Good day, and thank you for standing by. Welcome to the J&J Snacks Foods Third Quarter 2024 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. 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 the J&J Snacks Foods fiscal 2024 third quarter conference call. Before getting started, 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. 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/or 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 achievements 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 30, 2023, 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 today. Any such forward-looking statements represent management's estimates as of the date of this call, Tuesday, August 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 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 to the nearest GAAP measure in the company's earnings press release, which you can find in our Investor Relations section of the 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 open the call for a question-and-answer session. With that, I would now like to turn the call over to Mr. Dan Fachner. Please go ahead, Dan.

Thank you, Alberto. Good morning, everyone, and thank you for joining us today. J&J Snack Foods delivered an excellent third quarter, building on our strong momentum from the first half of the year. I'm so proud of the J&J team and employees who continue to execute our strategy, while delivering consistent results. These results continue to validate that the investments we have made and the strategies that we have implemented are having a positive impact on the sales and earnings power of our business. And it's positioning J&J to win and what remains a dynamic consumer and operating environment. To further illustrate our success, I will share a few highlights from the quarter followed by a review of our sales performance and operations. Our record third quarter net sales of $440 million marked a second highest quarterly net sales performance in our company's 53-year history. This impressive result was led by strong sales in our foodservice and retail segments, offset by temporary challenges in the Frozen Beverages, which were impacted by softer sales in the theater channel. Our ability to grow the top line 3.3%, while maintaining a healthy 33.6% gross margin underscores the strength of our strategy led by improved operating efficiencies and a balanced and diverse portfolio of products, brands, and customer channels. We continued our trends of growing profits faster than sales with the third quarter operating income and net earnings growth of 3.8%. This resulted in a record high quarterly earnings per diluted share in the quarter. Kim will provide more insights into our financial performance in just a few minutes. Our strategies to leverage innovation and cross selling opportunities to expand placements of our core products and brands continue to deliver positive results. Taking a closer look at our sales performance. Third quarter net sales…

Thank you, Dan and good morning everyone. I will start by saying that it has been a tremendous honor to serve as CFO for J&J Snack Foods and I am truly blessed to have worked alongside Dan and his amazing team to improve and grow this business. I'm proud of the finance and IT organization that we have developed over the last four years and confident that the foundation is set to continue delivering strong financial discipline, business performance and system capabilities. Turning to our results. I'm pleased with our ability to deliver strong performance for the quarter, including record fiscal third quarter net sales. This combined with gross margins of 33.6% contributed to significant profit growth and profits growing faster than sales. Net sales for the quarter totaled $440 million, an increase of 3.3% versus the prior year. As Dan mentioned, top line performance was led by higher volumes and new business performance in our Food Service and Retail segments more than offsetting softer sales in our Frozen Beverages segment. Food Service, our largest segment saw sales increase 3.7% to $264 million. Handhelds sales increased 25.3% to over $21 million, bakery and frozen novelties increased 6.8% and 9.1%, respectively, driven by unit volume growth in cookies and a 5.3% increase in Dippin' Dots sales. Growth across the segment was offset by a decrease in Soft Pretzels and Churros sales of 6.3% and 0.7%, respectively driven primarily by the challenges in our theater channel that Dan referenced earlier. In addition, sales of new products and added placement with new customers totaled approximately $6.4 million driven primarily by the addition of Churros to the menu of a major QSR customer. This led to third quarter operating income of $20.2 million, a decrease of 2.6% versus the prior year period reflecting a…

Thank you. At this time as mentioned, we'll conduct a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Todd Brooks with The Benchmark Company. Your line is now open.

Hey, thanks for taking my question and nice results in the quarter here kind of absorbing some of that pressure in the theater channel.

Thank you, Todd.

Yes. Thanks, Todd.

First question is on that theater channel and I think this might be helpful for all of us. Can you size if you think about foodservice and frozen beverage what percentage of each of those segments is made up by the theater channel?

We don't have that exact number on the foodservice side. We know on the beverage side, it's about 25% of the Icee beverage sales. The food service side is much less than that, but growing. It's a nice piece of business for us that continues to grow and we've even added some people from a company standpoint into that group to try to energize it.

Okay. Great. Thanks, Dan. Secondly, the churro success with Subway has obviously been a great story. I look at that sidekick line and I see three products that J&J would be well suited to make not just the churro. Have you had any luck making inroads with either the cookie offering there or the soft pretzel offering?

We've built a really nice relationship with that company through this program that they have. Both that and their buying arm, we've built a great relationship. We're continuing to have conversations and absolutely believe that in the future we'll have the opportunity to be making some of those products or some others. There's some nice opportunities for us coming.

Okay, great. And then a final one and you touched on the KFC test a little bit, Dan, but I was just wondering if you look forward a couple of calendar quarters here. What we're seeing either on the new product launch side, the distribution side or maybe some tests that are out there that can help you continue. You drove, I think almost a little over $9 million in revenues from new placements and new products, which is great to see. I'm just wondering what you can share with us in the go-forward look for what may continue to drive that?

Yes. I'm not sure I can share some names, but I will tell you we have a tremendous pipeline. In retail, we've got a couple of things that are really strong for us and a lot of new a lot of customers expanding the distribution. On the foodservice side, we've talked about this in the past. Whenever a particular customer like Subway comes out with a churro product there's lots of others who are watching that. And so we have some tests in play that some will even kick in before the year's end with some other large organizations out there that we'll see continue to grow. And so really happy there. The bakery side, as you watch those numbers, we've got some good things in some private label areas that we're continuing to grow that we're happy about. And then it just the IT with the KFC as you mentioned, that's a really big opportunity for us. And so far that test has gone extremely well with a lot of press around it, a lot of people, a lot of attention to it. So I love our pipeline right now. I think we've got a really good chance of having a really strong 2025.

Okay, great. Thanks.

Thank you. Our next question comes from the line of Connor Rattigan with Consumer Edge. Your line is now open.

Hey, guys. Good morning. Congrats on a great quarter.

Thank you, Connor. Good morning to you as well.

Great, great. Yes. So you guys called out the weakness in frozen beverages driven by the theater channel. So, I'm curious, could you guys maybe share how trends looked across the other channels to get maybe give us a better sense of relative performance across those channels? Like, was performance relatively even outside the theaters or was there may be quite a bit of volatility by channel?

Well, we were up in volume in most of all of our big brands and products. It was a pretty good quarter overall for us. And I mentioned this in my opening. Even inside the beverage side of our business, inside Icee, if you took the theater channel out, we would have been up by 3%. And so overall, a pretty good quarter with all of our products and we're seeing some nice growth.

Yes. Connor, I mean, we were purposeful in making that comment about what the gallon increase was without theaters. So that tells you amusement was up, QSR was up, mass merchandise was up as it relates to frozen beverages. So again, this was really a tale of particularly in April and May where the theater industry was, is related to releases and you can read pretty much any publication from any of the theater companies and you'll see that outside of that really, really good quarter for us on that side of the business.

Awesome. So also in the press release, you guys noted some strength in amusement parks, specifically with Dippin' Dots. So I'm curious, what did you guys really see as the driver there? Was it just strong summer seasonal traffic? Maybe was there some pricing, distribution gains? Any color on that would be great?

Our teams do a great job, Connor, getting into the amusement park industry and making sure we're well positioned when the season comes. And the Dippin' Dots team really excels in that area. In fact, I toured one of our amusement parks last week with a group of leaders and the Dippin' Dots presentation across that Six Flags park was tremendous. They just do a really good job making sure we're positioned right, making sure that it's marketed appropriately. It certainly helps when you have a nice warm summer and we're having that. But that industry seems to be doing really well in all facets of our business right now.

Awesome. And then just one last quick follow-up. So you guys have previously mentioned that about 80% of your products was slowing through the new RDC system. I'm not sure if I missed it, but did that tick up a little bit during the quarter?

I think it ticked up, I want to say, Connor, maybe a couple of 100 basis points. I think again, I'm doing this by memory. I want to think Q2 was around 78%. So, yes, it ticked up somewhat from Q2.

Okay great. Thanks guys. I'll pass it on.

Thanks Connor.

Thank you. Our next question comes from the line of John Anderson with William Blair. Your line is now open.

Hi, thanks for the question. And Ken, thanks for your help the past few years and best to you in your retirement down the road.

Thank you, John.

Yes, you bet. I guess, I wanted to first ask just a big picture question around the consumer, what you're seeing in terms of any macro impacts on your business relative to the consumer. Are they exhibiting more value seeking behavior or any kind of channel shift you're seeing across the various channels that you serve that suggest either consumer remains healthy or you're seeing some pockets of weakness? Thanks.

John, we talked a lot about this and I used this term last quarter and I'd probably use it the same again today. I just still think the consumer is a little fickle. I think they react to what has been said in the media. I think, EVO, over the last 24 hours, we saw stocks plummet and then come back up. And I think when you don't -- we expected some interest rate drop last week and that didn't happen, the consumer reacts to that. I think what we see kind of still is somewhat of a tale of two cities, right? I think the low end consumer still is under pressure in a lot of ways and they're cautious and they're careful about how they spend. And then I think we see the opposite end of that spectrum where they're looking for premium or expense rental kind of environment to be able to spend on things. And I think it's still a typical customer And I think it probably will remain that at least during this period of time as we're going through an election. So we're going to have to watch that really close, right? I think they're discerning on where they spend their money. Q –: It makes sense. So if you kind of stripped out the theater channel this quarter, it looks like your sales would have been up about 5%. I think historically that has been kind of an area that, I think the company has kind of grown organically. Is that a reasonable kind of a mid-single-digit organic growth rate expectation, a reasonable way to think about the business as you look to not just the fourth quarter, but fiscal 2025. Like you've got a lot of great kind of tests in the works. You've got some good new products that are expanding distribution, just a lot of kind of cross linked stuff that's working. So trying to get a better sense for how that kind of all rolls up into a top line view here?

Hey, John, I think that's a really good way to look at it. We are working really hard to be right in that mid-single-digit growth year-over-year. And I think we're well positioned for that in the future. And you mentioned the third -- theaters and I just want to kind of highlight kind of the impact of what good movie releases can do for us. So theater industry really struggled in April, struggled in May and struggled most of June, but we get into the back half of June and we get a couple of really good movie releases out there and we just catapult our sales so much that Icee ends up having a record month of June, right? And so what we're encouraged by is that we continue what we've talked about with the new products releases and the new distributions and seeing the growth in our core products and then you get the theater business to come back, which all indications look like it will in back half of '24, I think what I heard is they have 10 big movies, only four of them have been released so far, so we got six of them in the back half of the year and then 2025 a great lineup. All of that combined, we feel pretty well positioned to be in that mid-single-digit growth for the future.

That's helpful. And I guess following on that, is it fair to say that because your products that you're selling in theaters are some of the core brands, that's a margin accretive part of your business as well?

Yes, absolutely. And we're growing with the Dippin' Dots side of that with AMC, Cinemark and Marcus Theaters and a couple of other regional chains. And as you know, the margins through Dippin' Dots are really healthy. Go ahead.

I was just going to add and we stated this in Dan's script, but a really big deal. When we add over 900 theaters between now and the end of the year for Dippin' Dots, that's going to be a really nice business and then obviously be accretive to margins as we go into those winter months. So that's another reason we feel optimistic as we head into the end of the year and into next year.

That's helpful. Also ties into my last question, you kind of reaffirmed the outlook for gross margin this year to be above 30%, which I think was kind of an interim target for you at one point. Having kind of assuming you deliver on that this fiscal year and the work that you've done from an operational perspective, a productivity perspective and again centering your investments around some of the core higher margin parts of your business. Have you given any thought to what gross margin might look like longer term?

Yes. I think Dan and I both talked last quarter, we have a desire and this won't be next year, it may even be two, three years down the road to get us up close to that mid-30s range. But as we focus on billing plans where profits go faster than sales and obviously gross profit is going to play a big role in that. We expect to keep inching that number up and some of that will be based on, focusing on really driving the core growth of those products that you mentioned earlier and then improving the margins of our lower margin business, which we've really made nice progress in a couple of those areas this year. But that's kind of where we're headed. I feel good about where we're going to land for this fiscal year given the first three quarters and I think that will build from there.

Great. Thanks so much guys for the help.

Thank you, John.

Thank you. Our next question comes from the line of Andrew Wolf with C.L. King. Your line is now open.

Hi, good morning. I also wanted to ask about the gross margin. Just sort of back of the envelope, looks like if the $7 million of movie theater business had comp, the gross margin would have expanded, I don't know 10 to 20 basis points, something in that range. Is that reasonable?

Yes. That's a good estimate, Andrew, yes.

Outside the company. Okay. The other thing I wanted to ask about gross margin was just pricing power. Some of the big retailers have their customers are hurting, at least a lot of them. And they're mass marketers, so they have everybody. And inflation for you, I guess is running, you said low- to mid-single-digits on the ingredient side. Obviously, there's an offset with your productivity improvements. But what do you feel about pricing power? There's contractual things, I think certainly in Food Service, but maybe in retail and just sort of in general, just the ability to pass through not to try to get margin out of price, but just to kind of make yourself hold on the production side?

Well, I mean it's a great question. I think you have to be really careful with pricing during this environment that we're in. As you talked about, we do have some contractual things that we're able to pass on and we're able to do that with the rise in cocoa or chocolate. And then you have to earn pricing outside of that, right? We have to be really careful about where we price and how we price and making sure that we have earned that price increase. Our new three RDCs and the efficiencies that we're gaining there and the new capacity that we have and making sure that we're delivering to customers on time and efficiently allow us to be able to earn some of that. But we're going to have to be really careful how we price that on. I think like I said, we were able to do that with chocolates and we'll watch any other of those key items in the future to make sure that we're being diligent and disciplined about how we do it.

Okay. And lastly, I just kind of since you mentioned Thinsters, is there an opportunity for a quite small brand like that to actually get some meaningful distribution given your relationships and…

We love to buy that. We love to buy.

So is that M&A strategy or do you need bigger brands like a Dippin' Dots when it comes to M&A?

Well, I'd love to find bigger brands. We've talked about that all along. But Thinsters was such an easy acquisition to make because it's such a great product, and very well receptive and we believe that we do have an opportunity to grow that. I don't know how big that can be, but our teams are really excited about out there and representing and growing it and we see some opportunities in the short term with it. We'll continue to look for larger ones like Dippin' Dots, but it doesn't mean we won't look for something like this that's easy to kind of strap on and grow.

Okay. That's it for me. Thank you.

Thank you, Andrew.

Thanks, Andrew.

Thank you. Our last question comes from the line of Robert Dickerson with Jefferies. Your line is now open.

Great. Thanks so much. Hey, guys.

Good morning, Rob.

Just a couple of quick clarification questions, a little perspective. I guess just in the Retail segment, op margin was around kind of that 11% level. We have seen some kind of decent volatility the past few years in that segment. I'm assuming that was kind of more cost price related. If we kind of think about the 11%-ish in Q3, is that like are we kind of like back on track to get to kind of like a more normalized kind of standard kind of run rate going forward or are there puts and takes et cetera?

Yes. No, Rob, that's a great question. I do think we're back on track. I mean, I'm not going to commit to 11 every quarter, but I think much more in that range. I think we've finally gotten things dialed in as it relates to how we manage margin in those retail products. We're moving and growing more in those higher core, Frozen Novelties, soft pretzels. As long as we do that, that's going to mix out much better than it was a few quarters ago or a couple of years ago. So I do think this is more realistic to what we ought to be able to do there versus say a year or so ago.

Got it. Fair enough. It seems more realistic. Okay. And then I guess just kind of a broader question on margin mix, kind of vis-a-vis new distribution. Like I heard you say, got more distribution to mass retailer. I think there's more distribution coming, more stores from a bigger grocer. We talk about Subway, you've got the KFC launch potentially coming at some point. Like as you enter those new stores, like let's just take KFC as an example. Let's say, okay, we're in two stores now and then we go to 100 and maybe we go to 500 whatever it is. And this would be, I guess a similar dynamic on Dippin' Dots. Once you're in, let's say, a movie theater or KFC with those products, is that just kind of you get your normal kind of margin rate on that product in that dollar per product from the start? Or is there scalability in this business? I mean, it seems like there usually is, but I'm asking because I'm not really sure if there is. Maybe it's just day one, that's what we get. And yes, the more we sell, the more profit we make. Or the more you sell in movie theaters or KFC or Subway or what have you, you actually are getting kind of incremental volume leverage and scalability benefits in the overall business?

Well, it's a really good question. Anytime you have volume, you do get some scalability. You're talking about a couple areas that are a little bit different when you're talking about Icee or Dippin' Dots. It's not quite the same thing, but if you grow in Dippin' Dots and you're able to produce more product, you're getting some scalability inside that plant where we produce it. So you do get some advantages there. On the Icee side, we're always very, very conscious what the cost is there typically is the piece of equipment and so you get some scalability around buying large numbers of pieces of equipment and hopefully you're able to be careful about how many people you have to hire to take care of that business. And so there's some scalability that happens there, but it's not quite the same as in a manufacturing plant. I hope that answers your question. It's a little bit different of a question, but the answer is, yes, there is some scalability, but maybe not as sizable as you might think.

Okay. Yes and Dan, I mean, I'm also asking because, I mean look clearly, you don't provide long-term guidance, right? But you've spent a lot of money on the efficiency side that gives you a lot of benefits. And then I'm also hearing overall also getting a lot of distribution kind of across pretty much all channels at least or all major channels.

Really are, yes.

Right, which and then there's like a volume led story, right? So kind of like usually what follows is a margin expansion story. I just don't have a slide that's showing us that. So I mean it seems like that's clearly the idea here. Is that fairly simple color?

It is and it falls right into what I've talked about with the RDCs and the efficiencies that we're gaining from that. And if you think about the Dippin' Dots side, we caught those RDCs early enough to be able to build a box inside, a box and maybe more even a little bit ahead of ourselves. We knew that that was something that needed to happen to be able to grow that piece of business and now we're growing into that box in a box, which will help us gain some efficiencies in the go forward.

Yes. Rob, these are all pieces in our ability and confidence to continue to move that gross margin number up as we grow volume in these areas, leverage automation that's going to create bits of efficiency that grab basis points in margin that should help us evolve to higher gross margin rate over the next two or three years.

Yes. Great. All right. That's all. Thanks so much.

Thank you, Rob.

Thanks, Rob.

Thank you. I'm showing no further questions at this time and would now like to turn it back to Dan Fachner for closing remarks. Go ahead.

Thank you, operator. In closing, we remain extremely confident in our path forward and in our ability to continue to execute at a high level. We're building a culture that emphasizes improving every aspect of our business in order to leverage the opportunities in front of us as well as to create some new opportunities of our own. We look forward to updating you on our progress later this Fall. 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 morning.

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