J & J Snack Foods Corp.

Welcome to the J&J Snack Foods 4th Quarter Earnings Conference Call. My name is James and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. During the Q&A session, if you have a question, please press star 1 on your phone. And also note this conference is being recorded. I'd now like to turn the call over to Norberto Aja, Investor Relations. Norberto, please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2021 Fourth Quarter Conference Call. We'll get started in just a minute with management's comments on your questions. But before doing so, let me take a minute to read the State Harbor language. This call will contain 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 fact should be considered forward-looking statements. including statements regarding management's plans, strategies, goals, and objectives, our anticipated financial performance, industry-wide supply constraints, and the expected impact of COVID-19 on the business. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors. They may cause for actual results, performance, or achievements to be materially different from any future results, performance, or achievements described by the four unlooked statements. Factors discussed in our annual report on Form 10-K for the year end of September 26, 2020 and other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the four unlooked statements made on this call. Any such forward-looking statements represent management's estimates of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP metrics, including adjusted EBITDA, which is reconciled to the nearest GAAP metric in the company's earnings release, which can be found in the investor relations section of our website at JJ Snack.com. With us on the call today are Dan Faschner, Chief Executive Officer, Ken Plunk, Chief Financial Officer, and Steve Every, our Chief Operations Officer of IC. Joining remotely today are Marjorie Roschkoff, our General Counsel, Lynwood Mallard, our Chief Marketing Officer, and James Hamill, Corporate Controller. Following management's prepared remarks, we will open the call for your questions and answers. With that, I would now like to turn the call over to Dan Faschner, J&J Snack Foods Chief Executive Officer. Please go ahead, Dan.

Thank you, Norberto, and good morning, everyone. Thank you for joining us today. Let me first and foremost thank the entire J&J Snack Foods team. We've all been through a lot these past 18 months, including on a personal level. And throughout it all, our team has delivered for our customers and partners. You've demonstrated dedication and resilience and you're the reason for our success. So thank you very much. Taking a quick look at our results, we are pleased with the strong finish to the year and the positive trends we see across our business, including exceeding pre-COVID sales levels in the fourth quarter. This was accomplished despite an incredibly challenging operating environment due to the rising costs across supply chain, including commodities, logistics and wages. While fiscal 2019 was one of our strongest years, net sales for the fiscal 21 fourth quarter increased 4% compared to the same period in fiscal 2019. Driven by a 6% rise in our food service segment and a 29% growth in our retail segment as traffic across many of our customers, venues and outlets continue to rebound. On a year-over-year basis, Q421 net sales of 323.1 million increased 28%. Gross profit as a percentage of sales was 28.4% in Q421 compared to 21.4% in Q420, reflecting the operating leverage benefit of increased sales, favorable product mix, and corresponding margin efficiencies. Despite industry-wide freight and distribution cost increases, strong top line growth drove a 543% rise in operating income, 187% increase in net earnings and a 69% increase in adjusted EBITDA. And our adjusted EBITDA margin of approximately 12% improved 293 basis points over the prior year period. As it relates to our three business segments, let me begin with food service. This segment represented approximately 62% of our total sales and experienced sales growth of over 35% compared to Q4 fiscal 2020 and 6% over Q4 of fiscal 2019. Sales accelerated through our key customer channels led by amusement, live sports, Convenience, schools and restaurants. Soft pretzel sales increased 62% and frozen novelties or frozen juices and ices increased 39%. Churro sales and bakery products increased 121% and 10% respectively. In addition, we are seeing growth of 36% in our handhelds, a sub-segment that we are very pleased with and have great expectations for. We are encouraged by our strong demand we are seeing for our products across many customers within the food service segment. As consumers begin to return to their favorite out of home activities, consumers are spending more in many of these venues with one of the largest movie theater chains reporting above average ticket prices driven by a record level of concession per cap spending. In addition, One of our largest amusement park operators in the country and a client of ours recently reported that attendance during the July through September period indexed at 92% of 2019, while sales rebounded at 95% of the same period in 2019. And even better than that, our amusement park channel exceeded fiscal 2019. Convenience stores and quick serve customers are also benefiting from a greater consumer mobility with many of these establishments pursuing new initiatives to expand mobile dining and enhance their food and beverage offerings. Additionally, customers are incorporating a great presence of self-checkout to offset labor shortages, which could present an opportunity for J&J in the snack category given its portability, and immediate availability for consumption. While foot traffic continues to recover to pre-pandemic levels, many of our customers are seeing higher food and beverage spending per person, which would lead to higher average transactions or an even stronger appeal for many of our portable products that are easy to enjoy on the go. Overall, strong consumer spending should continue to benefit many of our key customer segments in 2022. As a result, we feel good about where we are and where we are headed in the food service segment and expect these positive trends to continue into the new year. Moving to the retail segment, which represents approximately 15% of our total Q4 sales, we saw healthy demand for our soft pretzels as well as our frozen novelties, which were relatively flat at down 1% and 3.4% respectively, compared to the fourth quarter of fiscal 2020. This segment continued to see improvement reflecting sustained consumer at-home consumption at higher than pre-pandemic levels, while we also lapped the year-ago elevated demand in the lockdown days of the pandemic. While sales for the segment were down 9% versus Q4 fiscal 2020, sales increased 29% when compared to the fourth quarter of fiscal 2019, which was a very strong quarter for us. We believe the past 12 to 18 months will create a tailwind for us as people have discovered many of our products and will continue to enjoy and indulge in them going forward. At the same time, we see this segment as having significant runway and are making thoughtful sales and marketing investments to secure new customer wins, and drive increased consumer and shopper interest of our products. Based on the above, we expect sales in our retail segment to continue performing at above pre-COVID levels. Frozen beverage segment increased 46% year over year, led by frozen beverages growing over 104%. Frozen beverage sales continue to approach pre-pandemic levels and came in at just 4% below the fourth quarter of 2019. Led by strong growth across restaurant, convenience and amusement channels and then partially offset by a slower recovery in our theater business. The frozen beverage segment is approaching pre-COVID sales despite that slow recovering theater channel. Yet we expect growth into this next year. We have very high hopes that as we expand the footprint of our frozen beverage segment across more customers and more channels, we will continue to be able to grow this business. As an example, we recently introduced our Icy products into Crystal restaurants across its 285 plus locations across the Southeastern United States. And then also recently started our partnership with Golden Corral, which has over 380 locations across 40 states. and I am pleased to report that just in this short period of time, our customers are already seeing marked upticks in beverage incidents. One thing that is impacting all three of the segments and many facets of our business is the margin pressures brought on by rising costs across ingredients and supply chain, including commodities, logistics and wages. In particular, We are seeing double-digit cost increases in ingredients such as oils, sweeteners, and flour, while shipping costs continue their unprecedented escalation driven by diesel prices, carrier charges, and a worsening driver shortage. To offset this inflationary pressures, we have undertaken a number of actions, which in combination with the cost-saving initiatives will help drive margin improvement as a lag between the impact of these operational pressures and the benefits of our actions goes away. Examples of some of the initiatives we have put forward include a more optimized geographic network of cold storage warehouses, centralizing a much greater percentage of our purchasing and procurement to achieve economic scale across our 16 facilities, and investing in automation to improve efficiency and labor costs. As it relates to our product pipeline, we continue to prioritize in development of new products, including product extensions from some of our more popular brands. We have over 10 iconic brands that are leaders in the segment, along with a number of additional brands and licensed brands. In some cases, these brands define this segment. So there are several significant opportunities for us to leverage the brands and expand their appeal. We see tremendous opportunities to expand both the footprint and the reach of Icy, as well as the products we bring to market under the Icy brand. And really, we are bullish on the whole frozen novelty category, which includes Luigi's, our Italian ice, and Whole Fruit, our frozen fruit bars. In addition, we have had great success entering new markets Most recently reflected in our Dogsters novelty brand. We're also seeing significant opportunities in the Super Pretzel brand, including bringing filled product versions to the market. As it relates to inorganic growth, we continue to be very vigilant on this front and remain disciplined in our criteria and approach. We will not do acquisitions that are not accretive to our business, overpay for assets, are by something outside of our area of expertise. We have a long and successful track record on the acquisition front, and we intend for that to continue to be the case. So in summary, our business is on a strong recovery trajectory from the impact of the pandemic. We are seeing very positive trends across the business and remain well positioned to address the challenges to leverage the opportunities in front of us. We are laser focused on achieving greater effectiveness and efficiencies across our operations, continuing to strategically invest to strengthen the relevance and leadership positions of our brands and in furthering the growth of our business, both organically and inorganically. And really above all, we continue to invest in our most important assets, our people. As we enter into fiscal 2022, we're excited about the opportunities ahead and remain confident in our ability to deliver profitable growth and create added value for our partners and shareholders. I would now like to turn the call over to Ken Plunk to review our financial performance. Ken?