J&J Snack Foods Corp. (JJSF) Q3 2012 Earnings Report, Transcript and Summary

Welcome to the J&J Snack Foods Third Quarter Earnings Conference Call. My name is Sandra and I’ll be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Gerry Shreiber. Mr. Shreiber, please go ahead.

Good morning and welcome, everybody, to the J&J Snack Foods third quarter conference call. I will begin with the obligatory statements, and then I’ll continue on reviewing our operations and I’ll be happy to field questions and commentary from everybody. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Results of operations, we had a pretty good quarter again. Net sales increased 10% for the quarter and 12% for the 9 months. Excluding sales, post 12 months resulting from the acquisitions of the Frozen Handheld business of ConAgra Foods acquired last May and Kim & Scott’s Gourmet Pretzels acquired in June of 2012, sales increased 6% for the quarter and 6% for the 9 months. After adjusting out the positive effect of the bargain gain on last year’s earnings for the quarter, our net earnings increased by 12% to $18.7 million or $0.99 a share from $16.7 million or $0.89 a share a year ago. For the 9 months, our net earnings increased by 6% to $34.6 million or $1.83 per share from $32.5 million, $1.73 a share from a year ago. Our EBITDA, earnings before interest, taxes, depreciation and amortization before the bargain gain for the past 12 months, was $111.2 million. Food service, sales to food service customers increased 14% for the quarter and 12% for the 9 months. Adjusting for Handhelds and Kim & Scott’s as noted above, sales nevertheless increased 10% for the quarter and 7% for the 9 months. Soft pretzel sales were up 11% for the quarter. Let me repeat that line, core products of soft pretzel sales were up 11% for the quarter and 8% for the 9 months. Italian ice and frozen juice treat and dessert sales increased 15% for the quarter and 9% for the 9 months. Churro sales were up 12% in the quarter and 10% for the 9 months. Bakery sales were up 15% for the quarter and 11% for the 9 months. A drop in funnel cake sales to 2 customers of $2.6 million in the quarter and to 3 customers of $8 million in the 9 months had a negative impact on food service sales. Retail, grocery and supermarkets, sales of products to retail supermarkets were up 7% for the quarter and 25% for the 9 months. Adjusting for handhelds, sales were down 2% for the quarter and 1% for the 9 months. Soft pretzel sales were up 1% for the quarter and up 1% for the 9 months on flat case volume for the quarter and down 2% for the 9 months. Sales of our frozen juice and Italian ices were down 2% in the quarter and up 2% in the 9 months on case volume decrease of 2% for the quarter and an increase of 1% for the 9 months. ICEE and frozen beverages. ICEE, including ICEE, Arctic Blast, Slush Puppie and Parrot-Ice frozen beverage and related product sales were up 2% in the quarter and 6% for the 9 months. Beverage related sales alone were essentially unchanged in the quarter and up 2% for the 9 months. Domestic gallon sales were down 5% in our base ICEE business in the quarter and down 2% for the 9 months. Service revenue for others was up 12% in the quarter and 16% for the 9 months. Gross profit as a percentage of sales in the quarter decreased to 32% from 32.7% last year, and for the 9 months, decreased to 29.4% from 31% a year ago. Almost all of the gross profit percentage decrease in the quarter resulted from the lower margins of the Handheld business. Last year, we did not own the Handhelds for the entire quarter. We were impacted by about $1.5 million of higher ingredient and packaging costs in the quarter. We cannot project the impact or benefit of changes in ingredients and packaging costs going forward. However, there has been a very significant increase in the market cost of ingredients and packaging costs over the past 24 months. We have implemented price increases to defray the impact of a portion, or all, of the net cost increases we may incur over the balance of this fiscal year. Total operating expense as a percentage of sales was 0.8 percentage points lower in the quarter, and 0.9 percentage points lower in the 9 months, mainly because of substantial sales increases and continued good management of costs. Capital spending and cash flow. Our cash and investment securities balance increased $2.8 million in the quarter to $164.4 million. We continue to look for acquisitions as a smart use of our cash. Our capital spending was a heavy $9 million in the quarter, as we continued to invest in plant efficiencies and growing our business. We mentioned last quarter, we completed the expansion of our St. Louis bakery building and added a line at our Carrollton, near Dallas, Texas, pretzel manufacturing facility, essentially doubling that. We are presently estimating capital spending for this year to be about $40 million or so, but we are confident that it will pay off. A cash dividend of $0.13 a share was declared by our Board of Directors and paid on July 5, 2012. We did not buy back any of our stock in the third quarter. Commentary, our sales growth of 6% this quarter before acquisitions marks our second straight quarter of strong organic growth, following 8% growth last quarter. Sales of soft pretzels and food service were very strong and include new pretzel products such as rolls, sticks, pretzel pogs, soft -- and soft pretzel buns to casual dining restaurants and club stores. Frozen juices and ices in food service had hit their stride again, up 15% in the quarter after being up 4% in the first 6 months. Churros and bakery products had very sharp sales increases of 12% and 15%, as we generated sales increases spread across our customer base. Funnel cake product sales to 2 customers, as mentioned before, were down in the quarter. The decline in funnel cake sales has just about run its course. Unit sales of soft pretzels and frozen juice and ices in our retail supermarket segment were relatively flat again for the quarter. In ICEE and frozen beverages, gallon sales were weak, which we believe was an aberration. And service revenue to others was up a very strong 12% in the quarter, as this area of our business has performed extremely well. Prudent expense management combined with strong service revenue growth resulted in a $932,000 increase in operating income in the quarter for ICEE and an almost incredible $4.3 million increase for the 9 months. Regarding the acquired Handheld business, sales after a modest decline initially has flattened out at roughly $50 million annual rate and the business has begun to contribute to operating income. We are cautiously optimistic that we can continue that trend. We are working diligently to get the top line increase. Our estimated income tax rate was at 38% for the quarter. And we’re estimating a rate of between 37.5% and 38.5% for the year. I thank you for your continued interest. And now, I will turn it back to the listening audience for questions and [indiscernible].

[Operator Instructions] And the first question is from Akshay Jagdale.

So my question was just the top line was very strong, especially in food service as you highlighted. And I was a bit surprised that the EPS and margin performance wasn’t better. My guess is there were some one-time issues there in terms of perhaps acquisition costs and new products not being as profitable as they will be maybe a few months out. Am I right in thinking that way or can you just help me understand why with a 10% organic growth number in food service, your margin performance wasn’t better than it was?

Well, you’re right on all counts. We did develop several new products or we completed the development of them, and we expanded our plant in Dallas. We literally doubled its capacity. And oftentimes when this is done, you’re done but you’re not done, if you know what I mean and then it’s getting them online and getting the wrinkles out. But we’re pleased that we are on the right path to getting the benefit of the plant in Texas and the plant Daddy Ray’s in Missouri, as well as some of the other things we’re doing. I would concentrate on looking at our sales increase and our overall bottom line increase if I would be taking the full measurement of the quarter, Akshay.

Yes, that’s helpful. But do you expect some of these issues -- when should we expect these issues to sort themselves out on the profitability side? So underutilization of your plant, I guess, the new products not being as profitable as they will be eventually, et cetera, like how long does that usually take?

Well, with us, speed is of the essence, but we’re not talking anything beyond a quarter or 2. So we’re in that mode now, so you can look forward to improved performance.

Okay, that’s helpful. And just talk to us a little bit about the -- on the acquisition front, you’ve been making some small tuck-in type deals here. You’ve had obviously quite a bit of dry powder on your balance sheet for a while and your cash position is getting better despite the fact that you have increased your CapEx spending. So can you just help -- what do you see out there, what are you waiting for, what has kept you on the sidelines from doing something perhaps a little bit larger?

Well, we made a small acquisition this quarter, and it’s of course -- it’s a fit with us. We’ve looked at some things, but for one reason or another, they were found that they didn’t meet all of the criteria that we have established. We’re not going to be -- we’re certainly not going to be bullish with our investment, our money, and we will continue to sort things through and look for acquisitions that fit our criteria. We’ve made them in the past. The chances are we’re going to make them in the future, and we’re going to continue the proper due diligence, so that we don’t do anything that’s transformational or sloppy.

Okay. And then just more broadly on the topic of commodities, obviously, wheat has skyrocketed in the last month or so. I know it’s not the only commodity you buy. But you have tremendous momentum, the most I’ve seen I guess, since I’ve started covering the company on organic growth. What’s holistically -- how are you thinking about your margin, your percentage margin going into next year in light of the recent increase in wheat prices? Is it -- do you think it’s possible to have a margin increase next year?

We look at that very closely. We’re looking at a the possible pricing opportunities now. We want to be a little bit more leaning forward to bounce with this. We will buy forward when some of these prices come back and -- but it’s something that we’ve gone through several times in the past, like I don’t know, 8, 8, 10 years and hopefully we’ll be better experienced for it. Let’s give somebody else a chance, Akshay, and then we’ll go back to you.

And the next question is from Mitch Pinheiro.

So firstly, I want to talk about the frozen carbonated beverages. You said that the sort of the gallon decline in the quarter, a little weak was an aberration. What was it and why do you think it’s an aberration?

Couple things. One, a couple of our big retailers slowed. You’ve seen some of the census reports in there. Some of the retailers have slowed down. We did lose a major C-store that opted to have its own, let’s say, frozen beverage, and this has happened in the past. That was Thornton Oil. But we think we’ve seen a sharp rebound in July and we’ll probably be -- hopefully, we’ll be close to the plus side, around the plus side for the year.

And how is pricing in that channel? Did you take any price increases in the last 12 months in FCB?

We did.

Okay. And then relative to FCB, any -- to be flat is probably a pretty good thing considering that carbonated soft drinks are in a slow and steady decline, and coffee and other alterative beverages are on the upswing. Can you talk about whether any of these trends have changed and what you guys are doing strategically to get into the faster growing segments?

Well, to begin with, you’re right on. These trends have not changed than to be flat even though it’s nothing to really crow about, it’s like -- it’s holding on to your volume that you have. We’ve been expanding -- just like our pretzel business has been expanding into the fast food and casual dining restaurant. Similarly, ICEE has started to do some of the same things with the Buffets International and the Hometown Buffet, and more recently, some preliminary test going on with Chuck E. Cheese. But gallon per outlet and volume per outlet has been -- it needs to be strengthened. It has been flat for some time. But ICEE overall, well, its sales increase every year. Its contribution to EBITDA increase every year. Its management is sharp, honed, enthusiastic and energized. So, that’s performing well for us overall.

Okay. And then, back to this Akshay’s question on commodities, does -- so we’ve seen a sharp spike in wheat and some other commodities. In the past, when there is sort of temporary shocks, or if you view them as temporary, you have tended, at least my recollection is you’ve tended to hold back on increasing prices, absorb a little of it yourself if you think it’s temporary. And then, when it becomes somewhat more systemic, you’ll raise prices like you’ve done over the last 12 months. How -- what’s the strategy right now with the spike in wheat and other ags? What’s -- anything changed?

Well, besides us watching it every day and buying it on dips, there’s nothing that really has changed. And incidentally, I forgot to introduce everybody before. You all know Dennis Moore, our CFO; Teddy Shepherd, our CED; Bob Radano is here; Jerry Law; and Bob Pape, who’s in choice of Sales for our Food Service and Retail. We will not be as -- what’s the best way to describe this? We will not be -- we’re going to be a little bit more aggressive, is that the right way, in taking price. As each -- sometimes you go through these little experiences and you get the confidence, it’s like watching a little boy swim. He can swim out to there and then he can swim further and further. We were a little bit hesitant a few years ago in taking prices. But now we can swim out there and come back in here and we’re just going to protect the business and make sure that we don’t impact volume, but where we have to take price, so that we can certainly maintain our margins and where we can to even improve it, we’re going to look at it.

And so just one last sort of a follow-up to that. So in the past, if you take -- I’ll make up the number. But if you take soft pretzel prices to food service up a nickel, the operator moves it up $0.50, and obviously that could have an impact on how the consumer makes their choice at the snack bar. Do you think...

It’s market it’s true, it has an impact, and then we got to balance it with our -- what we call our marketing and our allowances, and our people are pretty good at that, but it does have an impact.

But do you think, given the general state of the consumer and maybe a little pushback on prices, that perhaps this time, if you do raise a nickel, you may not see the operator raise $0.50, they might only raise a dime. Do you think you’ll still see these accelerated pass-throughs, or do you think they’ll be more -- not respectful, but more aware of the pressures on the consumer and, and maybe you won’t see as much negative volume?

To answer your question, no. But some operators are a lot more sensitive with the pricing to consumers than others. Certainly and I’m not singling anybody out, but certainly Costco and Sam’s and Wal-Mart and Wegman’s and Breeze [ph] outlet stores, they’re a lot more sensitive to raising prices to others, maybe that will help. The overall supermarket industry is not in really great shape and to some degree, the -- some of the food service customers are still digging out from the last couple years of recession. But it’s a two-way approach between us, the customer partner, and the retailer.

[Operator Instructions] And the next question is from Michael Lavery.

Dennis, just one question really remaining, it relates to the soft pretzels sales in the food service market, which obviously were quite impressive. Just, if you kind of break out that 75% number that you threw out that were sales to one customer, obviously that’s a pretty big number, north of $2 million or really about more than 10% of your total consolidated sales increase. So what I’m trying to get at is, obviously, that was an impressive number for you. How -- can you talk a little bit about how good of a number that is, or how good those sales are meaningful to that customer? In other words, what I’m trying to get at is how -- the potential there for it being a recurring revenue stream?

Well, I don’t know what the real potential there is for recurring revenue stream. We hope it will be. But we have a lot of our new products. We have a lot of our new products, products that we weren’t making 3 or 4 years ago, that are getting out into the food service field now. Pretzel sticks, pretzel buns, different kind of encapsulated pretzels with hot dogs, pretzel rolls. We have customers from the largest, like Wal-Mart and Costcos, down to some of the fast food restaurants like Buffalo Wild Wings, Hee Hee McGees and Friday’s. We have a lot of people now that are trying these for the first time in here and we’re looking at an overall base probably of $20 million to $25 million on -- annualized for next year in sales and revenue, which perhaps didn’t even exist 3, 4 years ago. You’ve been to some of our sessions where we talked about our targeting of fast food restaurants. And it is a target that now we have, not only identified, but we’ve started to make some progress. And we’re hopefully, cautiously optimistic that we’ll be continuing to make this kind of progress over the next -- over the near-term, certainly, and over the long-term too.

That’s helpful. Certainly, the trend looks really good there. Just I guess one other one real quick on retail supermarkets. Just given that -- I know it’s a smaller piece of your business. But given the tough comps you have for the next several quarters here, is there anything kind of on the product innovation side that you have to kind of hope for?

Well, there is. And let me turn you over to Bob Pape to comment on that. Bob?

I think...

You got Sweet cinnamon, you got...

Yes. We’re looking at -- we’re looking at the value-added protein products which we’ve added to the mix, which would be our Pretzel Dogs products. We’ve also launched a sweet cinnamon product that is doing well...

Sweet cream filled pretzel.

In our retail environment. And also our -- the introduction of the handheld products that will help us as well, that we’re executing on the corporate brand side for the customers for their private-label. So those 3 things will be adding some new innovation and the volume that goes along with it as we move forward.

We’re looking for a strong single-digit growth, perhaps even low double-digit growth, in retail alone for next year.

[Operator Instructions] Akshay Jagdale is back online with a question.

So I just wanted to ask about the same issue as the growth initiatives, the expansion of the plant and new products, roughly how much did that depress margins by, let’s say, this quarter? Any sense?

I don’t have the figure on the top of my head. Dennis?

Okay. Well, maybe we can follow-up on that offline. But -- okay, so the other question I had was related to what you just said, which is the growth prospects in retail. Can you elaborate on that? You said high single-digits to double-digit, if I heard you right, what would be driving that? It’s just the meat filled pretzels in retail stores?

Well, all of our handheld products.

Yes.

Where -- there is no guarantee that what we have on the R&D table on the new product entry is going to be a success. But if a fair amount of them are, and our new pretzel products, we think that we’ll have another good year in retail.

And the next question is from Brian Rafn.

Let me ask you, on the commodity prices, with the hottest summer, the driest summer since 1956, given the fact that you got drought across the United States, given the fact that this is kind of a universal perception with the consumer, hot summers, everybody is kind of facing it across the U.S., other than maybe the Deep South, does that allow you the ability to raise prices and maybe have a consumer not be so elastic because they understand the predicament?

Well, is this really the hottest summer since 1956?

That’s what the weather service says.

I was just a kid then. I remember the Yankees beating the Dodgers 4 games to 3, all right. Don Newcombe pitched the last game for the Dodgers. Yogi and Johnny Kucks pitched for the Yankees and Yogi Berra hit 2 home runs off of Don Newcombe, who got so mad he beat up a parking lot attendant in the -- outside. That I can remember, but I can’t predict what’s going to happen here guys, all right. But suffice to say, our management team -- your management team, all right, we care, we work hard, we’re experienced, we’re smart and we’re going to do everything we can to get in front of these things with the exception of beating up somebody in the parking lot.

Okay. Let me ask you, if you have a long, protracted 18-month run up in commodity cost, corn at $9 a bushel, does that maybe make -- does that squeeze the margins for everybody across packaged foods? Does that make your ability to make acquisitions any easier? Maybe pressuring some guys...

It might, but we’d have to -- no doubt we’d probably have to look at pricing and do something and no doubt, in doing that, that creates with it a little bit of ripples, not breezes, a little bit of ripples along the way. It might make the acquisitions easier, but who knows?

Yes. Okay, okay. And then the third question, kind of pivoting off that is, if again we see a longer protracted commodity run, lot more pressure, do you see any more business from maybe the grocery store chains asking you guys for more private-label product?

We’ve seen, in the past I’ll say 2 years, perhaps 3 years, we’ve seen a little more shift to that. Yes, Bob, I’ll let you comment on that.

We do have strategy to execute private-label products for their customers. We have, as you know, industry-wide we’ve seen private-label brand shares increase. So we want to be a player in that and have a good balance between our branded products and the private-label products as we manage our product portfolio.

Okay. Have you guys seen the old -- you’re talking national brands, talking about private-label, the old kind of generic, the really low-end stuff and this kind of 2007, 2009 mortgage crisis, weak kind of economy, is the generics a category at all or is it really more just branded and private-label?

Generics as a general rule still don’t –- aren’t a very predominant -- a predominant product execution out there right now. Customers are getting behind their own brands or obviously relying on nationally branded products. Those are the 2 main feeders of the volumes.

Yes, okay, okay. And I missed your opening comments, Gerry, of the first 4 minutes. Has the weather patterns in the summer, whether it be drought or whether it’d be hot or depending on where you’re regionally, have those at all affected, because I think you talked a little bit about some of the frozen bars and the LUIGI’S, MAMA TISH’S were a little flat. Did weather help you at all in any category?

Well, we always like -- weather is certainly helpful for our beverage business and ICEE is clicking on all cylinders when the weather is 85 to 93, say. But when it gets to be 98 to 100, all right, you have all that humidity, people don’t go out as much. They’re certainly not eating food stuffs as much. So we might have had a little bit of -- just a little bit twist of negative impact from the very, very hot weather. But in the long run, it equals out. And so I’m not going to blame -- I’m not going to get too excited over perfect weather and I’m not going to blame any kind of performance of what we call raindrops and clouds.

Yes, okay. Your distribution for some of these hot weather products, whether they’d be beverage or frozen, certainly you guys have the stadiums, the ballparks, baseball. You got the smaller -- the little carts and stuff like that for Little League and that type of thing. You have it at the cinema. How prolific is the water park, amusement park, maybe the snack shop at the local municipal swimming pool, is that a channel or is that really not a channel you guys participate in?

That’s a channel. That goes into what we call overall our leisure and theme. And although it’s still early to get any kind of accurate numbers, it appears to be having a decent season.

Okay. And then what was your overall CapEx budget for the year, Dennis?

We’re saying at this point about $40 million.

About $40 million? And how much of that would be maintenance, Dennis?

Well...

5%.

Well, probably 10 to 15 or so. A lot of what’s happening is we’re getting these new opportunities for growing the business. So we’ve been adding on to our CapEx plan as we’ve been moving along.

[Operator Instructions] We have a question coming from Robert Costello.

I have few questions. Good, good. A question regarding that acquisition and those -- some of those product varieties in the pretzel in the Chicago business. What’s the timetable for expansion of those varieties in the -- with SUPERPRETZEL going out in the retail and is it something you consider near-term or something more long-term?

Let me make sure I understand the question. Kim & Scott’s Gourmet is their own brand. And it’s kind of like a cachet brand with very limited distribution. We are studying our options right now, which would include both expanding the brand and its presence, and we’ll be able to comment on that better in the next 60 days.

Right. But my question is like a lot of your acquisitions, you typically -- like you’re doing this summer with the Whole Fruit, now you have it in the BJs in a product category that it wasn’t sold in before. Is that your game plan with -- like this with your other acquisitions to take it and obviously that’s the seller’s ambition as well.

It would be...

To make it mass distributed?

Yes. We’re going to be expanding the brand. But like, Bob, and we’ve chatted about this before, to expand the brand in retail or in grocery, it takes a long time. What we have going for us with this brand is they’ve been around awhile and they’re in a couple of key accounts like a Whole Foods. And even though their sales had been kind of like stalled for the past couple of years, we’re looking for ways that we can promote sales and extend the cachet.

Right, right. I think the verities they offer is something that can jump start the demand side of the business beyond what it normally would be and that’s obviously something you’re interested in?

We’re looking at all these things.

Right, right. On the club store side, when you put in the Whole Fruit and you don’t see Welch’s there anymore and your margin obviously on the Whole Fruit is better per pound wherever you look at it. What do you -- how do you go about -- because you have limited amount of frozen products you can get in there, what’s the decision you’re making to do that? It’s a margin basis, how do you look at it?

Our decision...

Because I don’t see Welch’s in BJ’s anymore.

Well, I don’t know what -- they’ve got a limited number of shelf space there. Our goal is to get as many SKUs, pieces on that shop as possible. My people -- our people do a terrific job. Given the size that we’re still basically a small company with a limited number of SKUs, we’re competing against people like Unilever, like Nestlé. Like we’re competing with a lot of big, big giants in here. Now, what do we do? We think we make better products and we know we move faster and execute faster and we certainly follow-up with the customer. So, we have a basic sales philosophy that we want it all and we keep trying to get there as quick as we can.

And at this time, there are no further questions.

All right, I want to thank everybody for their participation, and we look forward to our next quarter’s conference call and having good news to report again. Thank you.

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