J&J Snack Foods Corp.
Q1 2008 Earnings Call Transcript

Published: 25 Apr 2008

[Operator:]

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

[Gerald Shreiber:]

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

[Operator:]

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

[Mitch Pinheiro:]

Yes, good morning.

[Gerald Shreiber:]

Mitch who?

[Mitch Pinheiro:]

Mitch Pinheiro with Janney Montgomery Scott.

[Gerald Shreiber:]

Good morning, Mitch, how are you?

[Mitch Pinheiro:]

Good, how are you doing?

[Gerald Shreiber:]

Good.

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Dennis Moore:]

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

[Mitch Pinheiro:]

Right.

[Dennis Moore:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

That is reasonable.

[Mitch Pinheiro:]

Okay. Have you seen any elasticity issues?

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

So- well, but in the first quarter you were buying a lot of wheat at the- when wheat was trading at well over $10 a bushel. Now it has come down under nine. I know that there is basis and all the other premiums, you can not hedge, and you have to factor in. But it still seems like that if you are buying on a spot basis, it is becoming a little more favorable than it was in Q1, it seems to me. I know you bought back in Q1, so now- but going forward, it looks like maybe even in Q3 you start to have- later Q3 you start to have a positive year over- not year over year, but you will-

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

Okay

[Gerald Shreiber:]

-big-headed or lopsided.

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

That’s not what we’re doing.

[Mitch Pinheiro:]

Okay. Yes, so –

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

I believe yes.

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

Thank you Mitch.

[Mitch Pinheiro:]

Thank you Dennis.

[Operator:]

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

[Robert Costello:]

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

[Gerald Shreiber:]

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

[Robert Costello:]

Yes, the kids love them.

[Gerald Shreiber:]

– the Icy Bits label and we expect to introduce this at the NRA show in a couple of weeks. So far our early interest has been positive and we are excited about this opportunity. With respect to any new restaurants we have various tests going on right now with several chains including a couple of our core products. And we’re hopeful that by the first quarter of next year that we will be going from a controlled test perhaps into some limited expansion. But some of these things take years. We’re tracking into the going from the product being developed and accepted into going from the test kitchen into some store testing.

[Robert Costello:]

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

[Gerald Shreiber:]

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

[Robert Costello:]

Right.

[Gerald Shreiber:]

– dairy companies in the country.

[Robert Costello:]

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

[Gerald Shreiber:]

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

[Robert Costello:]

No, it’s a great product. I agree.

[Gerald Shreiber:]

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

[Robert Costello:]

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

[Gerald Shreiber:]

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

[Robert Costello:]

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

[Gerald Shreiber:]

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

[Robert Costello:]

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

[Operator:]

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

[Sarah Lester:]

Good morning.

[Gerald Shreiber:]

Good morning Sarah, how are you?

[Sarah Lester:]

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

[Vincent Melchiorre:]

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

[Sarah Lester:]

Okay.

[Vincent Melchiorre:]

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

[Gerald Shreiber:]

And the bite sized churros [inaudible]?

[Vincent Melchiorre:]

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

[Sarah Lester:]

Okay that’s great. Thank you.

[Vincent Melchiorre:]

Sure.

[Operator:]

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

[Cheryl Cortez:]

Hello.

[Gerald Shreiber:]

Hello Cheryl.

[Cheryl Cortez:]

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

[Gerald Shreiber:]

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

[Cheryl Cortez:]

Okay. Well thanks a lot.

[Operator:]

(Operator Instructions)

[Gerald Shreiber:]

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

[Operator:]

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

[Mitch Pinheiro:]

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

[Dennis Moore:]

Yes.

[Mitch Pinheiro:]

Where do I find the write-off?

[Dennis Moore:]

That would just be in operating income.

[Mitch Pinheiro:]

Okay, about how much was it?

[Dennis Moore:]

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

[Mitch Pinheiro:]

For the six months?

[Dennis Moore:]

Right.

[Mitch Pinheiro:]

Okay. And so was it about half and half?

[Dennis Moore:]

Yes.

[Mitch Pinheiro:]

Okay. My final question, just Gerry getting back to FCB for a second, if I go back five years to 2002, you had EBITDA from FCB of 26.6 million and then in 2007 was a good year for you. It recovered finally back to 25.9 million. So in five years it was basically flat, down slightly. So clearly it’s been challenging over the last five years with the carbonated soft drinks declines probably paralleling or mirroring FCB. But I’m just concerned that all the growth in beverage is non-carb. And it’s all the alternative water and the juices and teas. And what can you do – is FCB going to separate itself from CSD as far as its growth pattern? Or are you going to start to get into – put more barrels in your FCB to do Monsters and Red Bulls, et cetera?

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

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

[Gerald Shreiber:]

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

[Mitch Pinheiro:]

Okay. All right, thanks

[Gerald Shreiber:]

Thank you. Any other questions or comments?

[Operator:]

At this time we have no further questions.

[Gerald Shreiber:]

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

[Operator:]

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