Thank you for standing by, and welcome to J&J Snack Foods’ Fiscal 2024 First Quarter Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the call over to Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator. And good morning, everyone. Thank you for joining J&J Snack Foods fiscal 2024 first quarter conference call. We will start in just a minute with the management's comments and your questions. But before doing so, let me take a minute to read the Safe Harbor language. This 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 and our anticipated financial performance. These statements are neither promises nor 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 30, 2023, and there are 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, February 6, 2024. 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 cause expectations to change. In addition, we may also reference certain non-GAAP measures on the call today, including adjusted EBITDA, operating income or earnings per share, all of which are reconciled to the nearest GAAP measure in the company's earnings press release, which can be found in our 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 this morning to discuss J&J Snack Foods fiscal 2024 first quarter results. I am pleased with our ability to successfully manage through a challenging consumer environment with many of our customers experiencing year-over-year declines in consumer traffic and consumption. Our customers adapted to consumer trends by reducing inventories ahead of the holiday season, especially in product categories like pies, cookies and frozen novelties. I am proud of how the J&J team leveraged our iconic brands and incremental customer opportunities to maximize every sales opportunity in the first quarter. This resulted in a sales decline of just under 1%, largely in line with the trends in the overall industry. While we experienced a 4.1% decline in sales across our Food Service segment, driven by softness in our bakery, we saw resilience in Retail and continued strong growth in Frozen Beverages as sales grew 1.6% and 8.5%, respectively. Our ongoing focus on gross margin expansion resulted in a 130 basis points improvement to 27.2%, driven by our strategy to grow higher margin core products as well as continued gains in overall productivity. Importantly, the success of our strategic initiatives is becoming increasingly visible. Despite softer sales, we delivered a meaningful year-over-year improvement in the overall profitability of the business, including a 20.6% increase in adjusted operating income and a 19.2% increase in adjusted EBITDA. I'd like to take a few minutes talking about our sales performance in the quarter. We have never been more confident in our ability to grow even as our industry faces a more challenging consumer environment. For J&J, it's about continuing to leverage innovation and cross-selling opportunities to expand placements of our core products and brands. Our business is gaining incremental opportunities and is well positioned…

Thank you, Dan, and good morning, everyone. As Dan just discussed, we are pleased with our team's ability to navigate a softer consumer environment in fiscal Q1. For the quarter, we did experience a slight sales decline compared to the prior year, but were in line with overall industry trends. As Dan stated, we were executing our strategy, improving operational efficiency and profit margins and expanding growth opportunities across channels and customers. This helped balance declines in consumer traffic and consumption that impacted many of our customers. Net sales for the quarter totaled $348.3 million, down 0.9% versus the prior year. Food Service, our largest segment saw sales decreased 4.1% to $228.6 million, primarily reflecting reduced inventories of pies and cookies among certain customers during the holiday season as well as a decline in handheld sales due to a contractual cost true-up agreement. Bakery sales decreased 6.4% and handheld sales declined 6.5% in the quarter. Although volume sales for our core Food Service and handhelds did increase for the quarter. These declines were partially offset by our churros category, which grew 8.9% as we continue to drive growth in this high-margin business. Sales of soft pretzels and frozen novelties declined 4% and 3.3% in the quarter respectively, driven by the previously discussed consumer pressures. This led to Q1 '24 Food Service segment operating income of $6 million or a decrease of 5.8% versus the prior period. This reflects softer sales and onetime costs associated with the opening of our New Jersey distribution center, which impacted distribution expenses. Moving to our Retail segment. Q1 '24 retail sales increased 1.6% to $43.8 million compared to Q1 of '23. Handheld sales grew by 90.5% and while soft pretzel sales increased 27.4% led by our continued expansion of SUPERPRETZEL products into retail. Frozen novelties…

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Wolf of CL King. Your question please, Andrew?

Good morning, thank you. I wanted to ask about this contractual cost true-up with the handheld product. I guess it was the second quarter in a row. So first, is that kind of -- is that a normal thing that happens quarterly and because there's been such big swings in your cost -- input costs, it's worth calling out? Or is -- just what's the nature of that? Like how can we, on the outside, try to get a handle on how to model that and think about how that might occur going forward? And --

Yeah, good morning.

Yeah, thank you. Good morning.

Yeah, good morning, Andrew. How are you doing?

I'm doing great. It's a good question. It is a quarterly true-up. And we saw that as prices were -- our costs were going up, and we're seeing that as costs are coming down. We do it quarterly. Ken, do you want to add anything to that?

Yeah. It's a larger amount. The reason we call it out, Andrew, is because of the phenomenon of the last few years. So the cost in many areas two years, 18 months ago, up 20%, that obviously drove the opposite. And then as those commodities have had deflation. We've been trued up quarterly, and it's had the opposite effect, which is us passing and reducing that cost to that customer. And therefore, that has an impact on sales and on profits for that area. But we should lap the significance of that probably in the next quarter. We should be lapping that, Andrew, but that's why that number has been as big as it's been.

Okay. And could you give us like the dollar amount, so we can at least think about what earnings would be on a kind of a commodity neutral basis? I realize it's real money, but --

Yeah, it's over $1 million -- closer to close to $1.5 million, Andrew.

Got it. And then I wanted to ask last one as a follow-up on the situation with Costco and the Churros, which at least according to the Internet. Costco is discontinuing churros and replacing them with cookie, chocolate chip cookie. Just wanted to confirm, is that accurate? And is that kind of going to be a firm impact you guys across Costco? And what the timing of that would look like? And when you look at your relationship with Subway, is it where do you end up net-net in a year's time when those two events have matured rolled out?

Yeah, Andrew, this is Dan. That is a great question. Yeah, the account has rotated and they've done that in the past. They will offer different things periodically throughout time. They have a limited SKU within their locations, and so they do a rotation that churro has rotated off the menu at this point. That happened towards the end of December. And we saw some of the impact there. In regards to our Subway contract, we're really excited about that. It's a really good size opportunity for us, and it outweighs what we would potentially be losing at Costco, the Subway outweighs that just by the sheer numbers of locations, there's 20,000 to 21,000 Subways out there today. And the product is being accepted really, really well. So we're excited about the growth in the churros business.

Our next question comes from the line of Todd Brooks of the Benchmark Company. Please go ahead, Todd.

Hey, thanks. Good morning, to you both.

Good morning, Todd.

A couple of questions as well. Just want to ensure -- if we look at the fourth quarter sales results, was there any operational friction in there that cost us anything on the revenue line either around the new RDC coming up during the quarter or maybe some of the new lines ramping to full productivity? Or did the shortfall on the revenue side really just reflect softer end market demand?

Yeah. No, Todd, it really did just reflect the softer market. And really, what we saw more than anything is inventories being tightened up across the board, not just with our customers, but with distributors as well. In fact, we have some data that would show really strong sales even during the month. When you look at IRI or Circana, but inventories certainly were narrowed down. And so you could somewhere make that assumption that somewhere down the line, those inventories will come back into play. It won't happen in a January period or a February period, but it might happen as we get closer to spring. But the operational side did not affect sales going out in any way.

That's good to hear. And Dan, you brought up January, February. Obviously, the data points to really kind of tough consumer traffic through the month of January here. And obviously, what's going on in California is not helping right now. How do we think about what you're hearing through the channel for just a slowdown in consumer traffic, whether they're digesting holiday spend, whether it's the Omicron lab from the prior year. There's a bunch of different crosscurrents here. But what are you seeing in your end customer channels in Food Service?

Well, I think you're reading probably the same data we're reading as well. It's hard to come off a quarter like we just come off and not be concerned or cautious about what the future looks like. We're still very confident in our long-term strategy and what we're doing, and we're seeing that play out really well. And I think by the time that we close up the year, we'll have another strong year. But we're certainly cautious, and I think the consumer is cautious out there today. A couple of things that I've read that are interesting that I think makes a lot of sense to me. One, I do think we pulled back on inventory, and so I believe that inventory will come back around. The second is just the price increases that we had at such a rapid rate caused what they call kind of like a food reference price that people are shopping out there and they see a higher price and they're waiting for that price to come back down. And until water kind of seeks its own level, and you get used to that pricing, we may see a little bit of a softness there. Overall, I think it's short-lived. I don't know that for sure, but I think it's short-lived. I don't think that we can look at a January, February period of time and say, boy, that's what we're going to predict for the year. I feel really confident in the new business that we're generating and the play that the team is executing. And I feel very confident about our long-term play still.

I think that's correct. Sorry, go ahead --

Sorry, if I could just give a bit more context on sales. Because I went back and kind of look back at it and we thought we were going to have the stronger quarter than we did, not really expecting some of the consumer softness. But when you look at the last two years, we're laying growth on top of a little over 10% growth a year ago Q1 and 32% growth two years ago, Q1. So the foundation of what we're building growth on is on top of some really significant numbers. And a lot of that played out in post COVID and supply chain, and you kind of know the story there, but -- to be able to have two segments to have positive sales growth on top of that in the environment that we saw in the quarter, we're actually pretty happy about it, even as we continue to look at opportunities to continue to grow sales year-over-year.

Great. And one more, and I'll jump back in queue. Dan, as you're looking forward into '24, you made the comment in the release you see building sales momentum for the balance of the fiscal year here. If we just put aside the consumer, the consumer is going to do what the consumer does if you look at kind of new customer wins, cross-sell success, new product launches, what sort of growth rate did those three, if you're looking at the forward kind of pipeline deliver. And then we can all adjust for what we think the macro is on the back end as you're thinking about fiscal '24?

Yeah, I don't know if we have a number to give you on that growth rate, Todd. But I just kind of remind you of some of the exciting things that the team is generating. Love the Subway opportunity and the way that it's kicked off and how that's going and it might even lend to some additional opportunities for us there that we're working on as we speak today. Like the way that the and retail has kicked off. The Bavarian sticks moving up into the number two position of what we sell, and we see that a little bit unlimited at this point. Like some of the things that the bakery is doing. We've continued to narrow the bakery in rationalize some of the SKUs, but I like some of the things that they have going on right now with our cakables, which is the gourmet cookie and our seasonal cookies and working on sticks and buns in that area. We've talked about ICEE and now rolling out the Dave & Busters. We've got a QSR that we're going to test this quarter that I'm really, really excited about. The club store conversion to self-serve is working out great. We're going to escalate the way that we install that. Dippin’ Dots' growth in the theaters and convenience and just see a lot of the right things happening that can really impact our margins. And again, we talked about even on the operational side, the three DCs opening, the one in Glendale is actually opened yesterday. And so we're starting to see that take effect the new lines doing well as we fill those up, just really encouraged by what the future looks like.

That’s great. Thanks, Dan.

Thank you. Please standby for next question. Our next question comes from the line of David Shakno [ph] of William Blair. Your question please, David.

Hey, this is David Shakno, stepping in for Jon Andersen. Could you talk about price and volume a little bit? If I recall from the last call, you mentioned you were looking at some areas to take pricing in calendar '24? And then I just wanted to understand also how you're looking at volumes for the balance of the year?

Yeah. Well, what I can tell you, volume for the quarter, again, it can vary somewhat a little bit depending on the business and channel. But overall, volume was down 1% to 2%, depending on what area of business you're in. Again, I think kind of speaks to some of the things that we talked about, David, with the consumer. So if you just kind of look at that number against where we landed at negative 0.9, you can kind of get some idea of the price benefit overall for the company. As you look forward, we did take a price increase in January in our ICEE business. We took a price increase in January or December as well. And then on the snack food side, you got a lot of -- you've got some commodities with deflation, you got some with inflation. So we're kind of taking a surgical approach to that, David and really looking case by case, where we think we've got a place to increase price, but the market has an opinion on that as well in terms of price points. So that's kind of what's been done and what's planned. As we look forward on volume, I would just kind of echo what Dan said, we're coming out of a quarter that makes us a bit cautious. We have data that we're looking at each and every week to get a sense of kind of where the consumer is at when you get into spring, we're hoping that, that kind of launches people getting out and will benefit our business. But if I was looking forward, there might be some slight improvement in volume, but I think we're still cautious about what's out there in front of us.

For that price increase on ICEE in January, should we think of that similar to, I think, the price increases the past couple of years each January, so that has been mid-single digits or so. Correct me if I'm wrong. Should we be thinking about it roughly the same again?

Probably not quite as high as the last 2 years where we were with inflation, but some are in that mid-single digit, maybe a hair under that, probably David, is the way to think about that.

Great. And then one other thing, if I can. Historically, second half gross margins, those tend to be, I think, 200 to 300 bps higher than the first half just with one quarter down here for the fiscal year. Are you still kind of expecting that cadence for the second half of fiscal '24? And then regardless, can you just kind of outline some of the puts and takes there? I know you mentioned a little bit on the pricing question about commodities. But if you could just kind of outline that in general, that would be great.

Yeah. Yeah, we still feel really good about what we're doing as it relates to driving profit margins. We actually -- we're very happy with gross profit for this quarter even with some of the challenges on the sell side that we exceeded our internal budgets on that. We saw our bakery gross margins improved over 100 basis points strong margin performance in ICEE and in Food Service. So we like what we're doing. I think the initiatives we mentioned are working. What we're focused on is mixing out better. And then to your point, as we get into Q2 and particularly in three and four, those will make in much heavier ICEE, much heavier Dippin’ Dots, which are some of our highest margin businesses, and we expect that to generate those 30%-plus gross margin that we did a year ago. And so we see no reason to back off of kind of what we've talked about, which is getting above 30 for the year. And we think what we've done in the first quarter is a good sign that we're moving in the right direction on that.

Got it. Great. That’s all for me. I’ll pass it on.

Thank you, David.

Thank you. Our next question comes from the line of Connor Rattigan of Consumer Edge. Your question please, Connor.

Hey, guys. Good morning.

Good morning, Connor.

Yeah. So I just wanted to touch on the top-line a little bit, specifically on the Food Service pressure. So I guess first thing first, I guess, was this more isolated to maybe a select channel or a customer? Or was it maybe a more broad-based pullback? And also, was there any deflationary pricing involved in there?

There really was no deflationary pricing involved in it at all. We talked about Food Service being affected and really being affected through our pies and cookies. And so if you looked at it surgically, that had a pretty sizable impact on where we were off and saw that in inventory reductions as early as early December, late November, started to see that. And that's real. Again, I mentioned this earlier, we looked at some IRI and Circana data and our volume looks good through that. And so you know that these inventories were pulled back. And so we don't over complicate it. We think the consumer is cautious as we've said already, but we really do feel like a good portion of this is inventory related.

And just to magnify, you're trying to get into kind of particular product areas. The pie decline was the majority of the decline in bakery year-over-year. And then we mentioned cookies on top of that. But that's a product that once it gets on display and retailers as a shorter shelf life and so as they start to see retailers and grocery stores, concerns about traffic coming into the holidays, they backed down their orders. And so that was a big number in terms of year-over-year comparison.

Got it. So I guess it sounds like more the inventory and deload that you saw there on the pies and whatnot, it could be more of a onetime headwind and nothing to persist throughout the balance of the year. Is that fair?

We believe that to be true. Certainly, we're going to come off a quarter and be cautious about that, right, and watch it really, really closely and why we're looking at all the different data points that we can find, but yes, we do believe that. And remember, pies business is really a onetime a year business, too, that doesn't stretch out for four quarters.

Got it. Got it. And then just one more for me that I'll squeeze in. So a pretty significant step-up in marketing in the quarter. I mean, can you maybe touch on some of your initiatives there? And I guess, maybe what we should expect for the balance of the year? And do you maybe see a need to spend more or maybe do some more advertising sort of in light of the slowing traffic and consumption?

Yeah. We -- I think we talked about this before, Connor. We love what we're doing in terms of marketing Lynwood and his marketing team have really done a great job of both with our new products and with brands that we had are really investing and getting a lot out of those investments to ground growth. And we believe that is a key to us continuing to build these brands and grow. And so we continue to invest accordingly. Just remember a lot of those -- the spend of that has impacts and benefits to the rest of the year and even beyond that. So it's not always just a contained into a quarter-by-quarter kind of thing. It's also against our -- one of our lowest sales bases. When you look at Quarter1, Quarter2 will be much the same. You’ve got that kind of spend a lower sales base. So that should level its way out as we get through the year and ultimately in the year, probably in that low to 7.1% to 7.12% of sales range.

Thanks for the color both guys. Appreciate it. I’ll pass the line.

Thank you, Connor.

Thank you. Please standby for our next question. Our next question comes from the line of Robert Dickerson of Jefferies. Your line is open, Robert.

Great. Thanks so much. Hey, guys. I guess just to kind of circle back to the -- like the pies and the cookies situation relative to kind of what I'm hearing around maybe new distribution potential at Subway and kind of new distribution kind of potential overall. Maybe just provide some color as to kind of how you see the portfolio performing or recently performing maybe like a branded versus non-branded basis, right? Because I'm asking because I hear SUPERPRETZEL is doing great, right? ICEE still doing pretty well. So it almost sounds like there's maybe a little bit more momentum on the branded side versus the non-branded side. And usually, that also provides some positive mix -- margin mix uplift overtime. So just any updated thoughts there would be great. Thanks.

Rob, that's a really good question. You know this. We've talked about it several times. I love branded products, right? I love the fact that we have an opportunity to get out there and advertise and market our branded products. And I think our team is doing that really, really well. Within our brands like SUPERPRETZEL, we've been able to release some really good new products that are being really well accepted out in the industry. And so I think we're seeing some nice lifts from that like the Bavarian sticks. Almost feels like a natural that we should have done it maybe prior to this, but everything is about timing. And so I do like where our branded products are going and think we have some real opportunities. I think whole lot or in Retail still have some great opportunities. We're seeing our Dogsters really grow at a nice pace. And so our branded products are growing well, and we'll continue to push our brands as that's one of our core strategies in our organization. However, we do have some opportunities as well on the non-branded like the opportunity we have with Churros right now. That's our churros and it's doing extremely well. And if we continue to be a good supplier, we think there's more opportunities other than just the churro side of that business that we're going to continue to look at. So I think we have some nice growth going that way too. It's a balancing act, always, right? And so we're going to push the brands because we love them. And there's an opportunity to get behind them and advertise them and do some of the right things. But we're also going to seek out those opportunities that makes really good sense for us as an organization around non-branded.

All right. Great. Another quick one. I guess just very specifically, in your Retail Supermarket business, just when I look at the op margin, I just kind of feels a little low. And clearly, there could be some one-off true-up dynamic maybe in that segment. I'm just trying to gauge like if you're kind of doing well in that business and a decent amount of that business clearly is branded like maybe like why is the operating margin kind of so low now? And then if we think forward longer term, for two-three years, what have you. Is that like a business that we do think can kind of get to that, I don't know, high single digit or low double-digit op margin? Just trying to gauge kind of where we are today and then kind of what could come later.

Yeah. Rob, thanks. Great question. Let me just provide a little bit more clarity on Retail operating income. So included in that number is roughly $1.3 million of that onetime distribution expense. So if you're thinking about kind of adjusting that out as a one-timer, that starts to change that picture a little bit. Operating income would have grown, I think, roughly 8.5%, if you factor that in. It was a bit of a mix impact on gross margin because of higher sales in handheld and lower in frozen novelties. Again, we've got data that says in many of those frozen novelty areas like Luigi's [ph], the consumer bought more on sell, but our customer order less. And we think that is somewhat tied into this inventory leveling that many are doing kind of after the supply chain challenges, and we mentioned that in a couple of areas. So we think that will work its way out. Yeah, we think we can get that retail business. I think if we ended Q3, Q4, it was moving closer to the mid-single-digit range. Certainly expect to improve and get up into that range once we cycle some of these things.

All right, super. And then maybe one last question, more theoretical. Clearly, you're saying today, just being a little bit more cautious, right? Consumer seems to be a little bit more cautious, clearly not the only company seeing that, right? We consistently hear the term value seeking thrown around a lot over the past couple of quarters. You guys are kind of about to enter, probably two, three months left, but you are start -- about to enter kind of that seasonal uplift on the business. So when we think about kind of the cautious thought process as we get through the year. And then we also just think about price points, like some could argue that having an ICEE drink is mandatory, right? It's a need state, some others might argue it's more of a launch date, maybe it's a little bit more discretionary. So I'm just curious where you sit today, if we get about like May, really June, right, opening of all amusement parks, like it's time we're all out and about time to go. Are there areas where in these varied channels where you can promote a little bit more, I don't know, like maybe put a little bit more signage or just try to kind of push the consumer basically into consumption? And that’s it, thanks a lot.

Yeah, Rob. Absolutely. There are ways for us to do that. ICEE does that really well. In fact, the team led by Steve Every, even as soon as last week, have been revisiting all those ways that we can energize sales as we get to the core months, right? And signage is a big part of that. Our flavor rotations becomes a big part of that. Getting out in front of the customer and talking about promotional items or BOGOs or something along that line. And so the teams are already engaged in doing that. And we're proactive to make sure that as we get into that peak selling season that we're going to be able to get everything that we can. And I love your thought about ICEE being in need rather than an impulse item. I hope we can spread that across the country.

Yeah, I like it. All right. Thank you so much.

All right. Thank you.

Thank you. I would now like to turn the conference back to President and CEO, Dan Fachner, for closing remarks. Sir?

Great. Thank you. As we turn to 2024, we remain confident in our strategy to continue growing sales and profits. The J&J team is executing across all facets of the business, and we continue to secure incremental growth opportunities across the customers and channels that we serve. This positions us well for continued growth as the overall consumer environment improves. We look forward to updating you on our progress throughout fiscal 2024. 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 very much. Have a good afternoon.

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