J & J Snack Foods Corp (JJSF) Q3 2021 Earnings Call Transcript

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J & J Snack Foods Corp (JJSF -0.60%)
Q3 2021 Earnings Call
Jul 27, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the J&J Snack Foods Third Quarter Earnings Call. My name is Jenny, and I'll be your operator for today's call. [Operator Instructions]

I will now turn the call over to Dan Fachner. You may begin.

Dan Fachner -- Chief Executive Officer

Good morning. I'm Dan Fachner, and welcome to our third quarter earnings call. We are delighted to have you listening in with us. Let me start with some obligatory comments. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Again, I'd like to welcome you and thank you for your interest in J&J Snack Foods. We are thrilled to take you to talk today about our Q3 performance. We'd like to begin by thanking our employees across the business for helping deliver a strong, strong quarter. Our business performance is really starting to benefit from an economy that is moving much closer to pre-COVID activities. The strength of our product and brand portfolio enables us to quickly leverage consumer traffic across multiple food service and retail customers. Consumers are embracing the opportunities they missed over this past year, whether that is enjoying a SUPERPRETZEL at the game or sipping an ICEE at the beach with their family. Financially, we continue to strengthen our balance sheet and invest in our growing business. I remain extremely confident in our business and future growth opportunities.

So joining me today are Ken Plunk, Senior Vice President and CFO; Marjorie Roshkoff, Vice President and General Counsel; Bob Pape, Senior Vice President of Sales; Bob Kramer, Vice President, Operations; and James Hamill, Vice President, Corporate Controller.

Let me take a few minutes to review our exciting results. Results of operations, net sales were $324.3 million for the quarter, an increase of 51%. Our business improved across all three segments, led by our core soft pretzels, churros and ICEE and frozen novelty product categories. Both our Food Service and Retail segments returned to pre-COVID sales volume, beating fiscal 2019 sales by 1% and 30% respectively. Frozen Beverage sales improved significantly, beating prior year's same quarter by 83%. Operating income was $38.1 million for the quarter, an increase of $57.6 million when compared to last year. Improved sales volume, favorable product mix and a strong focus on cost efficiencies helped drive improved gross margins and profitability when compared to last quarter.

Now I'd like to review the results of each of our business segments. Food Service, just an outstanding quarter for them. Sales to Food Service customers increased 68% for the quarter and exceeded the pre-COVID 2019 Q3 sales by 1%. Traffic in our key customer venues returned to pre-COVID levels as anxious consumers embraced activities they had missed over this past year. Sales accelerated through our key channels led by schools, amusement recreation, restaurants, C-stores and theaters. Consumers are also spending more in many of these venues, driving improved average ticket sales.

Soft pretzel sales increased 138% and frozen juices and ices increased 60%. Churros sales and bakery products increased 174% and 24% respectively. Our handheld business had a strong sales quarter, exceeding last year by $11.5 million or 155% and was driven by a new product developed for one of our wholesale club customers. Operating income in our Food Service segment increased $35.9 million in the quarter, driven by higher sales volume, product mix and cost of goods efficiencies. Gross margin rate improved 380 basis points over the last quarter.

Retail Supermarkets continue the strong showing. Our Retail Supermarket business remained strong even as consumers enter back-out into the food service venues. While our sales for the quarter were 6% below last year, this was against a 38% growth in last year's third quarter. Also, sales for the quarter were 30% better than the same quarter of 2019, which is probably a better comparison of true performance.

Our frozen novelty business continues to perform well, growing 11% over last year. Soft pretzels decreased 12%, biscuits 44% and handheld 63% in the quarter as retail traffic declined compared to 2020. Operating income, however, increased $1.2 million or 15% in the quarter, driven by improved gross margins and operating expense management. Operating income margins were 16.9% over 300 basis points better than last year.

Frozen Beverages, we're seeing some great momentum here. Sales for the Frozen Beverage business segment increased 83% this quarter compared to last year. Beverage-related sales increased 157%, driven primarily by increase in traffic in gallons. This was led by our amusement channel that experienced sales above pre-COVID 2019 levels and a continued traffic increase in our mass merchandisers, QSRs and theater channels. The theater channel continue to improve this quarter, but still lags 2019 sales by over 50%. This is a big improvement from our prior Q2 with expectations that this will continue as consumers return to the movies. Service revenue increased 32% as customers accelerated equipment maintenance in the quarter to support the post-COVID recovery. Machine revenue also increased 32% as customers started to invest more heavily in growth and replacement opportunities. Our Frozen Beverage segment realized an operating profit for the quarter of $11.4 million led by strong sales increases, gross margin improvement and operating efficiencies. Operating margins improved to 15.4% in the quarter.

Consolidated gross profit as a percentage of sales was 29.7% this quarter, almost a 600 basis points improvement compared to our second quarter. Gross profit performance was driven by improved sales volume and our higher margin product categories, the overall efficiency benefit of higher sales and continued focus on managing cost. Total operating expense as a percentage of sales was 17.9% in the quarter, leveraging 850 basis points when compared to last year's 26.4%. As sales volume accelerates, the business is doing a great job managing marketing and SG&A expenses even below pre-COVID spending. Net earnings for the quarter were $28.9 million, that's up $41.5 million when compared to last year.

Capital spending and cash flow. Our cash and investment securities balance was $305 million as of June 26, 2021, an increase of $27 million from September's year-end led by our strong earnings growth. Our balance sheet remained strong, and we are well positioned to drive growth for our shareholders. We continue to look for acquisition opportunities and remain focused on the long-term growth opportunity for our business. We spent $34.5 million in capital expenditures through the nine months ended June 26, 2021 as we continue to invest in plant efficiencies and growing our business. We estimate our spending for the year to be about consistent with prior years.

A cash dividend of $0.63 a share was declared by our board of directors and paid on July 12, 2021. That cash dividend represents an increase of 10% from the previous quarterly dividend rate of $0.575 per share. We did not buy back any shares for our stock during this quarter. Our investment income this year was $0.5 million, $0.8 million less than prior year's second quarter as market stabilized and more money was held in cash reserves.

I want to thank you for your continued interest in J&J Snack Foods, and I'm excited to deliver these great numbers to you today. I will now open up the meeting for any questions. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we have a question from Ryan Bell. Please go ahead.

Ryan Bell -- Consumer Edge Research -- Analyst

Hey, everyone.

Dan Fachner -- Chief Executive Officer

Hey, Ryan.

Ryan Bell -- Consumer Edge Research -- Analyst

Hey. Congrats on a good quarter. And had a question around the Frozen Beverage business. Would you perhaps provide a bit of color about how much of the base has reopened? We appreciate that the business was more stiff [Phonetic] in structural pressures than some of your other business units, amusement channel seem to be doing well. The commentary was that traffic was up in mass merchandise, QSR and theater. At this point, is the primary detractor getting back to normalized levels, just the theater channel?

Dan Fachner -- Chief Executive Officer

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

Ryan Bell -- Consumer Edge Research -- Analyst

Thanks. That's helpful. And then for Food Service, it actually grew relative to 2019 levels. What's the primary driver of that? Is that in [Indecipherable] as well restaurants, if you could provide a little bit more context?

Dan Fachner -- Chief Executive Officer

Yeah. Again, the amusement park channel is really strong. In addition to that, and maybe you picked up to this in my comments earlier, the per ticket price is up in a lot of these locations too. So where we're selling in theaters, per ticket price is up; where we're selling an amusement park, the per ticket price is up and even in the ballpark, as they come back, we're seeing that average per ticket price up, and a lot of new good growth as well in that Food Service channel.

Ryan Bell -- Consumer Edge Research -- Analyst

Great. Thank you. And then if you -- just a comment on what you're seeing in terms of input cost inflation and how you can balance that over the coming months against the huge increases in efficiencies that you're seeing as more of the volumes come back online for the Food Service and Frozen Beverage business?

Dan Fachner -- Chief Executive Officer

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

Ryan Bell -- Consumer Edge Research -- Analyst

Great, thanks. That's it for me.

Dan Fachner -- Chief Executive Officer

Thank you, Ryan.

Operator

[Operator Instructions] Our next question comes from Robert Costello. Please go ahead.

Robert Costello -- Asset Management, Inc. -- Analyst

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

Dan Fachner -- Chief Executive Officer

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

Robert Costello -- Asset Management, Inc. -- Analyst

Is it help -- a lot of manufacturers have been -- how do you think you've been able to stand out from the problems that the other manufacturers have been mentioning repeatedly? Is it because of your flexible workforce that you're not all full time? Can you give us some idea of what's helped you here?

Dan Fachner -- Chief Executive Officer

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

Robert Costello -- Asset Management, Inc. -- Analyst

Right. One last question. You're big in the donut manufacturing here in the Mid-Atlantic. Your big customer is down in their larger store base now in Florida than they do in Pennsylvania when I was down there. Is there any possibility in the near-term of building a plant down there or is it still a couple of years away?

Dan Fachner -- Chief Executive Officer

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

Robert Costello -- Asset Management, Inc. -- Analyst

All right, thanks.

Dan Fachner -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And we have no further questions at this time.

Dan Fachner -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Dan Fachner -- Chief Executive Officer

Ryan Bell -- Consumer Edge Research -- Analyst

Robert Costello -- Asset Management, Inc. -- Analyst

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