J & J Snack Foods Corp.

Welcome to the J&J Snack Foods Third Quarter Earnings Conference Call. My name is Cheryl and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, you could press star then 1 on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Jerry Shreiber so he may begin.

Good morning, everybody, and welcome to our third quarter conference call. With me today are Bob Radano, our senior vice president and chief operating officer, Bob Pape, senior vice president of sales, Marjorie Roschkopf, vice president, secretary, and in-house counsel, and remote is Dennis Moore, our senior vice president of finance, and Dan Fachner, president of our J&J group, but Dan is calling in from Tennessee. I think I got everybody. Let me begin. I'll begin with the obligatory statement. 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. Your caution 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 this date. Results of operations. Net sales decreased 34% for the quarter. Without sales from the acquisition of two IC groups in October 2019 and February 2020, sales decreased 35% for the quarter. We had an operating loss of $19.4 million compared to operating income of $39 million a year ago. Food service. Sales to food service customers decreased 40% for the quarter and 14% for the nine months. Our sales decrease for the quarter was due to decreased sales of soft pretzels, frozen juices, and ice sales, and churros, as well as funnel cake, and handhelds, and bakery products. We had an operating loss of $18.2 million in the quarter in our food service segment compared to operating income of $21 million a year ago, primarily because of lower production and sales volumes due to COVID-19, which had a devastating impact on our customers and on ourselves. This year's quarter also included approximately $5 million of costs for employee safety and increased COVID-19 compensation. Additionally, we decided to close a manufacturing facility in the Midwest during the quarter and recorded an impairment charge of $5.1 million. We expect to reduce manufacturing overhead and distribution costs by about $7 to $8 million annually as a result of this plant closure. Retail supermarkets and groceries. The unitary bright spots. Sales of products to retail supermarkets were up 38% for the quarter. Soft pretzel sales were up 74% for the quarter. Sales of frozen juices and Italian ices were up 26%. Handheld sales were up 6% and biscuit sales were up 56%. Sales were significantly higher for all product lines because of increased sales to supermarkets generally since mid-March of 2020 due to the COVID-19. Operating income in our retail supermarket segment increased in the quarter to $7.9 million from $3.8 million a year ago, all due to higher sales. Icy and frozen beverages, which includes Arctic glass and slush puppy. Frozen beverage and related product sales were down 56% in the quarter. and beverage related sales alone were down 71%. Without the sale of Icy Distributors and Bama Icy, overall sales were down 60% and beverage related sales were down 78%. Service revenue for others was down 23% as this part of business held up relatively well. Machine revenue was $6.4 million $11.8 million last year. Last year had two large installation projects for customers. We had an operating loss in our frozen beverage segment of $9.1 million compared to $14.2 million operating income in last year's quarter. And again, primarily because of COVID-19. Consolidated. Gross profit as a percentage of sales fell to 17% in a three-month period this year, down from 31% last year. Gross profit percentage decreased primarily because of lower volume in our food service and frozen beverage segments, higher costs related to production disruptions due to volume exchanges, and expenses related to employee safety and increased COVID-19 compensation and reserves of approximately $1.5 million for inventory write down. Even though total operating expense decreased $5.7 million this quarter to a $10.8 million decrease, not including the plant shutdown impairment charge, operating expenses as a percentage of sales increased to 26% in a quarter, up from last year's 19.7%. The percentage increase was because of the drop in sales and our inability and possibility in the short term to reduce expenses in line with a decrease in sales because of fixed costs that do not fluctuate with sales. Our EBITDA, that's earnings before interest, taxes, depreciation, and amortization, for the past 12 months was $103 million. Capital spending and cash flow. Our cash and investment securities balance of $270 million was up $3 million from our March balance as our balance sheet remains strong and we have no liquidity issues during this COVID-19 time. $80 Our bank preferred stock and mutual funds, $13 million, have stabilized in value since the drop in value at the end of March. We continue to look for acquisitions as a use of our cash. Our capital spending was $11 million in the quarter. Although down from last year in the quarter, we continue to invest in plant efficiencies and growing our business and have committed and are looking at further manufacturing capital projects to improve efficiencies on an ongoing basis. A cash dividend of 57.5 cents a share was declared by our board of directors and paid on July 7th. We did not buy back any of our stock during the quarter. Our investment income decreased from $2.8 million last year to $1.3 million this year, primarily as a function of lower interest rates. Regarding where we are now, net sales for the first four weeks of our current fourth quarter were down approximately 25% from a year ago. Although we cannot estimate whether net sales will continue to be down at the same rate for the balance of the quarter, we expect that our operating results for the fourth quarter will be improved from our third quarter, although operating income in the quarter will be materially lower than last year. As we have said, approximately two-thirds of our sales are down to venues and locations that have shut down or sharply curtailed their food service operations. So we anticipate COVID-19 will continue to have a negative impact on our business. As we have $270 million of cash and marketable securities on our balance sheet, we do not expect to have any liquidity issues. We have operated our business during the crisis, both with short-term consideration and for long-term as well. We have placed a high priority on continuing to keep our employees safe while looking for ways to improve our business going forward, including reviews of a manufacturing and distribution network. We have plans to close a manufacturing facility in the Midwest, and we have worked with our customers developing significant new products to sell as they open up. We continue to be optimistic about our future during these unusual tough times. I want to thank you for your continued interest and look forward to talking to you again at the end of our fourth quarter. I will now turn it back to the listening audience for any preguntas and comments.

Thank you. We will now begin the question and answer session. If you have a question or a comment, you can press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset first before pressing any numbers. Our first question comes from John Anderson. Your line is now open. Hi, John.