Good day, and thank you for standing by. Welcome to the J&J Snack Foods Fiscal 2025 Third Quarter Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to now hand the conference over to the first speaker today, Norberto Aja.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2025 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 as well as 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 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 28, 2024, 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 the call today. Any such forward-looking statements represent management's estimates as of the date of the call today, August 5, 2025. 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, 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 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 Shawn Munsell, 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. Fachner. Please go ahead, Dan.

Thank you, Norberto, and good morning, everyone. We delivered record financial results in our fiscal third quarter as we successfully navigated various market challenges during the quarter. Our ability to achieve these results despite a cautious consumer backdrop, unfavorable summer weather and foreign exchange headwinds reflects the resilience of our diversified portfolio of brands and products as well as the commitment of our team. Net sales grew 3.3% to a record $454.3 million, while adjusted EBITDA increased 1.6% to a record $72 million, and adjusted EPS was $2 per share as compared to $1.98 last year. We delivered gross margin of 33%, reflecting a seasonal mix shift towards our higher-margin products as well as we progressed on pricing initiatives and a sharpened focus on operating discipline. I'm proud of our performance in the quarter and commend our team members for their hard work delivering exceptional financial results. Our peak summer season encountered slow traffic at outdoor venues across the country throughout the quarter due to poor weather. However, a meaningful rebound in theater traffic helped to compensate for sluggish performance in other channels. Box office sales, coinciding with our third quarter are estimated to have increased 37% versus the prior year, driven primarily by the strength of the Minecraft movie in April and May. And although our beverage sales were down modestly for the quarter, beverage sales would have increased compared to the prior year, if not for the impact of foreign exchange related headwinds. We have been working with our customers this year to implement price increases to help offset persistent input cost inflation, namely related to chocolate, and we've made further progress in the quarter. These conversations are never easy, and we endeavor to minimize the impact to customers wherever we can. While tariffs are threatening margins as…

Thank you, Dan, and good morning, everyone. Third quarter revenue increased 3.3% to $454.3 million. As Dan mentioned, Food Service sales increased 4.8%, retail sales decreased 7.1% and Frozen Beverages sales increased 6.1%. Top line improvements largely reflect price increases as well as higher machine revenue in the Frozen Beverages segment, while a weaker peso had a 60 basis point unfavorable impact on revenue for the quarter. The quarter included a nonrecurring gain of $10.6 million from insurance proceeds associated with last year's plant fire as well as a nonrecurring $1.5 million brand impairment charge associated with the write-off of a churro brand that has been replaced by the Hola! Churros brand. These impacts have been excluded from the adjusted results that I will be discussing. Cost of goods sold increased 4.1% to $304.2 million. Ingredient costs increased in the aggregate as compared to the prior year quarter, with the largest increases related to chocolates. The quarter also included tariff charges paid to suppliers that increased total cost of goods sold by about 0.25 percentage point. Gross profit increased 1.5% to $150 million, equating to a gross margin of 33%, slightly less than 33.6% in the prior year. The slight decline in gross margin is mostly attributed to lower gross margin in the Frozen Beverage segments due to a higher mix of and lower margins on machine sales and a lower proportion of beverage sales, which includes the impact of unfavorable foreign exchange. We have exposure to certain imported raw materials that are subject to tariffs. Under the 10% tariff environment, our exposure without mitigation could approach $8 million annually and could rise as new higher tariff rates are implemented. We will continue to monitor the situation and to pursue mitigation through pricing alternate sourcing or substitutes. Operating expenses totaled…

[Operator Instructions] Our first question comes from the line of Scott Marks of Jefferies.

First thing I wanted to ask about just in the Retail segment, you noted a pullback in some promotional activity across the frozen novelties business. Wondering if you can just speak a little bit to what was informing that decision? And then secondly, on the handheld side of that business, maybe if you could talk a little bit about some of the plans to kind of outsource some of the capacity later this year.

Sure. Scott, good to talk with you. On our retail front, we went into the quarter with a plan around marketing efforts and probably just didn't go deep enough to where we needed to do. We realized that somewhere in the midst of the quarter and have course corrected that for the future, but probably just didn't promote advertising as well as we could have or as deep as we needed to. As it relates to the fire and that plant, we have made the decision now to shut that plant down. Kind of the story of necessity is the mother of all invention. As that plant shut down, we were able to lean on another plant of ours to build up the inventory that we needed. And as we've started to do that, have discovered that, that plant now can produce more than what it used to and enough for our needs in the future.

Understood. So you're able to shift all of that capacity essentially to an existing facility?

We really are. Teams have done a tremendous job looking at the line that we have today. In fact, I was even out there about a month ago and seeing what they're able to do and really proud of that operational group and the way that they have picked it up. And by the end of this year, we will be over the capacity that we need for those lines.

Understood. Second question I wanted to ask about just in terms of your cost structure, specifically around marketing and distribution. I think marketing obviously stepped up a little bit. You talked about some of the reasons behind that. But I think overall, marketing as a percent of sales remains a little bit elevated relative to some other maybe center store food peers. So maybe wondering if you can speak to that a little bit and maybe any optimization opportunities going forward? And then on the distribution side, as a percentage of sales, it obviously came down a touch, but the absolute number was pretty much in line with last year. So wondering if you can just kind of speak to the fixed versus variable nature of those distribution expenses.

Yes. I'll start with the summer promotions. I'll start with marketing. And what you're seeing there is really the impact of summer promotions, and that's mostly for the Frozen Beverages and the Dippin' Dots business. If you look at that marketing spend as a percentage of sales in the first half of the year, it was relatively well contained kind of versus the change in sales. So I think it's been really well managed. And what you're seeing is really a function of the summer events. As it relates to the distribution costs, what we called out was improvements around freight optimization, and we called out some of the benefits of fuel expenses in the quarter. And so we are seeing the impacts. We are seeing the benefits from the conversion to the RDCs, call it, somewhere in the neighborhood of $1.2 million, $1.3 million alone in savings from the RDCs last year. I will say there were some other, call it, onetime costs that we incurred in Q3 that inflated that number just a little. So I'd say, overall, it's going in the right direction.

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

Two quick questions. One, if we think and we're kind of rolling our minds now to modeling for fiscal '26, one, what's the materiality? Or how do we think about what handhelds can be next year versus what the fire impacted volumes will be in '25? And two, and probably more importantly, Dan, as you look at these new programs with a Mexican-focused QSR chain, potentially on the churros side and then the Frozen Beverage rollout that you were talking about, you talked about kind of a list of these opportunities and things that are in test now. How material do you see those being -- stacking up to be if you're able to convert on all those opportunities?

Yes. Great question, Todd. On the handheld front, probably we're expecting that we might be able to see a 10% lift or so this coming year from what we were able to produce this year. We'll have capacity in this one plant that we will be able to rise at about 37% from what it was producing before which should get us back in exact format for what we need in the future. And I would say -- I don't just trying to ballpark that, I would say we're going to be somewhere in that 10% to 20% lift in 2026. As it relates to a couple of the other things that I talked about, I love what the team has in the pipeline, doing a really, really good job, making sure that we're prepared as we get into '26. This one test we talked about with churros could be really meaningful. We're not ready to jump out there and say exactly what that is to date. I might be able to give better clarity to that at the end of this next quarter. But it could be a meaningful impact to our sales for '26. They're in the middle of a kind of a secondary test right now, and all indications are that it's doing better than what was anticipated. So we're kind of keeping the fingers crossed that, that will come through and be as strong as what we think it will be. On the FCB front, a really nice QSR, same thing in the midst of a test right now, just getting word that we're going to be able to expand that test and again, is ahead of what anticipations are. We've talked about this before, ICEE programs take a little while to roll out. And so it could have a meaningful position for us over the next several years. But again, if you think about ICEE, once you get the okay, it takes you 4 or 5 months to get it all rolled out. So have more of a meaning as we get to the back half of the year, but love what the teams are doing, love the pipeline that we have really in each one of the segments of our business.

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn it back to Dan Fachner.

Thank you, operator. In closing, we're executing with focus and discipline in a dynamic environment, and we remain confident in our ability to deliver on our fiscal 2025 goals and longer-term priorities. We look forward to updating you on the progress when we report our fourth quarter results. In the meantime, please don't hesitate to reach out to our Investor Relations team at JCIR at (212) 835-8500 with any questions. Thank you again for your time and interest. Have a good morning.

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