MiNK Therapeutics Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 3 speakers on the call.

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J and J Snack Foods Fiscal 2023 Third Quarter 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. 30s.

Operator

Please be advised that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Norberto Aja of Investor Relations. Sir, please begin.

Speaker 1

Thank you, Michelle, and good morning, everyone. Thank you for joining the J and J's Snack Foods fiscal 2023 3rd quarter conference call. We will 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 Lounge. Today's call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

As such, All statements made on this call that do not relate to matters of historical facts should be considered forward looking statements, concluding statements regarding management's plans, strategies, goals, expectations and objectives as well as our anticipated financial performance. These statements are neither promises or guarantees that involve known and unknown risks, uncertainties and other important factors that may cause results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Factors discussed in our annual report on Form 10 ks for the year ended September 24, 2022 and their other filings with the Securities and Exchange Commission could cause 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 of the date of this call, August 1, 2023. While we may like 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.

Speaker 1

In addition, we may also reference certain non GAAP metrics on the call today, including adjusted EBITDA, operating income per earnings per share, all of which are reconciled to the nearest GAAP metric in our 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 along with Ken Fleming, 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. Dan Fashner, J&J's Snack Foods' Chief Executive Officer.

Speaker 1

Please go ahead, Dan. Thank you, Norberto, and good morning, everyone. We appreciate you joining us to discuss our fiscal 2023 Q3 results. I'd like to start by thanking our employees across all J and J segments for a record quarter. I am so proud of our team and their efforts to continuously improve on our business.

Speaker 1

Their hard work and dedication are allowing us to post record top and bottom line results and create added value for all our employees, partners and shareholders. For the fiscal Q3, revenues increased 12% to $425,800,000 and net earnings increased 124.8 percent to $35,000,000 led by strong gross margin performance and improved distribution expenses. Our gross margin initiatives and strategies are starting to gain momentum, helping us to drive improved profitability. Like most of our industry, we are beginning to see cost inflation stabilize and our pricing actions are now better aligned with costs. This combined with improved margin mix and added efficiencies in our manufacturing plants should have us well positioned to deliver consistent margin performance.

Speaker 1

Kim will provide more details on our financial performance later in the call. Today, I'd like to begin by talking about the operations and supply chain side of our business. As we have discussed in prior quarters, our team has been focused on several initiatives to create more efficiencies in our business and enhance our capabilities. Combined, these initiatives will help us transform how we operate as a company. Here's a quick update on these key priorities.

Speaker 1

Our team has improved logistics management over shipping, warehousing and product distribution through our partnership with NFI. NFI now manages 100% of our transportation network and it's helping us improve truck capacity, minimize miles, reduce stops, enhance customer service, helping us lower shipping, handling and storage costs. Next, we are transforming our warehouse network to simplify how we manage product through our warehouses. This includes the build out of 3 geographically positioned regional distribution centers, adding freezer capacity, including more storage space for Dippin' Dots products in 2 of these three locations. The first of these 3 RDCs recently opened in Peril, Texas in June and the other two locations are scheduled to open later this calendar year and early 2024.

Speaker 1

These initiatives will simplify our logistics network by moving from over 30 warehouse locations to less than 10, resulting in improved customer service and lower distribution costs. Also, we have rolled out 6 state of the art production lines adding capacity to support growth in our key product categories such as pretzels, churros and frozen novelties. These lines are more automated creating production efficiencies and higher output metrics, all aligned to support our growth opportunity in these core products. Our operations team has implemented stronger discipline within the plan that is driving efficiency improvements in areas such as waste reduction, maintenance spend, SKU productivity and hours utilization. And we have improved our financial and operational foundation via we expect to continue to see additional benefits from this initiative.

Speaker 1

Together, these percent. Operational and supply chain initiatives are transforming our business and will play a pivotal role in reducing distribution and manufacturing costs and providing better service to our valued customers. 1 of our key strategies is to leverage the strength of our core products and brands to drive growth and improve profitability. Our team is working across segments and channels to create new selling opportunities and drive innovation. I'd like to highlight a few of our brand priorities.

Speaker 1

Zippendots is quickly penetrating new markets and gaining placements in new channels. One of our biggest growth opportunities is in the theater channel, where we are now in approximately 375 Regal Theatres and actively testing with the other 2 largest theater chains. Like we reported last quarter, we are leveraging our brand portfolio to create products like Dippin' Dot's Icy Cherry and Blue Raspberry, which is already the best new product launch for Dippin' Dots ever. Finally, we are pursuing numerous vending opportunities as we find new ways to serve our customers. All our Syrup's has exceeded our expectations with sales growing by over 19% in the most recent quarter and almost 30% year to date.

Speaker 1

We now have significant market share and are confident in our ability to maintain our leadership position. We are finding growth opportunities that include bringing Olaf Churros into the retail space in the 4th quarter and new business with major U. S. Food distributors, QSR and fast casual channels. Supercrestle is one of our most powerful brands with endless potential it seems.

Speaker 1

In the Q4, we will be launching Super Pressled Bavarian Sticks, Bites and Mini Dogs into food service and retail, creating new snacking occasions and solidifying our dominant position within soft pretzels. I see it continues to benefit from a recovering theater industry as well as from its strong consumer appeal across a growing number of occasions. There is recent momentum in the theater industry as attendance moves close to pre pandemic levels and stronger movie releases are hitting the market. We continue to gain placement in QSR and are currently discussing any major opportunity with the club channel customer. On the marketing side, a new campaign is currently being tested in the Atlanta market called Let the Kid Out.

Speaker 1

That includes out of home, curb in and digital media support and is receiving very positive reviews. We continue to have strong plans to market and grow this brand across our portfolio. We have really built a business balanced across multiple products, channels and customer segments, which together helps us adapt to changing consumer and snacking occasions. We manage this portfolio to maximize our growth opportunities across foodservice, retail and frozen beverage segments. This quarter is a great example of our flexible business model and our capabilities to continue driving both sales and growth and profit growth.

Speaker 1

Before transitioning to Kim, Let me highlight a few additional insights within each of our business segments. Foodservice continued its strong performance from prior quarters with sales up 11.9% to 255,000,000 Supercrestle Bavarian Pretzel Bites and jalapeno cheese filled nuts launched this quarter and we gained placements of a Supercuts of Bavarian Sticks at a large family entertainment center. Also, we launched Olaf chocolate filled churros across foodservice, including incremental placements with distributors, cash and carry, national accounts and individual operators. We're also testing a significant opportunity with a large QSR customer with full rollout scheduled in early calendar 2024. Funnel Cakes fries.

Speaker 1

Funnel cake fries are a big opportunity in QSR and casual dining growing 10% in Q3. And Zaxby's, a fast casual restaurant chain with over 900 locations across the U. S. Recently informed us that they will move from a test of our 5 inches funnel cake to a permanent menu item in Q4. As it relates to the retail segment, sales were up 0.2 percent to $61,200,000 For the quarter, the consumer environment was a bit soft in the 1st couple of months as retailers and grocery stores reported lower traffic in their stores and slower baskets.

Speaker 1

This trend did improve in June, that highlights the fluctuation we are seeing in retail consumer spending. We believe this impacted sales of soft pretzels and biscuits in the Q3 as both were down 12.2% 15.3% respectively compared to the prior year. We continue to see strong growth opportunities in retail, especially in our Supercrestle, Frozen Novelty and churros. The Super Parcel brand continues to resonate with consumers with purchase intent up 50% versus the year ago. As previously discussed, we are currently launching Supercuttle Bavarian 6, Bites and Mini Dogs in the retail supported by strong sales plans and marketing.

Speaker 1

Frozen Novelies continue to be an opportunity led by Luigi's, Docksters and Icy Sticks as the performance of each product continues to outpace the category. Olad Churros will begin shipping in the Northeast region this month as we bring this growing brand to retail. Moving to our 3rd business segment, frozen beverages. We saw a record Q3 sales of $109,600,000 reflecting the strong rebound in the theater channel as well as ongoing strength at our Mexico operations. There's a lot of excitement in the theater industry on the heels of stronger movie releases and higher food and beverage consumption per visit.

Speaker 1

Theater attendance is improving closer to prepay endemic levels. Beverage sales grew 26.1 percent in Q3, driven by 9% volume increases in the quarter. Our maintenance and service sales grew 5.5% and equipment sales grew 17.1%, driven mostly by the continued Checkers rollout. Finally, we continue to make progress growing consumption and placements in amusement, mass merchandisers and restaurants. As it relates to M and A, we continue to evaluate potential M and A opportunities that complement our branded portfolio and business model and that offer an attractive shareholder return.

Speaker 1

Financially, we are well positioned to invest in growth when the opportunities align with our business model. In summary, I applaud the excellent work everyone across the organization is doing to improve every aspect of our business. I am confident that our team is aligned on our core strategies and executing the right initiatives to grow our business and improve our operations. We are well positioned in the market with a long term focus on growing sales and profits and delivering shareholder returns. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance.

Speaker 1

Ken? Thank you, Dan, and good morning, everyone. Like Dan, I am so proud of our J and J employees and their many contributions and helping us deliver a record quarter. We are executing the strategy across organizations with a focus on driving top line and bottom line growth. I am equally pleased with our ability to show margin improvements across most of our operational KPIs, including gross margin and distribution expenses.

Speaker 1

We believe that we have the right plans in place to drive continued growth and deliver value to our shareholders. I would like to take a few minutes to walk you through our results. Net sales for the quarter totaled a record 400 $25,800,000 a 12% increase versus the prior period and sales through 9 months totaled $1,115,000,000 a 13.7% increase versus the 1st 9 months of fiscal 2022. The strong top line result was driven by growth across all three of our business segments and across most of our core products and reflects the health and resiliency of our business. Our largest segment, foodservice, experienced an 11.9% increase in sales to $255,000,000 representing 59.9 percent of total company sales.

Speaker 1

This strong performance has resulted in healthy growth across the segment, including a 176.4% increase in gross anomalies to $47,400,000 which included an incremental 29 point $1,000,000 in Dippin' Dox sales and showcases the benefits from the Dippin' Dox acquisition. Also a 19% increase in churros, 13.6% increase in soft pretzels and a decline in handheld and bakery of 32.9% and 8.3% respectively. Moving to our retail segment. Sales increased 0.2% to $61,200,000 compared to the same period in fiscal 2022. Handheld sales increased 180.2%, driven by expanding growth with a major mass merchant.

Speaker 1

We did experience sales decline in soft pretzels, biscuits size with retailers and grocery chains. As it relates to our 3rd segment, frozen beverages sales were a record 109 $600,000 or a 20% increase versus Q3 2022, led by strong growth across all 3 subcategories. Beverage sales increased 26.1%, led by gallon increases of 9%. Machine revenue increased by 17.1% and maintenance revenue increased 5.5% compared to the previous year period. As highlighted by Dan earlier, we made significant progress improving gross margins and distribution expenses, driving operating income growth of 127.2%, a $27,000,000 improvement over last year.

Speaker 1

Starting with gross profit. Q3 gross profit improved to $142,900,000 or a 31% increase versus the prior year. Gross profit as a percentage of sales was 33.6% Q3, comparing favorably to 28.7% in Q3 2022. It was driven by a combination of better product mix, alignment of pricing and costs, production efficiency as well as the stabilization of inflation pressures on the back of historic highs last year. Overall, we experienced low single digit inflation for the quarter, Inflation in sugar sweeteners and mixes, which continues to impact products such as frozen anomalies and churros.

Speaker 1

Looking at expenses, total operating expenses increased $6,800,000 or 7.7 percent. Represented a 22.2% of sales for the quarter compared to 23.1% In Q3 of 2022. Distribution costs were 10.4% of sales in the quarter, down sequentially from 11.3% and much improved from 12.7% in the prior year period. Our supply chain transformation initiatives, along with declining diesel prices and carrier costs, we're starting to drive improvements in shipping efficiency, cost per truck and cost per pound. Marketing and selling expenses represented 7.4% of sales versus 6 point 3 percent in the prior year period and 7.1% in Q2, 2023 and were driven primarily by the timing of them to trade shows and sponsorships.

Speaker 1

Shift? Administrative expenses were 4.4% of sales in Q3 'twenty three compared to 4.1% In Q3, 2022 and 5.3% in Q2 of 2023, but then mostly by the expected seasonal impact of adding dividends. This led to an operating income of $48,300,000 or 127.2% increase compared to $21,300,000 in Q3 of 2022. Adjusted operating income was After the impact to income taxes of $12,600,000 compared to $5,600,000 in Q3 fiscal 2022, net earnings improved to $35,000,000 resulting in reported diluted earnings per share of $1.81 or $2.51 for the 1st 9 months of fiscal 2023. This compares to $0.81 a share and $1.56 a share in the prior year periods.

Speaker 1

Adjusted diluted earnings per share was $1.92 per quarter and $2.56 for the 1st 9 months compared to $0.95 per share and $1.72 in the prior year period. Adjusted EBITDA increased 73.3 percent to $66,600,000 from $38,400,000 in the prior year period. And our effective tax rate was 26.5 percent in the 3rd quarter. Looking at our liquidity position, we continue to maintain a healthy Q3, including $70,200,000 in cash and marketable securities. In addition to the investments we are making across our business, We also continue to pay down debt of approximately $125,000,000 when we acquired dividends to $83,000,000 at the end of fiscal 3023.

Speaker 1

And we intend to continue returning value to our shareholders via dividend payment given the health of our balance sheet and our strong free cash flow generation. We have ample availability under our revolver of approximately 132,000,000 of additional volume capacity. This affords us add accessibility to strategically invest and support our business. In summary, we are executing our strategy and key initiatives and setting the foundation for continued growth. Our teams are aligned across the segments.

Speaker 1

They'll let us be focused on growing our core brand, innovating and finding new opportunities in snacking occasions, cross selling across our portfolio and channels and improving how we operate. This combination is helping us improve performance throughout the P and L and positions us well to have strong returns and shareholder value. I would now like to open the call to questions. Operator?

Operator

The first question comes from Conor Rabigan with Consumer Edge. Your line is open.

Speaker 1

So I guess just 3rd. First things first, just on the top line. So obviously results came in a little lighter than I think we and other folks had expected. So I guess maybe could you guys further maybe break out what you saw there? Maybe if anything came in ahead below your expectations, if you saw any topic of weakness or softness ahead of expectations there?

Speaker 1

Yes. Connor, this is Ken. Good question. Yes, let me break that down for you a little bit. Take the foodservice segment.

Speaker 1

And you got to kind of break it in. There's different things going on here. So if you look at soft pretzels, frozen, nollie excluding Bippin Bats, churros. That combination of products was up over 14%. So somewhat aligned with I think what you would expect and what we would expect and ties in to what we talked about and emphasizing growing those core products.

Speaker 1

If you look at handhelds and bakery, in handhelds, there's around $3,500,000 in there that is a Cost pass through based on an agreement we have with 1 of our club channel customers. So that's the units stay the same, but we passed on deflation that we got, we passed it on to the customer. Also when you think about bakery and handheld, the big part of their business is sold through retail. And as we talked about in the retail segment, The retail industry saw a decline in traffic, saw softer baskets. That's pretty much aligned with anything you need from some of the Core retail grocery channels that have come out recently.

Speaker 1

So those behave similar to that. And then if you add in Dippin' Dox, Dippin' Dox is an incremental twenty 30. $9,200,000 of those anomalies. Frozen Beverages, really excited about what we saw there. Beverage sales up 26%, The overall segment of 20%, volume up over 9% in the quarter.

Speaker 1

You talked about the recovering theater industry. So we're starting to see the consumer come back to theaters in the last 30 weeks having some of the biggest weekend they've had in a long, long time. So all in all, it's still really good, but there's certainly some things going on with the consumer. There's probably a little bit in the amusement area of impact from some of the hot weather. And some of our amusement customers have talked about Some impact on traffic in that category.

Speaker 1

So, it's kind of a quick overview. All in all, though, we feel like we're executing the plans we need to execute. And we're quite pleased given all of that and where we ended up with sales. Conor, I'd just add to that. We are confident in where we ended up.

Speaker 1

Much like what we've seen throughout this year, there's been some ups and downs throughout the year. And even this quarter, April, as it started was off. There was a consumer confidence issue I think going on that time with a lot of different things happening in our world And it kind of grew again throughout the quarter. So we've lost that really closely, but I don't think we had any big surprises as you asked in the quarter. Okay, great.

Speaker 1

That would be really helpful guys. And then I guess just moving into gross margin too, right? I mean, in the release you has called out pricing mix, stabilized inflation, right? I mean, I guess, could you maybe help us sort of, I guess, dimensionalize The extent of the impact in each one of those, just kind of get a sense for that. Well, there's a lot in that, Connor, in terms of kind of parsing all that out, I mean, the way I would answer your question is relative mix, When you see us growing in pretzels, churros, personalities in our biggest segment, foodservice, That mix really drives strong margin and it's a part of our strategy.

Speaker 1

At the same time, some of the declines in Bakery and handhelds are strategic. We're sharpening the pencil on SKUs and some SKUs we got out that weren't Driving the margins we need in and we're tweaking that and we're investing in other products in those areas that we expect that things up down the road. But The combination of both dialing down in that area and then growing in those highlands helps mix Little bit of that going on in retail as well. And then the other thing is when you mix in a record quarter for ICEE together with the biggest quarter, dip and dice. Those are both very accretive to our top line margin and so that mix Yes, we had a big role in our strong gross margin performance.

Speaker 1

You then add on inflation coming down, I think more than all of us expected. I think PBI was just shy of 3%. PBI, I think, was closer to 5%. That was about a I think a 200 basis points to 200 basis points decline just from quarter to quarter and we benefited from that call since some of our key commodities, flour, oils, things of that nature came down and certainly that Played a role on that. And then the other thing we talked about is our initiatives to get better in how we operate, to get better Yes.

Speaker 1

And how we produce product, we start to drop some efficiencies. So it all came together really nicely this quarter and I think it kind of sets the foundation going forward and we've somewhat moved out of that really crazy 12 months to 18 months of historic inflation. Okay. All right. Thanks for the color as always guys.

Speaker 1

I'll go ahead and pass it on.

Operator

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

Speaker 1

Thank you. Good morning and congratulations on the quarter and the results. Thank you very much, Andrew. My pleasure. So I'll speak for themselves,

Speaker 2

but I just wanted to

Speaker 1

ask about Sort of what Glyn, with prior question on the sales and you guys kind of touched on, I guess, pass through some deflation to a large customer. But in the past you talked about SKU rationalization in lower margin lines, which I think bakery is and perhaps handhelds as well. Is there any deliberate, if you will, kind of portfolio management of the lines in that way where you're Not bidding up for contracts that just don't make sense when you have other lines of products you can produce and distribute that maybe at 2 or 3 times the margin? Yes. Andrew, you heard us talk a lot about Kind of our strategy of pushing our core products and we continue to do that and we'll continue to do that.

Speaker 1

Also in the bakery, which We're fond of the bakery and what happens there, but we do have a strategic initiative there to make Sure. What we're bidding on and what we make and who we sell to also complements our strategy of What we've been talking about getting into that 30% gross profit margin. So absolutely has there been a strategy around it to reduce some SKUs that weren't operating there. And then the team, that Baker team is really focused on new business and what they bring to the organization. And as I said in the opening, I'm proud of all of our teams in the way that they're executing the strategy.

Speaker 2

Is there any way to quantify

Speaker 1

Beyond the past year of some deflation of what the SKU rationalization might have been as a drag and could see the sales growth? No, I'm not going to quantify what that is exactly and you can add some growth with You make month to month. I mean, the bulk of it is going to be in bakery. And so I think as you look at the bakery numbers, it's a combination of that Q2 together will detect that a lot of that bakery is in retail and grocery bakery groups where There has been some declines off of the traffic in those venues. Okay.

Speaker 1

Thanks, Ken. I understand. And Dan, if I could just Get back to the way you're talking about your sales and just kind of I know you don't guide to us, but Just wanted to ask like when you're thinking through your sales budget for the Board or however, how are you thinking about current quarter and going into fiscal 2024 for your budget about where the sales growth comes from in terms of price versus velocity gains on existing products. It sounds like you're really bullish on new placements, new distribution. So I'm not trying to fish a number out of you, but I know you don't guide, but I am trying to get sort of a sense of where you see the growth, especially as economy is showing less inflation.

Speaker 1

So obviously, price is going to be less and less of a driver of sales growth. Where would your volume I guess to focus more on the volume growth, Do you see it more in velocity in this kind of economy or more in your distribution gains? Thank you. Great question, Andrew. To kind of highlight, I probably see it on both sides of it, Right.

Speaker 1

I do think that we have the opportunity through some of the marketing activity that our team is doing to grow 30th. In locations that we're already in. And then I love as we've talked about some of the new innovation that we have and some of the new products that we're releasing and their abilities to complement and grow the business as well. And the teams are working really hard and have what I consider a really firm pipeline to look at for this next year. And so as I talked about before, there's some volatility in the market.

Speaker 1

We'll watch that Closely. Part of what I love about our company is that we have a really balanced portfolio. And you've lived through this with us or in the period of time when theaters were down, but retail was up and now we're living in a period of time where theaters are up and retail come back to more of a normal level. I like the way that this business has been built with great products and great customers around a portfolio that allows us to ebb and flow that way. I think this quarter we'll continue to see some growth.

Speaker 1

And then I look forward to see the budgets as they roll up over the next month or so for next year. Great. I appreciate that color. And if I could add just one kind of follow-up on your commentary on the marketing budget being expenses being out, excuse me. When you talk about trade shows and sponsorships, Is there some of the and I think in the past you said to get some of the products at churros all the churros into retail No, there would be slotting and things like that.

Speaker 1

Is that kind of what this is about? Or is this separate from that? And in the current quarter, we should look for No, the slotting fees as part of the marketing spend. Yes. It's really driven by kind of what we mentioned is both timing and I would even say Kind of the level of investment we're making in trade shows and sponsorships, particularly trade shows.

Speaker 1

I don't know if you've been to one recently that we're at, but Kind of the level of kind of bringing together a good brand presence and event, We're really blowing that out. I mean, it's really amazing what the marketing team has done to bring all our brands together and display it in a way. So We're making investments there. We believe that's paying off. It's driving new channels in.

Speaker 1

It's driving new conversations. So it's really about that. I mean full year, we may we'll probably be in the ballpark of where we typically are, maybe a hair above that, Andrew. But it's money well spent. I think it's starting to tie in to all the other strategies we're doing to drive interest in our brands.

Speaker 1

Yes. I'll just add to that. Some of it is timing, Andrew, But we did make a really conscious decision at some of the major trade shows this year to really highlight all the great things that we do in our core products and really proud of the team and the way that they put that together. You heard us talk about one of our core strategies being cross selling our portfolio By doing what we've done, we've had some really, really tremendous efforts by the team and some of our I've just really seen how well they can complement one of our products to the next. And we think that's working.

Speaker 1

So A part of that. Okay. Thank you. Yes.

Operator

Please standby for the next question. The next question comes from Robert Dickerson with Jefferies. Your line is open.

Speaker 2

Great. Thanks so much. Good morning.

Speaker 1

Good morning, Robyn.

Speaker 2

How's it going? I guess, just first question just on Dippin' Dots. I'd say maybe it's a personal anecdote, but I don't know, past few months have been over kind of all over the place. And I've seen certain formats in places like Wawa's. I've seen my kids eat them and now Kind of more handheld frozen novelty kind of on the go packaging.

Speaker 2

So as you talk about all the distribution opportunities, whether it's in foodservice, retail, what have you. I mean, is it fair to say at this point, kind of despite some of the innovation The overall portfolio that I mean it seems like kind of more highly likely, more highly probable kind of revenue generation upside here at J and J is kind of primarily being driven by different dots. I don't mean that as a negative. I just it sounds like the runway is pretty low.

Speaker 1

We love that acquisition. You heard us talk about that, Rob. Again, I'm proud of that team As we've worked hard at integrating and then cross selling and getting out and introducing them to some of the great relationships that we have out in the industry, it's really working. We see a really nice opportunity for that to continue to grow And are happy with what it's done to date. And also just thank you for your kids buying a product too, right?

Speaker 1

We appreciate that. But we really are happy with that acquisition. We're proud of the team and the way that they're managing it and the way that they have integrated with the whole J and J organization To find new growth and have a lot of hopes for it in 2024. I could, real quick, just to add to that. Everything James said, yes, optimistic and aggressive in the way we believe we can work different by us.

Speaker 1

But Dan rattled off in the script. He's focused on churros as a Ola as a brand, Superpresco as a brand, Icy as a brand. All of those businesses performed quite well in the quarter. Some pretzels and foodservice, which is the biggest Area that we sell preppers in was up 13%, 5%, churros was up 19%, Icy Beverages by themselves is up 26%. So, yes, I certainly want to give credit to what we do in giving that, but Our focus areas are growing and we feel really good about the opportunities down the road in those areas as well.

Speaker 2

All right. Super. And then

Speaker 1

I guess just to

Speaker 2

jump to the margin side, clearly gross margins back strong. Yes. As we think and then also frozen beverage, I think that's like maybe the highest margin I've ever seen. So I'm just curious, as we think forward into kind of Q4 then clearly we start thinking about next fiscal year, Kind of where things sit today. Some of this kind of margin mix shift in the portfolio sticky, like Is there anything that we saw in Q3 in frozen beverages, maybe kind of like a one off, so we don't want to get ahead of ourselves?

Speaker 2

Because you look at the gross margin in the quarter, it's great. But then you look at the op margins too and clearly there are Nice benefits flowing through. So I know that was the expectation kind of as we got into the back half. I'm just curious at this point kind of given normal seasonality as well as These improved margins now hopefully kind of where we sit for some time.

Speaker 1

Yes. As we go into Q4, we feel very good about the position we're in from a gross margin standpoint. I 30. If you look at Q4 and Q3 historically, given a little bit of slowdown as kids go back to school and that kind of thing, Yes. The margins are probably a little bit south of what they were in Q3, but they should still be very good because We think we've passed the hurdle of some of those things that challenged us and most in the industry over the last several months.

Speaker 1

And if theaters continue to perform the way they are, it's going to be a big shot in the arm with Both our IC business and as we penetrate theaters in different dots, again, both high margin parts of our portfolio. So, yes, I think we're pretty confident. We told you we're going to move this business to Getting into the 30 margin business year in, year out. And this is a really good start to that and we expect To have good momentum going into Q4. Obviously, as you get into Q1 and Q2, the seasonality of that, those margins won't Yes, that level, but they will be much better than over the last year or so.

Speaker 1

Rob, you've heard us talk about 3rd? Working all angles with the P and L and that's in fact what we're doing and we're really proud of each and every one who's focused on that, right? We're certainly in the summer months where the mix helps us for sure. But also just the movement in the IT business, 3rd, not only domestically, but really strong quarter out of our Mexico operations. Proud of what that team is doing.

Speaker 1

We think that we can Have those margins up in that 30 plus area like we've been talking about for a while. And it certainly gets a boost when you're in the summer months, But we're proud of what teams are doing at all angles of the P and L. All right,

Speaker 2

great. And then maybe just lastly, I know clearly kind of overall basket and cost inflation size improved like you're saying, but also seeing Some kind of material step up in sugar and sweeteners and anybody with decent exposure to those commodities have been saying the same thing and we We'll see it. So it sounds like overall clearly kind of pricing relative to your overall cost structure has really improved. But we've also heard from others that, look, if some of these inputs on the sweetener side remain elevated, The industry overall could potentially think about incremental pricing.

Speaker 1

Is that anything is there anything in that It's kind

Speaker 2

of come up internally in terms of kind of those 2 core commodities or you're thinking about it more from an overall portfolio

Speaker 1

dynamic versus kind of, let's say,

Speaker 2

further novelties. That's folio dynamic versus kind of get safer of the novelty? That's it. Thanks.

Speaker 1

It's a great question, Rob. We do A monthly review with our different teams around the P and L and are reviewing the snack food side of our businesses This last month, we talked a little bit about the frozen novelties and what we may or may not do. And so we will look at it individually like that. We're going to watch it closely and you're right. If that doesn't come down, then we may have to approach that in a different manner.

Speaker 2

All right. Super. Thank you so much.

Speaker 1

Thank you. Thanks,

Operator

3rd question. The next question comes from Todd Brooks with Benchmark Company. Your line is open.

Speaker 1

Hey, good morning guys and congrats on the results in the last quarter. That was very surprising margin improvement that you delivered. So congrats. Thanks, John. Few quick questions here, if I may.

Speaker 1

And this is just kind of getting this 1st year of Dippin' Dots correct. Can you talk about what the seasonality typically is for Dippin' Dots revenues in Q4 versus Q3? And I'm just trying to triangulate. You've talked about couple of annual goals for Dippin' Dots and I think we did a little bit less than $30,000,000 here in Q3. Would you expect that business to grow meaningfully in Q4?

Speaker 1

And if you look at overall company revenues, would you That Q4 will be your peak revenue quarter or Q3? Yes, Todd. We've talked about and been very clear about the seasonality with the Q4, particularly in the Papa side, I talked about that. I would say Q4 is going to probably perform Similar to Q3, maybe a little bit better. Like you, we're still kind of running this business.

Speaker 1

But we know obviously what they did last year. We know what some of the new initiatives and things we have in place in some of the areas of growth, Which is probably looking into Q4, I think it was somewhat similar to Q3, a bit of a mess. Okay, great. Thanks, Ken. And then based on Dippin' Dot similar to a little bit better in Q4, more core products, the SKU rationalization.

Speaker 1

Just trying to think about what the headwinds are If revenues are relatively similar between the quarters that would cause much of a gross profit margin moderation sequentially. You asked him talking about the headwind on sales or on gross margin? Well, if sales are relatively similar quarter over quarter and you're getting a little bit more Dippin' Dots revenue And you SKU rationalized some lesser margin products for core margin products. I'm just trying to figure out why gross profit should drop much from the 33% plus level that you did in Q3 when we get to Q4? Yes.

Speaker 1

It's really more about kind of historical seasonality. As you get into it's early into September, A lot of kids who are obviously in the high school active and theaters and amusement parks and Others, your business skews a bit heavier in Q3 and Q4 in those areas. So it's just more of the Seasonal behavior of the consumer, which traditionally we've seen a little bit lower gross margin in Q4 In Q3, but I wouldn't say it would be dramatic, Tom. Okay. That's fair.

Speaker 1

And then one final follow-up question on the gross margin. I look back historically just to try to map that seasonal movement in gross margins and You get back to 2018, 2019 and you were looking at maybe 200 basis points to 300 basis points higher gross margins in the back half of the year than the front half year. Do you think that's where we normalize to? I know that different dots is a new piece of business that may drag a little bit more in the first half. But what would you expect that Go forward type of gross margin spread to be between the first half and the second half of the year?

Speaker 1

Yes. I think the spread certainly, I would say the next year or so would be similar, but I think all quarters Well, it's what it was a year ago, particularly the 2 that we've already gone through. It should be better. So Q1 It's coming up a little bit better than Q1 of last year because we've gotten past some of the inflationary impacts and Yes. And some of our initiatives are starting to pay dividends.

Speaker 1

But if you just look quarter to quarter and think about the behavior of margin, It will continue to be strongest in Q3 and Q4 and then more relevant to history in Q1 duration dividend to places like theaters that provides a bit better seasonality for us and helps those 1 or 1 in different parts, which we think will pay dividends for us down the road. But that will be kind of a gradual Move to that, I think, as we build that business up. Okay, great. And then Dan, just a final one for you and I'll jump back in. You talked about the 6 new production lines that have been launched over the course of this year.

Speaker 1

As you start looking out to 2024, How meaningful is that incremental capacity and throughputproductivity as a revenue driver for J and J because it's levered on those core categories where you're seeing the best growth around novelties, pretzels and charters? Thanks. Yes. Good question, Todd. We're really excited about those 6 new lines.

Speaker 1

We've talked a little bit in the past about having capacity constraints in those core products that we think there's a lot of runway with. And so the teams are out there really Being able to sell things like churros and different forms of pretzels and maybe even bringing some of that core into our bakery division as well and that's being worked on right now. So they become really meaningful for us. They kind of are at the heart of the strategy that we have in place right now. We're being able to grow pretzels, churros, frozen novelties and being able to broaden that like releasing a new pretzel buyer or a pretzel stick for us.

Speaker 1

It allows the teams to get out there and sell on the things that we do best and on the things that help us drive the margin mix that we've been talking quarter. Okay, great. Thanks to you both. Thanks, Don. Thanks, Don.

Operator

I show no further questions at this time. I would now like to turn the call back to Dan Beshner for closing remarks.

Speaker 1

Thank you for your time today. In closing, we are excited about the opportunities to continue growing this great business of ours and confident that we have the right people, products, partners and strategy to maximize these opportunities. We look forward to sharing our fiscal 2023 full year results later this year and updating you on the positive impact the various operational and strategic initiatives they're having on our business. In the interim, should you have any questions or wish to speak to us, Please contact our Investor Relations firm, JCIR, at 212-835 8,500. Thank you and have a great rest of the summer.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
MiNK Therapeutics Q3 2023
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