Q3 2020 J & J Snack Foods Corp Earnings Call

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Welcome to the JJ snack foods third quarter earnings Conference call. My name is Charles.

Operator for today's call.

I'm all participants are in listen only mode. Later, we will conduct a question and answer session.

During the question answer session. If you have a question any good press Star then one and you touched on phone.

Please note that this conference is being recorded I will now turn the call over to Gerry Shreiber, Sir you may begin.

Good morning, everybody and welcome to our third quarter Conference call.

With me today are Bob Radano, our senior Vice President and.

Chief operating officer, Bob Pape, Senior Vice President of sales Margery Roscommon, Vice President circuitry and in the House Council.

Remote it's Dennis Moore, our senior Vice President Finance, Dan fashion, or President of our JNJ group, but Dan is calling in from Tennessee.

Oh, I think I got everybody, let me begin.

I'll begin with the obligatory statements.

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 data hero.

We undertake no obligation to publicly revise or update these forward looking statements.

To reflect events or circumstances that arise.

After this date.

Results of operations.

Net sales decreased 34% for the quarter.

Without sales from the act was issued up to I see rooted in October 2019, and February 2020 sales decreased 35%.

We had an operating loss of $19.4 billion compared to operating income of $39 million a year ago.

Food service sales to foodservice customers decreased 40% for the quarter and 14% for the nine months.

Our sales decreased for the quarter was due to decreased sales of soft pretzels frozen juices and ice as sales.

Ensures.

And as well as funnel cake and handheld.

And bakery products.

We had an operating loss of $18.2 billion in the quarter at our foodservice segment compared to operating income of $21 million a year ago.

Primarily because of lower production and sales volumes.

Due to covert 19, which had devastating effect impact on our customers and on ourselves.

This years quarter also included approximately $5 million of course for employee safety and increased covert 19 compensation.

Additionally, we decide to close a manufacturing facility in the Midwest.

During the quarter ever recorded an impairment charge of $5.1 billion.

We expect to reduce manufacturing overhead and distribution caused by about $78 million annually as a result of this plant closure.

Retail supermarkets and groceries.

Oh, the unitary bright spot sales of products to retail supermarkets were up 38% for the quarter.

Soft pretzel sales were up 74% for the quarter sales of frozen juices, and Italian ice is were up 26%.

In health sales were up 6%.

And this good sales were up 56%.

She elsewhere, so were significantly higher for all product lines because of increased sales to supermarkets generally since mid watch 2020 due to the Cove and 19.

Operating income in our retail supermarket segment increased in the quarter to $7.9 billion.

From $3.8 million, a year ago fall due to higher sales.

I see and frozen beverages, which includes Arctic blast slush puppie.

Frozen beverage and related product sales were down 56% in the quarter.

Average related sales alone were down 71%.

Without the sale I see distributors and Bamba IC overall sales were down 60% and beverage related sales were down 78%.

Service revenue for others was down 23%, that's just part of business held up relatively well.

Machine revenue was $6.4 million down from $11.8 million last year.

Last year had two large installation projects for customers.

We had an operating loss in our frozen beverage segment of $9.1 million compared to 14 million $14.2 billion operating income and last year's quarter and again, primarily because of.

Kobin 90.

Consolidated.

Gross profit as a percentage of sales fell 17% in a three month period this year.

Down from 31% last year.

Gross profit percentage decrease primarily because of lower volumes and our foodservice and frozen beverage segment higher costs related to production disruptions due to volume mix changes and expenses related to employee safety and increased covert 19 Commons.

Age and reserves of approximately $1.5 million.

Inventory write down.

Even though total operating expense decreased $5.7 million this quarter to.

A $10.8 million decrease not including the plant shutdown impairment charge.

Operating expenses as a percentage of sales.

Increased to 26% water up from last year was 19.7%.

The percentage increase was because of the drop in sales.

And all right and ability and possibility in a short term to reduce expenses in line with a decrease in sales because a fixed costs that do not fluctuate with sales.

Our EBITDA that's earnings before interest taxes, depreciation and amortization for the past 12 months.

I wanted to $3 million.

Capital spending and cash flow.

Our cash and investment securities balance of 270 million was up $3 million from our March balance as our balance sheet remains strong and we have the we have no liquidity issues doing this over 19 time.

80.

6 million of our investments are in corporate bonds with a purchase price yield to maturity of 2.8% of which 75 million.

Sure within the next two years.

Our back preferred stock and mutual funds 13, but you have stabilizing values since the drop in value at the end of March.

We continue to look for acquisitions as a use of our cash.

Our capital spending was $11 million in a quarter.

Although down from last year in a quarter, we continue to invest and plant efficiencies and growing our our business and have committed and I'm looking at further manufacturing capital projects.

To improve efficiencies on an ongoing basis.

A cash dividend of 57 and a half since a share was declared by our board of directors and paid on July 7th.

We did not fight back any of our stock during the quarter.

Our investment income decreased from $2.0 million last year to $1.3 million. This year, primarily as a function of lower interest rates.

Regarding where we are now.

Net sales for the first four weeks of our current fourth quarter were down approximately 25% from year ago.

Although we cannot estimate whether net sales will continue to be down at the same rate for the balance of the quarter. We expect that our operating results for the fourth quarter with the improved from our third quarter.

Although operating income in a quarter will be materially lower than last year.

As we have said approximately two third of our sales are down to that use and locations that shutdown or sharply curtailed.

Our foodservice operations.

So we anticipate cobot 19 will continue to have a negative impact on our business.

As we have $270 million of cash and marketable securities on our balance sheet, we do not expect to have any liquidity issues.

We have operating our business during the crisis, both would short term consideration and for long term as well.

Im pleased to high priority or continue to keep our employee see well looking for ways to improve our business going forward, including we views of manufacturing and distribution network.

We have planned plans to close a.

Manufacturing facility in the Midwest and we have worked with our customers developing significant new products to sell as they open up.

We continue to be optimistic about our future.

During these unusual tough times.

I want to thank you for your continued interest and look forward to talk in June.

You end up our fourth quarter.

I will now I'll turn it back to the listening audience for any pretty good does and confidence.

Thank you we will now begin the question and answer Sashaying. If you have a question or comment you can press Star then one on your Touchtone phone. If any are you. If you are using your speakerphone. Please pick up your handset first before pursuing any numbers. Our first question comes from Jon Andersen Your line.

Now all pen.

Hi, John.

Hi, Jerry good morning, everybody hope everyone as well.

We are well, we just hope that the sports and leisure and movie industry at schools get well.

Yeah, I don't we all I missed so I Miss all of that.

So you mentioned that.

Your sales during the quarter.

At least the rate of decline.

Got better improved I think you had previously said.

That are in April sales were trending down 45%.

Not again it is.

Sounds like June you are much better trending down, but but 25%.

We cut that in half and I guess my question for you is.

Do you anticipate at this point, given what you're seeing in your foodservice customer base.

And your frozen beverage customer base.

Do you anticipate that.

That rate of decline continues to improve in the second half of the calendar year.

You know, which would correspond with the fourth quarter in the first quarter up your fiscal year. He is the reason.

To believe that.

Yeah, the sequential trend should continue to improve from here.

We're cautiously optimistic we are hopeful.

Oh, once the sports and leisure Oh venues get back to a full time, that's going to make a big difference. The movie theaters are open and schools or are coming back and that represents a significant part of our business.

The improvement that you have seen from April to June.

Which segments.

Or venues or locations have driven that improvement.

And really any of the ones that workloads, it's his new business that we were able to secure.

New business.

We would have had a hell of a year. If we had not lost all of our sports and leisure and movie theaters.

Okay. Okay.

Yeah, Yeah. This is Dennis.

I mean, they saw new business, but what but its new business related to what was Oh I mean, it is the biggest improvement it was because.

You know venues opening up.

Maybe you know there's a lot more venues that are open now than they were in April but there was also the.

I guess the shock of the nickel shutdown so.

A lot of a you know distributors held back ordered and whatnot, but overtime as more and more opened up.

Yeah.

You know it's the primary reason why we have.

No not new business per se.

Right right right Okay.

Okay.

But that's the kind of their cautious optimism I think is the word you use that that we could see.

Sequential improvement from here at the trough is then in the June quarter terms with the sale.

Yes at this point, we certainly hope that's the case and.

Things are.

Contains the venues are continuing to open up and hope that that that continues but.

Yeah, We don't know where was the fact that whether we will continue to increase being down zero or somewhere in between 25% and.

Era, depending obviously on what continues to open up.

Fairpoint.

And then on the the profitability side I think on the the prior conference call. You you mentioned you thought.

You could be.

Profit neutral to maybe up a problem modest profit loss.

Where are you kick in with with they.

Pretty lots of like 19.

Million in the quarter was that.

In line with your expectations and anarchistic this.

I understand you're balancing the.

The need to kind of maintain your capacity and your capabilities.

For the other side this.

But at the same time also trying to manage cost to some extent as we move through it.

You know was the property in line with your expectations and.

And are there additional steps you're taking to reduce costs as we move forward.

I would say that Oh, yeah, I would say that.

The initially some back in April.

The loss is higher than what we would have we anticipated at the time.

And we went into the quarter, we had two primary.

I guess things that we wind to accomplish maintained we like to accomplish one relates to keep their employee safe.

And that in town lot of additional expense not only 5 million dollar job.

Direct expenses in terms of.

Adding a barrier is facing people apart.

Having safety gear or both.

Yes, they can temperature right screening screening all the employee every single day.

For temperature and to make sure that that they're okay. So all those so they're all those direct cost also inefficient because you know plants were not able to.

Ron.

As often as we would have liked one because well volume loss from the Gulf of Mexico clean room.

Got to handle that so all that added more cost.

Then we had anticipated.

The other thing that the other primary.

Oh that we'd like to make sure we attained in the quarter whats can meet our customer requirement.

And can fill all the orders and to some extent we had to do things that I have the additional cost we had come bottleneck be costs have increased.

Increased volumes in certain segments of the business with meant for example.

We might have had no might have it has to make crack on the west coast and normally wouldn't make on east coast, both at a higher cost and with higher distribution costs.

We had individually rack product.

Instead of shipping box there.

A bunch of costs that were added that.

You know were extra costs.

But having said all that we did reduce our.

Operating expenses backing out the.

Yeah impairment charge and the plant shutdown, we do stand by about $10 million, which was a 17% trial.

But again, it's hard when your sales are down thanks art that take out.

Now as much of the cross how she wants and into manufacturing and that the business.

Hi, how are costs.

Did not come down and they did not come down I'd be pursuing one you know our goal as we said before was not quite flash.

Because one we didn't have to go we have enough.

Cash and liquidity on our balance sheet that that we could weather the storm so to speak.

And that we didn't want to do things that would.

Come back by the six months now a year from that.

Yes, I would go a semi cautious approach.

And making those kinds of costs.

The other thing is when you look at I guess, maybe some of the mix like for example, I see this is I see.

Strong period of the year and I see gallon without a you know with after new business that we acquired last year I need gallons, we got 78% mean I did a huge huge drop and so many things you just can't overcome and.

And we then obviously we didn't it but.

So I'd say to answer your question yet the numbers look we're not we're probably more work worse than we had anticipated I would say not.

Finally worse, we obviously when you're saying the downturn books and it's not a lot you can do and it yeah that's going on.

I have not the crack.

That's helpful.

Go ahead. This is Dan fashion or Alan just wanted to add to that two things. One you asked about sales and and sure. We're not we're not exactly sure of what the future holds but.

As you said you know May was better in April June was better than May and July has held up to that number so far as well. So you know so we're encouraged by that fact.

And then the second question around expenses, we were going to continue to to monitor and ER and look at under every rock that we can't we want to be careful not to cut into the bone because as Dennis said, we really don't have too.

But we were going to be diligent about looking at every spot that weekend.

So that we're prepared for the future the best that weekend.

That's helpful. Thank you.

And then you mentioned that manufacturing facility that you closed in the Midwest if that.

Is that.

Ben it's been completed at this point.

And in the seven to 8 million in savings annualized savings associated with that does that began in the the fiscal fourth quarter four or just some additional work there before before you start to realize the benefits of that.

Oh It actually has completed at the end of this month. Dennis you went to answer that question about the savings, but at the where I'm going to say it again I'm on that yet yeah, and as Dan said, he shopping shutting down right now or this week actually some savings will start to tick them they won't be in August and but they won't be at the.

[laughter] run rate of seven $8 million right off the bat, but beginning a yeah beginning in next fiscal year they should be.

Okay, Great last one for me.

You know Jerry you mentioned M&A still you're really looking for deals.

I suppose in this environment.

No one would wish this environment on anyone but it probably creates put some pressure on on companies that aren't as well.

Capitalize as it is you are and I don't know maybe that present, some opportunities or any thoughts or comments on.

On the M&A.

Outlook.

Whether you're seeing some opportunities to pick pick things up.

Challenging environment.

We're looking and we take a I'm a very careful approach.

On the acquisition front, but we've made him in the past and I expect we will make some in the future.

Great. Thank you. Thank you everybody appreciate it and good luck going forward. Thank you.

Thank you. Our next question comes from Todd Brooks. Your line is now open.

Hey, good morning, everybody.

Good morning talk Quantums Gerry.

Jerry I hope you wouldn't know the team are all well and kind of hanging in there as we model our way through the so we are working at higher stronger were not use the best so we're going to come out.

Look into a we're going to come out swinging.

Well I'm looking forward to that and it kind of leads into my first question if I look at.

The June quarter, it's really in my mind kind of a tale of two quarters. There was the <unk> initial digestion of.

Kinda shifts in food service demand spikes in retail grocery demand, which I can I can picture, bringing some distribution inefficiencies with it but when we look at.

Five week period at the ended the quarter that was talked about in the release being down in the mid twenties or at the start to this quarter.

As we've moved further into whatever the new normal lives as we have digested.

Some of shifting lines, maybe between end markets and we've gotten volumes back to this down mid Twentys level does is the company set up for for profitability in the mid Twentys now where does it still require.

More recovery in sales before we can get back to a profitable results.

Well, let me see if I understand the question Yeah. The company. It is and has been adjusting our top our profitability.

Green as sales have dropped and we're confident that we will get back to our profitability levels in the early part of this.

Next fiscal year.

But as far as just the down mid Twentys sales results get us back to a better than breakeven level from a profit Axcelis is yeah. This is Dennis I would say in that range we.

Hopefully would be there.

Okay great.

And the second question I had in it.

I know that Weve used you guys abuse the balance sheet in the past offensively I mean, you talked about it in the March quarter.

Kinda not cutting into the bone, keeping especially human capital resources in place fall of others, where furloughing are laying off employees when I look at marketing expense in the quarter I would've expected.

That expense to be one that could have been more variable and I was wondering if we could talk about that.

Expense line as far as is the company's still playing offense on the marketing side because of the balance sheet allows it to do so.

Well I'm trying to understand the question keep in mind that yeah, leap sports arenas, and leisure and seem and whatnot those kind of.

Programs were pre set as far back as the beginning of our fiscal year, and it's awfully hard to cut them and to Oh re write them. Once the seasons have started but we're spending I think we're spending less on marketing than planned.

And as the business comes back.

Will put our foot.

On the gauge a little bit there.

Yeah, Hi, this okay and also the okay. So the other part of that they had been part of that is that.

The marketing.

No name is kind of a misnomer in that we often ben good selling expenses that well so.

A good part of that is handling and not you know what you would consider marketing or advertising and.

Okay. So if we look at the 22 million spending the quarter what percentage of that would you say was fixed versus variable.

Benaissance.

Yeah, and I'm thinking now.

I would say.

Yeah, probably half so little less than half of that is fixed costs.

Okay.

Great and then two more quick ones.

I know in this quarter there were.

A decent amount of initial covert related expenditures for employee safety.

Incremental employee wages to kind of thank them for their service during the real tough times with the pandemic.

If you think about the 5 million in covert spend during the quarter.

What's the continuing go forward versus kind of a onetime startup nature to the covert expenses.

And we say.

Probably a third of that.

At this point out we would be ongoing.

We're still going to creating for providing mast, we have checkpoints systems and.

So there is some costs added to that.

Okay, Great and then finally, Jerry you touched on kind of new products and new business that you were able to secure anything you could share with us on the new product pipeline coming up by now.

Some of some of the effort switch to packaging solutions post covert, but just any commentary I'm not I'm not new product pipeline would be great and then I'll hop in after we have an array of new products. Some that are a single customer base others that are for foodservice and we're very.

Optimistic that these things will come out.

<unk> either in the fourth quarter over next years first quarter and they will add to our sales and gross.

Okay, great. Thank thank you all very much.

Thank you. Our next question comes from Brian Brian Your line is now open.

Hi, Brian.

Brian Your line is open.

Hello.

Yes, fried chicken area.

Great.

Is there is there anything we should be thinking about.

With the with respect to the percentage of your business that's exposed to venues that facilitate larger gatherings. I mean, we knew a meaningful portion of sales go through malls and shopping centers stadiums arenas theme parks movie theaters in schools to as things get back a bit more to.

<unk> <unk> what are we thinking what type of percentages are.

Our sales would be allocated towards.

Hi venues that are.

Larger gatherings.

And people may be a little bit slower to come back to.

Well well I touched on a mall in the beginning of the sports venues the leisure and theme the Disney's of the world the movie theaters.

So all those venues are going to have an impact on us, but as they come back, albeit slowly we are hopeful that we will be able to.

Increase our locations and thus our sales.

And and so do you see a lot of that being predominantly driven by government policies or by consumer behavior.

Hi, Brian This is Dan I think there's a little mixture of both of those above but we're hopeful that to see a good percentage of that start to come back over the next quarter and maybe even two quarters.

But as Jerry as mentioned you know the ballparks and the theaters and some of the the food service areas that we have suffered from over the last quarter.

Are now starting to open up are predicting the open up over the next month or so.

Great. Thank you that's pretty helpful. And then next year as you're thinking about all of these parts of your businesses that were negatively impacted.

How do you how do you see the lapping of that and the pent up.

Demand and you know increase potential interest in things like sports and.

Movie theaters, and you know theme parks.

Well hopefully if we get this quarter off a we'll be able to project with a little bit more clarity.

As as we move on here, but right now it's still a it's a mixed bag you know I was all set to watch the Yankees Phillies game on TV, the other night and even though there were no fans well they canceled it because of Ah Cove at 19 spreading in the locker room.

Right and you you shut down a one plan is there any risk that another plant and may need to be shut down over the next quarter. So if demand doesn't come back or is that essentially I don't you think the plant. We shut down was acquired a few years back and as it was it was X.

As to our needs and we finally made the Oh.

The decision to a close it up and.

Take care, the severance and whatnot in there and go forward, we still have 17 plants that were operating throughout major geographical locations throughout the country. So we're in good position for production and even better position for distribution.

We need our sales back.

Thanks, that's that's pretty helpful and if if for whatever reason a good number of schools and opening up virtually rather than in person what type of impact would that have on your business virtually that's not help us all right. We'd like schools were opened what they have.

Lets students and their great from a through 12, and they get lunch and they get breaks and whatnot in there because we are feeding them during lunch and breaks.

And is there any way to understand what the impact might be overall in your business where that to happen.

Well, Brian schools health or roughly 5% to 6% of our overall battle.

Okay, and so I guess, but to some extent you know it's not all loss by end because thats why the school districts.

System throughout the country continue seed.

The children, even though they may actually be having class.

And it also as you know, Brian if you're watching it you know there's all across the country. Their schools that are still opened in some not open and so it's hard to put a finger on it but as Dennis said, it's in total its 5% to 6% up our business.

Perfect. That's very helpful. I I think that's that's it for me.

Thank you very much.

Thank you. Our next question comes from a sheet. Your line is now open.

Hi, Good morning. This is actually support wrong I just had a couple of quick question.

Okay I see.

Yeah. So.

In terms of the uptick improvement.

Well you win but what do you with.

Rob Dickerson.

Okay from Jefferies.

Very good.

Okay sure. So one of the questions I had was in terms of the improvement was wondering if you could give a little more color on specific channels like C stores, QSR, where you're seeing the improvement also how is the trends shaped up in deep last month in the month of July compared to the last five weeks of the took water.

Well, our sees yet where business is something that we began focusing on a few years back has been growing nicely.

And we expect that Oh, we have multiple products and C stores now I see pretzels and occasionally one of our.

Other oh products.

But the second part of your question and I'm really not sure how C stores, where June to July, but we're happy with our C store growth and with the exception of having to wrap everything with them, which slows down our process and add some cost.

We're happy with our C store growth.

Got it and in terms of meat seafood sense, what the what other companies because you mentioned like the trends for the last five weeks of June what grinding 24% down year over year was wondering how are those trends shaping up in the month of July.

Too early to tell yet we're still looking at that.

Got it. Thank you and then and the last one for me like in terms of changes or initiatives that you're looking into from Oscar can do.

Was wondering if you couldn't give it anymore color on that.

Sorry, I don't understand the question.

In terms of cost controls that youre looking into so well first of all the initiatives that are due from the cost control perspective.

We've had a oh and ongoing focus on labor a since labour appears to be an issue of almost all over the country. So we've been a working on projects that will control labor and or reduce labor and as gonna be a content.

You'd focus.

I see him in a big in addition to that we've had some plant improvements as well.

And then we mentioned the closure of one of the plants and that's part of their cost improvement that we've been working on.

Got it. Thank you that's it for me.

Thank you once again, if you ever question or comment. Please press Star then one on your Touchtone phone.

It's speakers at this time I show no further questions in queue.

Well, thank you I want to thank everybody.

For.

Being on this conference call, we look forward to talking to all of you again.

At the end of our fourth quarter.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.

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