Apr 24, 2012
Operator
Welcome to the J & J Snack Foods Second Quarter Earnings Conference Call. My name is John, 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.
Please note that this conference is being recorded. I will now turn the call over to Mr.
Gerry Shreiber. Mr.
Shreiber, you may begin.
Gerald Shreiber
Good morning, and thank you, and I am apologizing to everybody in advance. I got a slight, almost a cold, but I hope to have it beaten out of my system by the end of today.
I am Gerry Shreiber and with me today left to right is Bob Radano, our COO; Ted Shepherd, our CED; Dennis Moore, our Senior Vice President; Gerry Law, our Senior Vice President; and Bob Pape, our Senior Vice President in charge of Sales
Gerald Shreiber
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 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.
Gerald Shreiber
Results of Operations. We had a pretty good quarter.
Net sales increased 16% for the quarter and 14% for the 6 months. Excluding sales resulting from the acquisition of the frozen handheld business of ConAgra foods in May of 2011, sales increased 8% for the quarter and 6% for the 6 months.
For the quarter, our net earnings increased by 20% to $10.4 million or $0.55 a share from $8.7 million or $0.46 a share a year ago. This probably reflects a record second quarter in our history.
Gerald Shreiber
For the 6 months, our net earnings increased by 1% to $15.9 million or $0.84 a share from $15.8 million or $0.84 a share a year ago. So in essence, we made up all of our shortfalls from the first 3 months.
Our EBITDA, earnings before interest, taxes, depreciation and amortization before bargain gain for the past 12 months was $107.9 million.
Gerald Shreiber
Food Service. Sales to Food Service customers increased 15% for the quarter and 11% for the 6 months.
Without sales of handhelds, sales increased 8% for the quarter and 5% for the 6 months. Soft pretzel sales were up 8% for the quarter and 7% for the 6 months.
Italian Ice and frozen juice bar and dessert sales increased 4% for the quarter and 4% for the 6 months. Churros sales were up a very strong 14% in the quarter and 8% for the 6 months.
Bakery sales were up 13% for the quarter and 9% for the 6 months. A drop in Funnel Cake sales to 2 customers of $2.2 million in the quarter and $5.1 million in the 6 months had a large negative impact on Food Service sales.
Gerald Shreiber
Retail and Grocery and Supermarkets. Sales of products to retail supermarkets were up 36% for the quarter and 41% for the 6 months.
Without sales of handhelds, the sales were up 3% for the quarter and 4% for the 6 months. Soft pretzel sales were down 2% for the quarter and up 1% for the 6 months on a case volume decrease of 3% for both periods.
Sales of our frozen juice bars and Italian Ice were up 6% in the quarter and 7% in the first half on a case volume increase of 4% for both periods.
Gerald Shreiber
ICEE and Frozen Beverages. Frozen Beverage and related product sales were up 11% in the quarter and 9% for the 6 months.
Beverage related sales alone were up 6% in the quarter and 4% in the first half. Domestic gallon sales were up 5% in our base ICEE business in the quarter and up 1% for the 6 months.
Service revenue for others was up a strong 20% in the quarter following 2 consecutive quarters of 18% year-over-year increase.
Gerald Shreiber
Consolidated. Gross profit as a percentage of sales in the quarter decreased to 28.5% from 30.1% last year and for the 6 months decreased to 27.7% from 29.9% a year ago.
Over 80% of the gross profit percentage, over 80% of the gross profits percentage decrease in the quarter resulted from the lower margins of the handheld business. We are impacted by about $4 million of higher ingredients 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 21 months.
We implemented price increases to defray the impact of a portion or all of the cost increases, we anticipate over the balance of the year.
Gerald Shreiber
Total operating expense as a percentage of sales was 1.6 points lower in the quarter and 1.2 percentage points lower in the 6 months mainly because of substantial sales increases.
Gerald Shreiber
Capital spending and cash flow. Our cash and investment securities balance increased $4.1 million in the quarter to a $161.6 million.
We continue to look for acquisitions and opportunities as a use of our cash. Our capital spending was a little heavier than usual to $12.2 million in the quarter as we continue to invest and plant efficiencies in growing our business.
Gerald Shreiber
During the quarter, we completed the expansion of our St. Louis bakery building and added a line at our Carrollton near Dallas, Texas facility.
That's a pretzel manufacturing facility. We are presently estimating capital spending for the year to be in the $30 million-$35 million range.
Gerald Shreiber
A cash dividend of $0.13 a share was declared by our Board of Directors and paid on April 4, 2012. We did not buy back any of our stock in the quarter.
Gerald Shreiber
Commentary. Our sales growth of 8% this quarter before acquisitions was a huge improvement over our recent past.
Sales of soft pretzels in Food Service were very strong as we continue to make progress and inroads into the chain restaurant channel and other venues. Churros and bakery products had whopping sales increases of 14% and 13% respectively as we generated sales increases spread across our customer base.
As stated before Funnel Cake product sales to 2 customers were down $2.2 million in the quarter and we expect sales to them to be down in other $1.3 million to the balance of the year.
Gerald Shreiber
Unit sales of soft pretzels in our retail supermarket segment were down. Case sales of frozen ice and juices were up 4% in the quarter driven by new product introductions.
We did not run any significant advertising programs during the quarter. In ICEE and Frozen Beverages, gallons growth was strong and service revenue to others was up a very strong 20% in the quarter and we hope to continue to show growth in this area.
Gerald Shreiber
We were impacted by higher gasoline costs in the quarter and we expect to be impacted going forward. Prudent expense management, combined with strong beverage volume growth and strong service revenue growth resulted in a $1.8 million increase in operating income in the quarter for ICEE.
Regarding the acquired handheld business, sales increased over $1 million to $13,366,000 in the March quarter from $12,295,000 in the December quarter.
Gerald Shreiber
As we have stated previously, improvements in operating income will come as we increase sales. So we are moving in the right direction and we believe the wisdom of our efforts will begin paying off soon.
Our estimated income tax rate was at 37% for the quarter having benefited from refunds during the period. We are estimating a rate of between 37.5% and 38.5% for next year.
Gerald Shreiber
I want to thank you for your continued interest and let me turn it back to the moderator for any questions and comments.
Operator
We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Akshay Jagdale.
Akshay Jagdale
So Gerry, can you talk a little bit about the sustainability of your earnings here or your earnings growth, specifically the volume. I just wanted to get your thoughts on that.
Gerald Shreiber
Well, I am very hopeful that we have some wind behind our sails and this momentum will continue forward. I am hopeful but I am always a little bit, you know cautiously guarding but I am pleased with the quarter and we think we have some wins behind our sales.
We can measure some things that are happening, will be happening that’s going to affect us for the rest of this year and beyond.
Akshay Jagdale
Okay. So just a little bit more on that.
I mean, you know we’ve talk about this with our clients and I believe what you guys -- there’s been, in our opinion, a shift in consumer spending on food towards away-from-home channels which would benefit you. So I am just trying to and obviously that’s not a proven fact.
That’s just a theory from us. So I am trying to understand the growth -- the volume growth in this quarter.
Can you help me? How do you think of the volume growth in this quarter in terms of how much of it was driven by company-specific issues and how much of it you think was driven by industry-wide traffic increases, for example?
I mean, does it feel like it’s more company-specific or you think there was some industry-specific stuff that also helped you quite a bit this quarter?
Gerald Shreiber
Well, a couple of years ago we targeted, as an expansion, some of the fast food restaurants and channels and we are making progress -- careful progress but very good progress and as a result we can, we’re getting some commitments to this volume, which is affecting both directly pretzel sales and some of our other products. So to the extent that that’s away from home as opposed to supermarket, yes.
So we are part of the little bit away with that, but we happen to have a real good surfboard too.
Akshay Jagdale
That’s a good analogy. So, but again you feel -- and why now then, like why was it this quarter that you started to gain momentum versus a year ago because you started this initiative a couple of years ago.
I know you had some, new energized people as well that are driving that and you had the sales meeting not too long ago, which probably helped but why now or like why this quarter have we seen a sudden sort of improvement in volumes?
Gerald Shreiber
No, it’s just like watching your kids grow up and you go over their school lessons with them and you drum them into them every night. And then all of a sudden something magical happens, perhaps at age 5 or 6 or may be at 7.
We are in the beginning of magic.
Akshay Jagdale
Sorry, so you think that this is sustainable company-specific that just starting right now, correct?
Gerald Shreiber
I am very hopefully, albeit, cautiously optimistic. We think we are on to some long-term sustainability.
Our quarterly pretzel price had been inching up quarter after quarter past on -- past year.
Akshay Jagdale
And just on that, I mean the pretzel growth was good but I mean, we have seen that the last couple of quarters, I was really surprised by bakery, which you highlighted, up I think 13% or something.
Gerald Shreiber
Well.
Akshay Jagdale
Are you just, I mean, what’s happening there? Are you selling more in the same customer -- at the same customer base?
People are eating more, I mean, give me some color on that. Because that was a really outstanding quarter for bakery products.
Gerald Shreiber
Well, it’s a combination of things. One, the economy seems to be inching towards a turnaround; and two, we’ve expanded our bakery presence of both within DADDY RAY’S and our California Bakery where we’re just doing better with it.
Akshay Jagdale
Okay and just one last one on acquisitions as always, I mean, it looks like you invested some of your money back into PP&E this quarter. I know those projects were probably ongoing for a while, but you are adding significant, it looks like pretzel capacity but can you just help us with the landscape on M&A, what you are seeing, how you would characterize the activities that you have there?
Obviously, you can’t tell us what’s coming but just give us a sense as to, why it’s taking a little bit longer than, perhaps, impatient people like me would expect?
Gerald Shreiber
Well, you are asking a question in a very professional and a very detailed way. I have been -- and it’s not been -- we are very conservative and we are reasonably constrained.
And then also spending a good fair amount of time and we’re hopeful to be harvesting some fruit in that area in the near-term.
Akshay Jagdale
And just one follow-up on that, I mean why -- what are you seeing in the last -- I mean are you just seeing assets that have -- the valuations are too high. Are you not seeing quality assets that are being fit?
I mean, what’s been the issue or you think it’s --
Gerald Shreiber
I think we’re looking at it now, Akshay. This is all our common.
Everything we are looking at now, which we have gone from, an original suspect into a prospect. Everything we’re looking at now is, could be labeled a quality asset, and if we are able to act on them, we will be, pleased but that's all I want to say about acquisitions.
Suffice to say, we’ve made some in the past, and hopefully we are going to be making some in the future.
Operator
Our next question comes from Robert Costello.
Robert Costello
A question on the restaurant side. A year ago you had the waffle fries.
What specifically product did you add or the sales growth came from on the restaurant sales?
Gerald Shreiber
A combination of products both in the pretzel variety, pretzel rolls, pretzel sticks.
Robert Costello
And these are all in national chains like Burger King like you had before, or are they with a new customer, existing customer?
Gerald Shreiber
All and both casual dining and fast food restaurants, and I guess anybody that has more than an x number of stores could be considered national, but we think we have a great big yard to now develop and we are anxious to develop that.
Robert Costello
The Whole Fruit came out, I saw you advertising with the new product there; you are coming out in the small cup variety?
Gerald Shreiber
We've taken that product and we’re doing well with the Whole Fruit and we've been able to resuscitate that brand. But now we’ve taken it to another level and watching the smoothie development back and forth, we decided to get on-board that horse too and we’ve developed a smoothie, but I think Bob why don’t you comment on that?
Bob Radano
Yes, the ready-to-eat smoothies are better end products; controlled serving size and it’s obliviously appeals to consumers at this point in terms of the product.
Robert Costello
Where are you going to be selling them, retail or restaurant for this year?
Bob Radano
Groceries; although there has been some discussion, we are not there yet, but we are going to be selling in the retail grocery channel. Although some of our people have talked about perhaps putting them in a more sizeable container, so that they could dip and scoop.
Robert Costello
In the frozen novelty case, if you go into the BJs to the left, it’s the frozen cake products like Cheesecake and what not; is that an area that you would look into or no?
Bob Radano
That’s an area that I would enjoy having a slice, but I don’t know.
Robert Costello
Well it fits the novelty dessert area base that I don’t see with a lot of penetration; it’s just the question. DADDY RAY'S, a question on there; you talked about the sales growth; what specifically was it?
What product category?
Gerald Shreiber
Well, bakery goods selling more products to more customers; we’ve expanded DADDY RAY'S to take advantage of our strategic locations with respect to transit and logistics. Some of our production from the West Coast which is out there back into DADDY RAY'S in the Central Part of the U.S., now that gives us a little bit of trends what they call TA, transit advantage.
Robert Costello
Last question, you talked about the 14% increase in CHURROS sales, I have always thought that, that category for you has a tremendous growth opportunity. What specifically brought that growth, was it new customers, existing ones?
Gerald Shreiber
It’s new customers and continued penetration into the existing markets. It’s no longer -- and nobody knows about it and you and I had a conversation a couple of weeks ago, but we continue to further develop and increase their points of sale locations all around the country.
Robert Costello
So do you have the capacity now for Churros throughout the US if you got a national chain customer?
Gerald Shreiber
Yes.
Gerald Shreiber
Churros in 3 locations, 2 in the West Coast, 1 of our locations here in the East Coast and we could expand that rather quickly too, if we have the opportunity.
Operator
Your next question comes from Mitchell Pinheiro.
Mitchell Pinheiro
I wanted to talk about your frozen carbonated beverage segment. It looked like earnings were up nearly $2 million and I just curious, I mean I notice that your FCB dispenser locations were up about 4%; you said gallons were up I think 5% is that what was driving the business to new location growth; did you get help, I mean I know you always talk about weather but did you sense any warm weather help in various geographies in that segment?
Gerald Shreiber
Well, beverage and related product sales were up 11% in the quarter and beverage sales which have been strong over the recent past was up too. And the fact that we had a mild winter, certainly did not hurt us, but I see under Dan Fachner and his team has done a very good job as a matter of fact a remarkable job in controlling their cost and managing their cost and they’re really operating, I mean I think they are 12 cylinder engines but they are operating only 8 or 9 right now.
Mitchell Pinheiro
So the 4% increase in dispenser locations, own locations, are they new accounts; growth within existing accounts, how is that…?
Gerald Shreiber
It’s a combination of both Mitch; we picked up a major chain in the Midwest that we had sold to in the past many years ago, for one reason or the other they may stop, but we got in there. There is always some gains and pluses, people go out of business alright, they stop selling and what not; but in the overall big picture I think, our team was successful in adding a net number of locations.
Mitchell Pinheiro
When you do your projections, what type of sort of dispenser growth would be reasonable to expect, I mean -- I am sorry you broke up there Gerry.
Gerald Shreiber
Mitch, it’s 5% to 6%.
Mitchell Pinheiro
And does that growth like as the Wawa’s chain expands and is that how you - is that where you see it? Are you in most of the major other than 7/11 are you in most of the major like sea store and appropriate locations?
Gerald Shreiber
We are in quite a few of them. I don't know if I would use the word most of, but we've been able to expand the ICEE business outside of its strong sea store support and into the mass merchandises; we’re into the drug channels now, we are in Walgreens, we are in Leisure and Theme Parks and [indiscernible].
Mitchell Pinheiro
I have seen more of those frozen frappuccino, cappuccino, whatever you want to call them, dispensers in more and more locations, but I know you were in that business with Java Freeze and I don't know what other brands you may have there. But can you talk about what you are doing in the Frozen Coffee side?
Gerald Shreiber
We are not doing much and although we've had some efforts in the past, it really hasn't worked out for us. We are selling a frozen beverage in a different type of machine, a non-carbonated machine, but our coffee business and the smoothie business from a frozen beverage business has not really added anything incrementally.
Mitchell Pinheiro
Okay, and have you seen, you don't talk much about Paradise and SLUSH PUPPiE, but how have they done for you since you acquired them?
Gerald Shreiber
Well, collectively in the aggregate they’ve done well. They have added 2 additional brands and we've integrated them into our system and there's no special reason that we are not talking about other than you know Paradise is no longer new news and certainly SLUSH PUPPiE has been successfully integrated in now for about 5 years.
Mitchell Pinheiro
Are they growing?
Gerald Shreiber
They are growing marginally.
Mitchell Pinheiro
Okay. Last question.
On the service revenue, are margins in the service revenue segment still close to your corporate average?
Gerald Shreiber
They appear to be. We are pleased with the margins.
Mitchell Pinheiro
Okay.
Gerald Shreiber
Mitch, just getting back to the comment and maybe I wasn't fair about before with SLUSH PUPPiE and Paradise and to a lesser extent Arctic Blast, they have more strategic value when look at it as a view of the whole as opposed to individual pieces and components and I know you can understand that.
Operator
Our next question comes from Brian Rafn.
Brian Rafn
Do you have a sense Gerry, as you start seeing the tepid recovery in the consumer, certainly there is an offset in gasoline prices. We’re looking at a big tax like here in 2013.
Can you give a sense overall across your brands what is the price sensitivity or elasticity of your consumer towards price hikes. You have talked about making sure you don’t get over a $3 or so $4 in the frozen area in cases.
Give me a sense as to what, how the sensitivity muzzles the shopper?
Gerald Shreiber
Well whatever happens we’re going to have deal with and I think as we go through some of these adjustments so you, but I think that was a 2-part question, wasn’t it?
Brian Rafn
Right, right.
Gerald Shreiber
Fuel is going to have its impact on us from a cost standpoint. However we have enough locations in and around all over with a country, if somebody is not driving from a here to there, but if we are well placed in both here and there, we’re going to get business both there and here.
Brian Rafn
Okay. Let me ask the same question a little different way.
Does the sensitivity or elasticity or the consumer, does that force you guys to create new flavor formulations deal with, maybe shrinking packaging a little bit size, kind of price quality or was it about different channels. I mean what, or perhaps more couponing or discount, give me a sense as to the type of variables that you can play around with?
Gerald Shreiber
Well, we want to be real careful about shrinking our size and our consumer packaging size. We have been through some of that particularly on some of our private label where we do what others have and what we generally see are not real good results.
In the last few years, we have had a huge -- we've developed opportunities with the Dollar channels and by putting especially specialty products at specialty sizes and cost and there we have been able to grow those sales, but as far as price elasticity and every time we have a price adjustments, we see a little bit of a dip in sales, but by and large we appear to benefit from being a good value and a properly priced items.
Brian Rafn
Okay well my kids eat a lot of your frozen stuff. So you guys do hold on to sizes, so you guys have always been superb on that, not cheating the customer even though the ingredients are going up.
Well give me a sense Gerry, you talked about $4 million in kind of commodity and ingredient. What are you seeing, are you seeing a sense of a plateauing or are there specific ingredients, flour or shortening versus fructose corn syrup or is there anything that's up and continuing to be up, give me a sense of kind of the delta change in some of your ingredients?
Gerald Shreiber
Flour seems to have eased, but I will let Dennis comment on…
Dennis Moore
Brian this is Dennis and as you know flour is or wheat based ingredients are the largest component of the ingredients. However, probably in this quarter they accounted for roughly 20% of the overall increase of $4 million, so that has been trending downwards, but the others like you say sugar or Gerry the sugar and corn syrup and not in particular have been increasing.
So it's kind of an offset, so while the trend in flour is clearly down, the others are not yet at this point. But we are a lot better off I think today than we were a year ago.
Brian Rafn
Talk a little bit about and we haven't spoken about kind of your -- you've done some, certainly some co-branding in the Frozen, a novelty area in the past Minute Maid, Juice Bars and Barq's Root Beer Bars. Are those type of deals somewhat infrequent or episodic or is that something you are always working on those kind of joint ventures?
Gerald Shreiber
We are reasonably happy with what we have done in the past and we are always looking for new opportunities there too, but we have not dismissed co-branding and licensing and we are going to continue to evaluate and press for new opportunities there, but sometimes they just, it's not like they automatically come up and get thrown into our ear.
Brian Rafn
Yes, right, would you say Gerry that today versus say 5 to 10 years ago, given that the sheer size and the upward J&J Snack Foods that you are really now a known brand and it's not like you have to relinquish anything going into the Cokes or Pepsis or many or some of these larger companies, I mean you really have a sizeable presence in that area. Does that make it easier for you today or it's just that, there aren’t that many frequent opportunities.
Gerald Shreiber
You mentioned 2 companies and I respect the heck out of both of them, both the Coke and Pepsi and even though our company is better known and more widely known we are certainly not resting on our laurels.
Brian Rafn
Let me ask, any comment specifically in the Dollar Store area; is it you know new products; I am just talking about the Dollar Store; any new development?
Gerald Shreiber
We’re making inroads there. We have wide variety of products that range from a soft pretzel into a fig and fruit bar and now all of a sudden fruit and juice bar and frozen novelty.
So few years ago if we had this conversion, I might have been at a disadvantage, I am going to say what’s a Dollar Store? Now we’re in most of them, one or several products.
Brian Rafn
And then just specifically, the assault against in kind of the cafeteria to school section vending machines that type of things. What’s been your stance Gerry; are you a success in somewhat mitigating the whole anti-fat, anti-sugar in the K-12, the school cafeteria area?
Gerald Shreiber
It’s an issue; and they are restricting what the children particularly K-12 can have on their menu. We developed products that are more favorably looked at by the school food services group like whole wheat and whole grains pretzels; I don’t know if they are more favorably looked at by the students.
As far as taking all of this sugar out and made them 100% juice and we have a new special product, the pretzel Johnson in there that we are working on to get that to try otherwise whole grains and berries.
Brian Rafn
And then comment on SLUSH PUPPiE, PARROT ICE and ARCTIC BLAST, how dynamic have you been from where you purchase those products, actually developing new flavors, new formulations the distribution type thing? I guess I am asking is how much, how much restructuring, how much, I know you have kind of put into those brands?
Gerald Shreiber
Because of the SLUSH PUPPiE, and to a lesser extent some of our other experiences, we have a new brand that’s called Mix-It-Up where it may literally mix-up a variety of colors and greens, reds, blues and all these different colors and it becomes literally fun for the children and the consumers and we’re mixing up as it becomes almost a brand.
Brian Rafn
One last one Gerry, you talked about $30 million to $35 million, maybe one for Dennis on CapEx, is that more pretty in lines productivity efficiency or are you actually doing any physical footprint plant expansion?
Gerald Shreiber
We expanded 2 plants, but I’ll give it to Dennis.
Dennis Moore
We, and probably of the $12 million that we spend over the past 6 to 9 months that has gone into expansion of two facilities, one in Saint Louis Bakery, manufacturing facility in Texas where we essentially doubled that capacity over relatively small size plant.
Operator
[Operator Instructions] And we have a question from Joseph Petrowski [ph].
Unknown Analyst
Gerry, what kind of -- do you see any growth in the food service part of the business especially with the change you are making with the USDA label on the packaging?
Gerald Shreiber
You say food service; you mean the overall food service business?
Unknown Analyst
Overall food service, but a lot to do with the juice bar business and cup business that goes to the schools?
Gerald Shreiber
Well, we see overall growth opportunities in the food service business and there is always little bits of regulation and challenges; where you take the pieces and sometimes they are more challenged, but our food service business was up strong for the quarter.
Unknown Analyst
How do you see it growing from this point on?
Gerald Shreiber
In increased sales.
Unknown Analyst
Nothing to do with any new products at all?
Gerald Shreiber
New products and increased sales, expansion of all products, Joe, and expansion you see.
Unknown Analyst
Do you think making that change with the USDA is going to affect the business at all in schools?
Gerald Shreiber
Taking that change, is that a specific change that I am not privy to?
Unknown Analyst
As far as changing the labeling with nutrition?
Gerald Shreiber
Oh, well…
Unknown Analyst
Not having the USDA anymore?
Gerald Shreiber
Well, this is a regulation that, no I don't think that's going to impact sales. I think the bigger change there was the nutritional regulation what we had to go through.
Operator
And at this time I show no questions.
Gerald Shreiber
I want to thank everybody for their time today and I look forward to all of you on our next quarterly conference call and hopefully we will have continued good results to report. Thank you.
Operator
Thank you ladies and gentlemen.