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J&J Snack Foods Corp (NASDAQ:JJSF)
Q4 2019 Earnings Call
Nov 8, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. And welcome to the J&J Snack Foods' Fourth Quarter Earnings Conference Call. My name is Cheryl and I will be your operator for today's call. [Operator Instructions]. Later we will conduct a question-and-answer session. [Operator Instructions]. I will now turn the call over to Dennis Moore. Sir, you may begin.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

This is Gerry Shreiber. Dennis Moore is here, but he's across the room giving Radano a kiss. But I can begin whenever you're ready. Cheryl?

Operator

Yes, I'm here sir.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Good. Okay. This is Gerry Shreiber and I'm ready when you say go.

Operator

Okay. You're in the main conference sir, you can begin.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Right. Good morning everyone and welcome to our fourth quarter conference. I am Gerry Shreiber and I will lead the discussion and then we'll turn it over to the people who are attending with me and they are in order; Bob Radano, who is our COO, Dennis Moore, our CFO; Bob Pape, our Senior Vice President of Sales; Jerry Law, Senior Vice President; Marjorie Roshkoff Shreiber who is our Head of Legal; and Bo Powell, who is our Sales Manager for our food service.

I will now begin the call with the following obligatory statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ 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 this date. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Results of operations net sales increased 4% for the quarter and increased 4% for the year. Operating income in our fourth quarter was $31.1 million for both years and increased 6% to $117.0 million for the year.

Food service, sales to food service customers increased about 1% for the quarter. Sales of soft pretzels were down 4% and we had increased sales of funnel cake, up 6%, churros up 7%, frozen novelties up 3% and bakery products up 4%, handheld sales were down.

For the year, food service sales were up 2% with increased sales of soft pretzels, bakery products, funnel cake, frozen juice bars and churros. Handheld sales were down 19% for the year. Retail supermarkets which include grocery, sales of products to retail supermarket were up less than 1% for the quarter and down 1% for the year.

Soft pretzel sales were down 4% for the quarter and a 0.5% for the year. Excuse me a minute while I -- [Technical Issues] Sales of frozen juice bars and Italian ices were up 4% in the quarter and down 1% for the year.

Handheld sales were down 24% for the quarter and down 12% for the year. ICEE and frozen beverages which include Arctic Blast and slush puppie. Frozen beverage and related products sales were up 13% in the quarter and 13% for the year. Beverage related sales alone were up 9% in the quarter and 7% for the year with gallon sales up 5% and 8% in our base ICEE business.

Service revenue for others was up 10% and 8%. Machine revenues was up a sharp 41% for the quarter and 60% for the year. Consolidated, gross profits as a percentage of sales in the quarter decreased to 29.8% from 30.3% last year and was 29.5% this year and 29.5% last year for the year as the benefits improved, the improved operations in several of our manufacturing facilities and some modest increased pricing were offset by increases in lower margin sales of machines in our ICEE and frozen beverage segment and increases of lower margin sales of bakery and bakery products in our food service segment.

Operating income in our fourth quarter was $31.1 million for both years and increased 6% to $117 million for the year. Our EBITDA, that's earnings before interest, taxes, depreciation and amortization for the past 12 months was $165 million.

Total operating expense as a percentage of sales was 19.8% in the fourth quarter down slightly from last year's 20%. For the year, the percentage decreased to 19.7% from 19.8% of a year ago. Capital spending and cash flow, our cash and investment securities balance of $343 million was up $29 million from our June quarter and $67 million from a year ago. We continued to look for acquisitions as a use of our cash. $128 million of our investments are in corporate bonds with a yield to maturity of 2.8%.

Our capital spending was $15 million in the quarter as we continue to invest in plant efficiencies and growing our business. Our spending for the year was $57 million, $3 million less than last year, a cash dividend of $0.50 a share was declared by our Board of Directors and paid on October 3rd, 2019. We did not buy any shares of our stock during this quarter. We did not buy back any shares of our stock this quarter.

Other points of commentary, food service soft pretzels continued its recent strong sales growth in convenience store chain, but sales to restaurant chains have been down slightly. Churro sales continue to be strong in warehouse club stores and across the board. Funnel cake sales continue to do well in schools.

Bakery sales were up this quarter as we had significantly higher sales to one costumer and handheld sales were down 23% for the quarter because of a drop off in co-pack business and sales to restaurant chains.

Frozen juice bars and ICEE sales were up in the quarter and the year due to increased warehouse club store business. Overall sales to restaurant chains have downed this year, while sales to schools have been up modestly.

Operating income in our food service segment was down 5% to $18.9 million in the quarter because of overall declines in volume, a non-reoccurring costs resulting from ramping up production to meet increased bakery sales demand from a single customer.

Increase was from $74.1 million in 2018 to $78.1 million in 2019 resulting from benefits of improved operations at several of our manufacturing facilities and to some degrees some increased pricing. Soft pretzel sales in our supermarket segment were down 4% for the quarter because of decreases in volume.

Frozen novelties sales were up 4% in the quarter due to price adjustments and lower trade spending. Operating income on our retail supermarket segment was $1.1 million in the quarter compared to none in last year's quarter and increased from $8.3 million to $8.9 million for the year. The primary contribution to the higher operating income in this year was increases in pricing.

Sales at our frozen beverage segment were up a strong 13% for the quarter, service revenue was up 10% in the quarter as this business continue its strong sales growth and machine sales and revenues were up 41% or $3.5 billion in the quarter. ICEE's operating income for the year was up $2.1 million or 8% due to strong sales growth and was down $181,000 for the quarter, mainly due to inventory adjustment balances.

Thank you for your continued interest and I will now turn it back to the listening audience for any questions or comments. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions].

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

I'm sorry. Can you repeat what you just said?

Operator

Standing by for questions.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Okay.

Operator

Okay. Our first question comes from Jon Andersen. Jon, your line is now open.

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

Hello, Jon Andersen. How are you?

Hi, Gerry. I'm very good. How are you?

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

I'm good. Thank you.

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

Excellent. I hope everyone else around the table is good as well.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Everybody looks good including the two dogs I have here. Hatchy.

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

Well, it's been a good year for you and you have a lot to crow about.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Yes. We do. And from my perspective, at least early in the year, it looks good for next year too.

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

Well, maybe that's a good place to start. Since, you had another successful year in '19, as you look ahead to 2020, what are some of your main priorities for 2020 at this point?

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Well, we want to continue with our growth and we're looking for solid mid percentage growth in our overall business and that will be hopefully augmented by some of our newer products that we're doing presently.

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

Okay. Do you, since you mentioned new products, how do you feel about the innovation pipeline, as it sits today relative to maybe the last year or two? Are you as good as better than?

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Well, we're, hopefully, it's at least as good as, and perhaps a couple of points even better. But we continued to invest -- over invest in our manufacturing, which includes our R&D and we have multiple products in the pipeline that we plan on introducing, during the next -- in the next 12 months.

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

Okay.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Jerry Law?

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

Yes. We have a vast pipeline of pretzels or frozen desserts, funnel cakes, as we continue to add products across the C stores channel, healthcare channels, we've continued to see some growth in those areas. Let me pause for a second. A few years ago, I mentioned in these sessions, our plans to increase overall our presence in convenience store and convenience store markets.

We've done that and we're continuing, and now we think we have some momentum behind them to continue that for the next several years.

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

Good. Good. That's great to hear. So thinking about soft pretzels for a minute, it seemed like there was -- it was a little less strong in the quarter, not overly concerned about an individual quarter, but how do you think about the restaurant part of the business, your customer base because that's been a growth area for you for multiple years and I'm just wondering, are you still seeing the kind of opportunity there for further product penetration or you feel like you've kind of tapped that now and need to look beyond the C stores, healthcare, other channels.

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

You'll recall that we entered that business about five or six years ago. We jumped out of the shoot and got to $50 million overall quickly. Then it had a couple of back to back year declines for no other reason than the consolidation that they were going through. But now it represents about $60 million overall in our revenue. And we have specific products and specific chains that we have plans to increase that for this year. So we're looking ahead the next certainly year or two in there with a good degree of confidence.

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

Excellent to hear. What's holding back margins at this point? Because I think, the top line has been strong and I always kind of thought that if you've got a certain amount of revenue growth that the margin -- gross margins would follow. I know you've been doing a lot of work in your supply chain. Do you feel like, your middle innings of that or are we now getting to a point where mid single digit growth can translate into higher margins as well?

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Dennis, you want to comment on that?

Dennis G. Moore -- Chief Financial Officer

Yeah. Our margin for this year were impacted by a couple of factors. One being the higher sales of the lower margin ICEE machines. Overall, our margins in the balance of the business were higher. So that kind of is distorts the numbers somewhat. We also had some issues especially in our fourth quarter relating to new production for one of our customers in our bakery business which impacted our margin in the fourth quarter. So, I would say overall the margin profile is good. Margin profile was better this year, but was masked by those two issues, the -- our machine sales and the issues that we had in our fourth quarter in our bakery business.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

And actually Jon has a little bit of explain. We had one large customer and it begins with an M, we got a big bunch of business from in our fourth quarter. Looking ahead for the next year or two, we will perform better with that business. But, we had some issues in just absorbing it all in to our couple of our Midwest plants.

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

Yes. Jon, the projected business was much lower than what actually came in and it caused the disruption where we had. We have built a line to take on the business and we were prepared. But when the business came in, it was much bigger. We had to spread it from two facilities that moved into four facilities and our ramp up curve was pretty steep on that one.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

And Jon and I apologize, we [Indecipherable] that sounds like a lame excuse. Picture a chicken with one leg, it is a lame excuse. We will do better.

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

All right. I guess that's a high quality problem to have too much.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Fairly yes.

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

Okay. Last one for me is, I think at one point over the years we've talked, someone mentioned, hey, if we built the cash and investment, pile that exceeded $200 million, something like that, we'd really look at being more proactive and we're putting that cash to work, returning it to shareholders. I think you mentioned, your cash investment is now north of $340 million. So what's the thought process there?

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Well, the thought process is to use that cash in the most efficient way that we can. And even though I am the largest shareholder, I am reluctant to redistribute this back to shareholders. But we are continually looking at acquisitions, some small, some big and the best use for that cash in my estimation is for acquisition.

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

Fair enough. Again, good year and something to crow about. [Indecipherable]

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

You got it.

Operator

Our next question comes from Debra. Your line is now open.

Debra Manche -- Lakewood Capital -- Analyst

Hi. This is Debra Manche from Lakewood Capital. I just had a quick question. Gerry, a lot of your revenue growth this year was attributable to frozen beverage machine sales, which were above historical averages. Do you anticipate these levels are sustainable or would you expect the reversion next year to historical averages?

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Dan Fachner who is President of our Frozen Beverage division, which includes ICEE and Dan is on -- he is on a remote -- listen Dan, do you want to comment for that? But let me just say this, generally when frozen beverage machines jump out in one quarter, it is almost a matte for strong revenue growth in succeeding quarters. Dan, why don't you take that question and then better reply.

Dan Fachner -- President of the ICEE Company Subsidiary

Sure. Hi, Debra. Yes. Last year, 2019 was a great year for us at equipment sales. 2020, I think and expect to be also a good year, probably slightly down because one of our large customers in '19 won't be repurchasing. Equipment sales are somewhat cyclical. But I expect a good year in 2020 as well.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

And they don't follow any kind of specific pattern equipment sales, but it does bring the promise of higher revenue from gallons for the next quarters.

Dan Fachner -- President of the ICEE Company Subsidiary

Gallon, then service revenue.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Right.

Debra Manche -- Lakewood Capital -- Analyst

Great. Thank you.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Thanks Deb.

Operator

Our next question comes from David Mandel [Phonetic]. Your line is now open.

David Mandel -- Analyst

Good morning.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

David, as [Phonetic] in the past?

David Mandel -- Analyst

Good morning. I don't think we have, this is my first time with a pleasure. Congratulations on the strong year.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Thank you.

David Mandel -- Analyst

Just want to get into a couple of questions. One regarding on the Auntie Anne's rollout. Were you -- do you see it looked like there was some cannibalization of super pretzel. Are you seeing that across the board in most places? Was that expected? And was that a negative margin mix for you.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Jerry Law, you want to comment on it?

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

You know, in our analysis, we don't see cannibalization of super pretzel at all, the lower sales in the quarter as a result of some of our pricing in the quarter, we had increased our pricing, which reduced -- resulted in lower less promotions of our product. That's what we primarily attributed to this [Indecipherable].

David Mandel -- Analyst

Okay.

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

And this is Jerry again. Auntie Anne's was a formidable competitor for a number of years. We bought them and we were integrating it within our system and as we have in past years have bought other competitors and licenses. So, we expect our soft pretzel sales to continue to grow however modestly or strongly. And by doing these things that we did this year and for the past five or six years, it makes our overall business more bullish.

David Mandel -- Analyst

Got you. That makes sense. Thank you. When I look at your convenience distribution, I know we just discussed one of your opportunities for the future is a kind of wide space expansion. I see kind of like a 5% or 6% ACV, we use IRI here.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Right.

David Mandel -- Analyst

Now, are you expecting, how high can that get and also are you expecting to increase your assortment convenience?

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

We are. And if you go into any of the national convenience stores and you look at that front, we had dreams of getting on that front counter eight to ten years ago and now we're there. There's a big display case featuring rungs and rungs of pretzels. And I would suspect that 90% of the soft pretzel sales in convenience stores today are coming from us. We expect to increase that penetration around the country with all of its operators.

David Mandel -- Analyst

Yes. It seems like there's a lot of wide space. And my last question is regarding acquisitions. Just want to tackle that again. Where are you seeing valuations now and are they in line with where they were kind of last quarter? Have they backed up a little bit? And then in terms of food service and retail,

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

We look at growing our business always strategically but conservatively and given our major share -- a dominant share in there, these factor into our growth plans. I think pricing is a little bit relaxed than what it was two or three years ago. It's not quite what it was ten years ago, but we continued to look for good space, not just wide space, good space for us in there and as we continue to grow our soft pretzel market.

David Mandel -- Analyst

Well, thank you for answering my questions and I will pass it on.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

Thank you.

Operator

[Operator Instructions]. And speakers, at this time, I show no further questions in queue.

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

All right. Then let me conclude this conference. And again, it's a pleasure speaking with everybody and we look forward to many, many, many more quarters and years of solid growth. Thank you.

Operator

[Operator Closing Remarks].

Duration: 26 minutes

Call participants:

Gerald B Shreiber -- Chairman of the Board, President, Chief Executive Officer and Director

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

Dennis G. Moore -- Chief Financial Officer

Dan Fachner -- President of the ICEE Company Subsidiary

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

Debra Manche -- Lakewood Capital -- Analyst

David Mandel -- Analyst

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