J&J Snack Foods Corp. (JJSF) Q3 2019 Earnings Report, Transcript and Summary

Welcome to the J&J Snack Foods Third Quarter Earnings Conference Call. My name is Ellen and I will 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. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Gerry Shreiber. Gerry, you may begin.

Thank you, Ellen. And good morning everybody and welcome to the J&J Snack Food third quarter conference call. I'll begin with the obligatory statements. 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 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 good quarter, a very good quarter. Net sales increased 7% for the quarter and 4% for the nine months. For the quarter, our net earnings increased by 18% to $30.9 million or $1.63 a share, from $26.1 million or a $1.39 a share from a year ago. For the nine months, our net earnings were $68.8 million, $3.64 a share, compared to $80.2 million, $4.27 a share a year ago as last year's first quarter included tax benefits from the income tax changes enacted in December 2017. Our operating income increased by 12% in the quarter and 8% in the nine months. Our EBITDA, Earnings Before Interest, Taxes, Depreciation and Amortization for the past 12 months was a $175 million, a new record. Foodservice. Sales were up 4% for the quarter and 3% for the nine months. Our sales increase of 4% for the quarter was due to increased sales of soft pretzels, up 4%; churros up 13%; funnel cake up 10%; frozen juice bars and Ices up 8%; and bakery sales up 2%. Sales of hand-held were down. Our sales increase of 4% for the nine months was due to increased sales of soft pretzels, up 2%; churros up 7%; funnel cake up 19%; and frozen juice bars and Ices up 3%. In addition, bakery sales were up 3%. Retail Supermarkets and Groceries. Sales of products to retail supermarkets were down 5% for the quarter and 2% for the nine months. Soft pretzel sales were essentially unchanged for the quarter and up 1% for the nine months and sales of juice bars and Italian Ices were down 8% for the quarter and 3% for the nine months. Hand-held sales were up 3% for the quarter and down 7% for the nine months. Frozen beverages, which includes ICEEs, Artic Blasts and Slush Puppie. Frozen beverage and related product sales were up 20% in the quarter and 13% in the nine months. Beverage related sales alone were up 16% in the quarter and up 6% for the nine months. Gallon sales were up 2% in the quarter. Service revenue, this is our fast growing service revenue for others was up 14% in the quarter and 7% for the nine months. Sales of beverage machines and related revenue were up $5.0 million for the quarter and $13.7 million for the nine months on higher sales to three customers. Consolidated, gross profit as a percentage of sales was 31.02% in the three-month period this year and 30.85% last year. So you could see we're trending up. The increase resulted primarily because of increased sales including pricing and improvement in production efficiencies. Total operating expense as a percentage of sales was 19.1% in the quarter, down from last year's 19.5%. The increase was primarily due to lower freight rates and modestly higher increased selling and marketing expenses over a higher sales base. Other income includes a $2 million payment we see from a customer due to a cancellation of a production under a co-manufacturing agreement. Capital spending and cash flow. Our cash and investment securities balance of $314 million was up $27 million from our April balance. We continue to look for acquisitions as a use of our cash. A $137 million of our investments are in corporate bonds with a yield to maturity of about 2.9%. Our capital spending was $16 million in the quarter as we continue to invest in plant efficiencies and growing our business. We estimate our spending for the year to be about $60 million. A cash dividend of $0.50 a share was declared by our Board of Directors and paid on July 3, 2019. We did not buy back any shares of our stock during the quarter. Some other commentary. Sales of our food service products increased across the board, except for hand-helds. Sales of pretzels were especially strong to convenience stores change. Churro sales were up 13% with sales up across the board. Frozen juice bars and ices sales were up in club stores and in the value chain. Operating income in our food service segment increased from $19.7 million to $21.1 million primarily because of increased volume, lower freight rates and pricing. Soft pretzels, in our retail supermarket segment were flat for the quarter, but sales of frozen juice bars and ices sales were down as volume was impacted by our price increases. Operating income was up 14% for the quarter to $3.7 million, benefiting from lower freight rates, marketing spending and some increase in pricing. Frozen beverages operating income benefited from a 72% increase in machine sales revenue and a 14% increase in service revenue. Overall, sales benefited by increased sales to our distributor, which did not really benefit our bottom line, but which added 5 percentage points to this segments sales increase from 15% to 20%. Our investment income included $118,000 of unrealized losses this quarter and $385,000 of unrealized losses for the nine months. Our effective tax rate was 28.1% this quarter in line with our anticipated rate of 27.5% to 28% going forward. I want to thank everybody for your continued interest. And now I will turn it back to you as we entertain your questions and comments.

Thank you. We will now begin the question and answer session. [Operator Instructions]

I want to apologize, I have several people here with me on this conference call. And they are in no specific order but Jerry Law, our Senior Vice President; Bob Pape, our Vice President of Sales; Dennis Moore, our Senior Vice President of Accounting and Administration; Bob Radano, our COO; Bo Powell, our Vice President of Sales & Foodservice; and Marjorie Roshkoff, who is in charge of legal and HR.

And we do have a question, it comes from Jon Andersen. Please go ahead.

Good morning, Jon. How are you?

Good morning, Jerry. I'm doing really well. How are you doing?

I'm good. I want to compliment you on your good research by picking us up a couple of years ago and staying with us.

Well, you continue to deliver, so kudos, kudos to you and kudos to the team. And congratulations on another terrific quarter. One of the questions I had was related to pricing. You mentioned, pricing several times in the prepared comments. And I'm just wondering, it sounds like you've made a more concerted effort to implement pricing off late, and can you talk a little bit about that. Is that true where you're seeing the pricing opportunities and what kind of consumer response or any push back have you experienced in the market?

Well, every strategy, particularly in pricing is followed by a reverse strategy. We did increase pricing across the board approximately, couple of percent early on in January. And we've got most of it through. There are some delays in there, but we think that we are still very, very economical for the consumer and more than economical against any competition, whether they're in our sector or alongside of us.

Great. And in your food service business, you had particular strength in churros, for example. I'm wondering if you can talk a little bit about what's driving the double-digit growth there?

A few years ago when we started talking about churros, people were saying, what is it? Churros, churrio? Now everybody seems to know what a churro is and more and more customers and accounts are clamoring for the product. So we've experienced continuous growth with that product. And now we're in the double-digit growth across major chains and others.

So that's not a kind of a one or two customer thing, that's a broad based across food service you're seeing strength? Okay. You've mentioned a couple of channels recently as maybe focused channels where you've felt your portfolio was maybe underrepresented at least in certain areas, I think, convenience stores was one. I think, restaurants has been an ongoing effort for you. Can you talk a little bit about or somebody talk a little bit about the efforts within like the convenience channel and maybe some successes, and also kind of where you stand relative to your longer-term goals with restaurants?

Well, you just did, all right. We've made significant inroads with C stores. We've added a little bit of staff, maybe two years ago to that, that their total concentration is to further develop C stores and for some time we've addressed the fast food and restaurant group and we had a couple of back-to-back great years there. And then one year it slipped off by about 10%, but I'm happy to say that we covered that. Bob Pape is here. Bob, do you want to talk about that and how we're doing well?

Yeah, I can, the focus on the chain in national accounting [Technical Difficulty] national accounts continue to be a focus. And we're optimistic about our opportunities within the channel moving forward.

Well, and we're not really just horsing around in this. We have focused on this. And we're [Technical Difficulty] moving on all fronts.

Okay. There was some disclosure around the cancellation of a co-packing agreement. There was a payment in the quarter that you received, but could you describe how that impacts or maybe flows through the financials moving forward, presumably you take a hit to revenue from that, and just thinking about how we model that?

Well, the biggest loss for us, my biggest concern was we had high hopes for this and we are doing it for our co-packer. We had some protective clauses in there and they had to cancel, and we had to trigger a clause and we reaped the benefit of that.

Yeah, and Jon, this is Jerry Law. With that the revenue from that is already -- we've already lapsed it, so this is a reimbursement for capital outlay.

Okay.

And we have the equipment.

Okay. So that's in the base and you end up with the equipment as well. Okay, helpful. I guess, last thing. I think the $314 million balance, cash and investments is the highest since, at least I've been covering the company…

I think, you described it in your recent note as a fortress, right.

Yeah, I think it's right. So what are we going to -- what are the plans for the fortress I guess?

To use it properly for the business including primarily for acquisitions and perhaps some other developments.

Yeah, Jon. This is Jerry Law, again. We've really stepped up our vision into looking to larger scale capital projects, and we can't find something to purchase, we're going to increase our spend in the business to improve ourselves.

Okay, great, thanks. I'll pass it along.

[Operator Instructions] Our next question is from Robert Costello.

Hi, a question about your manufacturing. You talked about your capital spend, is there any plans for any closures redeployment? Could you just give an update on what your plans are a little more specifically with the capital spend?

Well, I'm going to turn it over to Jerry Law, but we did close one undersized plant in Pennsylvania and we've added two, a couple of our businesses that are strategically located in the Midwest. They already were good producers, but now the added volume, they'll pick up some favoritism in distribution.

We continue to look at these larger projects that we have, two that are in the pipeline to come along within the next 12 months and we continue to look for other larger scale projects to make us more efficient.

And Bob, and if we go back and we look at things what Jerry Law does and I do, when Dennis, they work. And we take on a project and we're going to add so much production efficiency and so much estimated savings, whether it be labor or what not, and then review six months to nine months later, they're working. So we're kind of pleased and proud of that.

All right. Another question, what's the cost today to get a bakery up to running capital wise like a large scale, one you need. Is this $50 million or more?

$40 million at the outset I would say. So if we were going to -- and right now we're reaping the benefits of some of the things we did years ago strategically. We carried a couple of plants enlarged by acquisition in the Midwest. And we invested in there gradually, but surely. Now, all hell has broken loose and that's good hell, all hell has broken loose and these plants are busy and they are churning out volume. So we think we're in good shape. We continue to provide investment and expansion into a few of the plants, but right now, we've increased not only our throughput, but these plants are operating at a higher capacity.

And at this time last year, it wasn't as warm as its been, correct? That would be a fair case?

I'll leave that to the weather man. Our ICEE business, which is a warm weather indicator certainly performed well this quarter. And they're probably going to have another good quarter here in our fourth quarter.

Right. Right. All right. Thanks again.

Thank you, sir.

The next question is from Chase West.

Hi, thanks for the question.

Hi, Chase. I don't know if we've met but, welcome to our company.

Thanks. Yeah, so just quickly want to touch on M&A and the environment. Are there assets out there you guy had seen or how are valuations trending these days?

We've had a unique history of being able to find little dusty pellets in there and polishing them up. As you are aware, these assets have, sometimes they become overpriced, sometimes it's grossly over price, but we have enough faith and confidence in our abilities to find these pieces that may be look dusty and coalish, like coal, and see how they fit in with us and what we could do with them. I would say that it's not nearly as lucrative as it was perhaps 5-6 years ago, but nevertheless we are looking at specialty things.

That's helpful, thanks for the color. And then just my second question on innovation. Looking out over this call for the next 12 months to 24 months. Can we expect new product contribution to accelerate from current levels, or just how should we think about innovation going forward?

Well, I'm going to give it to Gerry Law, who is in charge of, in addition to its other responsiblities, he is in-charge of R&D, which is in a separate facility here in New Jersey. But we have full-time staff of 5 or 6 people in there that are constantly working on new products.

Yes, we have a staff around the company that works on new products and the new product that is in the disclosure doesn't really reflect all of the new items because it doesn't show product line expansion or new flavors or those kind of growth. So it's a little bit muted.

You might want to mention the new product that's being distributed across the board now by that one convenience store chain.

Did you just mention?

No, I didn't tell them who it was. You guys get a chance, all of you. Stop in at your favorite convenience store, particularly 711, and ask them what is new from their partners in development. We have a product in there that is sensational with a couple of Ss. But it's only been there about two months in there, but we're getting a real good ripples from it.

Got it. Thank you for all the color. I'll pass it on.

And I'm showing no further questions at this time.

All right. I want to thank everybody for participating in our third quarter conference call. We had a good quarter. We're very-very proud of what we've done and we're going to do it again and again and again. Thank you very much.

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