Q2 2022 J & J Snack Foods Corp Earnings Call
Yes.
Good morning, and welcome to the J&J snack Foods second quarter earnings Conference call. My name is Brandon and I'll be your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question and answer session during which you may Dallas Zero Wonder if you have a question. Please note. It is zero one not star one as a reminder, this conference is being record.
And I will not turn it over to Norberto Uh-huh Investor Relations at J&J snack foods and you may begin sir.
Yeah.
Thank you operator, and good morning, everyone. Thank you for joining the J&J snack foods fiscal 2022 second quarter Conference call. We'll get started in just a minute with management's comments and your questions, but before doing so let me take a minute to read the safe Harbor language.
This call will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, all statements made on this call that do not relate to matters of historical fact should be considered forward looking statements, including statements regarding management's plans strategies goals and objectives.
Our anticipated financial performance industry wide supply constraints and the expected impact of COVID-19 on our business.
These statements are neither promises nor guarantees, but involve known and unknown risks uncertainties and other important factors that may cause our actual results and performance or achievements to be materially different from any future results performance or achievements expressed or implied by the forward looking statements.
Factors discussed in our annual report on Form 10-K for the year ended September 27, 2021, and other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward looking statements made on this call today.
Any such forward looking statements represent managements estimates as of the date of this call may three 2022, while we may elect to update such forward looking statements at some point in the future. We disclaim any obligation to do so even if subsequent events cost us our views to change. In addition, we may also reference certain non.
GAAP metrics, including adjusted EBITDA, which is reconciled to the nearest GAAP metric in the company's earnings release, which can be found in the Investor Relations section of our website at <unk>.
J J snack dot com.
With us on the call today are Dan Fastener, our Chief Executive Officer, and Mr. Ken <unk>, our Chief Financial Officer.
Following managements prepared remarks, we will open the call for questions with that I would now like to turn the call over to Dan patching or J&J snack Foods Chief Executive Officer. Please go ahead Dan.
Thank you Norberto and good morning, everyone. We appreciate you joining us this morning to discuss our second quarter results J&J snack foods had a number of accomplishments throughout the quarter, including new customer wins successful product launches and expanding product distribution.
We delivered an all time high second quarter net sales of nearly $282 million. Despite the unexpected challenges related to the early February implementation of a new ERP system.
We intentionally planned the ERP system launched during fiscal Q2, which as many of you know our seasonally slowest volume quarter.
The implementation created unforeseen temporary operational manufacturing and supply chain challenges that affected the performance of our foodservice and retail segments during the quarter.
Our frozen beverage segment, which already runs on JD Edwards platform was unaffected by the implementation of <unk>.
<unk> heard us talk about picking up some big boulders in order to best position J&J for the future and the ERP system was the largest and most necessary change required to strengthen our supply chain.
Having a robust ERP platform provides a more seamless integrated process from raw materials through production warehousing inventory management and electronic order fulfillment.
It is also vital to supporting many of the key initiatives, we have discussed over the past several quarters focused on increasing operational efficiencies expanding capacity accelerating our growth and improving margins. We are confident that this system will strengthen our operating infrastructure and deliver meaningful bend.
<unk> to our customers and shareholders today and for many years to come.
We estimate that these issues had a onetime impact on fiscal second quarter sales of approximately $20 million.
And approximately $4 5 million and operating income.
Taking the one time impact of the ERP implementation sales across foodservice and retail would have grown by approximately 11% with overall sales growing by approximately 18% along with the improved results across much of the rest of the income statement.
While we are disappointed by the impact that this had on our Q2 results I am proud of the way that our team stepped up to resolve these issues and to serve our customers. Thanks to their efforts our business has accelerated in April and we are confident that these issues were isolated this quarter and should not have any further.
Material impact going forward.
As we have discussed on prior calls our industry continues to experience sustained inflationary pressures across the supply and production chain rising.
The rising costs from sourcing ingredients and manufacturing to.
The packaging and distribution continue to pose a significant headwind to our margins and bottom line.
For the quarter key product ingredients like flour egg dairy oils chocolates and meets increased by more than 10% to our cost just three months ago.
To offset these challenges we implemented two price increases totaling a 9% to 10% increase and we expect to institute a third round in the near future that would most likely become effective sometime during our fiscal fourth quarter.
Our most right. Most recent price increase did not take full effect until early April and was therefore, only partially reflected in our second quarter results.
As a reminder, many of our partners and customers require a 60 day notice before our price increase can be implemented and the same time, we are aggressively implementing numerous cost reduction initiatives across procurement R&D production and distribution to drive additional efficiencies.
And cost savings.
We remain confident in our plans to build stronger margins in this business as we execute on our mix of price increases an ever sharper promotional strategies as well as a disciplined initiatives to reduce cost.
Despite these near term challenges, we remain extremely optimistic about J&J future.
The biggest affirmation of our growth opportunity is the strength of our products and brands, which are beloved by customers of all ages and backgrounds.
Incremental distribution across all classes of trade together with continuous innovation and enhanced brand marketing will remain key levers for further accelerated growth.
As Ken will discuss in greater detail, we generated record second quarter net sales and it was our third consecutive quarter of net sales exceeding pre COVID-19 levels.
Now commenting on each of our three segments food.
Food services continues to see healthy results led by strong growth in our pretzels and churros products as well as in our handhelds, which despite having a difficult comp versus the prior year still grew by two 6%.
Key drivers of this performance were organic growth aided by continuous foodservice recovery as well as accelerated pace and new customer wins other.
Other product lines, such as frozen novelties were impacted by the ERP delays and saw a 31% decline in Q2. However, I am pleased to report that frozen novelties sales have experienced a rebound in April .
Our retail segment, which was also impacted by the ERP delays as well as a challenging comparison versus a strong performance in the prior year net.
Net sales in our retail segment increased 19% versus the comparable 2019 period. Despite the ERP impact led by sales of our pretzel products.
For the full portfolio, we expect positive effects of current and new distribution gains and increased promotional activity and the effects of the price actions to drive momentum for our third and fourth quarter.
Moving to our frozen beverage segment.
This segment was not impacted by the various ERP disruptions. Thus it would be more reflective of the underlying momentum in our business sales grew by 50% versus Q2 of 2021 to $64 4 million from $42 9 million, we are seeing strong growth not only in our.
ICEE products, but also in the sales and servicing of machines.
As it relates to customer wins, we continue to have a healthy pipeline of new customers, including most Peter Piper Pizza and landmark cinemas as well as continued strong demand and growth opportunities with existing customers, including America's leading coffee retailer convenience stores and movie theaters.
Now, let's talk more about product launches and innovation.
We recently launched the Gelato line under our Luigi's brand with flavors, including MIT chocolate, Italian cannoli and sweet cream churro.
And our frozen beverages, we have some great new ICEE flavors being released.
In retail we are piloting and researching new ICEE sandwich cream cookies were also preparing to launch new Super pretzel filled by flavors and a sweet cinnamon Pretzel line extension later this year.
We also are getting ready to launch a new <unk> brand in foodservice. This will be supported by fresh graphics and targeted promotions.
Churros are trending up with 78% awareness in the U S offer solid margins and are easier to prep for operators such as quick serve restaurants movie theaters and adventure parks.
Finally, we continue to see significant opportunity in the pet segment.
Recent selling and promotional focus on dog sitters has resulted in a significantly 22 point gain in ACB at retail and a 14% increase in sales.
As we focus efforts on dog stores through fiscal 2022, we will build this momentum in 2023 with a new fully integrated marketing campaign.
As it relates to M&A, we continue to be highly focused and disciplined in our approach. We are actively evaluating opportunities that will be accretive to our business fit within our portfolio and complement our areas of expertise.
We are confident that there are opportunities for us to grow inorganically.
And hope to be in a position to extend our long and successful track record on the acquisition front in the near future.
In closing.
While there is no doubt that operate that that the operating environment remains highly dynamic our strategy remains the same.
Execute for sustainable growth through strengthened capabilities in operations innovation marketing and execution.
Looking ahead consumer spending remains healthy despite macroeconomic challenges and.
And we continue to see strong demand for our products as a growing number of consumers return to their favorite amusement parks restaurants retailers and outdoor venues.
One trend that stands out is that consumers are more willing than ever to treat themselves and enjoy our products inside or outside their home.
We expect these positive trends and the operating and financial benefits of our recent initiatives to become more visible in our results as we move into the second half of fiscal 2022.
I would now like to turn the call over to Kim Plunk CFO to review our financial performance Ken.
Thank you Dan and good morning, everyone, taking a look at the results for the second quarter of fiscal 2022.
We're pleased with the continued strength and resiliency of the business, surpassing pre COVID-19 sales for the third consecutive quarter.
Net sales increased by nine 9% year over year to $281 5 million.
And by one 9% when compared to fiscal Q2 2019.
These topline results represent the highest fiscal second quarter revenue in the company's 50 year history.
At the same time, our performance could have been even better this quarter.
Negatively impacted by the ERP conversion challenge as Dan mentioned earlier.
We estimate that the operational supply chain challenges, resulting from the ERP implementation impact sales by $20 million in the quarter.
Our improving sales performance was led by a four 1% increase in foodservice to $176 3 million.
A 50% jump in the frozen beverages segment to $64 4 million.
Partially offset by a seven 2% decline in our retail segment.
To $40 8 million.
Our retail business was lapping a 17% increase in last year's second quarter.
Third service continues to be our largest segment representing 63% of total sales.
While the frozen beverages segment accounted for 23% of total sales in our retail segment, representing the balance or.
Or 14% of overall sales for the quarter.
Foodservice growth of four 1% was led by 17, 6% growth in pretzels.
An 18, 5% growth in Churros as we prioritize customer opportunities in these core products.
Also sales of handhelds increased two 6%.
On top of a 168% increase last year.
This growth was offset by flat sales in bakery and declines across frozen novelties.
The decrease in retail sales.
It was led by a 52, 3% decline in handheld sales.
A 4% decline in biscuits, and the two 4% decline in frozen novelties.
Soft pretzel sales were flat year over year.
Regarding our third segment frozen beverages that 50% increase reflected healthy sales growth across all the segments, including.
A 90, 999% increase in beverage sales.
And $15, three and 33, 2% increase in maintenance of machine sales respectively.
This led to a gross profit of $65 $3 million, an increase of seven 3% compared to the previous year.
Where we had a gross margin of 23, 2%.
This was a slight drop compared to 23, 8% in Q2 of fiscal 2021.
As Dan mentioned, the combination of our ERP delays in the ongoing inflationary challenges combine to have a marked impact on our margins. However, we are confident in our plans to resolve and manage these headwinds as we move forward and expect gross margins to improve in the back half of the year.
Moving down the income statement.
Total operating expenses increased from $53 7 million to $61 3 million, representing 21, 8% of sales for the quarter.
Baird to 29% in Q2 of 2021.
These results largely reflect the negative impact caused by the ERP implementation disruptions.
And to a lesser degree the inflationary pressures across certain expense line items.
Such as depreciation expense.
Which was 10, 1% of sales compared to nine 9% in fiscal 2021.
Overall operating income declined from $7 2 million to $4 1 million for the quarter.
Compared to the prior year.
After taking into account income taxes.
<unk> 9 million compared to $1 8 million in Q2 of 2021.
Net earnings decreased to $3 3 million.
Resulting in diluted earnings per share of <unk> 17, a share compared to 32 a share in the prior period in the prior year period.
Effective tax rate was 22% for the quarter.
And on an adjusted EBITDA basis, we saw declined $18 million from $21 8 million in the prior year.
On the back of the decrease in net earnings year to date, adjusted EBITDA has improved 22% compared to the first six months of fiscal 2021.
Taking a look at our balance sheet and our liquidity position. We continue to have a healthy balance sheet and overall liquidity position with $231 million in cash and marketable securities and zero debt.
Our cash position did decline in the quarter, driven by timing of strategic capital investments and higher cost of goods impacting inventory valuation.
And temporary working capital impacts due to the ERP implementation.
The second quarter is historically, our lowest cash flow period for the company as we build inventory for the spring and summer seasons.
In closing our second quarter results reflect a resilient and healthy business.
As sales continue to grow despite the temporary impacts of the ERP implementation.
As I hopefully made it clear on today's call and in our previous communications.
The management team and the board are aligned on our strategy and focus on our long term long term success of the company.
We are making the necessary investments.
To build additional capacity improve operating efficiency.
And leverage our winning portfolio of brands to continue the 50 year legacy of J&J snack foods.
I would now like to open the call to questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please don't zero one on your Touchtone phone.
If you'd like to be removed from the queue. Please dial zero too.
If you're on a speaker phone please pick up your handset first before dialing.
Once again, if you have a question please Dallas zero one on your Touchtone phone.
And underlying we have Ryan Bill. Please go ahead.
Hi, Hugh.
You highlighted some pricing increases that you took in early April would you be able to elaborate a bit on the magnitude of those price increases and then maybe how you think about that impacting margins over the next few quarters.
Yes, good morning, Ryan how are you today.
We did highlight that we did take a second price increase that.
Went into effect some in the first quarter, but will be fully impacted in our second quarter.
On the ICEE side, we had the full impact in the second quarter.
But excuse me on the on the J&J side full impact on the third quarter and not in the second quarter pulling back on the second or third quarter in a partial impact on the second.
As far as the percentage, we're in that 9% to 10% price range.
Sure.
The impact for us and we expect that to have a significant meaning as we go forward through the second half of the year.
In addition to that I also highlight that we've taken a look at implementing a third price increase that would come into play probably later in our fourth quarter.
Thanks for those details and then in terms of the price increases that are in the market how much of the increase in the costs with back cover as Youre contemplating I guess another price increase on the horizon.
Yeah Ryan.
The challenge with that question is the pace of fund, which.
Cost increases are coming.
Just if.
If you just look from Q1 to say December to Q2.
Our key commodities and packaging collectively probably increased 10% so youre looking at.
$8 million $9 million of cost of goods increase just since the end of Q1.
So I think as we respond and look at what we're doing on pricing.
Yeah.
One of the big challenges is locking that in right as the costs continuing to go up just to give you a few examples.
Flower went up 8%.
Since the end of Q1.
Eggs went up 37% dairy went up 12% meat went up 18%.
Packaging went up 14% some of that is tied to commodities like wheat that have gone up over 30%.
Since October of last year, and feel Thats gone up almost 50% so.
Yeah, I think as we answered those questions.
The thing we have to keep in mind is the pace upon which these costs continue to increase the.
The pricing action that.
We've taken both last year and then what's hitting really most of it in April forward.
Collectively is expected to cover $28 million to $30 million of cost increase since last year Q4.
As we look at the third price increase.
That is anticipation of covering what we saw happen in Q2, and then expectations in Q3 and Q4 continued increases in some of these commodities.
So.
It's all about trying to keep up with the pace of those increases.
Thanks, and then.
Your ERP system that you implemented.
You highlighted some challenges that were there with the initial implementation would.
Would you be able to talk about whether or not you've gotten most of the kinks worked out or the degree to which that's something that's behind us at this point.
Brian we really feel like it is like any of these that get implemented and sometimes go south a little bit.
Always a continual progression to make it better and better each day and that is the process that we're in today.
Do see as I talked about earlier, we see April bounced back to normal and above range.
We say our first week of May continuing that so we have all signs pointing pointing towards that we are out of the worst of it and and now are just fine tuning a few pieces of it.
Thanks, and that that April bouncing back that's talking more about the issues that you had with the ERP system versus underlying demand trends.
No it is.
Demand has been strong all along it is with the ERP system.
Some of the picking and scheduling issues that we had with that.
Great. Thank you that's it for me.
Thank you.
We have Rob Dickerson. Please go ahead.
Great. Thanks, so much.
<unk>.
Alright.
I just had a question around the margin side.
Obviously margin squeeze in Q2.
Given the cost price lag.
What im kind of hearing is your demand is still strong but given.
The increase incremental increase on the cost side.
And then kind of a third round hopefully coming sometime in Q4.
We should still be expecting some margin pressure in Q3, and then the hope would be as.
Incremental pricing would come through Q4.
Youre, hoping you're taking enough pricing to kind of hopefully, let's say get back to more kind of pre COVID-19 margins, but that's more of a 'twenty three are bad.
That makes sense.
Help me with that.
Yes, I think thats ill, let Ken talk to it in a minute good morning to Rob How're you doing.
<unk>.
I think you said that pretty well, we'll continue to have some pressures into the third and fourth quarter. However, we have a good increase taken effect fully taken effect beginning April .
That will that will lighten that song right and we will continue to monitor what happens as we get into our third one and as that helps out in the fourth quarter. I think we had talked about getting back to pre COVID-19 margin levels by the end of this year and I think the last time, you and I talked we talked a little bit.
About that being delayed maybe three to six months and Thats, probably the range that we're in but youll continue to see the margins improved throughout that period.
Okay Fair enough and then.
Just one last one for me.
On the inventory side you made the comment.
Prepared remarks, just around kind of how you normally we'd built some inventories in Q2 right.
Get through the heavier seasonal part of the year.
I guess just with the ERP challenges you had through Q2 and usually right.
The step up on the revenue side Q3, Q4 like how are you doing with those inventories is there any risk to that inventory as we get into Q3 or.
ERP situation with fixed inventories in a great spot demand is good et cetera. Thanks.
Yes.
Again I'll talk to you again, if you have anything to add to a demand is high right. So we feel very comfortable with the demand out there our inventory is in a good spot to build the supply that.
Our ERP system looks to be fixed in a way that we're able to get it out the door and into our customers hands. So we're feeling comfortable with all three of them.
Alright Super Thank you guys.
Thank you Rob Thanks, Ralph.
Once again, if you have a question. Please do zero one on your Touchtone phone and up next we have Todd Brooks. Please go ahead.
Hey, good morning, Todd.
Alright.
Few questions for you.
<unk>.
One can we talk to I know you talked about $20 million in revenue loss due to the impact of ERP during this quarter.
Is that 20 million fully lost or is there any of that gets deferred into Q3, either due to customer inventories being drawn down and you need to replenish those as you're working your way through.
ERP issues I, just I wanted to size it.
Revenue, if we see any of this come back in Q3.
I think it's a great question Todd it's hard to put your finger on completely I do think that inventories were drawn down and our customers that we have opportunity to refill that pipeline and I believe that is happening. We also have strong demand. So do I believe that we can pick.
Some of that 20 million absolutely how much of it it's pretty hard to put.
Number two yes.
I would add to it the savings that lead time, certainly some of that we think will come in.
Q3, but I certainly couldn't sit here and tell you how much of it I mean, there is some ourselves in that number.
But the other side of that points to a little bit of that moving.
Is that sales in April .
<unk> has started out really well again as we've gotten beyond some of the challenges with the.
The system that impacted.
Q2, we're now starting to see sales.
Double digit.
Growth over 2019 so.
My Hunch is some of that is a bit of that Q2 flipping into Q3.
That's great. Thanks, and then just to follow up on that when you look at the disruptions.
From the implementation how impacted did your customers get where stock outs a problem and is that any issue as you know in negotiating this next round of.
Pricing increases that will go.
Into effect in Q4 was there any kind of service issue at the retail or the foodservice customer level that undercuts, maybe your ability to fully get the price increases that you are targeting.
Well, it's certainly a concern.
We value our customers deeply and so we've tried to handhold people throughout this period of time, our sales staff did a tremendous job stepping up and communicating with the customers and alongside the operational team letting them know, where we stood we are getting the products back.
Out there today feel like that we have the opportunity to pass on that third price increase because of what's happening in the commodity side of things and they are aware of that but yes, we do have to live up to the great service and that's what we believe the full conversion did JD Edwards will do for us so okay.
It's a good question.
Two more quick ones.
One can you were talking about the commodity cost pressures in the quarter and I think originally our outlook was that maybe we'd see some moderation in the second half of the calendar year on commodities I guess I'm wondering with the reality of the increases that we saw have contracting our hedging practices.
James just now kind of saying, Okay. We think this is going to persist through calendar 'twenty two and are you more fully contracted or hedged than where you were entering this quarter and if so any key categories you can share with us your hedge fund.
Yeah, well first of all our procurement team I think Todd, particularly in this environment, we all talk about this being.
Kind of probably the most difficult inflationary environment facing our career, you're going back 45 to 50 years I think until these kinds of increases are hitting you.
But they just took you through a review a couple of weeks ago and do a really good job of hedging what youre talking about flour eggs.
Oils.
For example, I think we are hedged about.
14 days, depending on the type of flat days 14 weeks, depending on the type of flower.
Many other categories over 'twenty, but even the decision on when to hedge it obviously is a challenge.
The situation in the Ukraine is not getting any better and the outlook on 2023 as it relates to wheat.
Continues to be a concern for all the companies that.
Use that as an ingredient in their products.
But I would speak for that group and I think Dan would agree with me that.
We are hedging.
To the best ability that we have and I think doing it in the right way, but it's a day to day challenge.
The team has done an outstanding job Todd, especially in the environment that we're in today.
Okay, Great and a final one for me if I can.
And I know given what kind of we've gone through since the onset of the war and obviously, we're just battling through ERP that you guys had in the quarter.
You didn't really call out omicron impacts in January is there any way you can size maybe.
Any sort of revenue fall off that you saw either from ability to staff and produce on your end or maybe end customer demand in January .
Normalized what this revenue number for this quarter could it looks like without really three discrete headwinds on your part.
Well, if there was an impact it would have been in early January right.
And so we probably had a.
A slight impact maybe even in the theater group as it started to continue to rise.
But I don't know that we've put a number to that China have you thought about that at all.
No I have I think.
Again, we tried to highlight it in.
Script.
When we look.
Look at adding the $20 million back and you look at the growth versus 19 and 20.
Yeah, I'd feel pretty good about that given the conditions given youre seeing elasticity kick in in some areas.
We beat 2019 and last year, even with the challenges of that.
So.
January .
We were tracking along pretty well and pretty pleased with where our business was we're adding new.
Customers, adding new Skus.
So theres probably NIM. If there is an impact it was probably in theatres in the month of January but I wouldn't I wouldn't call it significant.
Okay, great. Thanks, I'll pass it along.
Thank you Todd.
Thank you we have no further questions at this time I will now turn it back to CEO , Dan <unk> for closing remarks.
Thank you operator, I want to take this opportunity to express my deep gratitude and appreciation to all of our employees, who have consistently demonstrated their ability to offset challenges putting J&J snack foods on a path for continued success our greatest asset is our people whose commitment.
<unk> us to achieve our goals. We are also very grateful to our customers for their patience and loyalty as we work to resolve the ERP transition issues in the second quarter.
Thank you everyone for joining us on the call today. We appreciate your interest and continued support and look forward to updating you on our progress during our third quarter. Thank you very much.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for joining you may now disconnect.
Yes.
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