ProPhase Labs Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 9 speakers on the call.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Snacks Fiscal Year 2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. At this time, I would like to turn the conference over to Mr.

Operator

Norberto Aja of Investor Relations. Sir, please begin.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining the J and J Snacks Foods fiscal 2023 2nd 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 safe harbor language. This call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

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-nineteen 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 than many future results, performance or achievements expressed or implied by the forward looking statements. Securities and Exchange Commission, which 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's 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.

Speaker 1

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 GAAP 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 Fashner, our Chief Executive Officer with Mr. Ken Plunk, our Chief Financial Officer. Following management's prepared remarks, we 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.

Speaker 1

Dan Fashner, J and J Snacks Foods' Chief Executive Officer. Please go ahead, Dave.

Speaker 2

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 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 the $337,900,000 J and J also generated healthy year over year improvements across several key performance metrics, including gross margins and distribution expenses, resulting in strong earnings growth for the quarter.

Speaker 2

Taking a closer look at our segment performance, food services increased 23.8% for the quarter. $218,300,000 including approximately $16,000,000 in dip and dot sales and $3,300,000 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 percent increase in churros and a more than 264% increase in frozen novelties, including incremental dip and dot sales. Retail sales increased 13.7% for $46,400,000 including $2,500,000 of sales related to the recent launch of our Super Pretzel, Field Knots and the expansion of handhelds with a major retailer. Retail segment growth was also driven by strong sales in frozen Maldives, soft pretzels and biscuits.

Speaker 2

Frozen beverage sales increased 13.7% the $73,200,000 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 rebound in 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 We estimate inflationary impacts of approximately 9% compared to a year ago as our industry continues to manage to these historically high cost pressures. Despite these continued challenges, we delivered 26 point 8% gross margin in fiscal Q2 'twenty three, 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.

Speaker 2

We are aggressively investing and positioning J and 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 brands to prioritize growth of our core products, while also capitalizing on opportunities for increased product innovation and Extensions.

Speaker 2

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. I see. 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 IC in the venues representing incremental placement opportunities. The IC rollout across Moe's Southwest Grill is also progressing well, with 95 locations installed to date and Flush Puppy branded frozen pops across major retailers in late Q2, and the initial response has been very, very positive.

Speaker 2

Last quarter, we announced the 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 foodservice and retail channels. We are expanding placement of our existing pretzel products and excited to be launching new Super Pretzel branded filled knots, Bavarian 6 and Mini Dogs in retail later this summer.

Speaker 2

Our expanded production capabilities enable us to Aggressively grow our Super Pretzel business. Our frozen novelty brand, including Luigi's Italian Ice, Whole Fruit and Dogsters also experienced healthy dollar and unit growth during the Q2. 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 Olad Surrounds 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.

Speaker 2

S. Food distributors as well as the QSR, fast casual and retail channels. We expect to launch the whole Atsuro brand in our retail channel in 2023 with the 1st 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 Q3.

Speaker 2

The team also secured a test with AMC Theatres 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 ICEE branded cherry and blue raspberry ICEE Dippin' Dots flavor in March. This new product is Dip and Dot's best product launch ever, exceeding the best by over 40% unit growth. Also, we continue to evaluate Dippin' Zot's branded frozen novelty products for retail channel.

Speaker 2

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 5 new automated lines for supporting growth opportunities in churros, pretzels and frozen novelties. A 6th line will be added in Q3. This added capacity supports our aggressive plans to grow sales of our core products.

Speaker 2

In addition, We are completing the geographic optimization of our distribution and warehousing network by consolidating to a handful of locations, including 3 new state of the art distribution centers. The first RDC will open in June in Terrell, Texas, While the other 2 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 68 strategically located facilities and will significantly reduce our reliance on third parties for Storage and Logistics Management. 2 of these RDCs will also include freezer capacity for Dippin' Dot's product 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 for NFI.

Speaker 2

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 Processes, customer channels and operations is going just as planned. Also, We continue to evaluate potential M and 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 and J to deliver new levels of growth and shareholder returns. We have strong growth momentum heading into the back half of fiscal twenty twenty three, supported by our core brands and products.

Speaker 2

Strategically, the team is focused on transforming the business, investing in our brands and capacity for growth 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 and J Snacks Foods' for 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?

Speaker 3

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 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 $337,900,000 a 20% increase versus the prior year period 15% increase versus the 1st 6 months of fiscal 2022.

Speaker 3

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, foodservice, experienced a 23.8% increase in sales to $218,300,000 representing 65% of total company sales. The strong performance was a result of healthy growth across the segment, including 264.2 percent increase in frozen novelties, which also benefited from the Divin 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 $16,000,000 in Dippin' Dot sales, in line with our expectations given the seasonality of this business. Moving to our retail segment, sales increased 13.7% for $46,400,000 compared to the same period in fiscal 2022.

Speaker 3

Growth in this segment was driven by contributions from all sub categories, including 283.4% increase in handhelds, 9.8% increase in frozen novelties, 3% and 1.7% increase in biscuit and soft pretzel sales respectively versus the prior year. As it relates to our 3rd segment, frozen beverages, sales were $73,200,000 or a 13.7% increase versus Q2 'twenty two, led by growth across all three subcategories. Beverage sales increased 18.2%, for the quarter. Repair and maintenance revenue increased 7.5%. Machine revenue rose 9.4% compared to the previous year period.

Speaker 3

Moving down to the income statement. Gross profit came in at $90,400,000 or a 38.3% increase versus prior year, leading to a gross margin for fiscal 2023 Q2 of 26.8%, favorably comparing to 23.2% in Q2 of fiscal 'twenty two. 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.

Speaker 3

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 $18,900,000 or 30.9 percent that represented 23.7 percent 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 2022. However, we saw a significant improvement on a sequential basis for fiscal 2023 Q1 fiscal 2022 Q4, when distribution expenses represented 12% and 12.4% of sales respectively.

Speaker 3

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 for the quarter, 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.

Speaker 3

This led to an operating income of $10,200,000 favorably comparing to $4,100,000 for a year over year increase of 149.3%. Adjusted operating income was $12,100,000 also comparing favorably to $4,700,000 in Q2 2022. After considering income taxes of $2,400,000 compared to $900,000 in Q2 of fiscal 'twenty two, Net earnings increased to $6,900,000 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 for the quarter compared to $0.19 in Q2 of 2022. Adjusted EBITDA increased 52.5 percent for $27,500,000 from $18,000,000 in the prior year period.

Speaker 3

Our effective tax rate was 26 percent in the 2nd quarter. Taking a look at our liquidity position, we continue to maintain a healthy balance sheet, including $47,700,000 in cash and marketable securities and approximately $92,000,000 in debt. In addition, we have ample availability under our revolver of approximately $123,000,000 of additional borrowing capacity. This affords us the flexibility to strategically invest in support of business. We are currently investing close to $100,000,000 In the year, across various growth initiatives, including the completion of new product lines and the investments in our RDCs.

Speaker 3

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. I would now like to open the call to questions. Operator?

Operator

Please stand by while we compile the Q and A roster. Our first question or comment comes from the line of Conor Radigan from Consumer Edge. Mr. Radigan, your line is open.

Speaker 4

Good morning, guys. Thanks for the question.

Speaker 3

Good morning, Connor. Good morning, Connor.

Speaker 4

Yes. So I wanted to spend a little time talking about foodservice traffic. So it really seems like things rebounded nicely, especially in theaters. So I mean QSR is 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?

Speaker 2

It'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 Q1, we are a little concerned about it. And then as we came into the second quarter, That coming from us? As we entered into the hot party quarter here, the traffic pattern seemed to rise throughout the quarter.

Speaker 2

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 next 6 months for this business. 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. That's one of those things that we have to be really mindful of. And so we're doing that.

Speaker 2

I don't know if I feel like we're completely out of the woods, But I love where we're at right now.

Speaker 4

That makes total sense. And then, typically those next six critical months, right. It sounds like things are going really well with Dippin' Dots. And so it's about $13,000,000 in sales last quarter $16,000,000 this quarter. And I know that business is very heavily fast loaded.

Speaker 4

But I mean, I guess, as far as that distribution rollout goes, adding incremental theaters and whatnot, Are we sort of right around where you expected or are we maybe ahead of schedule on that distribution rollout?

Speaker 2

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.

Speaker 2

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 have expected.

Speaker 4

Okay, great. Good stuff guys. And then just one more for me here at the end. So I mean in any other world, cost inflation of 9% will be shopping, but for the Q and A. Alas, here we are.

Speaker 4

So just a bit of a 2 parter here. So I'm not sure if you quantified cost inflation last quarter. If So can you remind us what that was? And also just sort of looking at your inputs and maybe where you're hedging it at right now, so we sort of expect that 9% to be more of annual run rate given the movement in eggs and other commodities or just how should we think about that?

Speaker 3

Yes. Connor, this is Ken. Great question. And there's always so many variations of what's happening with inflation. There's year over year comparison, which again, you're comparing the Kind of the pre storm of inflation a year ago, at least so far.

Speaker 3

And then we're going to get 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 $0.10 since last quarter.

Speaker 3

So there are things moving. They're just not moving as fast and they're lapping Kind of the pre inflation time of the same quarter a year ago. We came out of Q1 with our internally measured inflation still in the mid teens, and now we're at 9%. And we kind of calibrate that also with external metrics. If you look at recent data on CPI food, Whether it's at home or in a restaurant, that's still at 8.5% to 9% production price index, Still in the upper 8s.

Speaker 3

So that kind of compares to our internal measurements, so that 9% in the current quarter. As we go forward, again, we're still expecting gradual improvement, but not as much as what I would have thought 2 quarters ago. And that could change. Eggs is a wildcard, I think. Sugar is kind of the new problem.

Speaker 3

It's Up near double digits and projected to go higher. But it will be a marginal improvement I think and then You will get the benefit later in Q3 and Q4 of lapping double digit inflation of a year ago. I think that's where the year over year comparison will change a little bit.

Speaker 4

Okay. All right. Thank you so much for the color as always. Appreciate it.

Speaker 2

Thank you, Connor.

Operator

Thank you. Our next question or comment comes from the line Our next question or comment comes from the line of Jonathan Anderson from William Blair. Mr. Anderson, your line is open.

Speaker 5

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 to pricing one way or the other in the near to medium term.

Speaker 2

Let me start and then I'll let Ken talk a little bit about it. We've had the conversation around pricing and over the last the quarter. We took an awful lot of pricing, right, as so did many other people. To date this segment. As a reminder, we took pricing in January in the IC group and have not been anything on the snack food side to date.

Speaker 2

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, but we're going to watch it really closely. Ken, maybe you want to touch on the numbers there.

Speaker 3

Yes. Well, I think if you remember kind of the last few quarters, we had a price increase late in 2021. We had 2nd one in the March April timeframe, 22 and then we have the 3rd one around the September October. So we've lapped one of those And we've left pieces of the second one. So just kind of remind everybody of that.

Speaker 3

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 What's happening in the next 30 days in the next quarter, we might have in some cases been more aggressive even late last year, because In Q1 from Q4 to Q1, there were still slight increases in inflation. I think the number was around 40 to 50 basis points. Yes, 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 and the Dippin' Dots business and really the foodservice business.

Speaker 3

And I think the retail side is just something we continue to watch and it's tricky with how we're competing in Retail for volume and space and a lot of the retailers are pushing back right now. But you watch it day by day and I think there may be pockets where We may need to do something at some point if things don't stabilize.

Speaker 5

That's really helpful. Thanks.

Speaker 6

So would

Speaker 5

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 The organic growth in the quarter was strong at, I think,

Speaker 7

around 14%, 15%,

Speaker 5

excluding the Dippin' Dots contribution, is price would it be fair to say that the price right now for maybe the majority of that, 2 thirds of that in volume positive as well, but maybe not contributed at the same level of price.

Speaker 3

Yes, I mean, price, That's probably a fair number, I would say. Again, it depends on category and situation. I mean, I'll just tell you for The IC Frozen business on the beverage side, they had volume growth of 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 that really starting to rebound and the outlook from theater folks is really positive as well.

Speaker 3

But I do want to be clear, there is a really nice influx of volume growth in our quarter this year, I mean this quarter, led by IC and even Foodservice. Retail had volume growth, But it was a little bit lower and candidly, we're very proud of that because if you look at recent data on all retail, most of them are reporting still declines in volume. So we had a slight,

Speaker 5

for sure. Yes, 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 for the quarter. I think you've talked a bit in the past various times about Restoring the gross margin rate to 30% or better kind of pre pandemic levels maybe.

Speaker 5

Is that what's the you sit here today kind of the timeline that you're thinking about, Is that still 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

Speaker 2

much. Great question, John. Yes, 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.

Speaker 2

So we're going to continue to fight for that and think we have a good chance at it.

Speaker 5

Thank you.

Speaker 2

Thank you, John.

Operator

Thank you. Our next question or comment comes from the line of Todd Brooks from The Benchmark Company. Mr. Brooks, your line is open.

Speaker 6

A few quick questions for you. 1, the organic growth that we saw in the Q2, 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.

Speaker 2

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 Q1 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.

Speaker 6

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, Let's say 2 to 4 quarters just from the capacity to either launch new products or meet demand that maybe you weren't meeting last year.

Speaker 3

Yes. I mean, I don't have an exact number, Todd. It gets Pretty, Harry, 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, if those lines and when those lines get up to the capacity we expect, Everything else being equal, we think those probably present $150,000,000 to $200,000,000 opportunity Once all those lines are at capacity and that capacity for us is really in the 80% to 85% range. It's going to take us a bit of time to get there, some faster than others.

Speaker 3

When we did the business cases on these investments, I mean, the returns are typically for 2 to 4 years depending on the situation. But that's kind of what the outlook could be once we're able to leverage these lines completely.

Speaker 6

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 3 facilities should roll out. Can we just talk about the consolidation into the 3 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.

Speaker 2

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 REC and that one is on schedule to open up early in 2024, somewhere around February 1. 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.

Speaker 2

And we think that can have a really big impact on our business.

Speaker 6

That's great. Thanks, Dan. And then final one for me. If we look at the product newness and successes at retail. Can you just talk about slotting fees maybe?

Speaker 6

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.

Speaker 3

Yes. Well, we're definitely investing in placement, I 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, 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, 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 Yes, it's an investment in that space and in marketing those brands that we think will ultimately pay off for us. I do not have here in front of me kind of what it was a year ago.

Speaker 6

Okay. I'll jump back in queue. Thanks, Ken.

Operator

Thanks, Todd. Thank you. Our next question or comment comes from the line of Andrew Wolf from CL King. Mr. Wolfe, your line is now open.

Speaker 2

Thanks and good morning. Good morning, Drew.

Speaker 3

Good morning, Drew.

Speaker 7

Good morning. Sales pipeline and answering bot, it sounds like it's pretty robust, plus you put it in your release and it remains pretty good. My experience has been that an organization when there's not enough capacity, the whole sales process kind of It doesn't grind to a halt, but the sales guys are and women aren't they're not going full tilt if they know it can't get fulfilled. Is that happened there and now you're it is more of an aggressive sales overall, just campaign because The stuff can get filled, the salespeople can get their commissions, etcetera.

Speaker 2

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 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.

Speaker 2

And we have just a really great pipeline coming on all fronts really, Not just the snack food side, but the churros now that being able to make those at the rate and pretzels in different shapes and sizes, 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.

Speaker 7

Okay. Thank you. And just specifically on this, you mentioned for Retail Launch of Olat Churros. Is that going to be a national or regional or 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?

Speaker 2

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 for the quarter. Soon to tell whether it will be a national launch or not and how big that will be. But I will tell you, when you just think about the product line and churros 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.

Speaker 2

And so we think that's going to go very well.

Speaker 7

All right. And I'd like to follow-up on the 30% goal on the gross margin. It's great to hear you say it could happen as soon as this quarter. Maybe Ken or whichever you guys are both of you. There's a lot of different puts and takes that are caused a lot of variability and pressure on gross margin.

Speaker 7

But to me, it looks like 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, it's also 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 who with their volumes not being good are asking for that.

Speaker 7

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 your how you're planning your gross margin?

Speaker 3

Yes. 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.

Speaker 3

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 Q4 with for the growth that we're having in IC and then adding really the peak seasons for Dippin' Dots. So the combination of all that Yes, it 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 2 and it's in the winter and sales of high margin items like icing dip and nuts Followed that where those margins might not quite reach 30%.

Speaker 3

But I think our goal is That were a business that year in and year out is in totality doing 30% or more gross margin and I feel like we're heading in that direction.

Operator

Thank you.

Speaker 7

I'm sorry, I was on mute. Can I ask another question around your distribution commentary? Sure. If you're going to realize an ultimate Taking it back down to where you were, so that's 100 of basis points of lower margin, for single digit 100, but it's a big number. How much of that is Rationalizing the sprawling distribution network that the company currently operates out of.

Speaker 7

How much of that is sort of NFI doing what they're doing? And lastly, how much of that is just the market kind of normalizing diesel prices coming down, for maybe perhaps labor getting a little less tight. Can you just help us a portion, how you guys think about this really big for the class savings that you anticipate.

Speaker 2

Well, you know 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 6 to 8, somewhere in that neighborhood. It's going to have a significant impact on the business.

Speaker 2

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 3 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 3 new DCs. And we get a chance to kind of touch and build the first one here in July, and teams are working really hard at making sure that we open that with excellence.

Speaker 3

Yes. Andrew, there are various pieces to it. I think 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 6 to 8 and having these 3 dedicated RDC is at the time we estimated that as a least a $10,000,000 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 $4,000,000 opportunity.

Speaker 3

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, but 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 9%, hopefully below that range. I think that is certainly within our targets here And we believe we'll eventually get there once all this starts working in tandem.

Operator

Thank you. Our next question or comment comes from the line of Robert Dickerson from Jefferies LLC. Mr. Dickerson, your line is open.

Speaker 8

Great. Thanks so much. Just two quick questions for me. I guess, we're sitting here now early May. I think Ken you had a couple of comments on mix impact as we think about kind of latter part of the fiscal year into next year.

Speaker 8

And I would assume conversations have been had, right, with some of your or let's just say kind of across channels as we get into these kind of heavier demand months. Any color you have, either Dan or Ken, on just 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, kind of how you've kind field demand as you start to enter kind of this core season.

Speaker 8

And then I have a quick profitability question.

Speaker 2

I'll kind of touch on this. So, amusement park industry has been very good for us 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 few months. But our big customers feel like they've got a really strong year coming.

Speaker 2

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 will 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 really even released over the next 3, 4 months. And so it was good to build that momentum with that group and the hopes of it coming back really strong this year.

Speaker 2

So we're encouraged by that. So I guess what I would say, Rob, is we feel good about what's coming over the next 6 months. We feel like we're positioned well. I like each segment of our business. I like what Dippin' Dot's doing.

Speaker 2

I like what Icee is doing. And I like what the snack food side of the business is doing. We feel good about what's to come.

Speaker 8

Lovely. Cool. And then just, I guess, on the margin side, as it kind of pertains each of the segments, right? I mean, we're seeing a little bit of differentiation in kind of how your operating margin that's been coming in in Foodservice and Retail Supermarket. Well, Q2 frozen beverages, I don't know, maybe that's the best

Operator

the Q2, so I'm

Speaker 8

just curious as we think on the go forward, It's kind of the expectation here that the frozen beverage margin actually can continue the past what we've seen historically and back to kind of a comment I think Ken made, that in itself can provide some of the margin mix positive, while maybe kind of the ramp and reversion back to the margins we used to see in foodservice 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 the margin side. But for the full year, right, foodservice and retail supermarket Actually, we're pretty good too. So just trying to gauge really just the next couple of quarters. There's probably more acceleration on frozen beverages, maybe a little less acceleration of foodservice and retail. Thanks.

Speaker 3

Yes, I think you're spot on with your observation, Rob. On frozen, I see, we feel really good about where we're at in terms of Sales and opportunities and where our 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, 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. On foodservice and retail, we're progressing, but slower. I feel better about The ground we're making up on foodservice, that business segment operates a little bit differently in terms of how you kind of manage cost and price Increases and I think we probably have come closer on that one. Retail, I do expect us to get better and we're looking at some things right now on areas to improve margin.

Speaker 3

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.

Speaker 4

Perfect. Thank you.

Speaker 2

Thank you, Rob. Thank you.

Operator

Our next question or comment is a follow-up from Mr. Todd Brooks from The Benchmark Company. Mr. Brooks, your line is open.

Speaker 6

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 for the quarter. 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.

Speaker 3

Yes. Todd, this is Ken. You characterized that really well. Just to Add a couple of things to that. Just over 70% of the sales of Dippin' Dots will be in Q3 and Q4.

Speaker 3

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 for SG and A cost of Dippin' Dots. And that's the point we're making in this quarter is, you really add just a little over $10,000,000 in SG and A cost This year for Dippin' Dots versus a year ago, 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 and A expenses.

Speaker 3

So, We will that will get better in terms of a leverage standpoint when you put more sales in that business. The way I would kind of answer the other part of your question, distribution expenses, yes, we talked about came in 11.3 overall for the company. It 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, they only went down around $0.10 But we expect that to continue to move down and Yes, I'm not going to throw out an exact number, but it should be below 11.3%. And then the other parts of the P and L will certainly leverage A bit closer I think what we do historically when we get into strong sales periods for dividends.

Speaker 6

That's perfect. Thanks, Ken.

Speaker 3

Thanks, Todd.

Operator

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Fashner and management for any closing remarks.

Speaker 2

Great. Thank you and thank you for your time today. I hope our results in our comments clearly reflect why we are optimistic about the future of J and J Snacks 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 1 of the largest theater chains, and it just feels good to have that happen.

Speaker 2

We look forward to sharing our fiscal 2023 Q3 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

Operator

today. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.

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Earnings Conference Call
Janone Q2 2023
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