’m on board with the TV internet campaign venture.

Gerald Shreiber

The only thing that was cut was that viral campaign that went on YouTube in there with the wrestlers that I know three people in the country watched after I told six people about it.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. Okay. And then last thing is on FCB. You talked about the challenge. It’s a challenging environment there. So what’s going to – what are you doing in the back half here, your strong FCB season, to try to shake things up?

Gerald Shreiber

Well, ICEE, the ICEE group had its best year ever last year in ’07 and we expect it to beat that this year. So we continue to be – to look at different ways that we can develop its growth. The managed service – the managed service continues to grow double digits and strongly. But the numbers from ICEE were probably a little bit better than what might have been reported on the Q2 because there was a higher – there was higher fuel costs and there was a one time write-off on some inventory.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. One time write-off in inventory, was that in the – is that in the Q?

Gerald Shreiber

I believe yes.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. I’ll look to that. All right. I will yield the floor. Thank you Gerry.

Gerald Shreiber

Thank you Mitch.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Thank you Dennis.

Operator

Our next question is from Robert Costello [ph]. Please go ahead.

Robert Costello

Hi, I had two questions. One, was there any new restaurants that you signed up during the quarter? What’s the outlook for the year with market expansion? And I had a question about the Dippin’ Dots brand regarding your – I see there’s a new company out there, a new brand Itsy Bits. What’s going on with that?

Gerald Shreiber

All right Bob let me answer your questions first. Let me deal with the first part last. We expect to introduce a product line called Icy Bits which are kind of similar to a similar to a Dippin’ Dot which are little bits of ice pieces it would be under –

Robert Costello

Yes, the kids love them.

Gerald Shreiber

– the Icy Bits label and we expect to introduce this at the NRA show in a couple of weeks. So far our early interest has been positive and we are excited about this opportunity. With respect to any new restaurants we have various tests going on right now with several chains including a couple of our core products.

And we’re hopeful that by the first quarter of next year that we will be going from a controlled test perhaps into some limited expansion. But some of these things take years. We’re tracking into the going from the product being developed and accepted into going from the test kitchen into some store testing.

Robert Costello

Right. Now are you going to be manufacturing the Icy Bits or is somebody else?

Gerald Shreiber

Somebody is manufacturing it for us on a copatent arrangement. It’s a – one of the premier –

Robert Costello

Right.

Gerald Shreiber

– dairy companies in the country.

Robert Costello

Right. Last question. Your Whole Fruit, I saw you had some couponing recently in the paper on Sunday. What do you anticipate for the year for that product since you bought it a year ago?

Gerald Shreiber

We have resurrected it. We have brought it back from the dead. We have –

Robert Costello

No, it’s a great product. I agree.

Gerald Shreiber

– it some life and it is doing better than projected. We expect to have good sales this year and better sales next year.

Robert Costello

Now is it mostly going to be sold through the C store or through the supermarket?

Gerald Shreiber

Mostly being sold for the supermarkets although we have gotten some interest in the club channel and some other mass merchandisers too.

Robert Costello

Right. And how’s it going to be distributed into the supermarkets? By you or by another?

Gerald Shreiber

It’s going to be going ex-warehouse, all right? And to some limited extent from a DSD system using independent –

Robert Costello

No, you gave it out at the annual meeting. It’s a great product. So keep up with it. Thank you.

Operator

Our next question is from Sarah Lester [ph]. Please go ahead.

Sarah Lester

Good morning.

Gerald Shreiber

Good morning Sarah, how are you?

Sarah Lester

I’m good how are you? I wanted to ask, could you just talk about more some of your new products coming out. I think you might have some things coming out in some mass merchandisers but anymore new products? And also talk about the – how far you’ve gotten along into the quick serve restaurants.

Vincent Melchiorre

It’s Vince. You will see us, you’ll see us debut some things at NRA. You’ll see a couple of new pretzel products from us at NRA –

Sarah Lester

Okay.

Vincent Melchiorre

– as well as a few others. So there are some things that are coming very quick in the pipe. You’ll also see us for the fall season introducing some new steam product in frozen novelty as well and some cup products. So there is a lot coming.

Gerald Shreiber

And the bite sized churros [inaudible]?

Vincent Melchiorre

Right. And churros as well. There’s like – will be bite sized churros as well introduced at NRA. So you’ll see us introduce a lot of new things in the next few weeks.

Sarah Lester

Okay that’s great. Thank you.

Vincent Melchiorre

Sure.

Operator

Our next question is from Cheryl Cortez. Please go ahead.

Cheryl Cortez - Susquehanna Financial Group

Hello.

Gerald Shreiber

Hello Cheryl.

Cheryl Cortez - Susquehanna Financial Group

I had a quick question if you were doing any sort of strategic planning on the additional rebate checks that all the tax payers might be getting. Talking to some grocers – I notice they’re doing some things there but is that on your radar?

Gerald Shreiber

I did not get a check. That’s an interesting question and I’m wondering if perhaps we can look into that.

Cheryl Cortez - Susquehanna Financial Group

Okay. Well thanks a lot.

Operator

(Operator Instructions)

Gerald Shreiber

Before we move on I just want to clarify a statement I made with respect to our ICEE company’s earnings. Even though their earnings were down about a million eight for the six months we do expect to have a much better second half. And it will be challenging for us to beat last year’s considering that. But we do expect to have a good second half with ICEE. We’re continuing to expand our efforts and manage service for others which is growing at a double digit rate and has been for several years.

Operator

We do have a question from Mitch Pinheiro. Please go ahead.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Yes, just a follow-up Gerry. On the – I could find – I looked through the queue – I could not find the asset write-off on the FCB. Is that the other – was that – Dennis, was that an other in the cash flow statement? Is that what that was?

Dennis Moore

Yes.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Where do I find the write-off?

Dennis Moore

That would just be in operating income.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay, about how much was it?

Dennis Moore

Well it was several adjustments, not necessarily all write-offs but I think we said approximately for the six month period totaling about $900,000.

Mitch Pinheiro - Janney Montgomery Scott, LLC

For the six months?

Dennis Moore

Right.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. And so was it about half and half?

Dennis Moore

Yes.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. My final question, just Gerry getting back to FCB for a second, if I go back five years to 2002, you had EBITDA from FCB of 26.6 million and then in 2007 was a good year for you. It recovered finally back to 25.9 million. So in five years it was basically flat, down slightly. So clearly it’s been challenging over the last five years with the carbonated soft drinks declines probably paralleling or mirroring FCB.

But I’m just concerned that all the growth in beverage is non-carb. And it’s all the alternative water and the juices and teas. And what can you do – is FCB going to separate itself from CSD as far as its growth pattern? Or are you going to start to get into – put more barrels in your FCB to do Monsters and Red Bulls, et cetera?

Gerald Shreiber

We’ve looked at these things from time to time and it’s true, we at ICEE are experiencing some of the same challenges and difficulties that the major beverage players, Coca-Cola, Pepsi-Cola, are experiencing with regular cola sales. That’s one of the reasons we’ve expanded, we acquired Slush Puppy. And we’re looking at other possibilities. We will continue to seek out new products and selective acquisitions in there to maintain its growth and profitability.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. I just – it just – and then on an operating – on an EBIT margin basis it’s gone from 23% to 16 during that same time period. So you held dollars but you – but it’s less profitable sales dollars and your ROA has kind of helped. So I just was wondering whether this is – you’re going to continue to invest in FCB and try to grow the business. Or is going to be a cash, kind of hold on to the current level? I just do not know where it’s heading.

Gerald Shreiber

I hear your point and it’s still generating cash and very profitable cash. So we’re going to continue to keep that in the flow.

Mitch Pinheiro - Janney Montgomery Scott, LLC

Okay. All right, thanks

Gerald Shreiber

Thank you. Any other questions or comments?

Operator

At this time we have no further questions.

Gerald Shreiber

Thank you for participating in the conference call and I look forward to talking to all of you again in our next quarter. Bye now.

Operator

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

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