J & J Snack Foods Corp.

Q2 2023 Earnings Conference Call

5/2/2023

spk03: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Snack Foods fiscal year 2023 second quarter earnings office call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, 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 of Investor Relations. Sir, please begin.
spk10: Thank you, Operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2023 Second 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 Barber 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 fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals and objectives, and our anticipated financial performance, as well as industry-wide supply constraints and the ongoing impact of COVID-19 on our business. These statements are neither promises or guarantees that involve known and unknown risks, uncertainties, and other important factors that may cause results, performance, or achievements to be materially different from many future results, performance, or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report in Form 10-K for the year ended September 24, 2022, and other filings with the Securities and Exchange Commission has caused actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management estimates as to the date of this call, May 2, 2023. While we would like to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause earnings to change. In addition, we may also reference certain non-GAAP metrics on the call today, including adjusted EBITDA, operating income, or earnings per share. all of which are reconciled to the nearest gap metric 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 Fashioner, our chief executive officer, along with Mr. Ken Plunk, our chief financial officer. Following management's prepared remarks, he will go ahead and open the call for a question and answer session. With that, I would now like to turn the call over to Mr. Dan Fashioner, J&J Snack Foods, Chief Executive Officer. Please go ahead, Dave.
spk04: Thank you, Roberto. And good morning, everyone. We appreciate you joining us to discuss our fiscal 2023 second quarter results. I'm pleased to report that our positive momentum continued in the fiscal second quarter, as sales this quarter was the highest second quarter sales in company history and was driven by strong demand across all three business segments. While the year began with ongoing economic and inflationary challenges for our industry, it is clear that consumers continue to show strong demand for iconic brands and diverse offerings of fun and indulgent products. We saw marked improvements in unit volumes in fiscal Q2, including strong performances in soft pretzels, churros, frozen novelties, and frozen beverages, higher volumes combined with the impact of price increases enacted in fiscal 2022 resulted in a 20% increase in net sales to 337.9 million. J&J also generated healthy year-over-year improvements across several key performance metrics, including gross margin and distribution expenses, resulting in strong earnings growth for the quarter. Taking a closer look at our segment performance, food services increased 23.8% to 218.3 million, including approximately 16 million in dip and dot sales and 3.3 million of sales related to new products and expanded customer placements. Overall, segment growth reflects a 28.3% rise in soft pretzels, a healthy 42.8% increase in churros, and a more than 264% increase in frozen novelties, including incremental dip and dot sales. Retail sales increased 13.7% to 46.4 million, including 2.5 million of sales related to the recent launch of our super pretzel, filled knots, and the expansion of handhelds with the major retailer. Retail segment growth was also driven by strong sales in frozen novelties, soft pretzels, and biscuits. Frozen beverage sales increased 13.7% to 73.2 million, reflecting an 18.2% rise in beverage sales led by strong consumption trends across amusement, restaurant, retail, and food service venues. as well as a healthy rebounding theater channel. Machine repair and maintenance revenues increased 7.5% versus the prior year, while equipment sales increased 9.4% on the back of healthy customer installation volume. While overall inflation has stabilized, we continue to experience year-over-year pressures on key commodity inputs such as flour, oil, eggs, mixes, and sugar. We estimate inflationary impacts of approximately 9% compared to a year ago, as our industry continues to manage through these historically high cost pressures. Despite these continued challenges, we delivered 26.8% gross margin in fiscal Q2 23, which compares favorably to the 23.2% gross margin in the prior year. Overall gross margin improvement reflects the benefits of our pricing action last year and the early impact of our initiatives to improve cost management and productivity. We are aggressively investing and positioning J&J for its next phase of growth, and it is clear that our strategy is delivering results. So before turning the call over to Ken, I'll briefly touch on the excellent work our teams have done and continue to do to optimize our business for the future starting with sales marketing and product innovation very proud of this group we remain focused on leveraging consumers affinity for our brand to prioritize growth of our core products while also capitalizing on opportunities for increased product innovation and extensions across all three business segments We are gaining placements in key channels, including theaters, QSR, casual dining, and retail, leading to market share gains in our core products with several notable achievements in Q2. Icy, America's number one frozen beverage brand, continues to gain share in the QSR and fast casual channels. The team is currently working on several customers to test the placement of Icy in the venues representing incremental placement opportunities. The Icy rollout across Moe's Southwest Grill is also progressing well with 95 locations installed to date and a total of 200 locations by calendar year end. In terms of product innovation, we launched Icy and Flush Puppy branded frozen pops across major retailers in late Q2, and the initial response has been very, very positive. Last quarter, we announced a new relationship with Checkers to install 800 new machines. To date, we've installed about 250 machines, with the remainder targeted to be completed by the end of July. Our Super Pretzel brand remains the soft pretzel category leader across channels. We continue to see significant growth opportunities in both food service and retail channels. We are expanding placement of our existing pretzel products and excited to be launching new Super Pretzel branded filled knots, Bavarian sticks, and mini dogs in retail later this summer. Our expanded production capabilities enable us to aggressively grow our Super Pretzel business. Our frozen novelty brands, including Luigi's Italian Ice, Whole Fruit, and Dogsters, also experienced healthy dollar and unit growth during the second quarter. We're also seeing solid sales momentum of these brands with key retail partners. We are also extremely pleased with the early success of our Hola Churros brand, with sales growing 43% this quarter and a healthy 37% year to date. As America's number one producer of churros, we see significant near and long-term growth opportunities of our branded products with major U.S. food distributors, as well as the QSR, fast casual, and retail channels. We expect to launch the Hola Churro brand in our retail channel in 2023 with the first shipments to commence in September. Finally, while the second quarter is a seasonally slow period for Dippin' Dots, we've made significant progress expanding into new channels and positioning the business for a very strong summer. The Dippin' Dots team worked quickly to install freezers in over 290 Regal theaters and plans for additional locations in the third quarter. The team also secured a test with AMC Theaters and another theater chain which plans to be in 200 plus locations in the back half of the year. We have a strong pipeline of opportunities as we leverage the breadth of our customer base and execute our cross-selling strategy. In terms of product innovation, we continue to find new ways to leverage the combined power of our brands by recently launching an Icy branded cherry and blue raspberry Icy Dippin' Dots flavor in March. This new product is Diff & Dot's best product launch ever, exceeding the best by over 40% unit growth. Also, we continue to evaluate Diff & Dot's branded frozen novelty product for retail channel. Turning to our operating initiatives, we have taken a number of actions over the last couple of years to increase efficiency and expand our capabilities to grow this business. operationally we continue to expand our production capacity and now have five new automated lines supporting growth opportunities in churros pretzels and frozen novelties a sixth line will be added in q3 this added capacity supports our aggressive plans to grow sales of our core products in addition we are completing the geographic optimization of our distribution and warehousing network by consolidating to a handful of locations, including three new state-of-the-art distribution centers. The first RDC will open in June in Terrell, Texas, while the other two are expected to come online later this year and early next year. The opening of these new RDCs will allow us to go from 30-plus shipping locations to somewhere between six and eight strategically located facilities, and will significantly reduce our reliance on third parties for storage and logistics management. Two of these RDCs will also include freezer capacity for Diff & Dodge products to support expanding growth opportunities and more efficient distribution capabilities. This aligns with our strategic initiatives announced in fiscal 2022. including the implementation of a new ERP system and the outsourcing of our shipping logistics to NFI. This supply chain transformation will play a pivotal role in reducing distribution costs and providing better service to our customers. We are confident that these combined initiatives position us for strong sales growth, improved operational efficiencies, and reduce distribution costs and provide the platform to deliver incremental profitability. As it relates to M&A, the integration of Dippin' Dots into the J&J systems, processes, customer channels, operations is going just as planned. Also, we continue to evaluate potential M&A opportunities that complement our brand portfolio and our business model. In summary, We are confident that the foundation we are building is further strengthening the long-term competitiveness of our business and positioning J&J to deliver new levels of growth and shareholder returns. We have strong growth momentum heading into the back half of fiscal 2023, supported by our core brands and products. Strategically, the team is focused on transforming the business. investing in our brands and capacity to grow while implementing initiatives to help us operate more efficiently. Our leadership team is aligned around these strategic initiatives, and the organization is excited about the opportunities ahead of us to continue building on J&J Snack Foods' long-term record growth and success. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken?
spk01: Thank you, Dan, and good morning, everyone. I am pleased with our financial results for the quarter. More importantly, I am pleased with the opportunities we have in front of us to grow and improve these results. Hopefully, it is evident that we are making progress across our various initiatives and well positioned for long-term success. Taking a look at the fiscal second quarter, net sales for the quarter totaled $337.9 million, dollars a 20 percent increase versus the prior year period and a 15 percent increase versus the first six months of fiscal 2022. the strong line results the strong top line result was driven by growth across all three of our business segments reflecting the health and resiliency of our business our largest segment food service experienced a 23.8 increase in sales to $218.3 million, representing 65% of total company sales. The strong performance was a result of healthy growth across the segment, including 264.2% increase in frozen novelties, which also benefited from the Dippin' Dots acquisition, a 42.8% increase in churros, a 28.3% increase in soft pretzels, and a relatively flat performance by both handheld and bakery, down 1% and up 1.6% respectively. These results included approximately $16 million in Dippin' Dot sales in line with our expectations given the seasonality of this business. Moving to our resell sales segment, sales increased 13.7% to 46.4 million compared to the same period in fiscal 2022. Growth in this segment was driven by contributions from all subcategories, including 283.4% increase in handhelds, 9.8% increase in frozen novelties, and 3% and 1.7% increase in biscuit and soft pretzel sales, respectively, versus the prior year. As it relates to our third segment, frozen beverages, Sales were $73.2 million, or a 13.7% increase, versus Q2 2022, led by growth across all three subcategories. Beverage sales increased 18.2%. Repair and maintenance revenue increased 7.5%. The machine revenue rose 9.4% compared to the previous year period. Moving down to the income statement, gross profit came in at 90.4 million, or a 38.3% increase versus prior year, leading to a gross margin for fiscal 2023 second quarter of 26.8%, favorably comparing to 23.2% in Q2 of fiscal 22. In fact, this marks the highest Q2 gross margin since Q2 of fiscal 2019. While overall inflation has stabilized, we continue to experience year-over-year pressures on key commodity inputs such as flour, oil, eggs, mixes, and sugar. As Dan mentioned earlier, we estimate our inflation at approximately 9% compared to a year ago. So we are pleased with our gross margin improvement in the face of these continued inflationary headwinds and see these results as further affirmation that our operational initiatives are beginning to have the expected results and positive impact on our business. Taking a look at expenses, total operating expenses increased 18.9 million or 30.9% and represented 23.7% of sales for the quarter compared to 21.8% in Q2 of 2022. The increase largely reflects the addition of Dippin' Dots to our business compared to a year ago. and ongoing inflationary pressures across many of our expense lines, in particular distribution expenses. Distribution expenses increased by 34.7% versus the prior year, representing 11.3% of sales compared to 10.1% in fiscal 22. However, we saw a significant improvement on a sequential basis compared to fiscal 2023 Q1, in fiscal 2022 Q4 when distribution expenses represented 12% and 12.4% of sales respectively. These improvements were led by stabilizing inflationary environment and improved logistics management across our business. Marketing and selling expenses represented 7.1% of sales versus 7.5% in the prior year period as the marketing team continues to do a great job driving efficiencies and targeting how we allocate marketing dollars. Administrative expenses were 5.3% of sales in Q2 2022 compared to 4.1% in Q2 of last year, reflecting addition of Dippin' Dots in this year's expenses. As a reminder, Dippin' Dots is a highly seasonal business with most of its profitability taking place over the second half of the year. As such and as expected, It had a negative impact on our results in the second quarter. This led to an operating income of $10.2 million, favorably comparing to $4.1 million in Q2 2022, or a year-over-year increase of 149.3%. Adjusted operating income was $12.1 million, also comparing favorably to $4.7 million in Q2 2022. After considering income taxes of $2.4 million compared to $0.9 million in Q2 of fiscal 2022, net earnings increased to $6.9 million, resulting in reported diluted earnings per share of $0.36. This compares to $0.17 in the prior year period. Adjusted diluted earnings per share was $0.43 compared to $0.19 in Q2 of 2022. Adjusted EBITDA increased 52.5% to $27.5 million from $18 million in the prior year period, and our effective tax rate was 26% in the second quarter. Taking a look at our liquidity position, we continue to maintain a healthy balance sheet, including $47.7 million in cash and marketable securities and approximately $92 million in debt. In addition, we have ample availability under our revolver, approximately 123 million of additional borrowing capacity. This affords us the flexibility to strategically invest and support our business. We are currently investing close to $100 million in the year across various growth initiatives, including completing the execution of new product lines and the investments in our RDCs. In summary, These results reaffirm the health, resilience, and potential of our business. As we enter the second half of the fiscal year, we continue to raise the bar in every aspect of how we do business and feel confident in our ability to effectively navigate this dynamic environment and deliver on our goals to create added value for our shareholders.
spk06: I would now like to open the call to questions. Operator?
spk03: Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 1-1. Again, if you have a question or comment, please press star 1-1 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Connor Radigan from Consumer Edge. Mr. Radigan, your line is open. Good morning, guys. Thanks for the question.
spk06: Good morning, Connor. Good morning, Connor.
spk07: Yeah, so I wanted to spend a little time talking about food service traffic. So it really seems like things rebounded nicely, especially in theaters. So, I mean, QSRs really seem to be holding up nicely across the space. I mean, I guess maybe could you maybe parse out by venue sort of what you're seeing traffic-wise and maybe if anything is coming in ahead of your expectations?
spk04: You know, that's a great question, Connor. Traffic is one of those things that we're keeping a really close eye on. As you know, when we ended the first quarter, we were a little concerned about it. And then as we came into the second quarter... Is that coming through? All right. As we entered into the second quarter here, the traffic pattern seemed to rise throughout the quarter. And so we're really pleased about that. But it's something that we're going to watch really, really closely. It maybe started slow in the quarter and ended strong, but now we're into that all-important, you know, next six months for this business. And so we're going to watch it really closely with threats of a recession out there and the things that we all read day to day. You know, that's one of those things that we have to be really mindful of. And so we're doing that. I don't know if I feel like we're completely out of the woods, but I love where we're at right now.
spk07: That makes total sense. And then typically those next six critical months, right, it sounds like things are going really well with Nip and Dots. And so with about 13 million in sales last quarter and 16 million this quarter, and I know that business is very heavily backloaded, but I mean, I guess as far as that distribution rollout goes, you know, adding incremental theaters and whatnot, are we sort of right around where you expected or, you know, are we maybe ahead of schedule on that distribution rollout?
spk04: Well, you know what? When we bought it, we were pretty aggressive about what we think we can do with that business. And I remain really aggressive about what we're doing with it. So I would say we're right about on par with where we think we need to be. I put a lot of pressure on that team. The group is a really solid group. They've integrated very well with the total J&J company. We're doing a great job in cross-selling activity across all of our channels. I like what we have coming in, and I would say they're right about on par with what we would expect.
spk07: Okay, great. Good stuff, guys. And then just one more from me here at the end. So, I mean, in any other world, COGS inflation of 9% would be shocking, but, you know, alas, here we are. So, just a bit of a two-parter here. So, I'm not sure if you quantified COGS inflation last quarter. If so, can you remind us what that was? And Also, just sort of looking at your inputs and into where your hedging is at right now, should we sort of expect that 9% to be more of like an annual run rate given the movement in the eggs and other commodities? Or just how should we think about that?
spk01: Yeah, Connor, this is Ken. Great question. And there's always so many variations of what's happening with inflation. You know, there's year-over-year comparison, which, again, you're comparing to kind of the pre-storm of inflation a year ago, at least so far. And then we're going to get to overlapping that later in Q3 and Q4. But that's what's creating the really pronounced continued inflation year over year because of what last year was. Flour has come down since last quarter. Cheese and dairy has come down since last quarter. Diesel has come down, but only 10 cents since last quarter. So there are things moving. They're just not moving as fast. and they're lapping kind of the pre-inflation time of, you know, the same quarter a year ago. You know, we came out of Q1 with our internally measured inflation still in the mid teens, you know, and now we're at 9%. And we kind of calibrate that also with external metrics. You know, if you look at recent data on CPI food, you know, whether it's at home or in a restaurant, that's still at eight and a half to nine percent production price index still in the upper eights so that kind of compares to our internal measurements so that's nine percent for the current quarter uh as we go forward again we're still expecting gradual improvement but not as much as what i would have thought two quarters ago and that could change you know uh eggs is a wild card i think sugar is kind of a new problem you know it's up near double digits and projected to go higher. But it'll be a marginal improvement, I think. And then you will get the benefit later in Q3 and 4 of lapping double-digit inflation of a year ago. I think that's where the year-over-year comparison will change a little bit.
spk06: Okay. All right, guys. Thank you so much for the call, as always. Appreciate it. Thank you, Connor.
spk03: Thank you. Our next question or comment comes from the line. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Our next question or comment comes from the line of Jonathan Anderson from William Blair. Mr. Anderson, your line is open.
spk06: Hi. Good morning, everybody. Thanks for the question. Good morning. Good morning, John.
spk08: And just following up on that last question about inflation, I guess, One of the things I'm curious about is where you are today with respect to pricing to offset that inflation. And I know it's kind of a year-over-year comparison that you provided, 9% in the quarter. How does your pricing and the pricing contribution in the quarter kind of marry up with the inflation that you're experiencing now? And would you expect to make any adjustments, you know, to pricing one way or the other in the near to medium term.
spk04: John, let me start and then I'll let Ken talk a little bit about it. You know, we've had the conversation around pricing and, you know, over the last year, we took an awful lot of pricing, right, as so did many other people. To date this year, as a reminder, we took pricing in January in the IC group and have not done anything on the snack food side to date. We are looking at it very closely. We're going to watch it closely, and we might do some spot increases where needed in different areas, but there's a real balance to making sure that you have the right pricing and watching the elasticity of your products. And so we're going to be careful as we do that,
spk01: uh but but we're going to watch it really closely ken maybe you want to touch on the numbers there yeah i'm well i think if you remember kind of the last few quarters you know we had a price increase late in 2021 we had second one in the march april time frame 22 and then we had the third one around the september october so we got we've lapped one of those and we've left pieces of the second one um so just kind of remind everybody of that. But in terms of your question on pricing, I think Dan and I always sit here and kind of say, well, if we'd have known kind of what's happening in the next 30 days, in the next quarter, we might have, in some cases, been more aggressive, you know, even late last year, because in Q1, from Q4 to Q1, there was still slight increases in inflation. I think the number was around 40 to 50 basis points. So you know, we're always kind of saying when's the right time. And I think as we said here, there was probably a little bit more opportunity to take in some spots, particularly in retail. But I think we're pretty well calibrated with price in the IC business, in the Dippin' Dots business, and really the food service business. And I think the retail side is just something we continue to watch. And it's tricky with, you know, how we're competing in retail for for volume and space and you know a lot of the retailers are pushing back right now but uh you watch it day by day and i think there may be pockets where you know we may need to do something at some point if things don't stabilize that's that's really helpful thanks um so would it be i'm trying to kind of hone in on a number here i'm not sure if it's going to be possible but
spk08: You know, the organic growth in the quarter was strong at, I think, around 14%, 14%, 15%, you know, excluding the Dippendot's contribution. You know, is price, would it be fair to say that the price right now is maybe, you know, the majority of that, two-thirds of that in volume, positive as well, but maybe not contributing at the same level as price?
spk01: Yeah, I mean, price, you know, that's probably a fair number, I would say. You know, again, it depends on category and situation. I mean, I'll just tell you, for the icy frozen business on the beverage side, you know, they had volume growth just over 10%, total growth of 18.2%, I think. so that is a really good sign and a lot of that is the theater industry as we mentioned really starting to rebound and the outlook theater folks is really positive as well but I do want to be clear you know there is a really nice influx of volume growth in our core this year I mean this quarter led by I see and and even food service retail had volume growth and but it was a little bit lower. And, you know, candidly, we're very proud of that because if you look at recent data, all retail, most of them are reporting still declines in volume.
spk06: So we had a slight increase in volume in retail.
spk08: For sure. Yeah, that's really helpful. The last one that I'll ask is related to gross margin. You made good, as you pointed out, made good progress both year over year and progress sequentially. I think you've talked a bit in the past various times about restoring the gross margin rate to 30% or better pre-pandemic levels, maybe. You know, is that, what's the, you sit here today, kind of the timeline that you're thinking about, is that still, you know, the kind of a target or what's the target? And what's a reasonable way to think about the timeline for perhaps getting there? Thanks so much.
spk04: Great question, John. Yeah, we're still bullish on getting ourselves to that 30% gross profit margin. We believe that we have a really good chance of getting there still, as we've been saying, in the back half of the year, probably as soon as the third quarter. And we think that's still a reality.
spk06: So we're going to continue to fight for that and think we have a good chance at it. Thank you. Thank you, John.
spk03: Thank you. Our next question or comment comes from the line of Todd Brooks from the Benchmark Company. Mr. Brooks, your line is open. Hey, thanks. Good morning, everybody.
spk06: Good morning, Todd.
spk05: A few quick questions for you. One, the organic growth that we saw in the second quarter, which was very impressive. Can we talk to how much of that has been unlocked by the new lines coming on so far this year, Dan, or is most of the incremental growth from what those new lines will unlock from a capacity standpoint to benefit the company more in the second half of the year?
spk04: I think that will continue to build. Those new lines, with the exception of a couple of the frozen novelty lines, just came on over this past quarter. And so we'll continue to see a nice build from those. The frozen novelty lines came on more in that first quarter-ish time frame or slightly one before that. And that will help us keep up with the level of business that we do during the summer months in the frozen novelty side. But I love what we're doing. with the new lines around churros. And you see that growth happening there by the numbers and also on the pretzel side and being able to release some new innovative products. And so I think most of the growth is still yet to come from those lines.
spk05: Is there a way, Dan or Ken, to think about what these new lines can contribute to organic growth as we're looking over the next decade? let's say two to four quarters just from the capacity to either launch new products or meet demand that maybe you weren't meeting last year?
spk01: Yeah, I mean, I don't have an exact number, Todd. It gets pretty hairy, you know, when you kind of try to look at all the impacts, whether it's new products, innovation. I think what I could tell you is those lines you know and when those lines get up to the capacity we expect you know everything else being equal you think those probably present you know 150 to 200 million dollar opportunity once all those lines are at capacity and that capacity for us is really in the 80 to 85 percent range it's going to take us a bit of time to get there some faster than others and You know, when we did the business cases on these investments, I mean, the returns are typically, you know, two to four years, depending on the situation. But that's kind of what the outlook could be once we're able to leverage these lines completely.
spk05: That's great. Thanks, Ken. Second question. It sounds like now you've found your West Coast RDC. You're giving us some timing for when the three facilities should roll out. Can we just talk about the consolidation into the three facilities and the consolidation of shipping points. And if you're looking at a longer term view on where distribution expenses can get back to, can we get back to the high single digits that we saw historically with this new facility structure?
spk04: Todd, that is the absolute goal for the leadership team. And we talk about that a lot. We do expect to get back to those high single digits. and hopes that as we have this all in place, that we'll be able to get maybe even something better than what used to be. You're right, we did identify a West Coast RDC, and that one is on schedule to open up early in 2024, somewhere around February 1st. And we're really excited about the way that that's coming together. We think we've spaced them out appropriately to be able to handle it as we move to them. And we think that can have a really big impact on our business.
spk05: That's great. Thanks, Dan. And then a final one for me. If we look at the product newness and successes at retail, can we just talk about slotting fees maybe? What slotting fees run in the quarter and what does the year-over-year comparison look like in slotting fees with all the new product activity that you have? Thanks.
spk01: Yeah, well, we're definitely investing in placement, Todd, and we think long-term that will benefit us. I don't have an exact comparison in terms of what we spent in slotting fees a year ago versus now here with me, but I can tell you that we're spending more, and I think we're spending in the right places, but it's something that as we get into this quarter and back half of the year, you know, we'll look to figure out the right way to balance all that to ensure that we're getting ultimate value for the space we're in. You know, there's a lot of retailers doing a lot of LTO-type promotions. And I don't know if you've been in any of the retail stores recently. You may have seen us on some of the end caps. But, you know, it's an investment in that space and in marketing those brands that we think will ultimately pay off for us.
spk06: But I do not have here in front of me kind of what it was a year ago. Okay, I'll jump back in queue. Thanks, Ken. Thank you, Todd.
spk03: Thank you. Our next question or comment comes from the line of Andrew Wolfe from CL King. Mr. Wolfe, your line is now open. Thanks, and good morning.
spk09: Good morning. The sales pipeline, you know, in answering Todd, it sounds like it's pretty robust. Plus, you put it in your release, and it remains pretty good. You know, my experience has been that, you know, an organization, when there's not enough capacity, you know, the whole sales process kind of, you know, it doesn't grind to a halt, but, you know, the sales guys and women aren't, you know, they're not going full tilt if they know it can't get fulfilled. Is that kind of what happened there, and now you're, there's more of an aggressive sales overall, you know, just campaign because, you know, the stuff can get filled, the salespeople can get their commissions, et cetera?
spk04: Well, no, that's absolutely correct, Andrew. We've talked about this and we've gotten to a pretty high level of capacity in our plants on our core products. And any good salesperson wants to absolutely deliver excellent service to their customers. And we've struggled a little bit with that to keep up with the kind of volume that we've had. It is really the core reason for investing in ourselves and investing in these new lines. And we are now being able to aggressively go out and sell those things that we want to sell and continue to grow the business. And we have just a really great pipeline coming on all fronts, really, not just the snack food side, but, you know, the churros, now that being able to make those at the rate and pretzels in different shapes and sizes and and we're really excited about what the future holds with that. And the team is out there aggressively selling, and it's nice to see.
spk09: Okay, thank you. And just specifically on this, you mentioned, you know, a retail launch of Ola Churros. You know, is that going to be a national or regional or, you know, I mean, is this a sort of a big launch or sort of a crawl, walk, run? I mean, what should... How should we think about expectations for that specific launch?
spk04: Well, we're out there selling it very heavily, and we've had a lot of good feedback on it already. I think it's too soon to tell whether it will be a national launch or not and how big that will be. But I will tell you, you know, when you just think about the product line and Churro's coming of age, that we're really excited about it. And as we sell it to our retailers out there, we're getting a lot of good feedback from it.
spk06: And so we think that's going to go very well. All right.
spk09: And I'd like to follow up on, you know, the 30% goal on the gross margin. It's great to hear you say it could happen as soon as this quarter. You know, maybe Ken or Dan, whoever, whichever you guys are, both of you, You know, there's a lot of different puts and takes that cause a lot of variability and pressure on gross margin. But to me, it looks like, you know, and I think people have been kind of poking at this, looks like a lot of these headwinds are either abating or turning into tailwinds, particularly input cost inflation and your pricing. But as we look at the back half, you know, it's also, you know, I mean, if you hit 30% plus in the back half, is that reasonable that that can be into 2024 because there's also a lot of seasonality in there. And I think you alluded to in the release and in some of the commentary, there's some increased promotionality. It sounds like maybe the retailers with their volumes not being good are asking for that. So there's a lot of puts and takes. If you could just walk us through some of those major ones as you guys think about how you're planning your gross margins.
spk01: yeah i mean first of all i think dan spoke about it andrew as we look to q3 and q4 we like the trajectory we're on we're getting better at managing some of the costs some cases inflation deflation is helping a little bit and also i think we're doing some things to manage that and improve margins that way we're also going to be mixing out the business really strongly in q3 and four with the growth that we're having in icy and then adding really the peak seasons for Dippin' Dots. So the combination of all that, you know, makes us feel pretty confident that we're going to get to that 30% range here in Q3 and Q4. As we go to further on and get into Q1, Q2 of next year, I think we're going to be much better, much closer at that. There may be a quarter or two when, you know, it's in the winter and sales of high margin items like icing dip and nuts fall a bit where those margins might you know might not quite reach 30 you know but i think our goal is that we're a business that year in and year out is in totality doing 30 or more gross margin and i feel like we're heading that direction
spk06: Thank you. I'm sorry, I was on mute.
spk09: Can I ask another question around your distribution commentary? Sure. You know, if you're going to realize, you know, an ultimate, you know, taking it back down to where you were, that's hundreds of basis points of lower margin, you know, single-digit hundreds, but it's a big number. How much of that is... you know, rationalizing, you know, the sprawling, you know, distribution network that the company currently operates out of. How much of that is sort of NFI doing what they're doing? And lastly, how much of that is this just the market kind of normalizing diesel prices coming down? Maybe, you know, maybe perhaps labor getting a little less tight. And can you, Just help us apportion how you guys think about this really big bucket of cost savings that you anticipate.
spk04: This has been one of our top five strategies for a while. And the company potentially outgrew the distribution network that it had at one time. And so it was pretty clear to see that we needed to do something early on. But it's a big undertaking. And so getting ourselves from 30 plus distribution points down to call it six to eight somewhere in that neighborhood is going to have a significant impact on the business. And you kind of touched on all the three things that will make it better and allow us to get down to our goal of that single high digit number again. I don't know if we have it broken down, Andrew, about how much each one of those three areas will impact it. But I know that we're confident that all three of those areas will allow us to make some significant gains in that area. And we're excited about the opportunity of opening these three new DCs. And we get a chance to kind of touch and feel the first one here in July. And teams are working really hard at making sure that we open that with excellence.
spk01: Yeah. And there are various pieces to it. I've said this before, so I'll add this. We talked about our business case on the RDC strategy, kind of going from this 30-ish to six to eight and having these three dedicated RDCs. At the time, we estimated that as at least a $10 million savings opportunity. And then we talked about the work with our partner and basically moving logistics management to them. and thought that was around a $4 million opportunity. Again, those were projections based on the business cases. And we still feel very good about what we're going to get out of all that. You add that in, where there will be some deflation, it helps. With some other things we're doing around things like inventory management, metrics we're putting in place, all of that combined gives us a lot of confidence that we're going to get this back down to that, you know, 9%. you know, hopefully below that range. I think that is certainly within our, you know, our targets here. And we believe we'll eventually get there once all this starts working in tandem.
spk03: Thank you. Our next question or comment comes from the line of Robert Dickerson from Jefferies LLC. Mr. Dickerson, your line is open.
spk00: Great. Thanks so much. Just two quick questions for me. You know, we're sitting here now early May. I think, Ken, you had a couple comments on, you know, mixed impact as we think about, you know, the latter part of the fiscal year and the next soon kind of conversations have been had, right, with some of your, or let's just say, you know, kind of across channels as we get into these kind of heavier demand months. So, you know, any color you have, either Dan or Ken, I'm just you know kind of how those conversations have been going let's say with like with amusement parks right like it's a last year there's some pent-up demand seemed like it was kind of a banner year this year I don't know maybe the economic backdrop is a little bit more pressured but maybe going to amusement park is more cost-effective than taking a trip to Europe so I'm just trying to kind of gauge
spk04: um kind of how you've you know kind of feel demand as you start to enter kind of this core season then i have a quick uh profitability question yeah i'll i'll kind of touch on this so um amusement park industry has been very good for us um for quite some time and as you talk to them today they still feel pretty bullish about what's coming this year so much of it is dependent on weather and the weather conditions throughout the next uh few months But our big customers feel like they've got a really strong year coming. It was impacted in a negative way over this past quarter with all the rain and hard weather we had on the West Coast. Our amusement park industry was impacted. But overall, we think that we'll continue to have a strong year. I just got back from CinemaCon, the theater industry. And they're feeling really really strong about what's to come they feel like they have a great lineup of some tremendous movies That are going to be released over the year and and really even released over the next three four months and so it was good to fill that momentum with that group and In the hopes of it coming back really strong this year. So we're we're encouraged by that. So I I guess what I would say, Rob, is we feel good about what's coming over the next six months. We feel like we're positioned well. I like each segment of our business. I like what Dippin' Dot's doing. I like what Icy's doing. And I like what the snack food side of the business is doing. We feel good about what's to come.
spk00: Lovely. Cool. And then just, I guess, on the margin side... as it kind of pertains to each of the segments, right? I mean, we're seeing, you know, a little bit of differentiation in kind of how your operating margin has been coming in in food service and retail supermarket, while, you know, Q2 frozen beverages, I don't know, maybe that's the best margin you've put up in any Q2. So I'm just curious, you know, as we think you know, on the go forward, you know, is kind of the expectation here that, you know, the frozen beverage margin actually, you know, can continue to surpass what we've seen historically. And back to kind of a comment that Ken made, you know, that in itself can provide some of the margin mix positive, while maybe kind of the ramp, you know, and reversion back to, the margins we used to see in food service and retail supermarket could be a little slower because it's like basically as we look at the back half of the year, right, frozen beverages always perform better on a margin side. But for the full year, right, food service and retail supermarket actually were pretty good too. So I'm just trying to gauge really just the next couple quarters. There's probably more acceleration on frozen beverages, maybe a little less acceleration of food service and retail. Thanks.
spk01: Yeah, I think you're spot on with your observations, Rob. Unfrozen, icy, we feel really good about where we're at in terms of sales and opportunities and where margins are at and do expect them to continue to be where they're at. I don't know if they're at historical levels off the top of my head, Rob, but I can tell you they're meeting our expectations right now in terms of where we're at with rate on IC. Food service and retail, you know, we're progressing but slower. I feel better about the ground we're making up on food service. You know, that business segment operates a little bit differently in terms of how you kind of manage cost and price increases. And, you know, I think we probably, you know, have come closer on that one. I do expect us to get better, and we're looking at some things right now on areas of improved margin. I mentioned earlier what some of that impact was, which is us being a bit more promotional. We think that there are good long-term advantages to that, but there's also some cases where the pricing environment is a little bit tougher to navigate on the retail side, and we're probably not yet covering all the cost increases from a year ago, but as those come down, we should continue to see that margin get better.
spk00: Perfect. Thank you.
spk06: Thank you, Rob.
spk03: Thank you. Our next question or comment is a follow-up from Mr. Todd Brooks from the Benchmark Company. Mr. Brooks, your line is open.
spk05: Thanks for letting me squeeze one more in here. We've talked about over the last couple of quarters the negative impact that Dippin' Dots has had on operating expense because it's just those incremental expenses against relatively seasonally soft revenues. We get into these next two quarters where they are strong quarters for Dippin' Dots. What do we see for sequential improvement in kind of the operating expense lines between marketing distribution and administration as Dippin' Dots instead of a drag, turns into either a neutral or a contributor to maybe some leverage on those lines as we get to Q3 and Q4. Thanks.
spk06: Yeah, Todd, this is Ken.
spk01: You know, you characterized that really well. Just to add a couple of things to that, you know, just over 70% of the sales of dip and dots will be in Q3 and Q4, so that gives you kind of a magnitude of the seasonality of that. And then, obviously, as you have higher sales at really nice margins, that's going to mix out well across the business. And it's also going to cover, on a rate basis, the incremental SG&A cost of Dippin' Dots. And that's the point we're making in this quarter is you really add just a little over $10 million in SG&A costs this year for Dippin' Dots versus a year ago when we didn't have Dippin' Dots. If you take that out, we came in roughly where we were last year, about 4.1% sales for SG&A expenses. So, you know, that will get better in terms of a leverage standpoint when you put more sales in that business. You know, the way I would kind of answer the other part of your question, distribution expenses, you know, we talked about came in 11.3 overall for the company. was at 12 12 4 i think we'll continue to see that improve particularly if diesel prices get a bit more aggressive on declining you know they only went down around 10 cents uh but we expect that to continue to to move down and you know i'm not going to throw out an exact number but it should be below 11.3 percent uh and then the other parts of the p l will certainly leverage a bit closer, I think, what we did historically when we get into strong sales periods for Dib and Nuts.
spk05: That's perfect. Thanks, Ken.
spk06: Thanks, Todd.
spk03: Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Faschner and management for any closing remarks.
spk04: Great. Thank you, and thank you for your time today. I hope our results and our comments clearly reflect why we are optimistic about the future of J&J Snack Foods and our ability to create value for employees, partners, and shareholders. I'm so proud of the teams and all the hard work that they're doing out there. I mentioned earlier about being out at CinemaCon last week, where we were awarded supplier of the year by one of the largest theater chains. And that just feels good to have that happen. We look forward to sharing our fiscal 2023 third quarter results with you later this year. And 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 very much, and thanks for being on the call today.
spk03: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-