J & J Snack Foods Corp. (JJSF) CEO Gerry Shreiber on Q3 2018 Results - Earnings Call Transcript

|
About: J & J Snack Foods Corp. (JJSF)
by: SA Transcripts

J & J Snack Foods Corp. (NASDAQ:JJSF) Q3 2018 Earnings Conference Call November 9, 2018 10:00 AM ET

Executives

Gerry Shreiber - Chairman of the Board, President, Chief Executive Officer

Bob Radano - Senior Vice President

Danny Moore - Senior Vice President of Finance and Administration

Marjorie Roshkoff - Legal

Bob Pape - Senior Vice President of Food Service and Retail Sales

Dan Fachner - President of ICEE Group

Jerry Law - Senior Vice President

Analysts

Michael Gallo - CL King & Associates

Lubi Kutua - Jefferies

Jon Andersen - William Blair & Company

Operator

Welcome to the J & J Snack Foods, Fourth Quarter Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note the conference is being recorded.

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

Gerry Shreiber

Thank you. Good morning everyone. I will begin with the obligatory statement.

With me today as we present is Bob Radano, our Senior Vice President; Danny Moore, Dennis is our Senior Vice President in charge of Finance and Administration; Marjorie Roshkoff who handles our Legal; and Bob Pape, Senior Vice President in charge of Food Service and Retail Sales. Also remotely is Dan Fachner, who runs our Beverage business which includes ICEE and Arctic Blast and Slush Puppie; and Jerry Law, who is also remote conducting meetings in the Midwest, and Jerry is our Senior Vice President and my personal assistant.

Alright, here we go. 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 this date.

Results of operations; this year's fourth quarter had 13 weeks compared to last year’s 14 weeks and the year at 52 weeks this year compared to 53 last year. The additional week added about 8% to sales for the quarter last year and 2% for the full year. Net sales decreased 5% for the quarter and increased 5% for the year. But without the extra week last year, sales increased 3% for the quarter and 7% for the year.

Excluding sales from Hill & Valley acquired in January 2017 and an ICEE distributor located in the Southeast acquired in June 2017, and Labriola Bakery which was acquired in August 2017, and the extra week in 2017, sales increased approximately 2% for the quarter and 4% for the year. Our EBITDA, that’s Earnings Before Interest, Taxes, Depreciation and Amortization for the past 12 months was $165 million.

Food service: Without the extra week in 2017 and without Hill & Valley and Labriola, sales were up 2% for the quarter and 4% for the year. All sales increases and decreases I mentioned below have been adjusted for the extra week last year. Sales to food service customers increased about 3% for the quarter. Sales of soft pretzels, one of our core products were up 20%, and funnel cake sales were up 9%.

Sales of Churros were roughly the same as a year ago, sales of frozen novelties were down about 12%, and handheld sales and bakeries – handheld sales were down about 30% and bakery sales down 2%.

For the year food service sales were up 9% and without Hill & Valley and Labriola we are up 4%, which increased sales of soft pretzels up 18%, handhelds up 7%, bakery products up 8% and funnel cake up 10%. Sales of frozen juice bars and ices were down 12% for the year and Churros sales were about the same as a year ago.

Retail Supermarkets and Grocery: Sales of products to the retail supermarkets were down about 1% for the quarter and up 3% for the year. So our pretzel sales were down about 5% for the quarter as we missed a couple of previously planned promotion with major retailers. They are up 6% for the year and sales of frozen juice and Italians ices were up about 6% in the quarter and 6% for the year.

Handheld sales were down for the quarter and down 14% for the year. Frozen beverages which include ICEE, Arctic Blast and Slush Puppie, a frozen beverage and related products sales were up 5% in the quarter and 5% for the year.

Beverage related sales alone were up 2% in the quarter and 7% for the year with gallon sales up 5% and 8% and our base ICEE business in the quarter and the year. Service revenue for others was up a strong 10% and 8%.

Consolidating; gross profit as a percentage of sales in the quarter decreased to 30.35% from 30.80% last year, that's about 50 basis points, and decrease from 30.53% to 29.54% for the year. Gross profit margin continues to be impacted by generally higher cost throughout our businesses, as well as by ideal plan cost during production upgrades. A major portion of these upgrades are going to be completed in quarter 1, 2019.

Operating income in our fourth quarter was impacted by the loss of one week compared to last year. Other than the one less week and gently higher cost, the biggest impact to our fourth quarter operating income was higher distribution, which includes trucking and warehousing. Higher distribution cost of about $2 million and increased trade spending of about $900,000 compared to plan in our retail supermarket segment.

Total operating expenses as a percentage of sales was 20% in the fourth quarter up from last year's 19.2%. For the year the percentage increased to 19.8% from 19.6%. The increase in both periods was primarily in our distribution cost due to higher shipping costs.

Capital spending and cash flow: Our cash investment securities, balance of $276 million was up $18 million from our June quarter and $35 million from a year ago. We continue to look for acquisitions as a use of our cash.

$135 million of our investments are in corporate bonds with a yield to maturity of 2.6%. Our capital spending was $17 million in the quarter as we continue to invest in plant efficiencies and growing our business. Our spending for the year was $12 million lower this year than last, as several of the onetime manufacturing projects finished up this year. A cash dividend of $0.45 a share was declared by our Board of Directors and paid on October 4. We did not buyback any shares of our stock during the quarter.

Commentary: Food Service, soft pretzels continued to have strong sales growth in restaurants, movie theaters and throughout our customer base and sales of our new brown house pretzel continues to be very encouraging.

Funnel cake sales continue to do very well in schools. Bakery sales were down modestly this quarter as some new co-pack business of the year ago did not repeat this year. Handheld sales were down 30% for the quarter, because of the drop off in co-pack business.

Frozen juice bars and ICEE sales were down 12% because of the loss of a promotion and distribution, both in warehouse and club stores. Funnel cake sales to schools continue to grow up about 30% for the quarter and 36% for the year. Overall sales to restaurant chains have been very strong this year, while sales to schools have been up modestly.

Soft pretzel sales in our retail supermarket segment were down 5% in the quarter because of increased trade spending. Frozen novelty sales were strong as we have rolled out a line of SOUR PATCH KIDS ice pops. We are focused on reducing trade spending going for.

Sales in our frozen beverage segment, that’s ICEE were up a strong 5% for the quarter. Service revenue was up 10% in the quarter as this business continues its solid and strong sales growth and machine sales were up 17% or $603,000 in the quarter.

ICEE operating income for the year was up $2.1 million or 8%. For reasons already mentioned, overall consolidated operating income in the quarter was down $5.8 million or roughly 16% from a year ago and down $7.3 million or 6% for the year. As we have said previously, we will aggressively, pursue price increases to offset the cost increases we expect to be continuing.

Lower federal income taxes this quarter benefited net income by about $0.09 a share. But higher New Jersey income taxes, a non-cash charge resulting from July change in tax regulations negatively impacted the quarter by about $0.07 this year. Going forward we expect to have an effective tax rate of 26% to 27% for our fiscal year 2019.

Our company continues its solid growth, and we look forward to greeting you all again next quarter. Thank you for your continued interest.

Any questions, comments, I will field [ph] them now.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Michael Gallo.

Michael Gallo

Hi. Good morning, Gerry. Yeah, so obviously Gerry you’ve had some time now to digest, you know some of the opportunities in getting price realization through and also some of the things you're doing to improve efficiency. You also started to lap obviously the big distribution increase from last year.

Gerry Shreiber

Oh lap!

Michael Gallo

Yeah, you lapped that. Do you think starting in the first quarter we could actually start to see positive gross margins year-over-year or will it take more to the second quarter for the combination of some of the things you're doing in pricing, you know kind of become bullish at this?

Gerry Shreiber

I think with the calendar change, the year which would be our second quarter, you are more likely to reflect these improvements then.

Michael Gallo

Okay, and should we think about kind of pricing across the three segments, that’s kind of across the board or you know what you – did you see on that for stronger price realization and food service. I would suspect retail is perhaps a little harder to come by for [inaudible].

Gerry Shreiber

Well, that may be true, but nobody throws a party for you when you come in with the even with a detailed explanation of higher costs and price increases. But we're well on our way and we are hopefully optimistic that these will reflect as the calendar changes.

Michael Gallo

Great! And then final question Gerry. I think on prior calls you talked about migrating perhaps ICEE towards restaurant chain or QUR. I think you had said in the past you thought something could happen on that next year. Any update on where any of that stands?

Gerry Shreiber

Well ICEE has continued its strong growth performance for several years now. The restaurant and fast food area is a continuing target and we're working it and generally ICEE has an exceptional track record and we expect that this will continue.

Michael Gallo

Thank you, Gerry.

Operator

The next question comes from Akshay Jagdale. Please go ahead.

Gerry Shreiber

Good morning.

Lubi Kutua

Morning good. This is actually Lubi filling in for Akshay.

Gerry Shreiber

Oh Lubi! I haven’t talked to you in a while. How are you?

Lubi Kutua

Yeah, I’m good. Thanks. Thank you for taking the question. Can I just ask a question on just the organic sales growth trend? It looks like at least on our numbers that you know the trend has been sort of weakening for you know a couple of quarters now. I know there's a lot of moving parts as to what's driving it, but you know at a high level can you just comment on some of the things that have been you know sort of a headwind towards organic sales growth and any color you could provide on you know what things are looking like in your current quarter, that you are in right now.

Gerry Shreiber

As a matter of fact we have Jerry Law on the call. He’s in a remote location where he's leading some meetings that will cover some of what you just asked.

We had a couple of nice wins organically in the past couple of years. One of them was with the SOUR PATCH KIDS developed, another is a Special Pretzel that somebody is selling for us in major chain and we gave them a limited exclusive and they are doing a great job. But Jerry Law is responsible for our R&D and our new products and Jerry, you want to comment on Lubi’s question.

Jerry Law

Yeah Lubi, I think we still continue to see organic growth in our future. You know our target is always that mid-single digit. We are going through our annual sales meetings right now to get a feel for that. You know and I think some of the headwinds you know for handhelds and bakery, both will start to be behind us in the coming quarters.

Lubi Kutua

Got you, and then on margins, right. So you know I know the last few quarters you’ve you seen some probably extraordinary inflation and there's several reasons which we would probably consider to be more transitory in nature that have impacted the margins recently. But even if I look at the longer term trend, you know going back a couple of years, it does seem like the margin profile has deteriorated somewhat. I'm wondering you know, can use sort of comment on that and do you think you know margins can get back to where we were at three or four years ago, and what might it take to get margins moving in the right direction again.

Gerry Shreiber

Let me make a comment before we throw this back to Jerry. For the longest time, our margins, you know we were pecking at them like a – to get them reduced, and we went through some inflationary adjustments with some of our raw materials and packaging and what not. We hope the worst is behind us and these margin increases that we've been experiencing the last couple of years will also be behind us. To some degree it's like riding a horse, right and you’re never quite sure when he is going to jump over to the next post or not, but we're watching it very carefully. Jerry.

Jerry Law

Yes.

Gerry Shreiber

Jerry Law you there?

Jerry Law

I am here, I am here. Well, I think you covered it Gerry.

Lubi Kutua

Okay, then just one last question if I may, just any comments on the, you know how you guys are thinking about M&A now, what the environment looks like.

Gerry Shreiber

We are always thinking about M&A. We’ve looked at a couple things in the past quarter, the past six months and honestly we rejected them because they weren't nearly as good a fit as it was presented and there were some issues in there, and so there's been more of a concentration going forward on our base core business which remains very, very good with one or two exceptions.

And looking at these other acquisitions that present themselves to us and you guys know by now the we look at these things fairly quickly with a mind towards integration in there and we are certainly not going to do anything reckless you know, but there's always a line of possible acquisitions that have to go through a significant vetting process with Jerry Law with Dennis and others in there, but we’ve made acquisitions in the past. Chances are we'll be making them in the future.

Lubi Kutua

Got it, thank you, I'll pass it on.

Operator

Thank you. [Operator Instructions] The next question comes from Mr. Johnny Andersen.

Gerry Shreiber

Good morning Jon. How are you?

Jon Andersen

Good morning Gerry, I’m doing well. How are you? We are having our first snow here in Chicago this morning.

Gerry Shreiber

You are? Hopefully it's not a big one.

Jon Andersen

Well, it’s sticking in the suburbs. It doesn’t look like its sticking in the city, so I hope it’s not a big one either.

Gerry Shreiber

Careful!

Jon Andersen

How have you been doing?

Gerry Shreiber

Good, real good.

Jon Andersen

Good, you sound good and congrats on a solid year.

Gerry Shreiber

Thank you.

Jon Andersen

You mentioned earlier Gerry that there are some things that you're still kind of working towards completion in the supply chain, and that those projects should probably come to fruition or complete completion by, I’m not sure if you said the first quarter of is the second quarter of fiscal ’19. But I think you talked – could you talk about you know what are the one or two or three most important projects to complete and again remind me the timing of those.

Gerry Shreiber

We are good producers, efficient producers, but we can get better. There's a couple of projects that we are right in the middle of or in the advanced stage. This whole deal was reducing labor. Jerry Law, I’m going to throw this back to you?

Jerry Law

Yeah, I mean Jon we have, a couple of projects coming up online. I would say the biggest one [Cross Talk].

Gerry Shreiber

Projection management people, just going over these things in detail.

Jerry Law

But we have a line that is substantially complete in New Jersey that will move some production in our supply chain that we are currently producing in Texas up into our Jersey distribution center to help us realize some freight savings. We are in the middle of getting those products approved and get in the line commercialized. We expect it to be online in the – our second quarter, J & J fiscal second quarter; that’s a big imitative for us. And then we’ve also – we brought the two lines up in Pennsauken for the tourism funnel cake and we are – you know we have those start-ups behind us as well at this point.

Jon Andersen

To your end markets, you got a heroic year with soft pretzels again, I think with some good innovation and distribution expansion. You talked a little bit about the prospects for your restaurant segment as you look you know forward. You still see as much white space there or is that kind of opportunity you know filling up.

And then Churros I think was flattish for the year and Churros is a business which has been strong for you, because it's kind of an on-trend product line. What happened in Churros this year and what can you do to kind of get that back of a better growth path thanks.

Gerry Shreiber

Yeah, Bob Pape, what did happen with the Churros issue? I think I know, but why don’t you explain it to Jon.

Bob Pape

You know there were few LTO you know programs with customers that do not repeat and are still very optimistic about the Churro category. We are working actively now with many food service customers, whether they are [inaudible] or casual dining to be able to implement programs with our products and there's a variety of products that we can execute. So we're still very confident that Churros will continue to be a growth vehicle moving forward.

Jon Andersen

Okay, and then on the restaurant channel where you are overall in terms of – I know you had great success over the past three to five years, really building that into a solid business. How much more opportunity is there for you in that restaurant segment?

Gerry Shreiber

Jon, we think that could possibly double over the next five years and that would give it a compound rate of 16%, 17% a year. Now that would be in the absence of something dramatic happening like a serious recession or what not, but as we continue to develop products for this segment and products are, in a word you know even they're falling in the soft pretzel category, but they are not twisted, they are not freed looped in there. We are developing specialty products for the specialty restaurant chains and we're having some success.

Sonic, we developed a product for them and this is one of our best out-of-the-gate performers. We did over $10 million in our first year with them and to put that into perspective, I was in business for I guess four years before I even touched the $10 million mark overall, and this was one product for one chain that is kind of an offshoot of a pretzel. So as we get more experience with this and we get – our talent you know is maturing, we expect that this will continue.

Jon Andersen

Okay, last one for me, maybe Dennis if he is there.

Gerry Shreiber

Dennis is here.

Jon Andersen

I think – good, hi Dennis. I think you mentioned that you had almost $280 million of cash and investments now on the balance sheet. You know putting them in ASI because I know you can't really talk about M&A. $280 million of cash, a good portion of that in corporate bonds, you know yielding I think 2.5% you said. You know is there – you know absent M&A, how do you think about you know use of that cash or return of cash to shareholders or do you just continue to let it build in the hopes that you know a big acquisition comes along?

Gerry Shreiber

Well, before Dennis answers, it is for a big acquisition and I don't want anybody to think that we are going to suddenly distribute that as you know – but, go ahead Dennis, you can…

Dennis Moore

Well, I think you know we're at a point now where we don't think that the amount of cash that we have just continues to increase. I think we would consider upping the dividend rate perhaps a little bit more than we have in the past several years. But we are not going to have a special dividend or return a large amount of the cash all at once to shareholders. We also might [inaudible] our buybacks as well to return some of the cash, but I think that – you know I think we pretty much are of the opinion that we should not be just continuing after cash increase.

Johnny Andersen

Okay. Thanks everybody. Good luck! I’ll pass it on.

Gerry Shreiber

Thank you.

Operator

[Operator Instructions]. At this moment we show no further question - I'm sorry we have one other question from Chris Black [ph].

Unidentified Analyst

Hey guys.

Gerry Shreiber

Good morning.

Unidentified Analyst

Can you hear me. Just a quick question about transportation cost and how do you think higher prices will be accepted by your customers in a slowing economy.

Gerry Shreiber

Well, is the economy slowing, that's number one, and the transportation costs are going up and we are passing these on as well as you would expect. But there is definitely a shortage of trucks and operators and as a result there is a focus on adding transportation, including drivers on that, and these costs are being passed on rather quickly from the freight companies to the manufacturers, which include us.

We have to digest it and look at it. One of the reasons we're doing some things production wise, particularly with special products is to get the product closer to its main markets you know. So we're good at that and we’re going to be even more focused on that. But freight is a real cost which includes the freight transportation and the drivers and we are focusing on that to see how – that we can absorb what we can, but pass on what should be passed on.

Unidentified Analyst

Well, thank you for answering my question.

Gerry Shreiber

You’re welcome, sir.

Operator

And at this moment we show no other questions. Thank you.

Gerry Shreiber

Well, if we have no further questions, I guess we can conclude this quarter's conference call. I want to thank everybody for participating and dialing-in. We look forward to what will be our first quarter conference call for 2019. Hope you can all join us then and we look forward to having you on board. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.