Earnings Call Transcript - JJSF Q3 2021

Dan Fachner, CEO

Good morning. I'm Dan Fachner, and welcome to our third quarter earnings call. We are delighted to have you listening in with us. Let me start with some obligatory comments. 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. Again, I'd like to welcome you and thank you for your interest in J&J Snack Foods. We are thrilled to talk today about our Q3 performance. We'd like to begin by thanking our employees across the business for helping deliver a strong quarter. Our business performance is really starting to benefit from an economy that is moving much closer to pre-COVID activities. The strength of our product and brand portfolio enables us to quickly leverage consumer traffic across multiple food service and retail customers. Consumers are embracing the opportunities they missed over this past year, whether that is enjoying a SUPERPRETZEL at the game, or sipping an Iced Tea at the beach with their family. Financially, we continue to strengthen our balance sheet and invest in our growing business. I remain extremely confident in our business and future growth opportunities. So, joining me today are Ken Plunk, Senior Vice President and CFO; Marjorie Roshkoff, Vice President and General Counsel; Bob Pape, Senior Vice President of Sales; Bob Kramer, Vice President, Operations; and James Hamill, Vice President, Corporate Controller. Let me take a few minutes to review our exciting results. Results of operations. Net sales were $324.3 million for the quarter, an increase of 51%. Our business improved across all three segments led by our core Soft Pretzels, churros, ICEEs, and frozen novelty product categories. Both our food service and retail segments returned to pre-COVID sales volume, beating fiscal 2019 sales by 1% and 30%, respectively. Frozen Beverage sales improved significantly, beating the prior year same quarter by 83%. Operating Income was $38.1 million for the quarter, an increase of $57.6 million when compared to last year. Improved sales volume, favorable product mix, and a strong focus on cost efficiencies helped drive improved gross margins and profitability when compared to last quarter. Now, I'd like to review the results of each of our business segments. Food service, just an outstanding quarter for them. Sales to food service customers increased 68% for the quarter and exceeded the pre-COVID 2019 Q3 sales by 1%. Traffic in our key customer venues returned to pre-COVID levels, as anxious consumers embraced activities they had missed over this past year. Sales accelerated through our key channels led by schools, amusement and recreation, restaurants, convenience stores, and theaters. Consumers are also spending more in many of these venues, driving improved average ticket sales. Soft Pretzel sales increased 138% and frozen juices and ICEEs increased 60%. Churros sales and bakery products increased 174% and 24% respectively. Our handheld business had a strong sales quarter exceeding last year by $11.5 million or 155% and was driven by a new product developed for one of our wholesale club customers. Operating income in our food service segment increased $35.9 million in a quarter, driven by higher sales volume, product mix, and cost of goods efficiencies. Gross margin rate improved 380 basis points over the last quarter. Retail Supermarkets continue to show strong performance. Our Retail Supermarket business remains strong even as consumers are returning to food service venues. While our sales for the quarter were 6% below last year, this was against a 38% growth in last year's third quarter. Also, sales for the quarter were 30% better than the same quarter of 2019 which is probably a better comparison of true performance. Our Frozen Novelty business continues to perform well, growing 11% over last year. Soft Pretzels decreased 12%, biscuits 44%, and handhelds 63% in the quarter as retail traffic declined compared to 2020. Operating income, however, increased $1.2 million or 15% in the quarter, driven by improved gross margins and operating expense management. Operating income margins were 16.9%, over 300 basis points better than last year. Frozen Beverages, we're seeing some great momentum here. Sales for the Frozen Beverage business segment increased 83% this quarter compared to last year. Beverage-related sales increased 157%, driven primarily by an increase in traffic. This was led by our amusement channel that experienced sales above pre-COVID 2019 levels, and a continued traffic increase in our mass merchandisers, quick service restaurants, and theater channels. The theater channel continues to improve this quarter, but still lags 2019 sales by over 50%. This is a big improvement from our prior Q2 with expectations that this will continue as consumers return to the movies. Service revenue increased 32% as customers accelerated equipment maintenance in the quarter to support the post-COVID recovery. Machine revenue also increased 32% as customers started to invest more heavily in growth and replacement opportunities. Our Frozen Beverage segment realized an operating profit for the quarter of $11.4 million, led by strong sales increases, gross margin improvement, and operating efficiencies. Operating margins improved to 15.4% in the quarter. Consolidated gross profit as a percentage of sales was 29.7% this quarter, almost a 600 basis points improvement compared to our second quarter. Gross profit performance was driven by improved sales volume and our higher margin product categories, the overall efficiency benefit of higher sales, and continued focus on managing costs. Total operating expense as a percentage of sales was 17.9% in the quarter, leveraging 850 basis points when compared to last year's 26.4%. As sales volume accelerates, the business is doing a great job managing marketing and SG&A expenses, even below pre-COVID spending. Net earnings for the quarter were $28.9 million, that's up $41.5 million when compared to last year. Capital spending and cash flow, our cash and investment securities balance was $305 million as of June 26, 2021, an increase of $27 million from September's year end, led by our strong earnings growth. Our balance sheet remains strong, and we are well-positioned to drive growth for our shareholders. We continue to look for acquisition opportunities and remain focused on the long-term growth opportunity for our business. We spent $34.5 million in capital expenditures through the nine months ended June 26, 2021, as we continue to invest in planned efficiencies and growing our business. We estimate our spending for the year to be about consistent with prior years. A cash dividend of $0.63 a share was declared by our Board of Directors and paid on July 12th, 2021. That cash dividend represents an increase of 10% from the previous quarterly dividend rate of $0.575 per share. We did not buy back any shares of our stock during this quarter. Our investment income this year was $0.5 million, $0.8 million less than the prior year's second quarter as the market stabilized and more money was held in cash reserves. I want to thank you for your continued interest in J&J Snack Foods, and I'm excited to deliver these great numbers to you today. I will now open up the meeting for any questions. Thank you.

Operator, Operator

Thank you. We will now begin the question-and-answer session. We have a question from Ryan Bell. Please go ahead.

Ryan Bell, Analyst

Hey everyone.

Dan Fachner, CEO

Hey Ryan.

Ryan Bell, Analyst

Hey, congrats on a good quarter. Just had a question about the Frozen Beverage business? Would you provide a bit of color about how much of the base has reopened? We appreciate that the business has seen more consistent structural pressures than some of your other business units; amusement channels seem to be doing well. The commentary was that traffic was up in mass merchandise, quick service restaurant, and theater; at this point, are the primary detractors to getting back to normalized levels just the theater channel?

Dan Fachner, CEO

Ryan, it really is. Most of the other channels have come back to normal levels for us. The biggest piece that we are waiting on is the theater business. Remember that theater business for Frozen Beverage or for the ICEE business is about 25%. We are waiting on that coming back, but we feel really strong about all the rest of the business. And we've had some great new business that we've added. If you remember a couple quarters ago, we talked about some diversification, and we've been able to see some of that diversification into accounts come through. I think we mentioned that we're rolling out a program within Krystal's hamburgers in the South and we're rolling out a program at Golden Corral restaurants, and seeing some really great potential new businesses in the pipeline. So we feel really good about it as the theater business is starting to return.

Ryan Bell, Analyst

Thanks. That’s helpful. And then for food service, it actually grew relative to 2019 levels. What's the primary driver of that? Is that amusement as well as restaurants? Can you provide a little bit more context?

Dan Fachner, CEO

The amusement park channel is performing very well. Additionally, the average ticket prices are increasing at many of these locations. In theaters, amusement parks, and even in returning ballparks, we are seeing higher average ticket prices and significant growth in the food service sector.

Ryan Bell, Analyst

Great. Thank you. And then if you could give comments on what you're seeing in terms of input cost inflation, and how you can balance that over the coming months against the huge increases in efficiencies that you're seeing as more of the volumes come back online to the food service and Frozen Beverage business?

Dan Fachner, CEO

Well, we're working really hard at that. It's certainly like everybody, we've taken on some increases from commodities and things like that. But we've also been busy out there passing on some price increases that we're hoping will offset much of that in the fourth quarter. So we're working really hard at that. At the same time, we have some great continuous improvement initiatives going on within the plants that we're also hoping will help offset most of that.

Ryan Bell, Analyst

Great. Thanks. That's it for me.

Dan Fachner, CEO

Thank you, Ryan.

Operator, Operator

Our next question comes from Robert Costello. Please go ahead.

Robert Costello, Analyst

Hello. I have a question about the production. You've closed the plant, I guess, about a year ago and you have a pickup in demand. So how are you balancing the two? And in lieu of that, I saw that the inventories went down by $6 million. So, with this pickup in business, are you having to increase production beyond your expected sales growth just to make up for this pickup?

Dan Fachner, CEO

Yes, there's a lot to that question, Robert and good morning. Good talking with you. We did close down that plant in Chicago and are making most of those products internally now in a different plant. And you're right; like a lot of manufacturers out there today we're challenged with the labor industry and the way that it is and being able to keep up with the heavy demand. But today, we've been able to do that, and so we're continuing to shuffle the different products, the different plants to be able to best produce the way that we can and keep up with the heavy demand out there.

Robert Costello, Analyst

Is it helping that many manufacturers have been facing challenges? How do you think you've managed to differentiate yourself from the issues that others are frequently highlighting? Is it due to your flexible workforce, since not all of your employees are full-time? Can you provide some insight into what has contributed to your success?

Dan Fachner, CEO

Well, I don't know if I have the magic bullet there to give you except that we have a great management team in place who has watched that really closely. We've done a pretty good job with forecasting and working with our plant managers to do the best that we can to keep up with the heavy demand. Like a lot of other manufacturers, that labor shortage, as I mentioned earlier, has been one of those things that we've had to deal with. We've had to pass on some salary increases out there to keep up with the labor force. But we meet on that weekly and try to stay ahead of it as best we can. If I was going to give it a magic bullet, I think there's some really good managers in place who are watching that closely for us.

Robert Costello, Analyst

You're a major player in doughnut manufacturing in the Mid-Atlantic region, and your larger customers now have more stores in Florida than in Pennsylvania. Is there any chance of establishing a plant in Florida in the near future, or is that still a few years down the line?

Dan Fachner, CEO

Well, it's something that we talk about often and with that important customer. It's something that we've considered, but I wouldn't expect it to happen in the real short-term.

Robert Costello, Analyst

All right. Thanks.

Dan Fachner, CEO

Thank you.

Operator, Operator

We have no further questions at this time.

Dan Fachner, CEO

Well, I want to thank everybody for listening in. We appreciate your interest in J&J Snack Foods and we look forward to getting back together with you at our next earnings call. You have a wonderful day. Thank you very much. Bye-bye.

Operator, Operator

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