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J&J Snack Foods Corp  (NASDAQ:JJSF)
Q2 2019 Earnings Call
April 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the J&J Snack Foods Second Quarter Earnings Conference Call. My name is Sylvia, and I will your operator for today's call. At this time, all participants are in a listen-only mode. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Gerry Shreiber. Gerry, you may begin.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Thank you, Sylvia, and good morning, everybody, and welcome to our second quarter conference call. I'm Gerry Shreiber, and with me in the room today is Bob Radano, our COO; Gerry Law, our Senior Vice President and assistant to me; Dennis Moore, our Chief Financial Officer; Marjorie Roshkoff, Vice President, Legal; and Bob Pape, Senior Vice President of Sales. Also with us is Bo Powell, Vice President of Food Service; and in a remote location in California is Dan Fachner, President of our ICEE Group.

I will begin with the obligatory statement. The forward-looking statements contained herein are subject to certain and uncertainties that could cause actual results to differ materially from those projected in these 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.

Well, we're pleased to announce that we had another good quarter. I will give you the results of operations. Net sales increased 4% for the quarter and 3% for the six months. For the quarter, our net earnings increased by 14% to $20.4 million or $1.08 a share from $17.8 million or $0.95 a share a year ago. For the six months, our net earnings were $37.9 million, $2 a share compared to $54.1 million, $2.88 a share a year ago. But last year's first quarter included tax benefits from the income tax changes enacted in December 2017.

Our operating income increased by 5% in both the quarter and the six months. Our EBITDA that's earnings before interest, taxes, depreciation and amortization for the past 12 months was $168 million.

Food Service. Sales were up 1% for the quarter and 2% for the six months. Our sales increase for the quarter was due to increased sales of soft pretzels, up 1%; churros, up 3%; and funnel cake, up 39%. Sales of frozen juice bars and ices were down 5% for the quarter. Bakery sales were unchanged. And sales of handhelds were down 14%. Our sales increase of 2% for the six months was due to increased sales of soft pretzels, up 1%; churros, up 3%; and funnel cake, up 23%. Sales of frozen juice bars and ices were down 1% in the quarter. Bakery sales were up 4% and funnel cake sales were up 23%.

Retail Supermarkets or grocery. Sales of products to Retail Supermarkets were down 1% for the quarter and unchanged for the six months. Soft pretzel sales, however, were up 7% for the quarter and 2% for the six months. And sales of frozen juice bars and Italian ices were down 5% for the quarter and up 3% for the six months. Handheld sales were down for the quarter and for the six months.

ICEE and frozen beverages, which includes ICEE, Arctic Blast and Slush Puppie. Frozen beverage and related product sales were up 15% in the quarter and 8% in the six months. Beverage-related sales alone were up 1% in the quarter and down 2% for the six months. Gallon sales were flat in our base ICEE business. Service revenue for others was up 4% in the quarter and the six months. Sales of beverage machines and related revenue were up $7.3 million for the quarter and $8.7 million for the six months on higher sales to customers.

Consolidated. Gross profit as a percentage of sales was 28.7% in the three months period this year and 29.04% last year. The decrease resulted from the increased sales of lower margin beverage machines as gross profit percentage in Food Service and Retail Supermarkets was higher than last year.

Total operating expense as a percentage of sales was 19.7% in the quarter down from last year's 20.2%. The decrease was primarily due to lower freight cost and lower selling and marketing expense.

Capital spending and cash flow. Our cash and investment securities balance of $287 million was down 1% from our December balance. We continue to look for acquisitions as a use of our cash. $136 million of our investments are in corporate bonds with a yield to maturity of about 2.9%. Our capital spending was $15 million in the quarter as we continue to invest in plant efficiencies and growing our business. We estimate our spending for the year to be about $50 million.

A cash dividend of $0.50 a share was declared by our Board of Directors and paid on April 4th, 2019. We did not buyback any shares of our stock during the quarter.

Commentary. Sales of our Food Service product increased this quarter. Products, I'm sorry, primarily due to a limited held time for sale of funnel cakes to a quick service restaurant chain, which ended in the quarter. Sales of a pretzels were strong to school food service, but were slightly lower to restaurant chains. Churros sales were up 3%, with sales up across the board.

Operating income on our Food Service segment increased from $18.5 million to $19.6 million, primarily because of lower marketing and distribution expenses and increased pricing, which began to take effect at the end of our second quarter. Soft pretzel sales in our Retail Supermarkets segment were up a strong 7% in the quarter, primarily because of sales of Auntie Anne's soft pretzels. Operating income was up modest in the quarter.

The sales increase in our Frozen Beverage segment was driven primarily by higher machine sales I have previously mentioned with a modest increase in operating income as a result. Our investment income included $760,000 of unrealized gains this quarter, and $267,000 of unrealized losses for the six months. Our effective tax rate was 26.1% this quarter, lower than our anticipated rate of 27.5% going forward.

Thank you for your continued interest. And I'll now turn it back to our listeners for any kind of Q&A.

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Jon Andersen.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Good morning, John. How are you?

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

I'm good. Good morning, Gerry. How are you, and the rest of the team?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Good, thank you.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Excellent. Let's see, I wanted to start out with the Food Service business, and ask you a little bit about the soft pretzel business grew, it looks like, in aggregate in Food Service but wasn't particularly strong in the quarter. I think you even mentioned that you may have had slightly lower sales to restaurants. So I know this has been a big focus area for you and the company over the past several years, and you've seen strong growth soft pretzels and in restaurants. Are you seeing kind of a plateauing of that opportunity? Or is this something just kind of unique in the quarter? And how do you think about the restaurant opportunity within Food Service going forward?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, we identified the fast food and restaurant businesses about four years ago, and we really jumped off flying high and increased year-after-year. It kind of had stabilized the last six months or so, although we are still growing in that sector and we're still very, very bullish on this sector going forward. But soft pretzels are not new to that segment anymore. They're in there and now we have to figure and tickle ways to grow them each quarter.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Okay. But you don't see -- was there kind of sometimes these different form factors, whether it be a type of bread or pretzel as opposed to a traditional role or appetizer? Have you seen any kind of shift away or any kind of broader trend that concerns you? Or...

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

(inaudible) as this product introduction and whatnot remains stabilized, we're looking for ways to grow that again. And work with the few restaurant chains that are not selling soft pretzels yet. So again, like I said I'm very, very bullish on this segment long term.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Okay. And then I think last quarter you had a big quarter in the bakery business. And I noticed the bakery business was flat this quarter. Wondering if you could talk a little bit about the dynamic there? What may be you're bumping up against some tough comparisons that I can't quite remember. You may have had some co-packing business year-ago that came on. But if you could talk a little about that leveling out baking business and why that happened and what to expects going forward?

Gerard Law -- Senior Vice President, Assistant to the President

Yes, Jon, we saw some slow down in school cookies a little bit. We did roll over some co-packing opportunities that had launched last year. And we had a -- another co-pack opportunity that have moved into another quarter.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

And is matter of fact Gerry and I will discuss just yesterday looking ahead for the next three to six months, how we're going to handle all of this volume which appears to be coming. So I don't notice or see any particular slow down there.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Terrific. That's great to hear. Other one for me that is soft pretzels business in supermarket was so strong at 7%. We're not seeing that kind of growth, generally speaking, in the supermarket. Is this just you getting your -- kind of your hands on Auntie Anne's and putting, I don't know, marketing or merchandising or product support behind it? Like what's going on there?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

(inaudible) that, that has been increasing for us for some time, and now let's more pronounced. I think we've a good team out there in retail grocery and they're executive well. We're hopeful that we can continue with similar gains for the rest of the year.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Okay. And I you don't have anything do with retail side, right, the shops and snack bars?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

A couple of them. We have one store that remains open...

Unidentified Speaker --

(inaudible)

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

No, no. We have nothing to do with Auntie Anne. I'm sorry. I'm thinking of Bob.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

That's it. Okay.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

We're not involved in that at all. We own -- we bought the license for Auntie Anne's which is a good brand, and that is for both food service and grocery. We've nothing to do with retail.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Got it. Now Frozen Beverages, we've talked about these machine sales in the past. I know they're very difficult to predict. It's hard, impossible for us to predict. I'm guessing fairly difficult for you to predict. But what happens when you have a big quarter like that? What's the end market situation that's going on?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

We sell the machines, we collect the revenue from it, And then we try influence the buyers of the machine to use our brand, which could be ICEE or Slush Puppie or what not in there, instead of going with the -- one of the colas or something that they're creating from ground zero. So on the one side, we have the revenue. And on the other side, we have a challenge how we create that revenue into additional sales.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Are you seeing more of these machines using other syrups than you have in the past? Does that become a tougher thing to keep the beverage side of the business?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Dan, you're on the phone, why don't you comment on that?

Daniel Fachner -- J&J Snack Foods Corp.

Jon nice to talk with you. I am not saying anything new on that front at all. We have always had challenges in the business. And once you sell a machine and getting our products in there and we're having great success with that, and it's no more challenging today than it's always been

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Good to hear from you as well. I don't hear you on the call that, so that was nice. Last one for me, I'll get back in the queue. I think you mentioned, Gerry you mentioned pricing coming on late in the quarter. What kind of pricing have you gotten? Has it met your expectations? And should we expect that to make a bigger contribution in the second half of your fiscal year given timing?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, I'll answer the last part of your question, first (inaudible) expect to have a bigger impact, particularly as we roll into the seasonal summer months. We got some pricing, it's never easy and we've always been customer-oriented, but the pricing is pretty much in effect across all product lines in Food Service and in Retail, and we look forward to capitalizing on that.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Great. Thanks so much, everybody. Appreciated.

Operator

And our next question comes from Robert.

Robert Costello -- Costello Asset Management -- Analyst

This is Bob Costello.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Hi, How are you?

Robert Costello -- Costello Asset Management -- Analyst

Good. Distribution cost, you mentioned they being down whereas most people have had increases in distribution cost, especially since the beginning of the year where trucking rates popped. So how are you able to get the comparison to go down for you unlike others?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Look like we lapped it, Bob. And as a matter of fact, when you were in Florida, you and I spoke when you were gone around looking at our location there. That same day I got a -- I had a chance to look at our distribution cost, because again it was very constrained to us. And it looks like they have plateaued. And from this point on, it will not be as much as a (inaudible) in our earnings or in our assets at what it was.

Robert Costello -- Costello Asset Management -- Analyst

Right. Other question. The movie business up until last weekend and in the country it was down 16%. Obviously, it's improved. What impact if any and what improvement might you see going forward with all the attendance?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, if we pack them in, in the movies, and particularly if it is kids or adults with a kids mind oriented, we will do more business at the concessions. We have products in the concessions both on the beverage side and on the snack and pretzel side. So we're hopeful even though they were down double digits, we're hopeful of filling in those pieces.

Robert Costello -- Costello Asset Management -- Analyst

Right. Right. What about overall the sports arenas that you, the business has been? And what is your expectation?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, here in Philadelphia, with the Phillies in first place, it's been good. And again, we are in most of the stadiums and arenas across the country. It's hockey season. It's basketball season. I have a tendency to root for a long series in there, because if they are open and if they're playing we move our couple of hundred cases at each and every location across the country. So we're having a good year with our leisure and theater business and we expect that to continue.

Robert Costello -- Costello Asset Management -- Analyst

All right. Last question. You mentioned your cash and securities. What's the maturity on those bonds that you have with the average?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Dennis?

Dennis Moore -- Chief Financial Officer, Senior Vice President, Treasurer & Director

I think they all mature within three years from now. Most -- and I guess about 70%, 80% or so in the next two years.

Robert Costello -- Costello Asset Management -- Analyst

Right. Related to that. So if you add do the math you're sitting on about 10% of your stock prices in cash right? Is there any talk of doing anything more than just acquisition with that? Or is that still your plan?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, we have the cash, and then -- and we're looking at different possibilities of acquisitions. We're not going to let that money burn a hole in our packet, but it's nice to know that we have that in reserve. And it will be -- there's no doubt it will be used. And we make acquisitions in the past and we expect to make acquisitions in the future.

Robert Costello -- Costello Asset Management -- Analyst

Right, but would you consider at all doing a special dividend at all or no?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Probably not because from a conservative viewpoint I think the best use of our cash is for acquisitions. We have increased the dividends multiple times over the past 10 years, And we're now paying a healthy $2 a share I believe. So as an investor, as a shareholder, you might look forward to future increases, but to pay a special dividend, I don't think so. That would be kind of self-serving and that's not something that we've done in the past.

Robert Costello -- Costello Asset Management -- Analyst

Right. Thanks.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Thank you, Bob.

Operator

We have no further questions at this time.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Okay. I want to give them one more chance, Sylvia, a round, people to think.

Operator

(Operator Instructions)

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

All right. I want to thank everybody who listened in on the call and participated. And we look forward to doing this again with you next quarter. And be healthy, and we will see you next time.

Operator

And we have a question from Chase West.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

I'm sorry from who?

Operator

Chase.

Chase West -- Consumer Edge Research, LLC -- Analyst

Hey, Gerry, sorry, Chase West, Consumer Edge. I apologize. Got in the queue late there. I just wanted to ask quickly, do you guys have clearer line of sight to increasing your product contribution over the back half of the year?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Constantly (ph) developing new products. And in the development of new products we are constantly introducing them to our business segments whether they be schools, food service or grocery, but I can tell you that I know of at least a half a dozen projects that are moving along. How many of them will go into our business cycle in the next 6 months? It would be a guess, but we started out as a tiny soft pretzel company with revenues in the single digits of millions. And now we're over $1 billion and a lot of that is new products. So we are constantly developing new products. So we're not horsing around with that.

Chase West -- Consumer Edge Research, LLC -- Analyst

Got it. That's helpful. Thanks. And just quickly to touch on M&A. I know you said that's main use of your cash. What are you seeing in the terms of the pipeline for assets out there? Are there a bunch of assets available? And maybe how the multiples look relative to historical.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, there are some that are available. Multiples have been higher than went in the past. And we're really careful not to (inaudible) store any of these, and so we will continue to do what's best for the company and what we think is best for the company. And we're constantly looking. And when we do decide to go, we have the cash we have the reserves. We got the team. And if we acquire something we'll integrate it quickly so that we move on.

Chase West -- Consumer Edge Research, LLC -- Analyst

Great. Thanks for the question. I will past it on.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Thank you.

Operator

And our final question from Jon Andersen.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

I'm back.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Good Jon.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

I was going to ask, I want to ask a question about your supply chain, because you've been doing a lot of work over the last 12 months or so. I think to bring on some new capacity, move some production with the intent of lowering your cost base and improving your gross margins. Can you give us a brief update on where you sit with the major projects elements of that? And are we through that now and should begin to see better margins going forward? Is there additional work to be done? That would be helpful.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, we have an opportunity and a chance to attack the margins, because we've always had a flexible distribution system. But about a year or so ago, we shifted some production from some of the more regional plants and we closed one plant that was kind of small in Pennsylvania. So there is opportunity for us to improve margins, because of logistics, and because of less product transfers. Gerry, you have more?

Gerard Law -- Senior Vice President, Assistant to the President

Yes. I mean, Jon, there's still coming. We still have a couple of projects in the pipeline to come online, not as disruptive as a plant closure. But there's still we have initiatives still ongoing that will come on throughout probably Q4 for us. We see some more improvement.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Okay.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Jon, in plants and all of them had certain strengths. And we're looking to take those strengths and add to the resources that we have.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Okay. How is the business trending in the fiscal third quarter? What are you seeing? Any difference during the start of the third quarter relative to what you've seen through the first half of the year? Because during the first half of the year, you had tough comparisons, right? You are growing 6%, 7% last year at this time. The comparisons ease in the second half I believe a bit. And just again wondering if you're seeing any kind of a -- just a continuation of how the business has been performing or some uptick or downtick and what that might be related to?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Well, we're in the third quarter now. A matter fact, we're pumped (ph) into it. We have two-thirds of the quarter to go. Generally speaking, these are the warmer-weather months. More people are outside visiting sports and leisure stadiums. And of course, we have the heat benefit the warm weather benefit in our frozen novelty and our ICEE business. So we're looking forward to the third and the fourth quarter. And we expect to have and again a good third and fourth quarter; and another good year for, I think it's a 48th year in row where we had increased sales and earnings. We're kind of stubborn in that way. We're not going to let it go backwards.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

And never a down earnings quarter right?

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

I don't believe we've ever had a -- I think we did a couple of years ago slightly, and -- but we don't expect to have any.

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Okay. Thank you very much. Appreciated.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Thank you, Jon. And we appreciate your support.

Operator

No further questions.

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

All right. Thank you, Sylvia. And I want to thank everybody that listened and participated on the call, and we look forward to doing it with you next quarter.

Operator

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

Duration: 28 minutes

Call participants:

Gerald B. Shreiber -- Chairman, President and Chief Executive Officer

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

Gerard Law -- Senior Vice President, Assistant to the President

Unidentified Speaker --

Daniel Fachner -- J&J Snack Foods Corp.

Robert Costello -- Costello Asset Management -- Analyst

Dennis Moore -- Chief Financial Officer, Senior Vice President, Treasurer & Director

Chase West -- Consumer Edge Research, LLC -- Analyst

Jon Andersen -- William Blair & Company L.L.C. -- Analyst

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