Welcome to the J&J Snack Foods' Fiscal 2024 Second Quarter Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining in J&J Snack Foods' Fiscal 2024 Second 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. 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 in our anticipated financial performance. These statements are neither promises or guarantees and involve known and unknown risks, uncertainties and other important factors that may cause results performance or achievement to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Risk factors and other items discussed in our annual report on Form 10-K for the year-ended September 30th, 2023, and 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. As such, forward-looking statements represent management's estimates as to the date of this call, May 7th, 2024. And while we may elect to update forward-looking statements at some point in the future, we disclaim many 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, adjusted operating income or adjusted earnings per share, all of which are reconciled near GAAP measure 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 questions and answers. With that, I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Food Chief Executive Officer. Dan, please go ahead.

Thank you, Dan, and good morning, everyone. I am pleased with our ability to deliver strong results for the quarter, including the highest fiscal second quarter net sales, topping our previous record achieved last year. This, combined with gross margins over 30% contributed to significant profit growth and profits growing faster than sales. Net sales for the quarter totaled $357 million, an increase of 6.5% versus the prior year. As Dan mentioned, top line performance was driven primarily by higher volumes than new business performance in the quarter. Foodservice, our largest segment also increased 5.2% to $230 million as Churro continued our strong growth momentum, increasing 28.7% to over $30.8 million. Bakery and Frozen Novelties increased 7.7% and 4.2%, respectively, driven by unit volume growth in cookies and a 5% increase in Dippin' Dots sales. Growth across the segment was offset by a decrease in soft presold handheld sales of 3.1% and 4%, respectively, driven by soft consumer trends. It is important to note that volume sales for our major handheld customer did increase for the quarter. In addition, the sales of new products and added placement with new customers totaled approximately $13.7 million, driven primarily by the addition of Churros to the venue of a major Churro's to our customers. This led to a second quarter operating income of $7.9 million, an increase of 54.5% versus the prior year period, reflecting the top line growth and improved gross margins. Moving to our Retail segment. Q2 24 retail sales totaled $52.9 million or an increase of 14.1% driven by handheld sales growth of 75.5% as we expanded product placement with a major mass merchant. In addition, Frozen Novelties sales increased 14%, led by the growth of Dogsters and Icee Novelties as well as higher shipments as customers build inventory for…

[Operator Instructions]. Our first question comes from David Shakno from William Blair.

Congrats on a nice quarter, guys. This is David Shakno now stepping in for John Anderson. Two quick questions for you guys. First off, can you help us quantify the savings that may be achieved with the third distribution center in Arizona that's now up and running?

Again, I don't know if you want to look forward towards what that savings might be. But David, that third one just got into place. And so what we've said pretty consistently is once we get those 3 distribution networks in the place, we believe that we can drive the percentage of sales of distribution down into that 10% or lower range. And they're just not getting into place. We haven't seen that savings yet, but we think that savings is yet to come in short order over the next 6 months to a year.

You do need to look at the savings collectively and all 3 of those RDCs and the change we've made work together. Just to add to what Dan said. I think we have come out and said in previous meetings. The business case for this, as it's all integrated and working together, we think will save us $2 million a year in that range, give or take. We're really confident about that. And it will be really the next quarter into Q4 next year when all of this really starts to be a bit more seamless, and I think we'll start to see that percent of sales come down under that 10% range that Dan mentioned.

Really excited about that distribution network though, I love what it's already performing at and how it's helping us better serve the customer and then know that, that savings is right around the corner.

And then if I can slip in one other, just wanted to know what attracted you to acquiring the Thinsters brand? I know in the prepared remarks, you mentioned that you produced that anyway. But if you could just talk about any plans you have for Thinsters, whether it's new flavors, distribution or something else that I'm not thinking of?

What really did attract us, you already have mentioned it, is we make the product today, right, and love the product and enjoy the brain, right? And so had the opportunity to acquire, it's a little bit out of what I've said that we're looking for in general, we look for something that's larger than that. But this is a product that we've been making. And if you tasted it, it's really, really good. I like the brand. I like the opportunity to be able to grow it not just in retail but in food service as well. And like it's clean label, honestly, there's just a lot about it, the products that I like, it's small. It's much smaller than what we've been looking at, but it was just a nice tuck-in for our organization.

Our next question comes from Todd Brooks from the Benchmark Company.

Congrats to everybody on a really eye-opening quarter and one which typically when you're seasonally softer one. So very impressive. First question for me, and this is just in my mind around the gross margin performance in the quarter and the normal seasonal pattern that we would see would be gross margins that were 500 basis points stronger for the second half of the year. How do we think about the improvement? I know, Ken, you're saying anchored to the 30%, but that's based on the historical seasonality seems like a low bar to clear. So how do you want us thinking about the seasonal gross margin performance in the second half of the year?

Yes, it was an exceptional quarter. Margin performance where a lot of things, Todd, are really starting to work together. It's the mix of what we're selling and the efficiencies that we're gaining in our production facilities. We're doing a much better job of leveraging the capacity of each facility really across the product categories. Gross margin improved significantly year-over-year, and I think, got pricing calibrated with costs really well. So all that working together really led to one of the best second quarters given the margin in the last 10 or 15 years for the company. It stretches up really nicely for the full year. I certainly expect when we say 30% or better, I expect it to be the better. We go into Q3 and Q4, where I expect margins. If you remember last year, they were very strong. I expect our Q3, Q4 this year to be probably similar to a year ago because the comparability is on a different kind of scale than it was this Q2 last year Q2. That ought to translate in us doing potentially up to 31% of sales for the year, we can execute that.

Todd, we've had a lot of conversations about what we've been doing here at the organization and really transforming the model. And gross margin is one of those areas that we're keenly focused on from sales to operations, finance, and it's nice to see it really working, and that's what we saw this quarter.

On a longer-term basis, Dan, with the new lines that you guys invested in last year that you're producing higher-margin products on with the success of cross-selling. What in that kind of 3- to 5-year horizon is the gross margin kind of profile for this business as you guys are thinking about the longer-term vision of the operating model?

Well, as we've said, we absolutely believe that we can continue to grow that margin, right? And I would love to see us somewhere at some point in that mid-30s range. I think we're doing all the right things, right? The teams are focused on pieces in the plant. The new lines are working. Our sales group is understanding pricing better than they ever have before. The finance teams come alongside and help face that as well. And so we're hopeful, as we've said, that we knew we could get to 30 and what the next milestone is, I would love it to be in that mid-30s over the next 4 to 5 years.

I think, Todd, one of the keys to that will be to spread out the seasonality for Dippin' Dots. And we mentioned, Dan mentioned in his script, a number of big wins that are coming in that business down the road in theaters. If we can spread that sells out in Q1 and 2 of our fiscal year, then that starts to build towards even stronger gross margins on a yearly basis.

Ken, you talked loosely about commodities in terms of wins and losses in the quarter. But can you talk about what the overall basket performance was in the quarter? And can you remind us, I think when we were living through the spike in sugar costs late last year that you may have been hedged through the second quarter here. So just wondering the second quarter reality commodity-wise and then the forward outlook that you have for commodities in the back half of the year?

Yes, I couldn't say enough positive things about what our procurement organization is doing to get ahead of some of these things other was double digits a few months ago. It's come down, I think it's around 6%, 6.5% for us, but we were managed against that with contracts in place, and we are in a good position to leverage where those prices are in the next 6 months as well. So we're not locked into old prices, and we're able to react to that. So feel good about our position there. We've done a good job of lock in supply and cost on chocolate, which is probably the biggest commodity ingredient challenge for us and many others that use chocolate. The good news there is about half of that is it built into contracts where we pass increases, decreases on to the customer. But we have that well managed. If you look at Q2, probably on a net basis, we were slightly favorable in terms of inflate and deflation. As we look outward, it's really focusing in on what inflation minus do. I think you saw the latest CPI numbers are about 3.5%. I don't know that anybody sees total inflation getting down to 2 anytime soon. We'll probably put on a little bit better than that, more in the $2.2 million. So, if I had to project out, say, net-net, we may see inflation of around 2% to 2.5% for the -- as we look forward, but we're in good shape where we need to be to lock in and protect ourselves.

I'm really proud of what that team is doing. Another area where we're really transforming the company. We brought in a lead or procurement about a little over a year ago, and it's just doing a tremendous job leading that group and helping us get better in ways that we needed to get better.

Our next question comes from Connor Rattigan from Consumer edge.

Congrats on a great quarter. So Ken, on inventory build in the quarter. I guess I was just curious maybe how much details or how much of a sale was that inventory build? And were there maybe any other onetime items that pull forward referring to like that to drive the top line? And just thinking about that in total, I guess also with all these new business runs you guys called out, should we maybe start thinking about the top line and maybe turning back to that 3 mid-single-digit growth.

Connor, we talked about this in Q1, kind of the opposite effect, particularly in areas like Frozen Novelties where during the winter months there's lot of dialing back of inventory. And in the second quarter, I think as people look forward to spring and summer, we saw a little bit of that being trued up, which I think benefited us. We also like Frozen Novelties, saw really nice growth in Dogsters and in Icee Novelties, those were all benefits as well. And really, some of the work we've done, and Dan talked about this, and improving on time and in full metrics with our stocking changes reduce some of the [indiscernible] that we were paying. So that benefited that sales number as well because those were deductions that we were taking in the prior year. So it's a combination of a lot of things that are working well and worked well in the quarter. And hopefully, it's a signal for what our customers kind of see as it relates to kind of the entertainment areas and people getting out and buying in Q3 and Q4 and then spring and summer that the outlook is that they'll see some improvement there. I mean I know the consumer many retailers have been a bit stretched, but I think there's an anticipation that some of that may improve. In fact, I know the outlook on travel is pretty strong based on something I read this morning. So it's a combination of those things that benefited us in the quarter.

So I guess also 2 in the sort of in the same vein. We've heard some numerous other reports that there appears to be a widespread slowdown in foodservice traffic. And I know you guys called that out pretty substantially last quarter, but it was sort of the absence in this quarter's commentary. I guess what are you seeing on your end? And is traffic still down? And if not, what do you think changed.

One, we're certainly in an interesting environment with consumers, right? I kind of call it, like toppy waters or tickle customers. We had a great quarter, right? Q2 was a really strong quarter for us, and we didn't see that nearly as much as we did in Q1. But we're watching it closely. We think that as we've said over the past 3 years, we have a product that is almost an experiential kind of product. And so often, you might cut back at the grocery store or in the basket, but you might still buy [indiscernible] ice on the way home or you might get a churro or you might get a Pretzel reward or a treat something out of the ordinary. We had a really good quarter. We're going to watch the consumer closely. We'll react to it if we see some downturn, but our teams are keenly aware. And again, I'd just call it kind of a little bit of a softy waters when it comes to consumer.

So, on the RBC, congrats on getting all 3 of those up and running assets, they have a long-running accomplishment. So I noticed that you mentioned only about 8 kind of product distilling through that system. I guess just one of the second on the remaining 20%. I guess, is that just going to take a little bit longer to get through and that kind of toggle is to get you down to that 10% distribution margin number? Or are you guy's maybe growing so fast that you kind of sustaining that excess capacity?

Well, we need more capacity than just the 3 RDCs, we'll probably use an additional RBC when it's all said and done, not one that we own, but one that we use down in the Florida market. But we still have some that we need to shut down, try to get that fine-tuned is one of those things that we're working on right now. The team has done a tremendous job. And you can see it in our numbers almost across the board. But we will continue to step down some of those other 3PLs over the next 3 to 6 months.

The kind of just a reminder, even with this new structure, there'll still be maybe 6 to 8 facilities that we'll use to move product in and out, whether it's a 3PL, regionally located. So it's not necessarily just going from where we were just 3. There still need a few other facilities as well. But that 80% will probably build a little bit higher as we move forward also.

Our next question comes from Andrew Wolf from CL King.

Congratulations also on everything. Quite impressive as everyone has been pointing out. I wanted to ask to revisit on the gross margin. Could you tell us either if it's gross price, how much price was in there or net of mix, I don't know how you guys communicated about that. But you did -- I think in the release call out price and mix, listed it first which often means was the biggest contributor. So I'd just like to get a sense of that versus maybe volume.

Well, let me see if I can answer that in a few ways. One, I want to be clear, each of the 3 segments had positive volume growth. So units were up in all 3 of the business areas. Pricing that we've been taking with the exception of the pricing we take in January with IC. And I think we took one in January with Dippin' Dots, the other pricing is more surgical. So we're having to do a few surgical things with chocolate. We've done some with sugars and nothing wholesale. So when you think about margin for the quarter, I don't really have it kind of broken out, Andrew, or I could say as much as probably as much as this. I can just tell you that when we kind of walk through it, it's a combination of really all of the above. The new business we have with Churro is driving really good margins for us. We've really done a lot to improve the production efficiencies in our bakery facilities that is improving margins on bakery items. Some of the automation we've put in is also starting to drive benefits in that way. So we're just finally getting to the point where these initiatives we've had, whether it's procurement, whether it's operations, whether it's margin management and sales and how we manage mix and the products would grow, that is all really working nicely together to get us to the margins that we reported this quarter.

I just wanted to ask on, I guess, subway. It looks like they started, announced it sort of mid to late January. And at least from my observation, started advertising pretty heavy later in the quarter. How should we think about just kind of -- because you gave us a number for subway how that run rate can -- is that understated as a run rate? Or do you think there was a bunch of trial? And maybe like, how should we think about the $6 million or so in sales you called out going forward?

Well, it's a great new piece of business for us, Andrew, for sure. I think they're still dialing in on what that means even to them. The positioning of where we're at with that Churro is great. There's 3 tiers to the foot-long pricing, and we're at the bottom tier of that. And we've been able to, because of kind of foreseeing the need in Churro and the new lines that we've had. We've been able to keep them in stock where a couple of the other areas struggled with that, which might even turn out to be an opportunity for us in some ways. So I think they're still dialing in. I don't know that we have an exact number that we'd be able to guide you with that particular customer, but we love the positioning and believe that we have some opportunities with them internationally even.

Congrats again.

Our next question comes from Robert Dickerson from Jefferies.

Dan, you said a lot today, our business is doing great. So congrats like everyone else has said. I guess the question I have, you kind of made these comments about like portfolio positioning and kind of indulgent treat that, frankly, a lot of your products are still affordable, as we brought up before a lot of companies talking about some pressure on food service restaurants, et cetera. But at the same time, you're saying there are a lot of new business with, right? Like subway comes up, I've heard you say that in the prepared remarks in the prepared remarks, like Handheld, frankly, growth was off the charts to the new mass merchant business, Dave & Busters, you've spoken to before, Dippin' Dots sounds like it has a nice little runway even through the back half of this year. So I'm just curious, like would you characterize this as like, yes, like demand broadly in the market could be a little softer in different parts. But given our product portfolio and these new business wins that clearly we're doing better. And then also, I'm curious, as you talk to the retailers, other retailers saying, "Yes, like we really haven't seen a self in your business. So absolutely, we're going to blast that out in all our C-stores." I'm just trying to navigate kind of like why it's doing better and then also combine it kind of with this new business upside potential.

I do think you hit on the nose, though, our business is diversified enough that, one, we are an indulgent and we're treat and a reward. And so I don't think we get as impacted as some of the things that are more stable that people are cutting back on. And I love what our team is doing with innovation and new products that we're releasing that are selling really well. And then kind of the third leg to that is the sales team bringing new opportunities to the business, which is something that we've been driving on. It's really part of the strategy that we have been laying out over the last 3 years or so, and it's really come into play. And I talked about cross-selling several times and even got the questions, could you really make that happen because it's not easy to make happen, but it is happening here at J&J. We're seeing the sales can really work with one another to be able to bring new products into customers that we deal with today, and they're working really hard at it. I'm proud of the sales team. I'm proud of the marketing team and the way that they brought innovation. And I think we have the fortunate thing of having products that are indulgent treats that are experiential and all of those are working together. The consumer is a concern. Ken and I are sitting here being naive that it's soft out there in some ways. But that's not an excuse for us not growing sites, and that's what you would hear within our organization. We're going to continue to drive other areas even if it is soft out there.

And then I guess just a follow-up question kind of around the demand landscape. You are entering, let's say, almost entered kind of what we normally consider your best part of the year. Some of the amusement parts have already opened. It seems like movie traffic may be a little bit still light. So I kind of like where we sit today, I guess, like as you got to April. Can I ask the same question every year, I ask every year? Would you say that kind of that landscape as you kind of think forward the next few months with respect to amusement parts and the other dynamics in business? Seems to be fairly set, like pretty good.

I think we're positioned really well, of course, you get into these 6 months and weather plays a big part of it. So if the weather gods can shine on us, and I mean that kind on us have that done out there and get people to the parks, the amusement park industry is forecasting a pretty good season. The movie industry we hadn't talked about a little bit, it has been soft and that strike did affect the movie industry and they're expecting kind of a softer year overall, down 15% or so. But it builds as you get to the later-half of the year as new movies start to be released. We're kind of in that long time right now. But we expect that to come back more in the fourth quarter or first quarter of our fiscal 2025. But we're investing in that group. We're investing in the movie industry because we saw before the strike, when you have the right movies in place, people are willing to come back out to the movies like the Barbenheimer last year. And so we're seeing some good growth there with our Dippin' Dots brand. But I think we're in a good position as we go into the core summer months.

I am showing no further questions at this time. I will now turn it over to Dan Fachner for closing remarks.

Great. Thank you very much. I appreciate that, and I appreciate everybody's questions today. So looking ahead, we remain focused on our executing our strategy, including maximizing average sale and new business opportunities to further grow our core brands while investing in our capabilities and resources to improve our overall operations. While we are closely monitoring consumer and inflationary trends, we expect to build momentum through the second half of fiscal 2024 and remain excited about the many opportunities ahead of us to deliver long-term value to our employees, partners and shareholders. 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.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.