J & J Snack Foods Corp.

Good day and welcome to the J&J Snack Foods Fiscal 2024 Fourth Quarter Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Noboto Aha, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2024 Fourth Quarter Conference Call. Before getting started, let me take a minute to read the Safe Harbor language. This call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, expectations, and objectives, as well as our anticipated financial performance. These statements are neither promises or guarantees. It involves known and unknown risks, uncertainties, and other important factors that may cause results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Risk factors and other items discussed in our annual report on Form 10-K for the year ended September 30, 2023, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by forward-looking statements made on the call today. Any such forward-looking statements represents management's estimates as of the date of the call today, November 14, 2024. 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 normalized sales, EBITDA, adjusted operating income, or adjusted earnings per share, all of which are reconciled to the nearest GAAP measure in the company's earnings press release, which can be found in our Investor Relations section of our website. Joining me on the call today is Dan Fasher, Chief Executive Officer, along with Ken Plunk, our Chief Financial Officer. Following management's prepared remarks, we will open the call for a question and answer session. With that, I would now like to turn the call over to Mr. Fasher. Please go ahead, Dan.

Thank you, Roberto. Good morning, everyone, and thank you for joining us today. Jane Jay Snack Foods achieved another year of top and bottom line growth in fiscal 2024. We not only achieved record annual sales and gross profit, but also set new highs for adjusted EBITDA. And we achieved our financial goals of improving gross margin rates, delivering improved supply chain metrics, and growing profits faster than sales. Adjusted EBITDA increased .2% in fiscal 2024. More importantly, these results were achieved during a dynamic consumer and economic environment that impacted traffic and spending in key channels, including amusement, convenience, theaters, restaurants, and retail. Despite pressures on consumer spending, we continue to grow sales on a -over-year basis, led by incremental placements of core products, brands, product innovation, and new customer wins. I'm so proud of our employees who continue to execute a well-aligned long-term strategy that positions Jane Jay for continued profitable growth. As we discussed our performance, it is important to remember that we had one less week of selling days in fiscal 2024 compared to fiscal 2023. This impacted fourth quarter sales by an estimated $33 million. We will refer to it as normalized sales in our discussions today to better explain what we feel is a more accurate -to-apples comparison. For the year, we grew sales 1% on a reported basis and .8% comparing results on a normalized basis. I'm especially proud of our double-digit growth in adjusted EBITDA, led by an 80 basis points improvement in gross margins to 30.9%, along with a 110 basis points improvement in adjusted EBITDA margins for the full year. Looking at our fourth quarter results, reported sales decreased 3.9%. However, on a normalized basis, sales increased 3.9%. Softer consumer trends, along with fewer selling days, impacted sales of our higher margin products during the quarter, including soft pretzels, churros, frozen beverages, frozen novelties, and Dippin' Dots. This resulted in a less favorable gross margin mix and created production inefficiencies as we adjusted inventory levels across our plants and distribution centers. As a result, our gross margin decreased 110 basis points for the quarter to .8% compared to our record fourth quarter of fiscal 2023, while operating income and adjusted EBITDA decreased .5% and 4% respectively. Despite these challenges in the fourth quarter, we managed operating expenses well, improving by 110 basis points and achieving net earnings at a percentage of sales of 6.9%, consistent with the previous year. Ken will review financial performance for the fourth quarter and fiscal year in more detail in just a few minutes. I'd like to emphasize the importance of our strategy and how it aligns with our results over the last year. Our J&J team remains relentlessly focused on executing our strategy of growing core brands and creating cross-selling opportunities to drive incremental sales. Each quarter, we expanded new products and incremental placement, even as consumer softness challenged sales in many of our key channels. This is a critical element of our strategy, as it layers on growth during short-term periods of declining traffic and attendance. As consumer trends improve, we are well positioned across our segments to continue driving growth and profitability. Let's review our three segments with a focus on the year's results and why we are confident in our ability to continue driving growth. In food service, reported sales grew .3% for the fiscal year and .4% on a normalized basis. This included growth of frozen novelties, churros, handhelds, and bakery on both a reported and normalized basis. We did experience consumer softness in key channels in the fourth quarter, but consider these challenges to be short-term in nature and do not expect that they will continue into fiscal 2025. Let me start with our frozen novelty business. Frozen novelty sales grew on both a reported and normalized basis for the year, despite channel performance and amusement and convenience, which are key sales venues for dip and dots. Dip and dot sales grew low single digits on a normalized basis for the year, as new theater locations were offset by declines in traffic and attendance in our core convenience and amusement channels. This was more pronounced in the fourth quarter after delivering stronger sales in the prior third quarter. As it relates to dip and dots, we remain optimistic with our growth opportunities driven by added placement in theaters and indoor amusement, together with expectations that business will improve in our channels. Dip and dots is currently in just under 900 theaters as of the end of fiscal 2024, and we expect to add another 120 locations in the first quarter and 180 locations in our fiscal second quarter. We will then have dip and dots available in the four largest theater chains, AMC, Cinemark, Regal, and Marcus. And early feedback from some of our theater partners is that dip and dots is exceeding the sales of other frozen novelties. We are rolling out dip and dots in all Dave and Buster's and Main Event locations. We expect this rollout to be completed within our fiscal first quarter across roughly 220 locations. We have significant opportunities in the dip and dots business, and will continue to expand placement and leverage innovation to add new flavors and packaging to drive growth. Taking a look at Churros, we continue to be confident in our long-term performance and growth opportunities. Sales growth for the full year was led by the addition of a major QSR customer launched earlier in the year. This business provides other opportunities for growth with this customer. Looking forward, we are excited about a new opportunity to launch Churro Fries with a leading national hamburger chain. This product was successfully introduced in a recent LTO, and it exceeded expectations. We are working with the customer on next steps and new opportunities. We are also working on LTOs with two additional major QSR customers. There is a lot going on with our Churro business that provides us with added confidence in our ability to continue to grow this business. Moving to Bakery, we had a strong year in the Bakery business, led by expanded growth of cookies with both current and new customers. Our Bakery team has a -thought-out plan to continue driving growth in 2025 that includes expanded production capacity, new products, and incremental contract manufacturing opportunities. Shifting to soft pretzels, sales declined for the year, driven by softness in the convenience, theaters, restaurant, and amusement channels. This was pronounced throughout the entire market. However, we continue to grow our market share within the industry. We remain well-positioned for growth as consumer trends improve in these key channels. Recently, we gained incremental placements of Bavarian pretzel bites across all sectors of the food service industry. We will continue to drive incremental opportunities through new innovations like Brauhaus pretzels and Bavarian pretzel sticks and bites, along with the expectations for channel performance of our core soft pretzel business. Moving to our retail segment, we grew reported sales .7% and normalized sales .4% for the fiscal year. This growth was driven primarily by continued expansion of our super pretzel Bavarian sticks and mini pretzel dogs as a major customer continues to expand placements across their portfolio. We have talked about this business before as being a great example of where cross-selling and leveraging our great brands across customer channels creates incremental opportunities. We have invested marketing dollars and trade funds to drive this growth and will continue building this brand across retail in 2025. Soft pretzel ACV grew over 3 per point driven by expansion of super pretzel mini pretzel dogs and Bavarian sticks. Our soft pretzel products are well positioned in the retail sector despite recent short-term softness in the fourth quarter. Looking forward, we expect distribution expansion across our super pretzel and Annie Ann's brands and will enter the premium pretzel segment as we launch our Brauhaus brand into retail. Let's talk about frozen novelty sales in retail. For both the year and the quarter, sales declined on both the reported and normalized basis. This decline was primarily driven by softer sales in Luigi's in an overall declining Italianized category. Our marketing and sales teams are focused on improving Luigi's performance in 2025 through improved marketing programs, enhanced consumer and product positioning, and incremental customer opportunities. Our Dogsters brand continues to perform well, growing almost 20 percent in the quarter and adding over four points of ACV expansion. We can continue to see opportunities to build this brand, leveraging the growing demand for pet products. We remain confident in this category and are really excited about bringing a new DiffinDots retail product to the market in fiscal 2025. Also, we continue to grow our retail business. Sales for the year grew over 58 percent on both the reported and normalized basis. This is a strong business for us, led by growth and incremental placements with a major mass merchant. Finally, let's discuss our frozen beverage segment. Sales increased 1.9 percent on a reported basis and 3 percent on a normalized basis for the year. The IC team grew this business despite volume declines in our theater and convenience channels throughout most of the year. On a reported basis, frozen beverage sales increased 2.4 percent for the year, even lapping an extra week in fiscal 2023. Theaters, a significant part of the IC business, was down 5 percent compared to the prior year as the actor strike impacted the volume and quality of movie releases. We did, however, see improvements in the theater channel in Q4, especially in July and September, as stronger releases hit the market. In talking with our largest theater customers, the industry expects significant improvements starting in our first quarter with a slate of franchise films and titles such as Wicked, Gladiator 2, and Sonic the Hedgehog 3. We see solid trends in the movie theater channel throughout fiscal 2025 with an improving movie slate and continuing strong concession consumption. Repair and maintenance and equipment sales increased on both the reported and normalized basis for the year. We continue to grow both of these categories led by expanded placements of IC machines and incremental service business across our customer portfolio. We're excited about the prospect for IC, and as the theater business comes back, we are confident IC sales will as well. In short, our strategies to leverage innovation and cross-selling opportunities to expand placements of our core products and brands continue to deliver positive results. I'd like to take a moment to emphasize the impact of our operational investments over the past few years. Enhancements to our manufacturing and distribution capabilities are leading to notable improvements in key efficiency metrics. Our supply chain initiatives anchored by the three new RDCs are working as planned, adding new capacity and creating efficiencies in how we move products to our customers. We now operate out of the nine cold storage facilities, simplifying logistics management across our network. Today, 90% of our sales orders are shipped from the new distribution network versus under 30% a year ago. With the average length of haul decreasing by over 30%, and on-time performance improving to over 80% versus 63% a year ago. Line haul cost per pound decreased 14% compared to the same quarter last year in our snack food business. Shifting to operations. The combination of new lines and increased capacity in collaboration with new distribution centers has streamlined operations, leading to reduction in waste and overtime. This optimization has allowed us to enhance our service to customers more effectively than ever before. Notably, fill rates have improved to 98.7%. I also wanted to mention that we are far along on our CFO search and will be in a position to confirm a new hire shortly. As you know, our current CFO, Ken Plunk, will be retiring at the end of this calendar year. In summary, we are pleased with the progress we are making to optimize sales across all customer channels and improve our operational efficiencies. Our diverse portfolio of products and brands, and our continued focus on innovation, provides considerable growth opportunities across our customer base. Additionally, our strong balance sheet and liquidity, along with our experienced leadership team, reinforce our confidence in generating long-term value for our employees, partners, and shareholders. I am incredibly proud of our senior team and employees who consistently carry out their jobs with dedication and skill. Their commitment to our goals has led to strong results that reflect their hard work and collaboration. It's truly inspiring to see how each team member contributes to our success, driving innovation and operational excellence. Together, we are building a strong foundation for future growth and success. As we enter fiscal 2025, we are optimistic about the growth potential of our core products and the success of our new product launches and client partnerships. We expect performance trends to improve in our core channels like convenience, theaters, amusements, and restaurants as consumer confidence and spending improves in fiscal 2025. With a stronger film lineup ahead, we believe there will be significant growth opportunities for Dippin' Dots and Icy, and we anticipate improved sales across our other products as well. With that, I would now like to pass the call over to Ken to review our financial performance in more detail. Ken?

Thank you, Dan, and good morning, everyone. I am pleased with our ability to deliver yet another record full year's performance, even as many of our core customer channels face a softer consumer environment. As Dan just stated, we are executing a strategy that is working, and confident our team is running the right place. I would like to take a few minutes to walk you through our fourth quarter and fiscal year results. Before reviewing our results, it is important to note that J&J's fiscal 2023 fourth quarter and full year included an additional week, with reported results comparing 14 weeks in the fourth quarter of fiscal 2023 to 13 weeks in the fourth quarter of fiscal 2024. Likewise, reported results include 53 weeks for the full year 2023 results, compared to 52 weeks for fiscal 2024. For purposes of comparability, we will refer to normalized sales more accurately explained performance trends. Looking at our fiscal fourth quarter results, net sales decreased .9% as reported and increased .9% on a normalized basis. The loss of one week of sales had an even more pronounced impact on the quarter compared to the prior year due to losing selling days in the first week of our July fiscal month. These are peak seasonal sales days for our core business. We estimate this impact to be approximately 33 million when comparing fourth quarter results for fiscal 2024 to 2023. Reported net sales for the quarter totaled $426.8 million. For the fiscal year, we grew sales 1% on a reported basis and added $15.9 million in incremental sales despite having one less week. Net sales grew an estimated .8% comparing results on a normalized basis. I'll spend a few minutes reviewing fourth quarter results for each of our segments. Food service, our largest segment, saw reported sales decrease 3% to $262.2 million during the fourth quarter compared to the prior year period. Churro and salt pretzels sales declined .5% and .4% respectively, while frozen novelty sales declined 4.3%. This was partially offset by a .5% increase in bakery sales to just shy of $100 million and an .4% increase in handheld sales. The sales decline across most categories was attributed to the one less week this quarter and softer consumer spending and key channels like convenience, amusement, and restaurants. Sales on a normalized basis increased an estimated 4.6%. Sales of new products and added placement with new customers totaled approximately $8 million, driven primarily by the addition of churros to the menu of two major QSR customers. This led to fourth quarter operating income in the food service sector of $15.3 million, a decrease of .7% versus the prior year period, reflecting lower overall food service sales, a less favorable sales mix, and production and supply chain efficiencies as we managed to soar to consumer demand. Moving to retail, Q424 reported net sales totaled $55.9 million, or a decrease of .7% driven by .3% and .8% declines in salt pretzels and frozen novelties respectively. This was partially offset by relatively flat biscuit sales and a .9% increase in handheld sales as we expanded product placement with a major mass merchant. Normalized sales decreased an estimated .7% as consumers tightened spending in key grocery and mass merchant retailers. We continue to see pressure on discretionary spending from long-term food inflation impacts, higher interest rates, rising credit card balances, and overall economic concerns. This led to an operating income of $3.3 million, or a decrease of $400,000 versus the prior year period, reflecting the drop in sales. As it relates to our third segment, frozen beverages, reported sales were $108.7 million, a .1% decrease compared to a record Q423. Overall segment sales increased an estimated .7% on a normalized basis. Beverage sales were flat at $71.3 million, but did increase on a normalized comparison led by improvements in theater sales, especially in July and September as the volume and quality of releases started to recover from last year's actor strike. Overall gallons so increased an estimated 7% when adjusted for the extra week. As Dan mentioned, we expect volumes to experience a significant improvement in calendar year 2025 given the stronger schedule of film releases. Repair and maintenance revenues declined .3% versus the prior year period, reflecting the impact of one less week while machine sales were up .7% in the quarter. This led to a Q4 2024 operating income increase of .4% to $21.3 million for the quarter compared to Q423 operating income of $20.6 million. This was driven by improved product mix and effective management of operating expenses. Before moving on, I would like to point out that on a full year basis, all three segments experienced growth, including .3% increase in food service, .7% in retail, and a .9% increase in food beverage sales. Adjusting for the additional week in fiscal 2023, we estimate that normalized sales increased 2.4%, 4.4%, and 3% respectfully for the food service, retail, and frozen beverages segments. Our investments and initiatives over the last two years enhance profit margins and drive efficiency across our business, proving to be successful. For the year, we continue to deliver on our goal of improving gross profit. In fiscal 2024, gross profit increased .5% to $486.1 million, leading to a gross margin rate improvement of 80 basis points to 30.9%. Due to the previously mentioned impacts, our fourth quarter gross profit did decline 7% to $135.5 million, leading to a gross margin rate of .8% compared to .8% in Q4 2023. We remain confident in our ability to deliver strong and consistent profit growth and expect to further improve our gross margin rate in 2025. And as it relates to inflation across our portfolio of raw materials, we experience net -single-digit inflation with the increase primarily driven by a higher cost of cocoa, chocolate, and to a lesser extent, increases in the cost of sugar, eggs, and meats. These increases were somewhat offset by deflationary trends seen in flour, cheese, and dairy and mixes. Pricing adjustments and contractual cost true-ups helped minimize the majority of the impact, but continued inflation in chocolates and sugars driving consideration of further price increases and cost of goods initiatives to manage gross margins. Our procurement team continues to effectively manage the applying costs, and we are well-positioned to respond to any impacts. Looking at expenses, total operating expenses decreased $8.4 million or 8%, representing .4% of sales for the quarter compared to .4% of sales in the prior year period. Distribution costs were .8% of sales in the quarter flat compared to the prior year period as the investments we made to increase efficiency across our distribution network and supply chain continue to drive expense savings. Marketing and selling expenses for the quarter were .3% of sales versus 7% in the prior year period as we continued to invest in our product innovation, brand promotions, and new selling opportunities. Administrative expenses were .3% of sales in Q4-24 compared to 5% in 2023. This led to an operating income of $39.8 million for the quarter or a .5% decrease compared to $41.7 million in Q4 of 2023. Adjusted operating income was $42 million in the fourth quarter or an .3% decrease compared to Q4-23. We estimate the additional week negatively impacted operating profit for the quarter by approximately $4 million. On a full year basis, operating income increased .3% to $117.5 million, while adjusted operating income grew .5% to $130.4 million. After the impact of income taxes of $10.9 compared to $11.3 million in the comparable prior year, net earnings for the fourth quarter decreased .6% to $29.6 million, resulting in earnings per diluted share of $1.52 compared to $1.57 in the prior year period. Adjusted earnings per diluted share were $1.60 for the quarter compared to $1.73 in the prior year period. On a full year basis, net earnings increased 9.7%, leading to diluted earnings per share of $4.45 versus $4.08 in fiscal 2023. This resulted in full year fiscal 2024 adjusted earnings per diluted share of $4.93 versus $4.50 in fiscal 2023. Adjusted EBITDA for the fourth quarter decreased 4% to $59.7 million from $62.2 million in the prior year period, and our effective tax rate was .8% in the quarter. On a full year basis, adjusted EBITDA increased .2% to a record of $200.1 million. Looking at our liquidity position, we continue to maintain a healthy balance sheet and overall strong liquidity position with $73.4 million in cash and no debt. Our ability to improve cash flow through working capital initiatives and stronger profitability is generating more cash to pay down debt, pay dividends, and continue investing in our business. Our focus will continue to be on maintaining a healthy balance sheet and prudent leverage position, which enables us to continue investing in the growth of our business and returning value to our shareholders. In addition, we have ample availability under our revolver of over $210 million in additional borrowing capacity. To summarize, we continue to see momentum in our business supported by the breadth of our portfolio and brands, the strength of our balance sheet, and the improvements we continue to make across our operations. Before I turn the call over to the operator, I wanted to thank Dan, our board of directors, and every member of the J&J team for their unwavering support during my time as CFO. J&J is truly an exceptional company and I very much enjoyed my time here. As Dan mentioned, we are close to announcing my replacement and I look forward to helping ensure a smooth and seamless transition. I would now like to turn the call over to the operator for questions and answers.

Thank you. If you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from Connor Radegan with Consumer Edge. Your line is open.

Good morning, guys. Thanks for the question. Good morning, Goddard. Good morning. Good morning. Dan, you called out challenge traffic and software consumption across your channels via QSRs, Retail, C-Store. I understand traffic is probably under pressure, but could you maybe comment where you're seeing the greatest pressure and help us understand the magnitude of that traffic pressure? Also, you also noted that you don't really expect this to continue into 2025. I guess just given the backdrop across the sector, what really gives you the confidence that pressure won't persist into 2025?

Yeah. Great question, Connor. A couple of the areas that we saw declines in really all year long, both the theater and the convenience sector, are ones that I believe, especially the theater, have a chance to really bounce back strong for this coming year. That's part of what gives me a confidence that there's a period of time that we've gone through that maybe has a reason to be hopeful for the future. There's some great new movie releases coming out even as we close the end of this year. Then if you look at their lineup into 2025 and really even into 2026, it gives you the great hope that those sales will return pretty rapidly. A couple of the other areas that we talk about, the restaurants and the QSRs being down throughout this period of time, we know that the consumer has been stretched and spending has been down. You heard me talk throughout the year, even I think you specifically asked me what some of my concerns were throughout 2025 or 2024. I said, as we get closer into the election period, I was worried about how the consumer might react during that time. There's a lot of publicity going out there and people feel one way or the other and there's just an uneasiness as you go through it. I felt it myself. Regardless of who wins and what party wins, once you come through that, there's the American people who are just so resilient that I believe will have a stronger feel for our economy as we go forward. I think we're starting to even feel some of that today. I'm hopeful as we move into 2025 that we'll see a lot of those pressures subside. It doesn't happen overnight, but it does happen over a period of time. As we get through our first quarter and into the rest of the year, we feel pretty hopeful with all the things that we have going on, both in operational efficiencies and some of the great new pieces of business and the pipeline that I see from each business unit that we can see a really nice 2025.

Great. That was really helpful. Then just one more too on the margin component. You called out about the margin pressure given the 14-week compare. I believe it was a $4 million operating income headwind. Correct me if I'm wrong, but it seems like the entirety of that $4 million operating income headwind should consist of gross margin pressure. Could you maybe elaborate a little on the mixed headwind you called out and just maybe why that was so significant? Or was there maybe some incremental inflation or promotional pressure that popped up in the quarter?

Yeah. Connor, this is Ken. Thanks for your question. Yeah, it's a combination of a lot of things. They won the loss of that key week. Again, we wanted to call out that that was the first week of the July fiscal month that we lost. That is a period of time where our core products, pretzels, churros, icee's, dip and dots really sell in high volume. Those are some of our strongest margin products. Because it was that week that drove especially pronounced impact on margin and on operating income impact that we estimated a $4 million. The other thing is we looked into the quarter, Connor, and you see the degree of sales decline in some of those core areas combined with increases in areas like bakery, handhelds and a few others. The combination of some of those lower margin areas growing and the higher margins declining, we estimate probably had around 80 basis point impact on margin rate in the quarter just from that change in mix. Those core items I'm speaking of, remember they are predominantly sold in amusement, in restaurants, in theaters, in those channels that we spoke about that are soft. You can read on many of those customers that we serve that recently come out in all those industries and channels talking about software traffic,

particularly NG4.

Thank you. Our next

question comes from Andrew Wolf with CL King. Your line is open.

Thanks. Good morning and Ken, congratulations on everything and have a great -J&J retirement and whatever else you do.

Thank

you, Andrew. You're most welcome. I want to follow up on the last question. Just from the outside, it looks to me like in terms of deleveraging and missing your earnings targets, clearly the food service part seems to be where the problems were and you just spelled out a big mix change. Can you unpack the rest of that because the press release referenced you guys, I think a little more than you have been talking about, inefficiencies in production and even supply chain. I know when there's unexpected demand shifts, either way, but particularly down, your labor rates are going to go the wrong way and so on. Was there anything unusual or is it mainly just that plus the lack of absorption of the overhead?

You summed it up well, actually, Andrew. It was a combination of all those things. So distribution expenses, rough numbers here, but around 20% of those expenses are fixed. Particularly as we've gotten into these three RDCs that are driving all the efficiencies that we talked about, the cost of those on a fixed basis is more. So when sales are down, then that's not going to leverage as well. That was part of the impact. That's why I'm actually quite proud that we came in flat with a year ago given the sales difference. On a dollar basis, we came in, I want to say, two or three million dollars less than a year ago in distribution expenses. So we still manage it well and Dan spoke to a lot of those metrics. But when we have the sales come down in those core areas and start to de-leverage fixed expenses, it creates that margin challenge that was really a byproduct. And it was both in distribution and then it was also in plant absorption because we had built up inventory. We started to see consumption declines. We ended up having to pull back on production, kind of managing position that. And because of that, there was less absorption and that contributed to this mixed challenge that I mentioned in the 100 basis points lower margin than a year ago.

Okay. And just kind of related to that, is there anything in demand planning that AI or machine learning, any way to get that so you can actually predict these previously unpredictable shifts in demand better or is it just as it's been in the East and never changed?

It's a great question. I hope it will change. It is a great question and whenever you go through a quarter, we've asked those questions as well. And Ken and I have sat down with the teams to really understand exactly how we go about demand planning and how that circulates within our organization. We always think there's opportunities for improvement. We think the team's doing really, really well, but I'm asking those same questions and our goal would absolutely to be better at that in the future, like a lot of areas that we've improved on or had transformation in. I think that's one of those areas that we can continue to look at and become better at.

Yeah. And I would add, Andrew, the quarter started out well. We had a good July. And really it was in August and September. And Dan and I attribute that a lot to the things that he summarized a few minutes ago in that the combination of probably uncertainty around the election with some trends already negative in many of these channels as discretionary spending was tightening up. And then the other thing we did mention in the script, we don't have a measure of it. It would be hard for us to measure is the timing of the two hurricanes that came through Florida and the Southeast. Florida is obviously a big, big state in terms of outdoor amusement, that sort of thing. But that played a role, I suspect, in some of the declines that we weren't necessarily anticipating coming out of July and then all of a sudden started to play out in August September.

Yeah. Yeah. Yeah. There was one of the big food service distributors tried to quantify it. It was pretty big impact. But I'm at least right. Lastly, I don't want to I'll see it. I just wanted to ask a specific thing because you covered a lot of your innovation, but did you mention or could you update us if you didn't mention it or if you did just repeat it? Are you still doing a frozen beverage test at a QSR, big QSR chain?

We are.

We

are. It's continuing to grow. I did not mention it, but it's continuing to grow. And we've now rolled out an additional market down in Florida with it. And so we remain hopeful that this is something that we can bring in during the 2025 year. Okay, great. All right. Thank you. Thank you, Andrew.

Thank you. As a reminder, if you'd like to ask a question, please press star one one. And our next question comes from Todd Brooks with the Benchmark Company. Your line is open.

Hey, thank you. Good morning, gentlemen. And can try not to play too much golf.

Okay. Thank you, John.

First question I have for you and it gets to just the timing of this call and looking forward to fiscal 25. You've had a nice track record here of gross margin improvement. We've talked about a more of a medium term target of getting to the mid 30s with gross margin. And you pointed to in the call expecting improvement fiscal 25 over 24 distribution. You talked about kind of a 10% goal, maybe levering a little bit beyond that as time goes on. Just can we talk about margin framework looking forward into 25 knowing that you're hopeful on the consumer bouncing back, but within the controllable elements of the business, maybe try to level set expectations from our standpoint for margin improvement that you're expecting to unlock in the upcoming year?

Yeah, absolutely. And great question. You know, there's a reason why we spent a lot of time in Dan's comments about really talking about the strategies and the financial strategies of improving gross margin. You know, and we did it last year. We did it this year. That's very important to us, growing profits faster than sales. Our plan for next year is to continue to do the same, Todd. We would expect gross margin to improve. I think it's safe to say we expect it to be over 31%, which would show improvement over the .8% for the year this year. I think Dan mentioned this in our call last quarter. The next mile gets harder, right? There's a lot more work we got to do to continue figuring out our way to 32 and beyond, but that is the goal. And we think we will get there. I don't think we'll get there next year. I would probably, you know, be thinking in the kind of low 31% range kind of area for 25. But the focus is there. The initiatives are there. We went through in our planning recently, and there are very specific initiatives, whether it's procurement, whether it's operational efficiency, whether it's distribution. How do we get that number starting to hit its way, you know, towards that, you know, below 10% range? All of those things are very specific initiatives and continue to be the focus.

Yeah, Todd, I'll just echo on that. We, you know, we're as bullish as ever before. We're going to continue to drive that as much as we possibly can. And just like Ken said, I say it all the time, the last mile is the hardest, but we're going to continue to work hard in that last mile. And the teams continue to be focused around it. And so I think we can continue to move it. I think Ken gave you a number that's probably fairly accurate for next year, and then we'll continue to get it better the year after as well.

And just to follow up on that, if I can, the distribution with all three of the RDCs now set up and really running 90% of the product, like you said, through there, is that 10% goal deliverable in fiscal 25 to meet or beat that number?

Probably not for the year, Todd. You know, you'll see us getting in that range, I think, in Q3 and Q4 when the sales are up there, and they want us to get there. You know, given the seasonality of many products and the level of fixed cost in that, you know, we won't hit that mark in Q1 or even in Q2. So that'll average out to probably something closer in the mid-teens somewhere, I would probably say, Todd.

Okay, perfect. Thanks. And then...

I mean, to be clear, mid-10s, not teens.

Sorry.

The -10% range is what I was trying to say.

Gotcha. And then final question from me, product newness, not as much focus on that on the call because we had to explain just kind of the lapse with the 53rd week here. But I know you just did announce the upcoming Dippin' Nuts launch and grocery at retail with Kroger. You talked about expanded placement all for theater channels, Dave and Buster's, which was incremental news. Dan, you talked about the ability to double this business relative to that $80 million run rate when you bought it. Are you more bullish on the outlook now as you're seeing this expansion through additional channels with the core product, but also opening up the retail channel here early in calendar 25?

Thank you. We're really excited about that retail thing. We believe Dippin' Dots in retail can be really, big for us. And early indications from talking to our customer, not the consumer, but talking to our customer, they're equally as excited. And so, we feel really good about that. And we think we have a potential product to back it up with, our upcoming out of Dippin' Dots as well. And so I love the momentum that our teams are working on and how they see being able to expand that. I still am bullish that we can double those sales. Now, they may show up in our P&L, some in retail and some under food service because of the way we report it. But I still believe that we can do that. And I love that acquisition. And if we were calling out some of the new items coming out, that would be top the list. I really like what we're doing with that. I also like, I mentioned our Brauhaus in the retail. I think that's going to do really, well for us. The team has positioned this good, better, best profile around our J&J snack foods pretzel and our Auntie Anne's pretzel and this Brauhaus pretzel. And I think we're entering into a really nice market there as well. And then a continued expansion with Doxers. Today we have a new flavor that we introduced last year and we're looking at how to introduce that in single serve to enter into the pet industry as well. Just see some really good things across all of our business units with great opportunities. Even mentioned in the call, just to call this out too, an opportunity that we have with contract manufacturing because it's something that we don't always talk about. But we have a really nice opportunity there. So a lot of really good tailwinds going into the year.

Okay,

great. Thank you both.

Thank

you, John.

Thank you. Our next question comes from John Anderson with William Blair. Your line is open.

Hey, good morning, Dan and Ken. Thanks for the question. Good morning, John. Maybe just to kind of try and close the loop a little bit on one of the questions from the last participant. You addressed kind of how you're thinking about gross margin in 2025 and the distribution ratio. I wanted to hit a different line, the marketing line. You know, there were a couple of years in 2020 and 2021 when the marketing ratio came down. I think that's quite understandable given what was happening at that time. It's crept up a little in 2023 and 2024, ended the year this year at about .4% of sales, but still below where it was several years ago, closer to 8.5 to 9. Dan, you mentioned some investments there, promo, marketing behind the retail part of the business. How do you see that line evolving over the next year or two as you expand, particularly some of the new products, different dots, et cetera, into retail? Thanks.

Yeah, good question, John. I'm really proud of that marketing team of ours, led by Linwood Mallard and some really, really good people within there, being cost-conscious at all the times. So I would first answer the question as I see that marketing line being basically flat to that .4% range somewhere in there during this next year. The teams are evaluating how they spend that all the time and maybe diverting it into some more digital and more focused marketing in different ways. I like how we have that lined up for next year, but I would see it in that same flat-ish range to that 7.4%.

Great. That's helpful. Okay. So I wanted to shift to the top line for a minute. You did talk quite a bit about some of the pressure on the consumer or softer traffic of late, and I guess some of that throughout the year in certain channels. But when I step back and I think about, hey, on a normalized basis, you grew sales about 3% this year. And even in this quarter, normalized, you grew sales at 4% or nearly 4%, which is pretty good. So I'm trying to take that kind of view and then some of the commentary around your thinking that cross-selling efforts are taking a hold, the consumer is likely to come back stronger, the theater channel is improving. What should we be thinking about for fiscal 25 in terms of normalized growth at this point? How would you at least give us some guardrails to work with as we think about modeling the top line going forward?

Yeah. Hey, thanks for calling some of those things out. That's exactly what I was trying to get across on the call too. We're really proud of the year that we've had, right? Especially if you back out some of the muddiness of an extra week in last year compared to this year. I love what the teams are doing to grow that. It kind of falls in line with some of the things that you've heard me say before, and I really believe this, the J&J company has this broad diverse portfolio, which allows us to be what I've called kind of recession resilient, not recession proof. It doesn't mean that in down periods of time, we don't get affected some, but we have such a broad portfolio that we have some recession proof to that or downtime proof. Our goals continue to be mid single digit growth year in and year out. As I look into probably 2025, I would see that low mid single digits growth somewhere in that range probably is how we're looking at it going forward. We think we have some really nice opportunities and we believe that the industry and channels will improve. Those combinations I think should get us somewhere in that mid to low single digits.

I think that there was at least a comment in the prepared remarks around some inflation, maybe it was cocoa, sugar, perhaps prompting you to look at some additional price. I think you usually take price late in the year to effective in the new calendar year. Is that part, is pricing part of the algorithm in 2025 or not at this point?

It is, and we will be taking pricing on what I call the three business units, IC snack foods and Dippin' Dots in the January timeframe. IC has that cadence that they always are on and they'll do that January 1st and Dippin' Dots is kind of now on that cadence as well. Then somewhere mid January, we'll have an increase in the snack food side as well.

That's helpful. Last one for me, your capex was down 30% or so this year. I think that's because there was some larger investments, obviously you're making in operational efficiencies, infrastructure, I think in 23 that didn't have to repeat in 24. How should we think about capital expenditure in 2025 maintenance and growth? Yeah, that would be helpful.

Thanks. Yeah, John, you summarized that well, 22, 23 were big investment years as we talked about the six lines and the three RDCs, etc. Now I think we're back to a bit more normal state. I mean, we'll continue to invest in our business. There's still, I want to say, two or three, four lines that we may add or improve next year on some other capital. But I think the way to think about it in 25 and going forward is it's going to be kind of a run rate of around four and a half to five percent of sales. So that would put you kind of in a range of 75 to 85 million probably in the near future, somewhere in there.

Great. Thanks so much. And Ken, good luck going forward.

Thank you, John. Thanks, John.

Thank you. Our next question comes from Rob Dickerson with Jeffries.

Your line is open.

Great. Sorry.

Yeah, I guess just two questions for me. First question is just, excuse me, it's kind of going back to the channel dynamics and consumer discretionary spend, all that fun stuff so far. You clearly have a kind of better view of what's been occurring in the convenience store channel where you do have some exposure. And clearly the channel has been under a bit of pressure. Recently, if I walk into a number of convenience stores, I actually see some promotions in C stores, which we normally don't see. And I've been talking to a few people who say, oh, you know, yeah, I mean, really, you know, have expectations and hope that that C store channel kind of comes back as we get through, you know, next year. So like, while I understand your comments on the movie theater channel with new film releases, like, kind of whatever you have, how you think about what could actually entice, you know, kind of the average person who would normally have gone to a C store to kind of go back to that C store. Because I do think that is kind of like a decent kind of benchmark as to where maybe some of the discretionary spend moves and kind of how consumers overall, you know, kind of think about shopping, you know, that channel or kind of preface it all with like, I realize there's an election and things are choppy and consumer, but it's kind of taking a guess, you know, like, like, what, what could get people back there? That's just kind of a very broad first question.

Yeah. You know, that convenience channel is interesting because I've watched it really closely too. It affects a lot of pieces of our business on the snack food side, on the icy side, and on the dip and dot side. All three of those are impacted by what happens there. And so I think you brought up some promotional activity and we're looking at that really strong. We're looking at, you know, marketing efforts that pull consumers in as they're out in the car and entices them to products that we have inside the store, which are highly impulse items often there. And, and I don't know if there's a silver bullet that, you know, pulls that industry back in overnight, but I think a greater consumer confidence will allow some additional spending for people to get out of their car and out of the gas pump area and into the convenience store to buy one of our, you know, core products. And so sometimes, and you've heard me say this before, and we've really been doing it in the theaters as well with Dippin' Dots. Sometimes the best way, our best time to invest in a particular channel that you have a lot of faith in that will come back is when it's a little soft, right? And so we're working really hard at that and continuing to grow in several of our areas in that channel. We were just out at the National Association of Convenience Store Show and had some good opportunities come out of that. We're going to continue to grow in it and in our confidence that it will come back. If it does come back, you know, in Q1 or Q2, I'm not sure, but we're going to do that and then we're going to drive some promotional and marketing activity to try to pull the consumer inside, as they are too. They're smart operators and they're working hard at it as well.

Yeah, I mean, I'm just kind of thinking, you know, like you introduced the Churro into Subway, right? And you drive to Subway and there's like signage everywhere. And, you know, little Johnny in the car is like, hey, mommy, can I, when we stop by Subway, we're going to get Churro. Like, why not put up, you know, different signage or say, oh, it's special icy day, you know, for $3 for a large size. Like, I'm assuming there are ideas out there to try to pull them in a little bit versus just like, hey, hopefully consumer gets better. You know what I mean?

I agree, Rob. That's exactly what I'm saying. We call it curb in marketing, where when you're driving up to that convenience store, you start to recognize some of those products that are out there right now. I see over the years has done that curb in marketing really well. And we're going to leverage some of those learnings into our other pieces of business. Fair enough. Fair enough.

Okay, cool. And then just kind of quickly, you know, there's been a lot of, you know, great kind of, you know, supply chain network optimization moves over the past couple of years, you know, along with the capex that you spent to do it. You know, I mean, I realize it's a little softer now laughing an extra week, but kind of like, you know, and then also the comments around, you know, gross margin expansion, right? You know, some next year, right? It's not a ton, but they're getting kind of far in the mileage of that gross margin. But like, there was still kind of like a longer term expectation, right? That, you know, you can get that operating profit margin, you know, over time because of the initiatives, because, and then, you know, obviously some consumer tailwinds would help too. So like, you know, if we're thinking three years forward, is there anything that's like necessarily changed or no? Like, well, the environment changed a little bit, but environment comes back and we're back on track and we'll be able to leverage some of our GNA distribution costs and what have you. So again, kind of a broad question, but just curious.

Yeah, no, Rob, nothing's really changed on our initiatives to continue to drive those to the levels that we've talked about. Other than what I've said before, and, you know, for a period of time in my life, I ran a bunch of half marathons. And if you've ever ran a half or a full, when you hear me say that last mile is the hardest, it really is the hardest. It seems like it takes you the whole marathon to get to that last mile, right? And so those are the things that we're up against. We will continue to grow margins of 30 plus with the goal of someday, you know, hoping to be in the mid thirties with that. We'll continue to drive that through the things that we do each and every day. And the same thing with supply chain, met with that team and I love the work that they've done, met with that team just a couple of weeks ago to talk about, okay, so now do we take the next really big step? And the team has some great plans in it. And I'm sure that they will execute on it. But those plans as we get to this stage are harder, right? When you get to the last mile, it's just harder. Our goals haven't changed. My initiatives haven't changed. I believe that we'll get there. It just gets tougher as you get deeper into it.

Yeah, Rob, just to add some emphasis to what Dan said, because I mean, we talk about this every day, every meeting, every quarter. These are real, you know, parts of the strategy. But the proof is in what we've done. So we improved EBITDA margin, adjusted EBITDA margin year over year by 110 basis points. I mean, that was driven by the 80 basis points improvement in gross profit. And then the other part primarily, probably the distribution expenses. Even in the fourth quarter, if you take out the impact of the extra week, we would have came in around 15% EBITDA as a way to sell. So, you know, we're hitting the mark there. It's going to be harder to get the next hundred and the next hundred. But I think as long as those are core strategies, and how we do things and how we drive performance, the business

is

going to be great. Thank you. There are no further questions

at this time. I'd like to turn the call back over to Dan Faschner for any closing remarks.

Thank you very much. In closing, we are successfully executing our strategy in an ever evolving operating environment. And we are confident in our ability to deliver our objectives in 2025 and over the long term. I also want to take this opportunity to thank Ken for being such a great partner and leader in his valuable work in transforming the business over these past four years. Everyone at J&J wishes him and his family the very best in this new chapter of his life. We look forward to updating you in our fiscal 2025 first quarter results. In the interim, should you have any questions or wish to speak to us, please contact our investor relations firm, JCR at -835-8500. Thank you and have a great day.

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