Ladies and gentlemen, thank you for standing by. Welcome to J&J Snack Foods First Quarter 2026 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. To ask a question during this session, you would need to press star 11 on your telephone. You will then hear an automated message of that, and your hand is raised. And to withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Reed Anderson, with ICR. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2026 First 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. This includes, without limitation, our expectations with respect to the success of our cost savings initiatives and customer demand improvements in the sales channels in which we operate. These statements are neither promises nor 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 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 the call today. As such, forward-looking statements represent management's estimates as of the date of the call today, 02/03/2026. 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 on 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 like to turn the call over to Mr. Fachner. Please go ahead, Dan.

Good morning. I'm pleased to report that our earnings recovery is underway and gaining momentum. We delivered adjusted EBITDA of $27 million on sales of $343.8 million in the first quarter, representing a 7% increase in adjusted EBITDA compared to the prior year. Results in the quarter included $1 million of unfavorable impact associated with product disposal costs. Our performance demonstrates the early benefits of Project Apollo transformation initiatives and our continued focus on operational excellence. Our first quarter results reflect meaningful progress on several fronts. Gross margin improved 200 basis points to 27.9% versus the prior year, driven by our early Apollo savings associated with plant consolidation and improved product mix. While net sales declined 5.2% to $343.8 million, most of the decline is attributed to our bakery business as we focus on higher margin opportunities. About $18 million of the revenue decline versus prior year was in that piece of business. Of this, about $13 million was related to SKU optimization efforts associated with Project Apollo. The remaining bakery sales decline included other lower margin products, which aligns with our portfolio optimization strategy. We expect portfolio optimization will represent an approximate 3% decline in sales in fiscal 2026. We also believe that sales in the quarter were impacted by the government shutdown and the pause in SNAP benefits. Looking at our syndicated retail data, we did see a dip in dollar sales in mid-November that coincided with the pause in SNAP benefits, with the largest impact in frozen novelties. Project Apollo is progressing as planned. Although we're still in the ramp-up phase and not yet at the full run rate, we realized over $3 million of net savings in Q1. With plant consolidation on track to be fully implemented during our fiscal second quarter, we remain confident in…

Thanks, Dan, and good morning, everyone. As Dan mentioned, we're pleased with our Q1 performance, which demonstrates early progress on our transformation initiatives. Foodservice segment net sales declined $19.7 million or 8.3% to $219.2 million, with $18 million of the decline attributed to our lower margin bakery business, largely reflecting steps we are taking to improve product mix. Handheld sales declined approximately $5 million in the quarter due to lower comparative volumes and contractual pricing true-up on lower costs of certain ingredients. Soft pretzel sales increased $3.6 million or about 6.9%, continuing the momentum from 2025. Retail segment net sales increased $1.2 million or 2.6% to $45.9 million, primarily driven by a $1.8 million increase in handheld volume as we lapped last year's capacity constraints from the facility fire. Sales within the remaining retail portfolio decreased about $600,000, primarily driven by lower frozen novelty sales as growth in Dogsters and Dippin' Dots was more than offset by decreases in other novelties. Frozen beverage net sales were materially flat at $78.7 million. Beverage sales were up modestly, whereas service and machine sales combined were down. Consolidated gross margin improved 200 basis points to 27.9%, primarily reflecting Apollo initiatives, including a reduction in lower margin sales. Results included product disposal expenses of approximately $1 million. Tariff-related costs were approximately $600,000 net of pricing offset. We do expect some tariff impact to subside over the course of fiscal 2026. Operating expenses increased to $95.4 million, which included $6.1 million in nonrecurring plant closure costs and other nonrecurring impacts. We expect additional nonrecurring transformation project costs of approximately $5 million in fiscal 2026. Selling and marketing expenses increased 9.9% or $2.8 million compared to the prior year quarter. Approximately 140 basis points of the increase was associated with higher commissions for retail vending sales,…

Thank you. Please press 11 again. And our first question comes from Jon Andersen with William Blair. Your line is now open.

Good morning. Thanks for the question. Good morning. I have one question on sales and then one on Project Apollo and cost outs. Beginning on sales, you mentioned that the SKU rat is now expected to kind of be a headwind of about three percentage points on a full-year basis. That makes sense, I understand, and is consistent with what you've talked about in terms of portfolio optimization work. But what I'm trying to kind of get to is how you're thinking about the full year, you know, in the context of that. I know you have kind of an underlying long-term objective of growing the business organically in the mid-single digits. But again, I think we have to net out the 300 bps related to this year. So and then I know there are some things that are building through the year as well in terms of commercial innovation, some new business wins. Are you looking for or expecting or budgeting, you know, to grow the business, headline sales on a full-year basis? And how might that kind of ramp from the number that you printed in Q1 work from here? Then I'll follow-up with a question on Project Apollo. Thanks.

Great. Thank you, Jon. Yeah. Great question. And, you know, just to start off, we're really pleased with the way that the quarter has shaped up. It's really what we had talked about to begin with with Project Apollo and are very happy with the way that it is shaping up so far. The sales results in Q1 were just slightly softer than we anticipated, and that's due to the ramp-up of being able to consolidate those plants. You know, we have three of them that we consolidated. One is fully done at this point. One's kind of halfway there. We'll be done shortly, and then the final one will be done by the end of this quarter, which puts us at a full run rate. So Hey, Jon. Can you Excuse me. Jon, can you hear us?

Yes.

Okay. Good. We're sorry. We got a little interruption here. Apologize for that. So overall, we're happy with where the quarter landed, much like what we have talked about all along with you. As it looks towards long-term and where we might shake out for the year, like you talked about, we have a lot of great new business, great innovation coming on. And, yes, about 3% impacted by this SKU rationalization that was escalated during this quarter because of the speed in which we are able to consolidate those branches. We still look towards low single digits growth for the entire year, though. We think that we're in a good position with all the great things that we have going on to kind of land the plane there in that low single digits growth.

Yeah. That's low single digits, Jon, on kind of the remaining portion of the portfolio.

Got it. On the on the x SKU rat portion?

Yeah. That's right. Yep. Okay. Fair point. Okay. And then you mentioned that Project Apollo, I think, delivered $3 million of cost savings in the quarter. I guess, the run rate you're looking to achieve once complete with phase one is $20 million. Yep. What else needs to happen to get to the $20 million annual run rate? And, you know, if you had to kind of, you know, point to a time frame this year, when you hit that stride, when do you think that that might be?

Yes. We really believe that we'll be there here in the second quarter. The team has done a tremendous job getting us to this position. And we talked about that $20 million annual run rate, and we believe that we will be fully capable of doing that starting in Q2.

Yeah. And that's the so that's the plant consolidation component. So if you remember, Jon, $15 million of the $20 million is associated with plants. So we were closing in on the full run rate in Q1. Expect to hit it in Q2. A lot of the work has been done in terms of, you know, shutting down those plants, transferring inventory, you know, all of the closure and consolidation work. We expect that to be complete this quarter. The remaining $5 million, if you remember, that's a mix between, you know, distribution expense savings and G&A savings, and we expect to be on the run rate. We'll be ramping up in the third quarter of this fiscal year and then should be on the full run rate for that remaining $5 million by the fourth quarter.

Okay. Super helpful. Maybe I squeeze if I could squeeze one more in. Know, I know that the commodity environment hasn't has not been a helper for you in recent years, and there have been certain, you know, pockets within your cost of goods basket, like eggs and cocoa. But, you know, can you give us an update on where things sit now? Are those less, you know, of a headwind moving forward? And how are you kind of thinking about just kind of inflation and also what you're doing overall from a portfolio perspective? And the impact on gross margin. You had a nice step up in Q1, 200 basis points. I'm wondering if we should be thinking about that kind of level of improvement year over year persisting as we move forward? And I know the plant consolidation is part of that. But there are probably other factors in there as well, portfolio mix, commodity costs, etcetera.

Well, the plant consolidation and addition of some of the new business and our continued kind of mantra of margining up. So we're seeing some really nice things come through with all three of those things. Commodity pricing, I think, will be a little bit in our favor this year. You know, last year, we really struggled in this quarter and Q2 with some headwinds of like you talked about with cocoa and eggs. But overall, we believe this year that there's a good chance that that will kind of be in our favor.

Yeah. And one of the things that one other thing I meant to add too, Jon, is, you know, that the $1 million worth of product disposal costs that we incurred in the quarter, just to be clear, that was not adjusted out of our earnings. And so just think about the gross margin improvement in the context of that. You know, if not for, you know, product disposal, we would have picked up another you've had another million dollars going through gross profit in the quarter.

Okay. And, Shawn, that's something that doesn't that that's done that's in the rearview mirror at this point that won't affect this group?

Yeah. That was just that was a one-time impact on some product that got on a spec.

Okay. Great. Thank you very much. I'll get back in the queue. Thank you, Jon.

Thank you. I am showing no further questions in the queue. I will now turn the call back to Dan for closing remarks.

Thank you, operator. In closing, I want to emphasize that our Q1 results demonstrate that our transformation project has taken hold. The early benefits from Project Apollo combined with our continued pretzel growth and strong innovation pipeline position us well for fiscal 2026. With our strategic focus on higher margin opportunities and operational excellence, we're building momentum for sustainable growth. Our strong balance sheet provides flexibility to invest in growth opportunities while returning capital to shareholders. We remain confident in our ability to deliver the full benefits of Project Apollo and drive long-term value creation. Thank you for your continued support, and we look forward to updating you on our progress throughout fiscal 2026. Thank you.

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