Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Snack Foods fiscal 2023 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Norberto Aja of Investor Relations. Sir, please begin.

Thank you, Michelle, and good morning, everyone. Thank you for joining the JJ Snack's fiscal 2023 third quarter conference call. We will start in just a minute with management's comments and your questions. But before doing so, let me take a minute to read the safe harbor language. Today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As such, all statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, expectations, and objectives as well as our anticipated financial performance. These statements are neither promises or guarantees that involve known and unknown risks, uncertainties and other important factors that may cause results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report on Form 10-K for the year ended September 24, 2022, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management's estimates as of the date of this call, August 1, 2023. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cost expectations to change. In addition, we may also reference certain non-GAAP metrics on the call today, including adjusted EBITDA operating income or earnings per share, all of which are reconciled to the nearest GAAP metric in our earnings press release, which can be found in the Investor Relations section of our website. Joining me on the call today is Dan Fachner, our Chief Executive Officer, along with Ken Plunk, our Chief Financial Officer. Following management's prepared remarks, we will go ahead and open the call for a question-and-answer session. With that, I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Foods Chief Executive Officer. Please go ahead, Dan.

Thank you, Norberto, and good morning, everyone. We appreciate you joining us to discuss our fiscal 2023, third quarter results. I'd like to start by thanking our employees across all J&J segments for a record quarter. I am so proud of our team and their efforts to continuously improve on our business. Their hard work and dedication are allowing us to post record top and bottom line results and create added value for all our employees, partners and shareholders. For the fiscal third quarter, revenue increased 12% to $425.8 million and net earnings increased 124.8% to $35 million, led by strong gross margin performance and improved distribution expenses. Our gross margin initiatives and strategies are starting to gain momentum, helping us to drive improved profitability. Like most of our industry, we are beginning to see cost inflation stabilize and our pricing actions are now better aligned with costs. This combined with improved margin mix and adding efficiencies in our manufacturing plants should have us well positioned to deliver consistent margin performance. Tim will provide more details on our financial performance later in the call. Today, I'd like to begin by talking about the operations and supply chain side of our business. As we have discussed in prior quarters, our team has been focused on several initiatives to create more efficiencies in our business and enhance our capabilities. Combined, these initiatives will help us transform how we operate as a company. Here's a quick update on these key priorities. Our team has improved logistics management over shipping, warehousing and product distribution through our partnership with NFI. NFI now manages a 100% of our transportation network and is helping us improve truck capacity, minimize miles, reduce stops, enhance customer service, helping us lower shipping, handling and storage costs. Next, we are transforming…

Thank you, Dan, and good morning, everyone. Like Dan, I am so proud of our J&J employees and the many contributions and helping us deliver a record quarter. We are executing the strategy across organization with a focus on driving top line and bottom line growth. I am equally pleased that our ability to show more improvements across most of our operational KPIs, including gross margin and distribution expenses. We believe that we have the lifeline employees to drive continued growth and deliver value to our shareholders. I would like to take a few minutes to walk you through our results. Net sales for the quarter totaled a record $425.8 million, a 12% increase versus the prior period and sales through nine months totaled $1.15 billion a 13.7% increase versus the first nine months of fiscal '22. The strong top line result was driven by growth across all three of our business segments, and across most of our core products and reflects the health and resiliency of our business. Our largest segment, food service experienced a 11.9% increase in sales to $255 million, representing 59.9% of total company sales. This strong performance has resulted in healthy growth across the segment including 176.4% increase in frozen novelties to $474 million, which included an incremental $29.2 million in Dippin' Dots sales and showcases the benefits from the Dippin' Dots acquisition. Also, a 19% increase in churros, a 13.6% increase in soft pretzels and a decline in handheld and bakery of 33.9% and 3%, respectively. Moving to our Retail segment. Sales increased 0.2% to $61.2 million compared to the same period in fiscal 2022. Handheld sales increased 182% driven by expanding growth with the major mass merchant. We did experience sales decline in soft pretzels, biscuits and frozen novelties of 12.2%, 15.3% and…

[Operator Instructions] The first question comes from Connor Rattigan with Consumer Edge. Your line is open.

So, I guess just first things first, just on the top line. So obviously, results came in a little lighter than I think we folks have expected. So I mean, I guess, maybe could you guys sort of maybe break out what you saw there? Maybe if anything came in ahead below your expectations, if you saw any topic of weakness or softness had expectations there?

Yes. Connor, this is Ken. Good question. Yes, let me break that down a little bit, take the Food Service segment and you've got to kind of break it in because there some different things going on here. So if you look at Soft Pretzels, frozen novelties, excluding Dippin' Dots, churros, that combination of products was up over 14%. So somewhat aligned with I think what you would expect and what we would expect. And ties into what we talked about and emphasizing drilling those core products. If you look at handhelds and bakery, in handhelds, there's around $3.5 million in there that is a cost past based on an agreement we have with one of our club channel customers so that's the units stay the same, but we passed on deflation that we got, we pass it on to the customer. Also, when you think about Baker and handheld, the big part of our business is sold through retail. And as we talked about in the retail segment, the retail industry saw a decline in traffic saw softer baskets, and that pretty much aligned with I think anything you need from some of the core retail grocery channels that have come out recently. So, those behave similar to that. And then if you add in Dippin' Dots, Dippin' Dots was an incremental 29.2 million including novelties. Frozen beverages really excited about what we saw there, beverage sales up 26%, the overall segment of 20% volume up over 9% in the quarter. We talked about the recovering the theatre industry. So, you start to see the consumer come back to theaters the last few weeks having some of the biggest weekends they've had in a long, long time. So all in all, we feel really good, but there's certainly some things going on with the consumer. There's probably a little bit in the amusement area of impact from some of the hot weather and some of our amusement customers have talked about impact on traffic in that category. So, yes, kind of a quick overview, all in all, though, we feel like we're executing the plan we need to execute. And we're quite pleased given all of that and where we ended up with sales.

Connor, I'd just add to that. We are confident and there we ended up much like what we've seen throughout this year, there has been some ups and downs throughout the year. And even this quarter, April, as it started was off there a consumer confidence issue I think going on a time with a lot of different things happening in our world, and it kind of grew again throughout the quarter. So, we've locked that really closely, but I don't think we had any big surprises as you asked in the quarter.

Okay. Great. That was really helpful, guys. And then I guess just looking at the gross margin to, right? I mean as you guys called out pricing mix, stabilized inflation, right? I mean, I guess, could you maybe help us sort of I guess to eventualize the extensive impact on each one of those, just kind of get a sense to that.

Well, there's a lot in that, Connor, in terms of kind of parsing all that out. I mean the way I would answer your question is relative to mix, when you see us going in pretzels, churros, to frozen novelties and our biggest segment we service, that mix will drive stronger margin and it's a part of our strategy. At the same time, some of the declines in bakery and handhelds are strategic. We're sharpening the pencil on SKUs and some SKUs we got out of that weren't driving the margins we needed, and we're tweaking that and we're investing in other products in those areas that we expect that things go down the road. But the combination of both dialing down in that area and then growing in those high row helps mix, a little bit of that going on in retail as well. And then the other thing is when you mix in a record quarter for ICEE, together with the biggest quarter to get the lives -- those are both very accretive to our top line margin and so that mix in -- had a big role in our strong gross margin performance. You then add on inflation coming down, I think, more than all of us expected. I think CPI was just shy of 3%. CPI, I think, was closer to 5% -- that was about, I think, 200 to 300 basis points decline just from quarter-to-quarter and benefit than that cost in some of our T commodities, flour, oils things of that nature came down, and certainly, that played a role on that. And then the other thing we talked about is our initiatives to get better and how we operate, get better and produced product is start to drop some efficiencies. So, it all came together really nicely in this quarter, and I think is kind of sets the foundation going forward, and we've somewhat we guided that really crazy 12, 18 months of historic inflation.

The next question comes from Andrew Wolf with CL King. Your line is open.

Congratulations on the quarter and the results. Results speak for themselves, but I just wanted to ask about sort of what a prior question on the sales, and you guys kind of touched on I guess, pass-through some deflation to a large customer. But in the past, you talked about SKU rationalization and lower margin lines, which I think bakery is and perhaps handhelds as well. Is there any deliberate, if you will, kind of portfolio management of the lines in that way where you're not bidding up for contracts that just don't make sense when you have other lines of products you can produce and distribute that maybe have 2x or 3x the margin?

Yes. Andrew, you heard us talk a lot about kind of our strategy of pushing our core products, and we continue to use that and we'll continue to do that -- also in the bakery as we're all fond with the bakery and what happens there. But what we do have a strategic initiative there to make sure what we're bidding on and what we make and who we sell to also complement our strategy and what we've been talking about getting to that 30% gross profit margin. So absolutely has there been a strategy around it to reduce some SPs that were operating there -- and then the team that maker team is really focused on new business and what they bring to the organization. And as I said in the opening, I'm proud of all of our teams in the way that they're executing the strategy.

Is there any way to quantify beyond the pass-through on deflation at what is SKU rationalization might have been as a drag to see the sales growth?

No, I'm not going to quantify what that is exactly and -- had some flows with you make month-to-month. I mean the bulk of it is going to be in bakery. So I think as you look at the bakery numbers, it's a combination of that SKU that together with the fact that a lot of that bakery is in retail and grocery bakery groups where there has been some declines softening of traffic in those venues.

Okay. Thanks Ken. I understand. And Dan, if I could just get back to the way you're talking about your sales. And just kind of -- I know you don't guide to us, but I just wanted to ask like how -- when you're thinking through your sales budget for the Board or however. How are you thinking about the current quarter and going into fiscal '24 for your budget about where the sales growth comes from in terms of price versus velocity gains on existing products. And it sounds like you're really bullish on new placements at new distribution. So I'm not trying to fish a number out of you, but I know you don't guide, but I am trying to get sort of a sense of where you see the growth especially as economy is showing less inflation. So obviously, price is going to be less and less of a driver of sales growth, where would your volume -- I guess, to focus more on the volume growth, do you see it more in velocity in this kind of economy or more on your distribution gains.

Great question, Andrew. And to kind of highlight, I'd probably see it on both sides of it. right? I do think that we have the opportunity through some of the marketing activity that our team is doing to grow velocity in locations that we're in. And then I love as we talked about some of the new innovation that we have and some of the new products that we're releasing and their abilities to complement and grow the business as well. And the teams are working really hard and have what I consider a really strong pipeline to look at for this next year. And so -- as I talked about before, there is some volatility in the market. We'll watch that closely. Part of what I love about our company is that we have a really balanced portfolio and you lived through this with us, there is a period of time when theaters were down, but retail was up and now we're living in a period of time where theaters are up and retails come back to more of a normal level. I like the way that this business has been built with great products and great customers around a portfolio that allows us to ebb and flow that way. I think this quarter, we'll continue to see some growth, and then I look forward to seeing the budgets as they roll up over the next month or so for next year.

Great, I appreciate that color. And if I can add just one kind of follow-up on your commentary on the marketing, budgeting expenses being excuse me. When you talk about trade shows and sponsorships, -- is there some of the -- and I think in the past, you said to get some of the products like churros -- all the churros into retail, there would be slotting and things like that. Is that kind of what this is about? Or is this separate from that? And in the current quarter, we should look for the slotting fees as part of the marketing spend.

Yes. It's really driven by kind of what we mentioned is both timing and I would even say kind of the level of investment we're making in trade shows and sponsorship, particularly trade shows, I don't know if you've been to one recently that we're at, but kind of the level of kind of bringing together a good brand presence and event -- we will bring that out. I mean, it's really amazing what the marketing team has done to bring all our brands together and display it in a way. So, we're making investments there. We believe that's paying on. It's driving new channels and it's driving new conversations. So it's really about that. I mean, full year, we may -- we want to be in the ballpark of where we typically are maybe hear about that, Andrew but it's money well spent. I think it started to tie in all the other strategies we're doing to drive interest in our brands.

I'll just add to that. Some of it is timing, Andrew, but we did make a really conscious decision at some of the major trades this year. To really highlight all the great things that we do in our core products and really proud of the team and the way that they put that together, you let us talk about one of our core strategies being cross-selling our portfolio by doing what we've done, we've had some really tremendous effort by the team and some of our customers have just really seeing how well they can complement one of our products to the next. And we think that's working. So, we're proud of that.

The next question comes from Robert Dickerson with Jefferies. Your line is open.

Great. I guess just first question, just on Dippin' Dots. I say it's personal anecdote, but I don't know, past few months have been over kind of all in place and have seen certain formats in places like Wawa's, themes like kids eat them and now kind of more handheld frozen novelty kind of on-the-go packaging. So as you talk about all the distribution opportunities, whether it's in food service, retail, what have you? I mean, is it fair to say at this point, kind of despite some of the innovation of the overall portfolio that -- I mean it seems like kind of more highly likely, more highly probable kind of revenue generation upside here, J&J is kind of primarily being driven by Dippin' Dots. And I don't mean that as a negative. It just sounds like the runway is pretty low.

We love that acquisition. You've heard us talk about that, Rob. Again, I'm proud of that team, and we've worked hard at integrating and then cross-selling and getting out and introducing them to some of the great relationships that we have out in the industry, it's really working. We see a really nice opportunity for that to continue to grow and are happy with what it's done to date. And also just thank you for your kids buying a product too, all right, we appreciate that. But we really are happy with that acquisition. We're proud of the team and the way that they're managing it and the way that they have integrated with the whole J&J organization to find new growth and have a lot of hopes for.

Quick just to add to that. Everything then said, optimistic and aggressive in the way we believe we can grow different dots. But Dan rattled often the script is focus on churros, Hola! as a brand Super-Pretzels as a brand, ICEE as a brand. All of those businesses have performed quit well in the quarter. Soft Pretzels and Food Service, which is the biggest area that we sell pretzels about 13.5%, churros is up 19%, ICEE beverages by itself was up 26%. So, I certainly want to get credit to what we do is given that, but our focus there is growing, and we feel really good about the opportunities down the road in those areas as well.

All right, super. And then I guess, just to jump to the margin side. Clearly, gross margin is back strong as we think -- and then also frozen beverage, I think that's like may be the highest margin I've ever seen. So I'm just curious, as we think forward into kind of Q4, then clearly, we start thinking about next fiscal year, kind of where things sit today, is some of this kind of margin mix shift in the portfolio sticky. Like is there anything that we saw in Q3 in frozen beverages maybe kind of like a one-off, so we don't want to get ahead of ourselves because you look at the gross margin in the quarter, it's great, but then you look at the op margins too. And clearly, there are nice benefits flowing through. So I know that was the expectation kind of as we got into the back half I'm just curious, at this point, kind of given normal seasonality as well as these improved margins now hopefully kind of where we sit for some time.

Yes. As we go into Q4, we feel very good about the position we're in from a gross margin standpoint. I think if you look at Q4 and Q2 historically, given a little bit of slowdown as kids go back to school, that kind of thing, the margins of probe a little bit south a little bit here in Q3, but they should still be very good because we think we've passed the hurdle of some of those things that challenged us and most in the industry over the last several months. And if theaters continue to the form the way they are, it's going to be a big shop in arm is both our IC business. And as we penetrate theaters and given to us, again, those high-margin parts of our portfolio. So yes, I think we're pretty confident. I told you we're going to this make business to getting into the e-margin business year in, year out. And this is a really good start to that, and we expect to have good momentum going into Q4. Obviously, as you get into Q1 and Q2, the seasonality of that, those margins won't be at that level, but they will be much better than over the last year or so.

Rob, you heard us talk about kind of working all angles of the P&L, and that's exactly what we're doing. And we're really proud of each and everyone who's focused on that, right? We're certainly in the summer months where the mix helps us for sure. But also, just the movement in the ICEE business, not only domestically but really strong quarter out of our Mexico operations, proud of what that team is doing. We think that we can have those margins up in that 30-plus area like we've been talking about for a while. And it certainly gets a boost when you're in the summer months, but we're proud of what the teams are doing at all angles of the P&L.

All right. Great. And then maybe just lastly, I know, clearly, kind of overall basket and cost inflation side improved like you're saying, but also you're seeing some kind of material step-up in sugar and sweeteners and anybody with decent exposure to those commodities have been saying the same thing, we all see it. So, it sounds like overall, clearly, kind of pricing relative to your overall cost structure has really improved. But we've also heard some others that, look, if some of these inputs on the sweetener side remain elevated, the industry overall could potentially think about incremental pricing. Is that anything -- is there anything in that that's kind of come up internally in terms of kind of those two core commodities? Or you're thinking about it more from an overall portfolio dynamic versus kind of, let's say, froezen novelties. That's it.

Yes, that's a great question, Rob. We do a monthly review with our different teams around the P&L and our review in snack food the side of our business, this last month, we talked a little bit about the frozen novelties and what we may or may not do. And so, we will look at it individually like that. We're going to watch it closely. And you're right. If that doesn't come down, then we may have to approach that in a different manner.

[Operator Instructions] The next question comes from Todd Brooks with Benchmark Company. Your line is open.

Congrats on the results in the last quarter versus margin improvement that you delivered, so congrats. Two quick questions here, if I may. And this is just kind of getting this first year of Dippin' Dots correct. Can you talk about what the seasonality typically is for Dippin' Dots revenues in Q4 versus Q3? I'm just trying to triangulate you've talked about a couple of annual goals for Dippin' Dots and I think we'd be a little bit less than $30 million here in Q3. Would you expect that business to grow meaningfully in Q4? And if you look at overall company revenues, would you expect that Q4 will be our peak revenue quarter or Q3?

Yes, Todd, we've talked about we're very clear about the seasonality Dippin' Dots, particularly on the profit side, I talked about that. I would say, Q4 is going to probably perform similar to Q3, maybe a little bit better like you. We're still kind of running this business. But we know, obviously, what they did last year. We know what some of the new initiatives and things we have in place in some of the areas of growth that you probably look at into Q4 that behaves somewhat similar to Q3 with Dippin' Dots.

Okay. Great. And then based on Dippin' Dots similar to a little bit better in Q4, more core products the SKU rationalization. Just trying to think about what the headwinds are, if revenues are relatively similar between the quarters that would cause much of gross profit margin moderation sequentially.

Are you asking Todd about the headwind on sales or gross margin?

Well, if sales are relatively similar quarter-over-quarter and you're getting a little bit more Dippin' Dots revenue and you SKU-rationalize some lesser margin products for core margin products. I'm just trying to figure out why gross profit should drop much from the 33% plus level that you did in Q3 when we get to Q4.

Yes. It's really more about kind of historical seasonality. As you get into mid to late August is certainly in the September, a lot of kids who are obviously, when they're out of school active in theaters and amusement parks and others, our business SKUs a bit heavier in Q3 and Q4 in those areas. So, it's just more of the seasonal behavior of the consumer, which traditionally, we've seen a little bit lower gross margin in Q4 than Q3. But I wouldn't say, it would be a dramatic Todd.

Okay. That's fair. And then one final follow-up question on the gross margin. I look back historically, just to try to map that seasonal movement in gross margins. And you get back to '18, '19 and you were looking at maybe 200 to 300 basis points higher gross margins in the back half of the year than the front half of the year. Do you think that's where we normalize to? I know the Dippin' Dots is a new piece of business that may drag a little bit more in the first half. But what would you expect that go-forward type of gross margin spend spread to be between the first half and the after the year?

Yes. I think the spread certainly -- I would say the next year or so will be similar, but I think all quarters relative to what it was year ago particularly the one -- the two that we've already gone through, it should be better. So, Q1 is coming up here should be better than Q1 of last year because we've got and passed some of the inflationary impacts, and yes, and some of our initiatives are certain big dividends. But if you just look quarter-to-quarter and think about the behavior of margin, it will continue to be strongest in Q3 and Q4 and then more relative to history in Q1 and Q2. Now what we're focused on, like we did in the ICEE business years ago, is as we grow the penetration in Dippin' Dots in the places like theaters, that provides a better seasonality for us and helps those winner much in Dippin' Dots, so which we think would be dividends for a sound road -- but that will be kind of a gradual move to that, I think as we build that business up.

Okay. Great. And then, Dan, just a final one for you and I'll jump back in. You talked about the six new production lines that have been launched over the course of this year. As you start looking out to 24, how meaningful is that incremental capacity and throughput/productivity as a revenue driver for J&J because it's levered on those core categories where you're seeing the best growth around novelties, pretzels and churros.

Yes. Good question, Todd. We're really excited about those six new lines. We talked a little bit in the past about having capacity constraints in those core products that we think there's a lot of runway with. And so the teams are out there really actively being able to sell things like churros and different forms of pretzels and maybe even bringing some of that core into our bakery division as well, and that's being worked on right now. So, they become really meaningful for us. They kind of are at the heart of the strategy that we have in place, right now. We're being able to grow pretzels, churros, frozen novelties and been able to broaden that like releasing a pretzel buyer a pretzel stick that we have had some great early interest in. So, I think it becomes very meaningful for us. It allows the team to get out there and sell on the things that we do best and on the things that help us drive the margin mix that we've been talking about.

I show no further questions. At this time, I would now like to turn the call back to Dan Fachner for closing remarks.

Well, thank you for your time today. In closing, we are excited about the opportunities to continue growing this great business of ours and confident that we have the right people, products, partners and strategy to maximize these opportunities. We look forward to sharing our fiscal 2023 full year results later this year and updating you on the positive impact of various operational and strategic initiatives are having on our business. In the interim, should you have any questions or wish to speak to us please contact our Investor Relations firm, JCIR, at 212-835-8500. Thank you, and have a great rest of the summer.

This concludes today's conference call. Thank you for participating. You may now disconnect.