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J&J Snack Foods Corp (JJSF) Q1 2020 Earnings Call Transcript

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J&J Snack Foods Corp (NASDAQ: JJSF)
Q1 2020 Earnings Call
Jan 28, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

I will now turn the call over to Gerry Shreiber, you may begin.

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

Thank you. Paulette. Good morning everybody, and welcome to our conference call for our first quarter. Let me begin by introducing who is in the room with me Dennis Moore, our Chief Financial Officer; Bob Radano, our Chief Operations Officer; Bob Pape, our Vice President of Sales; Jerry Law, Senior Vice President of Operations; Marjorie Shreiber Roshkoff, our legal representative; and Bo Powell, Sales Manager for our Food Service. Did I get everybody.

Let me begin. 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 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.

Results of operations. Net sales increased 4% for the quarter, which include sales from the acquisition of a ICEE Distributor in October 2019, without that sales increased 3%. Food Service, sales to Food Service customers increased 2% for the quarter. Our sales increase was due to increased sales of soft pretzels, up 2%, churros up 8%, funnel cake products up 25% and bakery sales up 2%.

Frozen juice bars and ices sales were down 6% and handheld sales were down 18%. Sales to restaurant chains were up this quarter, while sales to schools were down. Operating income in our Food Service segment increased to $18,034,000 from $17,697,000 last year, primarily because of higher volume and improved operations at our Hill & Valley plant in the Midwest.

Retail Supermarkets. Sales of products to retail supermarkets were down 6% for the quarter. Soft pretzel sales were down 4% for the quarter. Sales of frozen juice bars and Italian ices were down 8%. Handheld sales were down 15% and bakery sales including biscuits were down 11%.

Operating income in our retail supermarkets segment was essentially the same as last year, as the benefit of price increase implemented a year ago offset the impact of slightly lower volume. We expect to see volumes at least stabilizing and improving in the second quarter.

Frozen Beverages, which include ICEE, SLUSH PUPPIE, ARCTIC BLAST brands. Frozen beverage and related product sales were up 16% in the quarter, and beverage related sales were up 13%. Without the sale of ICEE Distributors, an acquisition in the first quarter from the [Indecipherable] Van Group, overall sales were up 12% and beverage related sales were up 4%. Service revenue for others was up 13%. Machine revenue was $12 million, up from $8.9 million last year.

Operating income in our Frozen Beverage Group decreased, I'm sorry to $1,452,000 from $2,174,000 in the quarter, primarily because of relocation costs and -- cost and expenses related to the ICEE headquarters move to Tennessee. Approximately $1 million this quarter and estimated to be about $800,000 in our second quarter in connection with the relocation of ICEE headquarters.

In October, we purchased the asset of ICEE Distributors, the [Indecipherable] Van Group, which does business in Arkansas, Louisiana and Texas with annual sales of approximately $13 million. Consolidated. Gross profit as a percentage of sales was 27.52% in the three-month period this year, down from 28.30% -- 28.3% last year. Gross profit percentage decreased because of lower unit volume in the snack side of our business, generally higher costs and unfavorable product mix changes.

Total operating expense as a percentage of sales was 19.9% in the quarter, down from last year's 20.2%. The decrease was due primarily to lower distribution costs in connection with freight.

Capital spending and cash flow. Our cash and investment securities balance of $306 million was down $37 million from our September year-end, primarily because of the purchase of the ICEE Distributor. We continue to look for acquisitions, as a use of our cash. $116 million of our investments are in corporate bonds with a purchase price yield to maturity of 2.8%.

Our capital spending was $18 million in the quarter, as we continue to invest in plant efficiencies and growing our businesses. We estimate our spending for the year to be about $60 million, as we continue to invest in our manufacturing plants and the ICEE business. Cash dividend of $0.575 a share was declared by our Board of Directors and paid on January 7th. This was a 15% increase from the previous dividend.

We did not buy back any shares of our stock during the quarter. Our investment income this year was $746,000 more than last year, because we recognized $1,027,000 of unrealized investment losses in last year's quarter. Last year we had a tax benefit of $900,000 related to the Tax Cuts and Job Act, which benefited last year's EPS by $0.05 a share.

Thank you for your continued interest, and we look forward to continuing our growth and success. Well, that concludes my upfront comments.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operating Instructions] And our first question comes from Rob Dickerson. Please go ahead.

Rob Dickerson -- Jefferies -- Analyst

Great. Super. Thank you so much.

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

Good morning, Rob.

Rob Dickerson -- Jefferies -- Analyst

Good morning. How are you?

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

I'm good. I think you just did a recent report on us or...

Rob Dickerson -- Jefferies -- Analyst

I did. We -- Jefferies is a firm and my team just recently initiated on a number of food companies and you happen to be in that group. So look forward to working with you going forward.

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

We appreciate your research, and we're going to make you a hero.

Rob Dickerson -- Jefferies -- Analyst

I always love hearing that. Not everyone thinks, I am. So I guess look -- couple of questions I have all I think fairly basic hopefully. I guess the first one is just on the Supermarket division, you stated there was a little lost distribution there driven maybe by some of the higher prices, and then you're stating hopefully things stabilize in Q2. If you could just provide a little color as to kind of how that happens and I guess one, do you always like lose distribution when you take prices up, right because that doesn't always happen. It sounds like that was happened a little bit here...

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

That will stabilize. We haven't lost any -- we certainly haven't lost any share. And we still dominate that with our products in that category.

Rob Dickerson -- Jefferies -- Analyst

Okay. So but -- and when you think Q2 going forward, it sounds like maybe there was a little bit of distribution loss, but things seem to be OK. And as long as the kind of velocities are OK that you don't expect more distribution loss, it sounds like things should get better.

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

I mean, we don't expect any more distribution loss, and we expect that recovery to start as we have our new products going in for the summer selling season. This is generally the time when we see the quarter resets. We've been selling our Pretzel Bites and Auntie Anne's. We've seen good placements for. So we expect the -- that we've bottomed out.

Rob Dickerson -- Jefferies -- Analyst

Okay. All right. That's great. And then in terms of the Frozen Beverage segment just maybe a couple of questions. One, I guess just on the top line. Did great in the quarter, decent growth even on organic basis, which is always nice to see. As we think forward though for the rest of the year, we all know the compares get a little bit more difficult, machine sales seemed to be advantaged, let's call it in the back half of last year. Is there -- when you look forward for the rest of the year, could there be some deceleration in that business not because the overall base is doing terribly, but just more so because you had a great back half of '19? That's the first question.

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

Well, we had another good quarter in our Frozen Beverage Group, which is led by our ICEE brand, but that was complemented to some degree by the acquisition, one of the last remaining independent ICEE Distributors. We don't expect that to have a major impact on the year, but it's significant to note that, that added some $35 million or so for the quarter. ICEE Group, which include SLUSH PUPPIE and ARCTIC BLAST continues to perform or outperform.

And Dan Fachner is on the call, I am going to let him comment on the rest of the year. And Dan, rest assured, I'll kill you if we don't have a great year.

Dan Fachner -- President of the ICEE Company Subsidiary

Thank you, Gerry. Yes, Rob, it was really a good quarter for us for sure. Top line was great. I don't know that I would anticipate the top line being at that rate through the rest of the year. We are up against some good equipment sales, as we get deeper into the year, and I think those will taper down some and our increases will be more normalized in that probably 4% range or so. And then we will, as I said, we'll be fighting some really good equipment sales, as we get later into the year.

Rob Dickerson -- Jefferies -- Analyst

Okay, fair. Good answer.

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

Dan is President of our ICEE Group and I didn't introduce him at the beginning of the meeting, but he's in California, no I am sorry, he is in Tennessee now participating in the call.

Rob Dickerson -- Jefferies -- Analyst

Okay. That's great. It's a very unique business, which is -- continues to perform well. So good job. And...

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

More you [Speech Overlap]

Rob Dickerson -- Jefferies -- Analyst

Yes. It's a uniquely positive. In terms of the -- just kind of the margin progression, where delta we saw in Q1 both gross and operating, the gross margin was down a little bit more than operating margin, but then you call out some of the incremental expenses for the Frozen Beverage headquarter move. I was just trying to kind of understand, it seems like from my kind of either distant perspective that maybe the gross margin was a little pressured more because of that kind of near-term distribution pressure in retail along with maybe some product mix shift, not necessarily expenses flowing through from the headquarter move, which I would think would be...

Dennis G. Moore -- Chief Financial Officer

Hi, and it's Dennis, Rob I think essentially, you are correct. I think the lower volume at our manufacturing plants, which is the snack food side of the business being down will always -- almost always have a negative impact on your margins simply because you've less volume flowing through. And costs for the most part go up from year-to-year, payroll costs go up, insurance costs go up that you've higher costs and lower volumes. So that was the biggest component of why the margin -- the gross margin dropped.

Rob Dickerson -- Jefferies -- Analyst

Okay. But like -- so if -- but then it's -- if there is a little Q1 pressure given, you have retail distribution, but then that picks up back in Q2, and hopefully that gross margin decline is not -- it does not continue to decline at an increasing rate going forward, it would seem if volumes stabilize?

Dennis G. Moore -- Chief Financial Officer

We'd expect this to improve, as volume improves.

Rob Dickerson -- Jefferies -- Analyst

Okay, perfect. And then lastly for me. Keep it quick. Just balance sheet capital structure, you don't have any debt when I started looking at your company, it's always fastening when you see a company with zero debt. [Speech Overlap] Yes, right. You've cash, you've free cash flow generation and cash flow balance sheet, dividend growth is obviously helped -- is healthy what you stated on the call upfront.

Just in terms of kind of the go forward think internally strategically is this a -- continue to look for great companies that can complement our business to acquire or is it more hey, if our cash builds and yes, we might think about continuing to increase the dividend at a high rate. I'm just basically trying to figure out where your head is right now in terms of cash allocation if that cash continues to build?

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

Well, I think we increased the dividend by 15% in the last quarter, which is a healthy, healthy increase.

Rob Dickerson -- Jefferies -- Analyst

Yes.

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

We will continue to operate our business in a strong dynamic manner, and we expect to, perhaps, we're still looking for acquisitions. They have to be right. They have to be a right fit. Notwithstanding our balance sheet of cash and liquidity, we're not going to let it burn a hole in our pocket. We will...

Rob Dickerson -- Jefferies -- Analyst

Okay, fair.

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

Okay.

Rob Dickerson -- Jefferies -- Analyst

Yes. Makes complete sense. I will -- thank you so much. I really appreciate your time, and I'm happy to pass it on.

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

Where are you located at? Are you in New York? Connecticut?

Rob Dickerson -- Jefferies -- Analyst

I'm in New York City, Big Apple.

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

Okay. Well, you're close enough that someday, you can come down and visit us.

Rob Dickerson -- Jefferies -- Analyst

Yes, that's the plan. That is the definite plan. I look forward to seeing you.

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

Make your plans through Dennis, and when you're here, I'm looking forward to meeting you.

Rob Dickerson -- Jefferies -- Analyst

Sounds great. I've -- likewise. Thank you.

Operator

[Operator Instructions] And our next question comes from Jon Andersen. Please go ahead.

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

Good morning, Jon. How are you?

Jon Andersen -- William Blair -- Analyst

Good morning, everybody. I'm doing well. Hope you're all well?

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

We are.

Jon Andersen -- William Blair -- Analyst

Terrific. Well, maybe I'll start with a question on the top line on sales. I'm thinking more as we look to the second quarter, I'm trying to understand if there are any -- anything we should pay particular attention to. I think last year, there were some new items that you may have shipped, I think maybe in Q2 that might have -- there might have been some pipeline benefit and there may have been some movement of some of your business with some co-packers that we haven't lapped yet. So if you could talk a little bit, I don't know Dennis, maybe you have some more of the detail around that just so that we can think through how the top line might progress, as we move through the year? Thanks.

Dennis G. Moore -- Chief Financial Officer

Yes. I think in the second quarter, you're right, we did last year, we had the Burger King limited time offer program, which generated roughly $3 million of sales in the quarter, which we don't have this year. And then throughout last year, as Dan had mentioned, our machine sales were relatively -- yes, relatively high, compared to what they normally are, and we would probably expect a drop off in those sales, the balance of the year, maybe in -- as much as say $10 million. So that is going the other way. But on the other hand, there are some positives that perhaps Gerry walk and talk about.

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

Yes. We have a group of new items rolling in the Food Service. We have our new fries rolling out. We have a new funnel cake product rolling out. We have a group of savory crackers. We feel good about schools rolling forward, which has been a headwind for us in the first quarter. Retail, the resets are going to be great for us we think. We've refreshed our LUIGI'S packaging, which we feel like we're going to get a bump out of. We have a more robust. We have, I guess more comprehensive marketing program going forward in the next couple of quarters. So we're doing a lot around the business to get at the top line to move.

Jon Andersen -- William Blair -- Analyst

And on the retail side, did you mentioned Gerry earlier something around Auntie Anne's that you're doing that's been well received, ahead of the resets?

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

We acquired Auntie Anne's about the -- almost two years ago and it's been a good acquisition for us, although was a competitor to us in the soft pretzel category and supermarkets, now it's complementary product to our SUPERPRETZEL. So we expect to benefit from that this year and beyond.

Dennis G. Moore -- Chief Financial Officer

Yes. It continues to grow. There's a lot of white space for Auntie Anne's, and we continue to push that out there. And we have a new Minute Maid novelty rolling out or Minute Maid sticks this year, which we expect benefit from.

Jon Andersen -- William Blair -- Analyst

So those -- net-net couple of headwinds, but you've got a good -- it sounds like a strong pipeline that's going to start working its way into the business over the course of the next quarter or two?

Dennis G. Moore -- Chief Financial Officer

Yes, and [Speech Overlap] And other thing I didn't mentioned with regards to Frozen Beverages is that there will be an offset, a positive offset, which comes from the acquisition that would be $11 million of sales or so of the balance of the year.

Jon Andersen -- William Blair -- Analyst

Is that from the ICEE -- the acquisition of the...

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

We acquired the -- one of the very, very last independent ICEE Distributors this past quarter. Their sales were in the $35 million to $40 million range.

Dennis G. Moore -- Chief Financial Officer

No, no. Their sales were roughly $30 million.

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

I'm sorry, right.

Dennis G. Moore -- Chief Financial Officer

$11 million [Indecipherable]

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

But we expect that will continue and that will be a positive overall halo for the business, not only in the areas that we acquired it, but elsewhere.

Jon Andersen -- William Blair -- Analyst

Okay. Are there -- you said it's one of the last, how many are left and do you plan to pursue that? Is there something important about having all of them?

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

We're in almost regular communication with them. They kind of look to us as the leader to set the profile and whatnot. So there is no doubt that one day, they will be included in our Group. It's only a matter of when.

Jon Andersen -- William Blair -- Analyst

Okay. And then the other question I had was on the relo costs in the quarter. So there were $1 million of relocation costs in the quarter, another $800,000 in the second quarter. Where do those show up in Q1 in the P&L, and where would we expect them to show up in Q2? Will they split across cost of goods and operating expense? Or they are heavily -- more heavily weighted in one or the other?

Dennis G. Moore -- Chief Financial Officer

More heavily weighted in operating expenses.

Jon Andersen -- William Blair -- Analyst

Okay. Great. Thanks. Thanks very much guys. And look forward to seeing the new products on the shelf going forward.

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

Okay. And incidentally, you covered the relocation, but we thought long and hard about the exodus from California for all the right reasons and we think it's going to work out very well for us in the long run.

Jon Andersen -- William Blair -- Analyst

Well, maybe I should ask about that. And then, so presumably there is some kind of return on this -- the cost or investment that you're making, right now. What are the benefits from making that move, because you're not moving manufacturing, right, you're just moving the kind of the administrative headquarters?

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

Administrative?

Dennis G. Moore -- Chief Financial Officer

Yes. This is Dennis again. Most of the benefit comes from -- the hard dollar benefits comes from what our lease costs would have increased in California, if we had stayed there. So even our costs are going to be, we may save a $1 million a year going forward compared to what our costs, where are you, you really don't see most of that, because our costs would have gone up in California close to that number maybe $700,000 or so because we would be having higher lease costs, once the lease we're in now or had been in expires.

Jon Andersen -- William Blair -- Analyst

Okay. I see cost avoidance then. Okay. Okay. Thanks, everybody. Thanks for the help and the color. Talk soon.

Operator

Our next question comes from Ryan Bell. Please go ahead.

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

Good morning, Ryan. This is Gerry Shreiber.

Ryan Bell -- Consumer Edge -- Analyst

Hey, Gerry. Would you be able to walk through the performance of some of your recent innovations...

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

Ryan, are you there?

Ryan Bell -- Consumer Edge -- Analyst

Yeah. I'm here. Can you hear me now?

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

Yes, it's better, but it's not real clear yet.

Ryan Bell -- Consumer Edge -- Analyst

Okay. Could you walk us through -- of some of your recent innovations from your press release, it looks like the Food Service innovation is coming along well. And can you talk about the recent progress you've been making into c-stores?

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

Sure. A couple of years ago, we've laid out a determined effort and plans to increase our sales in c-stores, and there are roughly -- there is tens of thousands of c-stores. We have gotten both our pretzel products and some of our ICEE products and our juice bar products and good distribution and now that we're in there, we're going to be methodically [Technical Issues]. So that is part of the consumer [Technical Issues]. Many years ago, if you walked into a convenience store, you might get a hot-dog, you might get a drink, now there are soft pretzels there, there is the ICEE Group [Technical Issues].

Ryan Bell -- Consumer Edge -- Analyst

Great. And if I'm looking at IRI traction or trends through your December quarter, it looks like they were a little bit healthier than what you reported in the quarter. Is there anything that you could talk about that would help to explain that dislocation?

Robert J. Pape -- Senior Vice President of Sales

Hi, this is Bob Pape. Mostly [Technical Issues] consumers to the new retail pricing, and we feel that, that is starting to recover. And as a result, the takeaway numbers continue to improve.

Ryan Bell -- Consumer Edge -- Analyst

Okay, great. Thank you. That's it from me.

Operator

And we are showing no further questions.

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

All right. I want to thank everybody for their participation in this call, and we look forward to all of you in our next quarter's call, which will be approximately three months or so from now. Have a good day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

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

Dan Fachner -- President of the ICEE Company Subsidiary

Dennis G. Moore -- Chief Financial Officer

Robert J. Pape -- Senior Vice President of Sales

Rob Dickerson -- Jefferies -- Analyst

Jon Andersen -- William Blair -- Analyst

Ryan Bell -- Consumer Edge -- Analyst

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