J & J Snack Foods Corp.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Smack Foods fiscal 2023 first quarter conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the conference, you will need to press star 1-1 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Norberto Aja, investor alert. Norberto, please begin. Thank you, operator. And good morning, everyone. Thank you for joining the J&J Snatch Group's fiscal 2023 first quarter conference call. We'll start in just a minute with management's comments and your questions. But before doing so, let me take a minute to read the State Harbor language. This call will contain four 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 the matters of historical fact should be considered forward-looking, including statements regarding management's plans, strategies, goals, and objectives, and our anticipated financial performance, industry-wide supply constraints, and the effects of COVID-19 on our business. These statements are neither promises nor guarantees that involve known and unknown risks, uncertainties, and other important factors that may cause results, performance or achievements could be materially different from any future results, performance or achievements expressed or implied by the four related statements. Factors discussed in our annual report informed 10-K for the year ended September 24th, 2022 and other filings with the Securities and Exchange Commission could talk actual results to defer materially from those indicated by the four related statements made on this call today. Any such statements represent management estimates of the date of this call, January 31st, 2023. While we may elect to update or look at statements at some point in the future, we display any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP metrics on the call today, including adjusted EBITDA, operating income, earnings per share. all of which are reconciled to the nearest GAAP network in the company's earnings press release, which can be found in the Investor Relations section of our website. Joining me on the call today is Dan Pashner, our Chief Executive Officer, as well as Ken Plunk, our Chief Financial Officer. Following management prepared for Mars, we will go ahead and open the call for question and answer session. With that, I would now like to turn the call over to Mr. Dan Pashner, J&J Snack Foods, Chief Executive Officer. Please go ahead, Dan. Thank you, Roberto, and good morning, everyone. We appreciate you joining us this morning to discuss our fiscal 2023 fiscal quarter results. We are pleased to report the seventh consecutive quarter of double-digit top-line growth and remain confident in our plans to continue growing sales. We are investing in our brands, accelerating the cross-selling strategy with our customers and across our channels, expanding our production capacity, and building a strong pipeline of product innovation. We've hit the ground running with our Dippin' Dots business, having already gained placement at Regal Theaters, the second largest movie theater chain in the United States. In fact, we increased unit sales in our Dippin' Dots business over 14%, in the first quarter. Also, we recently launched Hola Churro brand and are seeing strong momentum, including over 30% sales growth in the first quarter. This positions us well to grow our churro business, including the introduction of new products and entry into new channels. These are just a couple of examples of the opportunities ahead of us. In the first quarter, Our industry experienced some softness in spending and traffic across retail, restaurants, and food service as consumers adapt to the changing economy. Also, the historic winter storm that hit most of the country during two key selling weeks prior to Christmas did impact volume sales, especially in theaters and outdoor venues. Despite these challenges, many of our strategic categories, including ICI, Dippin' Dots, and Hola Churros grew volume during the quarter. As it relates to our income performance, ongoing inflationary pressures and the softening consumer environment impacted our year-over-year bottom line results. Our recent pricing actions helped deliver improved gross margins of approximately 100 basis points above Q1 last year, and we are confident that this will continue throughout the year. However, we continue to manage cost pressures on the expense side when compared to prior year. Most noticeably, our distribution expense. We expect to see improvement in distribution expenses as we cycle through the high inflationary periods later in the year. Also, Dippin' Dots is a seasonal business, and as expected, It negatively impacted our results in the first quarter. This business will drive most of its profitability in the second half of the year. Ken will provide some more insights to our financial performance in just a few moments. Switching to our three business segments, starting with food service, Q1 revenue was up 13%, even as we managed through the challenging winter weather events in December. This, combined with a weaker slate of movie releases, had some impact on our sales. Soft pretzel sales increased 4% this quarter. We see expanded growth opportunities throughout the year as we introduce pimento knots and pretzel bites focused on the entertainment, theater, QSR, and convenience channels. We also saw continued strong momentum in our churro business. with sales increasing 32% as we introduced our new Ola Churro brand of food service. The sales team expanded placement of churros with major distributors, large regional QSRs, and fast casual restaurants. We are confident that there are still significant growth opportunities across QSR, fast casual, convenience channels, and with major distributors. including a significant opportunity with a major QSR burger chain going into test in the first half of 2023. Olatouros will have a full selling and marketing support plan throughout the year. Frozen Novelties was relatively flat in Q1, excluding sales from Dippin' Dots. The first quarter is a slow seasonal period for this category and was further impacted by the challenging weather conditions. We have strong incremental sales plans in place starting in the second quarter and remain very confident in growing this category throughout the year in theme parks, healthcare, and convenience channels. We have also added two new production lines to support these growth opportunities. Transitioning to our bakery business, sales increased 1% driven by strong growth of handhelds and cookies with a major club customer, and we expanded business with a strategic convenience store customer as well. Looking forward, we see additional growth opportunities for our icy cookies and our frozen cookie dough. Our strategy to improve margins in the bakery business is working as we shift the mix to more profitable products and customers and rationalize less productive items in our portfolio. Very pleased with our bakery group. Lastly, we continue to forecast added gains in key items such as handhelds and funnel fries. Moving to our retail segment, sales increased 1% for the quarter as the industry started to experience softness and macroeconomic spending for consumables. In our soft pretzel segment, we saw continued strength in our flagship Super Pretzel brand, driven by distribution gains and organic growth. However, Overall pretzel sales declined 11% in the quarter, primarily in licensed and private brand products, as we executed planned SKU rationalization of lower margin items. As the year progresses, our strong focus on super pretzel brand, including new super pretzel pretzel bite flavors, launch of super pretzel knots, and super pretzel Bavarian pretzel sticks, is expected to lead a four-year revenue growth in the soft pretzel category. In frozen novelties, we saw a 1% sales increase for the quarter. As we enter the second quarter, we are planning for incremental growth in this category, including the launch of Icy and Slush Puppy Pops, Whole Fruit in the weekly distribution game, and further expansion of our Dogsters brand in groceries. We are also confident with our plans to bring Ola Turo to retail later this year. We added capacity. This will be a big growth opportunity for this category. Regarding our third segment, frozen beverages, Q1 revenue was up 9%, driven by a 15% increase in beverage sales and an 8% increase in service sales. This was partially offset by 11% decline in equipment revenue due to the timing of customer installations between years. However, we are excited to communicate that we have secured a contract with Checkers to buy approximately 800 machines, and these will be installed over the second half of the year. This business also includes a service contract as well. IC branded tests continue with large QSR customers. and we are in the process of rolling out IT across most stores nationwide. In regard to Dippin' Dots business, our pipeline is strong. Not only has it performed very well thus far, including a 14% increase in unit sales in the first quarter, but it holds significant potential for added growth, both in food service, where it's predominantly today, as well as in expanding into the retail sector. As an example, We recently signed a deal with Regal Theaters, which as some of you know, is the second largest theater chain in the United States with over 540 locations. The initial placement will cover over 230 locations, with the rest to come thereafter. The initial sales results are really encouraging. We also recently introduced Icy Cherry and Blue Raz Dip and Dot flavors, a new product launch with promising Q1 sales. which demonstrates our ability to leverage our strong brand portfolio across business channels. I would now like to spend a few moments reviewing our strategic priorities as we remain focused on transforming the business. We have taken aggressive measures to offset the challenges facing us as we operate under this historic backdrop of inflationary pressures and to position the company for long-term success. We are aggressively focused on improving operational efficiencies through initiatives like implementing a new ERP system, adding seven new, more automated production lines, outsourcing our shipping logistics, and building a more geographically optimized distribution network. In addition, we have now fully implemented various price increases across our portfolio, which will continue to drive improved gross margins. Let me start with our supply chain strategy priorities. We communicated last quarter that our logistics and distribution management responsibility have now been fully outsourced to NFI, a recognized expert in the industry. They are now managing 100% of our business, and we expect to generate approximately 4 million annualized benefits as we improve management of carriers, improve truck load efficiencies, and minimize miles through better network management. We are further investing in our supply chain process through the build out of three geographically located distribution centers across the country. These RDCs will enable better location of inventory and simplify our warehouse network, moving from managing over 30 plant 3PL locations to approximately six. Two of these new RDCs will have a box in a box where we'll be able to store Dippin' Dots products, adding capacity for growing this business and getting product closer to the customer. Our first RDC will open up in June at a facility just outside of Dallas, and the second RDC should open up later in the fiscal year. The third RDC is still in development and expected to be opened in fiscal 2024. On the operations side, We have committed investments to add seven new production lines that will add capacity and drive efficiency through better automation. To date, we have opened two new frozen novelty lines and one additional churro line. Over the next six months, we will activate three additional lines focused on expanded pretzel production. As it relates to M&A, we are currently working on integrating Dippin' Dots into the J&J systems. processes, customer channels, and operations. At the same time, we continue to evaluate potential M&A opportunities that complement our brand portfolio and our business model. In summary, we will remain focused on building this business for the long-term growth. Strategically, we are transforming the business, investing in our brand and capacity to grow while implementing initiatives to help us operate more efficiently. Our leadership team is aligned, and the organization is excited about the opportunities ahead of us to continue building on the great history of J&J Snack Foods. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken?

Thank you, Dan. Good morning, everyone. As Dan mentioned earlier, We continue to experience double-digit sales growth across our business. We remain optimistic about the balance of the year given the many initiatives we have underway and their expected impact on our business, from the top line to the bottom line. Net sales for the quarter were 351.3 million, going by 10.3% versus the prior year period. Shall we recruit service? Our largest segment representing approximately 68% of our total sales, revenue of $238.3 million exceeded Q1 2022 by $26.6 million, or an increase of 13%. That included approximately $13.4 million in given by sales. The healthy performance in food services was driven by a 157% increase in total novelty sales, benefiting from our Dippin' Dots business as well. 32% increase in churro sales and 27% increase in handheld sales. We also saw growth in soft pretzels in our bakery business of 4% and 1% respectively. The retail segment posted sales of 43.1 million or an increase of 1% compared to the same period in fiscal 2022. handhelds continued their strong performance with a 127% increase in sales, while frozen novelties increased 1%. Soft pretzels and biscuits decreased 11% and 4%, respectively, versus the prior year. Frozen beverage sales were 70 million, including 9% versus Q1 2022, led by beverage sales growth of 15% as well as repairs and maintenance service revenue growth of 8%. Equipment sales declined 11% due to the timing and installation between years. Gross profit for the quarter was $90.9 million, or an increase of over 14% compared to the previous year period. Gross margin was 25.9% in the quarter, favorably comparing to 24.9% in Q1 of fiscal 2022. Moving down the income statement, total operating expenses increased 81.5 million, representing 23.2% sales for the quarter compared to 20.3% in Q1 of 2022. These results largely reflect the persistent inflationary pressures across all our expense lines, in particular distribution expenses. Distribution expenses were 12% of sales compared to 10.5% in fiscal 2022. This did improve compared to Q3 and Q4 of 2022 when they were 12.7% and 12.4% respectively. The 150 basis points higher distribution costs as a percent of sales contributed approximately $5 million additional expense for the quarter on an equivalent basis when compared to a year ago. Marketing and selling expenses represented 6.7 percent of sales versus 6.6 percent in prior year period, while administrative expenses were 4.7 percent of sales in Q1 of 2023, compared to 3.3 percent in Q1 of 2022. Also, Dippin' Dots is a seasonal business, and as expected, negative going impacts are resolved in the first quarter. This business will drop most of its profitability in the second half of the year with higher sales, better leverage expenses in those quarters. This led to an operating income of $9.3 million compared to $14.8 million in Q1 2022, or a year-over-year decline of 37%. Adjusted operating income of $11.2 million and adjusted earnings for the lead chair was 42 cents. After considering income tax of 2.3 million compared to 4 million in Q1 of fiscal 2022, net earnings decreased to 6.6 million, resulting in reported diluted earnings per share of 34 cents. That compares to 58 cents in the prior period. Adjusted EBITDA decreased 8% to 25.3 million. Our effective tax rate was 26% in the first quarter. Taking a look at our liquidity position, even with the Dippin' Dots acquisition, we continue to have a healthy balance sheet, an overall strong liquidity position with $61.2 million in cash and marketable securities and approximately $92 million in debt. In addition, we have ample availability under our revolver with approximately $123 million of additional borrowing capacity. In summary, we are excited about the opportunities ahead and remain confident that our portfolio brands, investments in our business, and strategic initiatives will continue to fuel growth. Our efforts to gain ad efficiencies and effectiveness has placed J&J in a position of added strength and improved our ability to leverage opportunities ahead of us. With $55 million in cash and ample available liquidity, we have the means to adequately support invest in the growth drivers of the business. I would now like to open the call to questions. Operator?

Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Again, if you have a question, please press star 1-1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, you may press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Andrew Wolfe from CLT. Mr. Wolfe, your line is open. Hi, thank you. Good morning. I want to start, you know, morning, gentlemen, on the kind of your volume results and maybe what you saw with consumer behavior, elasticity of demand. You know, I think, you know, it seemed like you were kind of outperforming most consumers on elasticity in particular. And then this quarter you referenced the industry slowing and it seems like to some extent perhaps the business itself kind of caught up to the industry and experienced some negative consumer behavior. Could you just kind of give us a qualitative sense of that and a quantitative sense too like where your volumes are maybe adjusted for the skew rationalization as well so you don't get penalized by that. That'd be great. Thank you. I'll talk to some of that, Andrew. Thanks for your question. Yeah, it's much like what you said. When we ended our last quarter, our volumes were strong. And even as we entered into this quarter, they were strong. And then as the quarter went on, they trailed off. And so we're watching that really closely. I tend to personally think, and we do as a company, that we were affected pretty greatly in the December month and mainly as we got into the, you know, really two or three weeks of cold weather. We never like to blame anything on weather and I won't allow our people to do that, but it does have an effect, especially as you're in the holiday shopping season. And we experienced that as we got late into the quarter. And so now we're watching it really closely as we move into a new quarter and and are going to be mindful and watching it with a close eye to see what happens from there on out. I don't personally think that we have hit the issue of elasticity. I think the pricing that we took was well within line of what others in our categories might have taken and maybe even slightly below that. So I don't think that that's the issue. I really believe that we hit into a period of time where, you know, there's threats of a recession and you got cold weather and people aren't out shopping as much as they might have done under different conditions. Thanks. Very helpful. And Ken, I alluded to the, I think, you know, skew rationalization where you got out of some unproductive skews, I think it's soft pretzels.