Q3 2024 J&J Snack Foods Corp Earnings Call

August 6, 2024

Music PC-BLEEP

Operator: Good day, and thank you for standing by. Welcome to the J & J Snack Foods third quarter 2024 conference call. At this time, all participants are in a listen-only mode.

Speaker Change: Good day and thank you for standing by. Welcome to the J & J Snack Foods third quarter 2024 conference call.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. You'll then hear an automated message advising that your hand is raised.

Speaker Change: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

Speaker Change: To ask a question during the session, you'll need to press star 1-1 on your telephone. You'll then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded.

Operator: To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Norberto Aja, Investor Relations. Please go ahead.

Speaker Change: I would now like to hand the conference over to your first speaker today, Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja: Thank you, Operator, and good morning, everyone. Thank you for joining the J & J Snack Foods Fiscal 2024 3rd Quarter Conference Call. Before getting started, let me take a minute to read the Safe Harbor link.

Norberto Aja: Thank you, operator, and good morning, everyone. Thank you for joining the J & J Snack Foods Fiscal 2024.

Speaker Change: third quarter conference call. Before getting started, let me take a minute to read the Safe Harbor language.

Norberto Aja: This call contains forward-looking statements within the meaning of the Private Security Litigations Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. Including statements regarding management's plans, strategies, goals, expectations, and objectives, and or anticipated financial performance. These statements are neither promises or guarantees and 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 statement.

Norberto Aja: This call contains forward-looking statements within the meaning of the Private Security Litigations Reform Act of 1995.

Norberto Aja: 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, expectations, and objectives, and or anticipated financial performance.

Norberto Aja: These statements are neither promises or guarantees, and involve known and unknown risks, uncertainties, and other important factors that may cause results.

Norberto Aja: performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward looking statements.

Norberto Aja: Risk factors and other items discussed in our annual report on Form 10-K for the year ended September 30, 2023, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made today. Furthermore, any such forward-looking statements represent management's estimates as to the date of this call, Tuesday, August 6, 2024. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause expectations to change.

Norberto Aja: Any such forward-looking statements represent management's estimates as to the date of this call, Tuesday, August 6, 2024.

Norberto Aja: While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even subsequent events cause expectations to change.

Norberto Aja: In addition, we may also reference certain non-GAAP measures on the call, including Adjusted EBITDA, Adjusted Operating Income, or Adjusted Earnings Per Share, all of which are reconciled to the nearest gap measure in the company's earnings press release, which you can find in our Investor Relations section of the website.

Norberto Aja: In addition, we may also reference certain non-GAAP measures on the call today.

Norberto Aja: including Adjusted EBITDA, Adjusted Operating Income, or Adjusted Earnings Per Share, all of which are reconciled to the nearest gap measure in the company's earnings press release, which you can find in our Investor Relations section of the website.

Dan Fachner: Joining me on the call today is Dan Fachner, our Chief Executive Officer, along with Ken Plunk, our Chief Financial Officer. Following management's prepared remarks, we will open the call for questions and answers. With that, I would now like to turn the call over to Mr. Dan Fachner. Please go ahead, Duke.

Speaker Change: Joining me on the call today is Dan Fachner, our Chief Executive Officer, along with Ken Plunk, our Chief Financial Officer.

Speaker Change: Following management's prepared remarks, we will open the call for a question and answer session.

Speaker Change: With that, I would now like to turn the call over to Mr. Dan Fachner. Please go ahead, Dan.

Dan Fachner: Thank you, Norberto. Good morning, everyone, and thank you for joining us today. J & J Snack Foods delivered an excellent third quarter, building on our strong momentum from the first half of the year. I'm so proud of the J & J team and employees who continue to execute our strategy while delivering consistent results. These results continue to validate that the investments we have made and the strategies that we have implemented are having a positive impact on the sales and earnings power of our business, and it's positioning J & J to win in what remains a dynamic consumer and operating environment.

Dan Fachner: Thank you, Norberto. Good morning, everyone, and thank you for joining us today.

Dan Fachner: J & J Snack Foods delivered an excellent third quarter, building on our strong momentum from the first half of the year. I'm so proud of the J & J team and employees who continue to execute our strategy while delivering consistent results.

Dan Fachner: These results continue to validate that the investments we have made and the strategies that we have implemented are having a positive impact on the sales and earnings power of our business.

Dan Fachner: And it's positioning J & J to win in what remains a dynamic consumer and operating environment.

Dan Fachner: To further illustrate our success, I will share a few highlights from the quarter, followed by a review of our sales performance and operations. Our record third-quarter net sales of $440 million marked the second highest quarterly net sales performance in our company's 53-year history.

Dan Fachner: To further illustrate our success, I will share a few highlights from the quarter, followed by a review of our sales performance and operations.

Dan Fachner: Our record third quarter net sales of $440 million marked the second highest quarterly net sales performance in our company's 53-year history.

Dan Fachner: This impressive result was led by strong sales in our food service and retail segment, offset by temporary challenges in frozen beverages, which were impacted by softer sales in the theater channel. Our ability to grow the top line 3.3% while maintaining a healthy 33.6% gross margin underscores the strength of our strategy, led by improved operating efficiencies and a balanced and diverse portfolio of products, brands, and customer channels. We continued our trends of growing profits faster than sales, with a third quarter operating income and net earnings growth of 3.8%. This resulted in a record high quarterly earnings per diluted share for the quarter.

Dan Fachner: This impressive result was led by strong sales in our food service and retail segment, offset by temporary challenges in the frozen beverages, which were impacted by softer sales in the theater channel.

Dan Fachner: Ken will provide more insights into our financial performance in just a few minutes. Meanwhile, our strategies to leverage innovation and cross-selling opportunities to expand placements of our core products and brands continue to deliver positive results. Taking a closer look at our sales performance. Third quarter net sales growth was driven by higher volumes across most of our core products and brands, as well as strong business performance in our food service and retail segment. As we had anticipated, production delays related to the 2023 actors strike had a negative effect on this quarter's film slate as compared to last year, especially in April and May.

Speaker Change: As we had anticipated, production delays related to the 2023 actors strike had a negative effect on this quarter's film slate as compared to last year, especially in April and May.

Dan Fachner: The theater industry reported declines in attendance during the quarter of approximately 30 percent, which impacted fiscal third-quarter sales of frozen beverages, soft pretzels, and churros. We estimate that these temporary challenges impacted sales by approximately $7 million compared to the same period last year. While the sales theater channel declined in the third quarter, I do want to highlight the impact of great movie releases in the market and why we remain so confident in growing sales in this channel.

Speaker Change: Inside Out 2 was the first of several strong releases planned for Q4 and the remainder of the year.

Dan Fachner: This momentum should also benefit our Dippin' Dots business as they complete the rollout to AMC, Cinemark, and Marcus Theatres over the next few months. Looking ahead, our movie theater customers, as well as industry observers, expect box office and attendance trends to begin to recover in the second half of calendar 2024. These positive trends are expected to continue into calendar 2025 with a greater number of titles, including a diverse offering of proven franchise films and highly anticipated new titles.

Speaker Change: As a result, we expect sales of our products and brands to significantly improve in this channel as attendance trends recover.

Speaker Change: Moving on to our segments. In food service, frozen novelty sales increased 9.1%, led by the continued growth of Dippin' Dots, which increased 5.3%.

Dan Fachner: Bakery sales increased 6.8%, driven by unit volume growth in cookies, new products, encouraging Finster results, and expanded customer placement. In addition, we saw a meaningful improvement in handheld sales, up 25.3%. Overall, food service segment sales grew 3.7% with the increase in these product categories partially offset by weakness in soft pretzels and churros due to the previously mentioned challenges in the theater. We continue to see strong growth in CHROs with the third largest QSR and remain confident in this opportunity going forward. Moving to retail

Speaker Change: Bakery sales increased 6.8% driven by unit volume growth in cookies, new products, encouraging Finster results, and expanded customer placements.

Speaker Change: Overall, food service segment sales grew 3.7% with the increase in these product categories partially offset by softness in soft pretzels and churros due to the previously mentioned challenges in the theater.

Speaker Change: We continue to see strong growth in TROs with the third largest QSR and remain confident in this opportunity going forward.

Dan Fachner: We experienced broad-based growth across nearly all of our product categories, resulting in a 12.4% increase in sales for the quarter. Handhelds grew approximately 70%, driven by expanded placements with a major mass merchant. Frozen novelty sales increased 11%, led by growth in Luigi's, Icy Tubes, and Dogsters, which was driven by unit volume growth and incremental placements in the club channel. Soft pretzel sales increased 8.2%, led by our continued expansion of Super Pretzel products, largely reflecting strong demand for super pretzel Bavarian sticks.

Speaker Change: Moving to retail, we experienced broad base growth across nearly all of our product categories, resulting in a 12.4% increase in sales for the quarter.

Dan Fachner: Biscuit sales were down slightly in the quarter. The frozen beverage segment declined 2.6% for the quarter, driven by the previously discussed softness in the theater channel. Frozen beverage sales decreased 1.1% due to a 6% drop in gallons.

Speaker Change: The frozen beverage segment declined 2.6% for the quarter driven by the previously discussed softness in the theater channel.

Dan Fachner: However, gallons increased 3% in Q3, excluding the impact of theaters. Let me just say that one more time. Gallons increased 3% in Q3, excluding the impact of theaters, driven by strong performance in mass merchandisers, amusement, and QSR. We continue to diversify our customer portfolio, finding growth opportunities in channels like QSR. In fact, we are very encouraged by the current test at KFC that was recently highlighted on Good Afternoon Kentucky as they market this new program and new flavors like Sweet Lightning and Blackberry Lemonade in the local Lexington market. However, repair and maintenance revenues decreased 1.6%, reflecting lower preventative maintenance call volume.

Speaker Change: However, gallons increased 3% in Q3, excluding the impact of theaters. Let me just say that one more time.

Speaker Change: Gallons increased 3% in Q3, excluding the impact of theaters, driven by strong performance in mass merchandisers, amusement, and QSR.

Speaker Change: Repair and maintenance revenues decreased 1.6 percent, reflecting lower preventative maintenance call volumes.

Dan Fachner: Machine sales, while exceeding our internal budget for the quarter, were down 15.4% as we lapped a large QSR rollout from last year. Let me quickly highlight a couple of other important focus areas as we continue to cross-sell our brands and products across the channel, starting with Super Pretzel. This iconic brand is outperforming the snack category and continues to provide opportunities for growth, new product extensions, or new points of sale. We are expanding across retail, led by the launch of Bavarian Sticks, which remains the number two seller in the SuperPretzel portfolio, reaching an ACV now of 28% and growing.

Speaker Change: Let me quickly highlight a couple of other important focus areas as we continue to cross-sell our brands and products across the campus.

Speaker Change: starting with Super Pretzel.

Speaker Change: This iconic brand is outperforming the snack category and continues to provide opportunities for growth, new product extensions, or new points of sale.

Speaker Change: We are expanding across retail, led by the launch of Bavarian Sticks, which remains the number two seller in the Super Pretzel portfolio, reaching an ACV now of 28% and growing.

Dan Fachner: I'm so pleased with the incremental distribution we are achieving with leading retailers. In late fiscal Q4, we expect to double our store count with a major grocery retailer under the Super Pretzel and Annie Anne brands. Now, let's talk about Dippin' Dots.

Speaker Change: I'm so pleased with the incremental distribution we are achieving with leading retailers. In late fiscal Q4, we expect to double our store count with a major grocery retailer under the Super Pretzel and Annie Ann brands.

Dan Fachner: Summer promotions are underway with Regal and Chuck E. Cheese, resulting in higher volumes and increased brand awareness. We also continue to roll out Dippin' Dots at AMC, Cinemark, and Marcus Theaters with expectations to be in approximately 930 locations by the end of the calendar year. Currently, we have installed Dippin' Dots at 176 AMC locations, 134 Cinemark locations, and 51 Marcus locations.

Speaker Change: Let's talk about Dippin' Dots.

Speaker Change: Summer promotions are underway with Regal and Chuck E. Cheese, resulting in higher volumes and increased brand awareness.

Speaker Change: We also continue to roll out Dippin' Dots at AMC, Cinemark, and Marcus Theatres with expectations to be in approximately 930 locations by the end of the calendar year.

Dan Fachner: Also, we are actively testing new opportunities with convenience store customers and will be installing freezers in approximately 230 locations with a major food service customer. We remain confident in our plans to expand Dippin' Dots across customers and channels. I'd like to spend some time highlighting the significant impact of our operational investments over the last couple of years. The investments we have made in manufacturing and distribution capabilities are resulting in improvements across key efficiency metrics, starting with our supply chain strategy.

Speaker Change: Also, we are actively testing new opportunities with convenience store customers, and will be installing freezers in approximately 230 locations with a major food service customer.

Speaker Change: We remain confident in our plans to expand Dippin' Dots across customers and channels.

Speaker Change: I'd like to spend some time highlighting the significant impact of our operational investments over the last couple of years.

Speaker Change: The investments we have made in manufacturing and distribution capabilities are resulting in improvements across key efficiency metrics.

Dan Fachner: All three RDCs are exceeding expectations and will enable us to continue driving productivity improvement. At this time, 85% of our sales orders are shipped from the new distribution network versus only 26% a year ago, with the average length of haul decreasing by 38%, and on-time performance improving to over 82% versus 73% a year ago. Line haul cost per pound decreased 17% compared to the same quarter last year in our snack food business.

Speaker Change: starting with our supply chain strategy.

Speaker Change: All three RDCs are exceeding expectations and will enable us to continue driving productivity improvement.

Speaker Change: At this time, 85% of our sales orders are shipped from the new distribution network versus only 26% a year ago.

Speaker Change: with the average length of haul decreasing by 38%.

Speaker Change: in on-time performance, improving to over 82% versus 73% a year ago.

Speaker Change: Line haul cost per pound decreased 17 percent compared to the same quarter last year in our snack food business.

Dan Fachner: We have reached We have reduced the number of cold storage locations to 10, driving efficiencies and how we ship products, and reducing transfer cross transfers across our network by 9% Shifting to operations. The addition of six new production lines has significantly expanded our capacity. This has enabled added efficiency and given us the ability to meet growth opportunities across our core products, such as pretzels, churros, and frozen novelties. The expanded capacity has created production efficiencies and higher output metrics through better automation, which improves product margins, decreases overtime, and provides the flexibility to respond to new sales opportunities. Fill rates have reached 98.5%.

Speaker Change: We have reduced the number of cold storage locations to 10, driving efficiencies in how we ship products and reducing transfers across our network by 9%.

Speaker Change: Shifting to operations.

Speaker Change: The addition of six new production lines has significantly expanded our capacity. This has enabled added efficiency and given us the ability to meet growth opportunities across our core products such as pretzels, churros, and frozen novelties.

Speaker Change: The expanded capacity has created production efficiencies and higher output metrics through better automation, which improves product margins, decreases overtime, and provides the flexibility to respond to new sales opportunities.

Dan Fachner: A high point for J & J's business and high relative to the overall industry trend. Finally, as many of you likely saw in our 8K filing, our CFO, Ken Plunk, will be retiring at the end of this calendar year.

Speaker Change: Fill rates have reached 98.5%, a high point for J & J's business, and high relative to the overall industry trends.

Speaker Change: Finally, as many of you likely saw in our 8k filing, our CFO Ken Plunk will be retiring at the end of this calendar year. The company will be conducting a thorough search process to identify a successor and to ensure a smooth transition.

Dan Fachner: The company will be conducting a thorough search process to identify a successor and to ensure a smooth transition. Ken's been a great partner and leader to both me and the organization. I want to thank Ken for his help and support as we transformed the business over these past four years, the entire J & J team, and the board of directors, and I wish him and his family the very best in their new chapter of their lives. Thank you, Ken.

Speaker Change: Ken's been a great partner and leader to both me and the organization.

Dan Fachner: In summary, I am pleased with our ability to post record third-quarter sales and profits while managing through continued challenges in the consumer environment. I'm so proud of how the J & J team continues to execute on our growth agenda. While we expect our 2024 fiscal fourth quarter results to be impacted by one less sales week versus the comparable prior year period, it is clear that our strategies to maximize sales across our customer channels and improve operating efficiencies are working.

Speaker Change: In summary, I am pleased with our ability to host record third-quarter sales and profits while managing through continued challenges in the consumer environment.

Speaker Change: I'm so proud of how the J & J team continues to execute on our growth agenda.

Speaker Change: Well, we expect our 2024 fiscal fourth quarter results to be impacted by one less sales week versus the comparable prior year period.

Speaker Change: It is clear that our strategies to maximize sales across our customer channels and improve operating efficiencies are working.

Dan Fachner: We have a strong portfolio of beloved products and brands, with tremendous growth opportunities ahead of us, and we remain confident in our ability to deliver long-term value to our employees, our partners, our customers, and our shareholders. With that, I would now like to pass the call over to Ken to review our financial performance in more detail.

Speaker Change: We have a strong portfolio of beloved products and brands, with tremendous growth opportunities ahead of us, and we remain confident in our ability to deliver long-term value to our employees, our partners, and our customers.

Speaker Change: and our shareholders.

Speaker Change: With that, I would now like to pass the call over to Ken to review our financial performance in more detail. Ken?

Ken Plunk: Thank you, Dan, and good morning, everyone. I will start by saying that it has been a tremendous honor to serve as CFO for J & J Snack Foods, and I am truly blessed. You have worked alongside Dan and his amazing team to improve and grow this business. I'm proud of the finance and IT organization that we have developed over the last four years and confident that the foundation is set to continue delivering strong financial discipline, business performance, and System Capabilities.

Ken Plunk: Thank you Dan and good morning everyone. I will start by saying that it has been a tremendous honor to serve as CFO for J & J Snack Foods and I am truly blessed.

Speaker Change: You have worked alongside Dan and his amazing team to improve and grow this business. I'm proud

Ken Plunk: of the finance and IT organization that we have developed over the last four years and confident that the foundation is set to continue delivering strong financial discipline, business performance, and system capabilities.

Ken Plunk: Turning to our results, I am pleased with our ability to deliver strong performance for the quarter, including record fiscal third quarter net sales. This, combined with gross margins of 33.6%, contributed to significant profit growth and profits growing faster than sales, meaning sales for the quarter totaled $440 million, an increase of 3.3% versus the prior year. As Dan mentioned, top line performance was led by higher volumes and new business performance in our food service and retail segments, more than offsetting softer sales in our frozen beverages segment. Through service, our largest segment saw sales increase 3.7% to $264 million. Handheld sales increased 25.3% to over $21 billion.

Speaker Change: Turning to our results, I am pleased with our ability to deliver strong performance for the quarter, including record fiscal third quarter net sales.

Speaker Change: This combined with gross margins of 33.6% contributed to significant profit growth and profits growing faster than sales.

Speaker Change: that sells for the quarter, total $440 million, an increase of 3.3% versus the prior year. As Dan mentioned, top-line performance was led by higher volumes.

Speaker Change: and new business performance in our food service and retail segments, more than offsetting softer sales in our frozen beverages segment.

Dan Fachner: Through service, our largest segment saw sales increase 3.7% to $264 million.

Speaker Change: Handheld sales increased 25.3% to over 21 billion. Bakery and frozen novelties increased 6.8% and 9.1% respectively, driven by unit volume growth in cookies and a 5.3% increase in Dippin' Dots sales.

Ken Plunk: Bakery and frozen novelties increased 6.8% and 9.1%, respectively, driven by unit volume growth in cookies and a 5.3% increase in dip and dot sales. However, growth across the segment was offset by a decrease in salt pretzels and churro sales of 6.3% and 0.7%, respectively, driven primarily by the challenges in our theater channel that Dan referenced earlier. In addition, sales of new products and added placement with new customers totaled approximately $6.4 million, driven primarily by the addition of churros to the menu of a major QSR customer. This led to third-quarter operating income of $20.2 million, a decrease of 2.6%, versus the prior year period, reflecting a less favorable sales net.

Speaker Change: Growth across the segment was offset by a decrease in soft pretzels and churro sales of 6.3% and 0.7% respectively, driven primarily by the challenges in our theater channel that Dan referenced earlier.

Speaker Change: In addition, sales of new products and added placement with new customers totaled approximately 6.4 million, driven primarily by the addition of churros to the menu of a major QSR customer.

Speaker Change: This led to third quarter operating income of $20.2 million, a decrease of 2.6%, versus the prior year period reflecting a less favorable sales mix.

Ken Plunk: Moving to our retail segment, Q3-24 retail sales totaled $68.7 billion, or an increase of 12.4%, driven by handheld sales growth of 69.9% as we expanded product placement with a major mass merchant. In addition, frozen novelty sales increased 10.9%, led by the growth of Luigi's Icy Novelties. Dogsters, and an overall higher shipment as customers added inventory for the peak spring and summer season, saw pretzel sales increase 8.2%, led by a continued expansion of super pretzel products in retail, while biscuit sales decreased 5.8% in the quarter.

Speaker Change: Moving to our retail segment, Q3-24 retail sales total $68.7 million, or an increase of 12.4%, driven by handheld sales growth of 69.9%.

Speaker Change: as we expanded product placement with a major mass merchant.

Speaker Change: Salt pretzel sales increased 8.2% led by a continued expansion of super pretzel products in retail, while biscuit sales decreased 5.8% in the quarter.

Ken Plunk: We also benefited from new product innovation and customer placement in this segment of approximately 3.1 million in the quarter. This was largely the result of the super-premium Bavarian steaks launched early in the year into the retail segment.

Ken Plunk: We expect continued growth of this product as a major retailer expands placement in the fourth quarter. This led to an operating income of $7.8 million, or an increase of $3.6 million, versus the prior year period, reflecting the improved sales, product quality, and higher gross margin. As it relates to our third segment, frozen beverages, sales were $106.8 million, a 2.6% decrease compared to a record Q3 2023. Beverage sales were down 1.1%, or approximately $800,000 below prior years, reflecting weakness in the theater customer channel.

Ken Plunk: Overall, gallons sold declined 6% in the quarter, but they did increase 3%, excluding the impact of the theater channel. This was led by Growth in Amusement, Convenience, and Mass Merchandise. As Dan mentioned, we expect volumes to experience a significant improvement in the back half of the calendar year, given the stronger schedule of FEM release. Parent maintenance revenues also decreased by 1.6% as we saw lower preventive maintenance call volume.

Speaker Change: This was led by Growth in Amusement, Convenience, and Mass Merchandisers.

Ken Plunk: Machine sales were down 15.4% as we left a significant customer rollout from last year. This led to operating income of $22.1 million compared to Q3'23 operating income of $23.3 million, with the decrease driven by weaker top-line sales. Our investments and initiatives over the last two years to enhance profit margins and drive efficiency across our business are proving to be successful. For the quarter, gross profit totaled $147.8 million, a 3.4% increase compared to Q3'22. This led to a gross margin of 33.6%, flat versus the prior year despite a less favorable sales mix.

Speaker Change: For the quarter, gross profit totaled $147.8 million, a 3.4% increase compared to Q3'23. This led to a gross margin of 33.6%.

Ken Plunk: We remain confident in our ability to deliver strong and consistent profit margins and expect to achieve gross margin of 30% or better for the full year. As it relates to inflation across our portfolio of raw materials, we saw net low, mid, single-digit inflation increases, with the net increase primarily driven by increases in the cost of cocoa, slash chocolate, and to a lesser extent, increases in the cost of sugar and sweeteners. Those increases were somewhat offset by deflationary trends seen in flour, cheese, Dairy Mixes, and Eggs, pricing adjustments, and contractual cost true-ups, which minimized the majority of the impact on our gross margins in the quarter.

Speaker Change: We remain confident in our ability to deliver strong and consistent profit margins and expect to achieve gross margin of 30% or better for the full year.

Speaker Change: As it relates to inflation across our portfolio of raw materials, we saw net low-mid single-digit inflation increases, with the net increase primarily driven by increases in the cost of cocoa,

Speaker Change: slash chocolate and to a lesser extent increases in the cost of sugar and sweeteners.

Ken Plunk: Our procurement team continues to effectively manage flying costs, and we are well positioned to respond to any impact. Looking at expenses, total operating expenses increased $3.1 million, or 3.2%, representing 22.2% of sales for the quarter, flat with the prior year.

Speaker Change: Our procurement team continues to effectively manage flying costs. We are well positioned to respond to any impacts.

Speaker Change: Looking at expenses, total operating expenses increased 3.1 million, or 3.2%, representing 22.2% of sales for the quarter, flat with the prior year.

Ken Plunk: Distribution costs were 10.2% of sales in the quarter compared to 10.4% in the prior year period, as the investments we have made to increase efficiency across our distribution network and supply chain continue to drive expense savings. Marketing and selling expenses were 70.4% of sales, flat versus the prior period, as we continue to invest in our product innovation, brand promotions, and new selling opportunities. Administrative expenses were 4.5% of sales in Q3-24, compared to 4.4% in Q3 of 23.

Speaker Change: Distribution costs were 10.2% of sales in the quarter compared to 10.4% in the prior year period as the investments we have made to increase efficiency across our distribution network and supply chain continue to drive expense savings.

Speaker Change: Marketing and selling expenses were 7.4% of sales, flat versus the prior period, as we continue to invest in our product innovation, brand promotions, and new selling opportunities.

Speaker Change: Administrative expenses were 4.5% of sales in Q3 of 24, compared to 4.4% in Q3 of 23.

Ken Plunk: This led to operating income of $50.1 million, or a 3.8% increase compared to $48.3 million in Q3'23. The adjusted operating income was $53.1 million, or a 3.9% increase compared to Q3'23. After the impact of income taxes of $14.1 million compared to $12.6 million in the comparable prior year, net earnings increased 3.8% to $36.3 million, resulting in record quarterly earnings per diluted share of $1.87 compared to $1.81 in the comparable prior year period.

Speaker Change: This led to operating income of $50.1 million or a 3.8% increase compared to $48.3 million in Q3-23.

Speaker Change: Adjusted operating income of $53.1 million or a 3.9% increase compared to Q3'23.

Speaker Change: After the impact of income taxes of $14.1 million compared to $12.6 million in the comparable prior year,

Ken Plunk: Adjusted earnings per diluted share were $1.98 per quarter compared to $1.92 in the prior year period, suggested EBITDA increased 6.3% to $70.9M from $66.6M in the prior year period, and our effective tax rate was 27.9% in the third quarter. Looking at our liquidity position, we continue to have a healthy balance sheet and overall strong liquidity with $64 million in cash and approximately $12 million in debt. Our ability to improve cash flow through working capital initiatives and stronger profitability is generating more cash to pay down debt, pay dividends, and continue investing in our business.

Speaker Change: Adjusted earnings per diluted share were $1.98 to the quarter compared to $1.92 in a prior year period.

Speaker Change: Looking at our liquidity position, we continue to have a healthy balance sheet and overall strong liquidity with $64 million in cash and approximately $12 million in debt.

Speaker Change: Our ability to improve cash flow through working capital initiatives and stronger profitability is generating more cash to pay down debt, pay dividends, and continue investing in our business.

Ken Plunk: Our focus will continue to be on maintaining a healthy balance sheet and prudent, leveraged position, which enables us to continue investing in the growth of our business and returning value to our shareholders. In addition, we have ample availability under a revolver of approximately $203 million in additional borrowing capacity.

Speaker Change: Our focus will continue to be on maintaining a healthy balance sheet and a prudent, leveraged position, which enables us to continue investing in the growth of our business and returning value to our shareholders.

Ken Plunk: To sum it all up, while we recognize there's still much work to be done to capture the vast opportunities in front of us, we are encouraged by our results to improve every aspect of how we do business. We are confident that the power of our brand portfolio and the unwavering dedication of our employees will continue to deliver strong results and added value for our shareholders. I would now like to turn the call over to the operator for Q & A. Operator?

Speaker Change: To sum it all up, while we recognize there's still much work to be done to capture the vast opportunities in front of us, we are encouraged by our results to improve every aspect of how we do business.

Speaker Change: We are confident that the power of our brand portfolio and the unwavering dedication of our employees will continue to deliver strong results and added value for our shareholders.

Operator: At this time, as mentioned, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Speaker Change: Thank you. At this time, as mentioned, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Operator: Please stand by while we compile our Q&A roster. Our first question comes from the line of Todd Brooks with The Benchmark Company. Your line is now open.

Speaker Change: Our first question comes in the line of Todd Brooks with the Benchmark Company. Your line is now open.

Todd Brooks: Hey, thanks for taking my question and for the nice results in the quarter here, kind of absorbing some of that pressure on the theater channel. Thank you, Todd. Uh, my first question is on that theater Channel, and I think this might be helpful for all of us.

Todd Brooks: Hey, thanks for taking my question and nice results on the quarter here, kind of absorbing some of that pressure in the theater channel.

Dan Fachner: Can you size, if you think about food service and frozen beverage, what percentage of each of those segments is made up by the theater channel? We don't have that exact number on the food service side. We know on the beverage side, it's about 25% of IC beverage sales. The food service side is much less than that, but it is growing. It's a nice piece of business for us that continues to grow, and we've even added some people from a company standpoint into that group to try to energize it.

Speaker Change: Thank you, Todd. Yes, thanks, Todd.

Todd Brooks: First question is on that theater channel, and I think this might be helpful for all of us. Can you size, if you think about food service and frozen beverage, what percentage of each of those segments is made up by the theater channel?

Speaker Change: We don't have that exact number on the food service side. We know on the beverage side it's about 25% of the IC beverage sales.

Speaker Change: The food service side is much less than that, but growing. It's a nice piece of business for us that continues to grow, and we've even added some people from a company standpoint into that group to try to energize it.

Dan Fachner: Okay, great. Thanks, Dan. Secondly, the churro success with Subway has obviously been a great story. I look at that side kick line, and I see three products that J & J would be well suited to make, not just the churro.

Speaker Change: Okay, great. Thanks, Dan. Secondly,

Speaker Change: The churro success with Subway has obviously been a great story. I look at that side kick line and I see three products that

Dan Fachner: Have you had any luck making inroads with either the cookie offering there or the soft pretzel offering? We've built a really nice relationship with that company through this program that they have, both that and their buying arm. We've built a great relationship. We're continuing to have conversations and absolutely believe that in the future, we'll have the opportunity to be making some of those products or some others. There are some nice opportunities for us. Okay, great. And then a final one, and He touched on the KFC test a little bit, Dan, but

Speaker Change: J & J would be well suited to make not just the churro. Have you had any luck making inroads with either the cookie offering there or the soft pretzel offering?

Speaker Change: We've built a really nice relationship with that company through this program that they have.

Speaker Change: Both that and their buying arm, we've built a great relationship. We're continuing to have conversations and absolutely believe that in the future, we'll have the opportunity to be making some of those products or some others. There's some nice opportunities for us coming.

Speaker Change: Okay, great. And then a final one, and, um...

Dan Fachner: I was just wondering if you'd look forward a couple of calendar quarters here, what we're seeing either on the new product launch side, the distribution side, or maybe some tests that are out there that can help you continue. You drove, I think, almost a little over $9 million in revenues from new placements and new products. It was great to see.

Speaker Change: He touched on the KFC test a little bit, Dan, but I was just wondering if you look forward to a couple of calendar quarters here, what we're seeing either on the new product launch side, the distribution side, or maybe some tests that are out there that can help you continue. You drove, I think, almost.

Dan Fachner: I'm just wondering what you can share with us in the go-forward look for what may continue to trend. I'm not sure I can share some names, but I will tell you we have a tremendous pipeline in retail. We've got a couple things that are really strong for us and a lot of new, a lot of customers expanding distribution. On the food service side, you know, we've talked about this in the past. Whenever a particular customer like Subway comes out with a churro product, there are lots of others who are watching that. And so we have some tests in play that some will even kick in before the year's in with some other large organizations out there that we'll see continue to grow. And so we're really happy there.

Speaker Change: a little over $9 million in revenues from new placements and new products, which

Speaker Change: It's great to see. I'm just wondering what you can share with us in the go-forward look for what may continue to drive that.

Speaker Change: I'm not sure I can share some names, but I will tell you we have a tremendous pipeline in retail. We've got a couple of things that are really strong for us and a lot of new or a lot of customers expanding the distribution.

Speaker Change: On the food service side, you know, we've talked about this in the past.

Speaker Change: You know, whenever a particular customer like Subway comes out with a churro product, there's lots of others who are watching that.

Speaker Change: And so we have some tests in play that some will even kick in before the year's end.

Speaker Change: with some other large organizations out there that we'll see continue to grow. And so, really happy there. The bakery side, as you watch those numbers, we've got some good things in.

Dan Fachner: On the bakery side, as you watch those numbers, we've got some good things in some private label areas that we're continuing to grow that we're happy about. And then, you know, just the IC with KFC, as you mentioned, that's a really big opportunity for us. And so far, that test has gone extremely well, with a lot of press around it, a lot of people, and a lot of attention to it. So I love our pipeline right now. I think we've got a really good chance of having a really strong 2025. Okay, great. Thanks.

Speaker Change: and some private label areas that we're continuing to grow that we're happy about and then, you know, just the IC with the KFC as you mentioned.

Speaker Change: That's a really big opportunity for us, and so far that test has gone extremely well with a lot of press around it, a lot of people, a lot of attention to it, so I love our pipeline right now. I think we've got a really good chance of having a really strong 2025.

Speaker Change: Okay, great. Thanks.

Operator: Thank you. Our next question comes from the line of Connor Rattigan with Consumer Edge. Your line is now open.

Speaker Change: Thank you.

Speaker Change: Our next question comes to the line of Connor Radigan with Consumer Edge. Your line is now open.

Connor Rattigan: Hey guys, good morning. Congratulations on a great quarter. Thank you, Connor. Good morning to you as well.

Speaker Change: Hey guys, good morning. Congrats on a great quarter. Thank you, Connor. Good morning to you as well.

Operator: Great, great. Yeah, you guys called out the weakness in frozen beverages driven by the theater channel. So, um, I'm curious, could you guys maybe share how trends looked across the other channels to get to maybe give us a better sense of relative performance across those channels? Like, for example, what was performance relatively even outside the theater, or was there maybe quite a bit of volatility?

Connor Radigan: Great, great. Yeah, so you guys called out the weakness in frozen beverages driven by the theater channel, so

Speaker Change: I'm curious, could you guys maybe share how trends looked across the other channels to maybe give us a better sense of relative performance across those channels, like was performance relatively even outside the theater or was there maybe quite a bit of volatility by channel?

Dan Fachner: Well, you know, we were up in volume, and most of all of our big brands and products; it was a pretty good quarter overall for us. And I mentioned this in my opening, even on the beverage side of our business inside Icy, if you took the theater channel out, we would have been up by 3%. And so overall, a pretty good quarter for all of our products, and we're seeing some nice growth.

Speaker Change: Well, you know, we were up in volume in most of all of our big brands and products. It was a pretty good quarter overall for us, and I mentioned this in my opening.

Speaker Change: Even inside the beverage side of our business, inside Icy, if you took the theater channel out, we would have been up by 3%. And so, overall, a pretty good quarter with all of our products, and we're seeing some nice growth.

Dan Fachner: Connor, I mean, we were crucial in making that comment about what the gallon increase was without theaters. So that tells you amusement was up, QSR was up, mass merchandise was up as it relates to frozen beverages. Again, this was really a tell of, you know, particularly in April and May, where the theater industry was as related to releases, and you can read pretty much any publication from any of the theater companies.

Speaker Change: Yeah, Connor, I mean, we were purposeful in making that comment about what the gallon increase was without theaters.

Connor Radigan: So that tells you amusement was up, QSR was up, mass merchandise was up as it relates to frozen beverages.

Speaker Change: Again, this was really a tell of, you know, particularly in April and May, where the theater industry was as related to releases, and you can read pretty much any publication from any of the...

Speaker Change: theater companies, and you'll see that outside of that, really, really good quarter force on that.

Dan Fachner: And you'll see that outside of that, really, really good quarter force on that side of the business. Awesome. So also, in the press release, you guys noted some strength in amusement parks, specifically with Dippin' Dots. So I'm curious, what did you guys really see as the driver there?

Speaker Change: on that side of the business.

Speaker Change: Awesome. So also in the press release, you guys noted some strength in amusement parks, specifically with Dippin' Dots. So I'm curious, what did you guys really see as the driver there? Was it just, you know, strong summer seasonal traffic? Maybe was there some pricing, distribution gains? Any color on that would be great.

Dan Fachner: Was it just, you know, strong summer seasonal traffic? Maybe there were some pricing, or distribution gains? Any color on that would be great.

Dan Fachner: Our teams do a great job, Connor, getting into the amusement park industry and making sure we're well positioned when the season comes, and the Dippin' Dots team really excels in that area. In fact, I toured one of our amusement parks last week with a group of leaders, and the Dippin' Dots presentation at that Six Flags Park was tremendous. They just do a really good job making sure we're positioned right, making sure that it's marketed appropriately.

Speaker Change: Our teams do a great job, Connor, getting into the amusement park industry and making sure we're well positioned when the season comes.

Speaker Change: And the Dippin' Dots team really excels in that area. In fact, I toured one of our amusement parks last week with a group of leaders.

Speaker Change: And the Dippin' Dots presentation across that Six Flags Park was tremendous. They just do a really good job making sure we're positioned right, making sure that it's marketed appropriately.

Dan Fachner: It certainly helps when you have a nice, warm summer, and we're having that, but that industry seems to be doing really well in all facets of our business. Awesome, and then just one last quick follow-up.

Speaker Change: It certainly helps when you have a nice warm summer, and we're having that. But that industry seems to be doing really well in all facets of our business right now.

Dan Fachner: So you guys have previously mentioned that about 80% of your product was thrown the slow through the new RDP system. I'm not sure if I missed it, but did that pick up a little bit during the quarter? I think it picked up, I want to say, Connor, maybe a couple hundred basis points. I think, Again, doing this on memory, I want to think Q2 was around 78%, so yeah, it ticked up somewhat from Q2. Okay, great. Thanks, guys. I'll pass it on.

Speaker Change: Awesome, and then just one one last quick follow-up. So you guys have previously mentioned that about 80% of your products was thrown the slowing through the new RDP system. I'm not sure if I missed it, but did that pick up a little bit during the quarter?

Speaker Change: I think it picked up, I want to say Connor, maybe a couple hundred basis points. I think

Connor Radigan: Again, doing this on memory, I want to think Q2 was around 78%, so yeah, it picked up somewhat from Q2.

Operator: Thank you, Connor. Thank you. Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.

Speaker Change: Okay, great. Thanks, guys. I'll pass it on. Thank you, Connor.

Jon Andersen: Hi, thanks for the questions. And Ken, thanks for your help the past few years and best to you in your retirement down the road. Yeah, you bet. I guess I wanted to first ask just a big picture question about the consumer and what you're seeing. In terms of any macro impacts on your business relative to the consumer, are they exhibiting more value-seeking behavior or any kind of channel shift you're seeing across the various channels that you serve that suggests either, you know, the consumer remains healthy, or you're seeing some pockets of weakness. You know, Jon, we talked a lot about this.

Connor Radigan: Thank you.

Speaker Change: Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.

Speaker Change: Hi, thanks for the questions. And Ken, thanks for your help the past few years and best to you in your...

Speaker Change: retirement down the road. Thank you, Jon.

Ken Plunk: Yeah, you bet.

Speaker Change: I guess I wanted to first ask just a big picture question around the consumer, what you're seeing in terms of any macro impacts on your business relative to the consumer, are they...

Speaker Change: exhibiting more value-seeking behavior, any kind of channel shift you're seeing across the various channels that you serve that suggest either, you know, consumer remains healthy or you're seeing some pockets of weakness. Thanks.

Dan Fachner: And I used this term last quarter, and I'd probably use it the same again today. I just still think consumers are a little fickle. I think, you know, they react to what has been said in the media.

Speaker Change: I just still think the consumers a little fickle. I think, you know, they react to what has been said in the media. I think even over the last 24 hours, we saw, you know, stocks plummet and then come back up. And, you know, I, I think when you don't.

Dan Fachner: I think even over the last 24 hours, we saw stocks plummet and then come back up. And, you know, I think when you don't, We expected some interest rate drop last week and that didn't happen. The consumer, you know, reacts to that. I think, you know, what we see kind of still is somewhat of a tale of two cities, right?

Speaker Change: We expected some interest rate drop last week and that didn't happen. The consumer, you know, reacts to that. I think, you know, what we see kind of still is somewhat of a tale of two cities, right? I think the low-end consumer still is under pressure in a lot of ways and they're cautious and

Dan Fachner: I think the low-end consumer is still under pressure in a lot of ways, and they're cautious. And they're careful about how they spend. And then I think we see the opposite end of that spectrum, where they're looking for a premium or expensive rental kind of environment to be able to spend on things. And, you know, I think it's still a typical customer. And I think it probably will remain that way, at least during this period of time as we're going through an election. So we're gonna have to watch that really closely, right?

Dan Fachner: I think they're discerning about where they spend their money. Makes sense. So if you kind of stripped out the theater channel this quarter, it looks like your sales would have been up about 5%. I think historically that has been kind of an area that all rolls up and does a top line view here. Yeah, Jon, I think that's a really good way to look at it.

Speaker Change: Makes sense. So if you kind of stripped out the theater channel this quarter, it looks like your sales would have been up about 5%. I think historically that has been kind of an area that

Speaker Change: I think the company has kind of grown organically. Is that a reasonable, kind of a mid-single-digit organic growth rate expectation, a reasonable way to think about the business as you look?

Dan Fachner: You know, we are working really hard to be right about that mid single-digit growth year over year. And I think we're well positioned for that in the future. And you know, you mentioned the third theater, and I just want to kind of highlight the impact of what good movie releases can do for us. So the theater industry really struggled in April, struggled in May, and struggled most of June, but we get into the back half of June, and we get a couple of really good movie releases out there, and we just catapult our sales so much that I see end up having a record month of June, right?

Speaker Change: And I think we're well positioned for that in the future. And you know, you mentioned the third theaters and I just want to kind of highlight kind of the impact of what good movie releases can do for us.

Speaker Change: So, so much.

Dan Fachner: And so what we're encouraged by is that we can continue what we've talked about with the new product releases and the new distribution and seeing the growth in our core products. And then you get the theater business to come back, which all indications look like it will in the back half of 24. I think what I heard is, you know, they have 10 big movies, but only four of them have been released so far.

Speaker Change: that I see ends up having a record month of June .

Speaker Change: Right, and so what we're encouraged by is that we can continue what we've talked about with the new product releases and the new distribution.

Speaker Change: And seeing the growth in our core products, and then you get the theater business to come back, which all indications look like it will in back half of 24. I think what I heard is...

Speaker Change: They have 10 big movies, only four of them have been released so far. So we got six of them in the back half of the year, and then 2025, a great lineup. All of that combined, we feel pretty well positioned to be in that mid single digit growth for the future.

Dan Fachner: And I guess following on that, is it fair to say that because your products that you're selling in theaters are some of the core brands, that's a margin-accretive part of your business as well? Yeah, absolutely. And, you know, we're growing the Dippin' Dots side of that with AMC, Cinemark, and Marcus Theaters and a couple other regional chains and, as you know, the margins through Dippin' Dots are really helpful. Last one for... Sorry, but go ahead.

Speaker Change: That's helpful. And I guess following on that, is it fair to say that...

Speaker Change: Yeah, absolutely. And, you know, we're growing with the Dippin' Dots side of that with AMC, Cinemark and Marcus Theaters and a couple other regional chains. And, and as you know, the margins through Dippin' Dots are really healthy.

Dan Fachner: I was just going to add, and we stated this in Dan's script, but a really big deal, you know, when we add over 900 theaters between now and the end of the year for Dippin' Dots, that's going to be a really nice business and then obviously be accretive to margins as we go into those winter months. So that's another reason we feel optimistic as we head into the end of the year. That's helpful.

Speaker Change: I was just going to add, and we stated this in Dan's script, but a really big deal, you know, when we had over 900 theaters between now and the end of the year for Dippin' Dots,

Speaker Change: That's going to be a really nice business and then obviously be accretive to margins as we go into those winter months. So that's another reason we feel optimistic as we head into the end of the year and into next year.

Dan Fachner: Also ties into my last question. You know, you kind of reaffirmed that. The outlook for gross margin this year to be, you know, above 30%, which I think was kind of an interim target for you at one point. Assuming you deliver on that this fiscal year and the work that you've done from an operational perspective, a productivity perspective, and again, centering your investments around some of the core higher-margin parts of your business, have you given any thought to what gross margin might look like longer term?

Speaker Change: Also, ties into my last question, you kind of reaffirmed the

Speaker Change: The outlook for gross margin this year to be, you know, above 30%, which I think was kind of an interim

Speaker Change: you know, assuming you deliver on that this fiscal year and

Speaker Change: The work that you've done from an operational perspective, a productivity perspective, and again, centering your investments around some of the core higher margin parts of your business. Have you given any thought to what, you know, gross margin might look like longer term?

Dan Fachner: Yeah, I think Dan and I both talked last quarter, you know, we have a desire and this won't be next year may even be, you know, two, three years down the road, get us up close to that mid 30s range, but, As we focus on building plans where profits grow faster themselves, and obviously gross profit is going to play a big role in that, we expect to keep engine that number up, and some of that will be based on focusing on really driving the core growth of those products that you mentioned earlier, and then improving the margins of our lower margin business, which we've really made nice progress in a couple of those areas this year. But that's kind of where we're headed.

Speaker Change: Yeah, I think Dan and I both talked last quarter, you know, we have a desire, and this won't be next year, it may even be, you know, two, three years down the road, to get us up close to that mid-30s range, but

Speaker Change: As we focus on building plans where profits grow faster themselves, and obviously gross profit's going to play a big role in that, we expect to keep engine that number up, and some of that will be based on

Speaker Change: focusing on really driving the core growth of those products that you mentioned earlier and then improving the margins of our lower margin business which we've really made nice progress.

Dan Fachner: I feel good about where we're going to land for this fiscal year, given the first three quarters, and I think that we'll build from there. Great. Thanks so much, guys, for the help.

Speaker Change: And a couple of those areas this year, but that's kind of where we're headed. I feel good about where we're going to land for this fiscal year, given the first three quarters, and I think that will build from there.

Operator: Thank you, Jon. Thank you. Our next question comes from the line of Andrew Wolf with C.L. King.

Speaker Change: Great, thanks so much guys for the help. Thank you, Jon.

Andrew Wolf: Your line is now open. Hi, good morning. I also wanted to ask about the gross margin, sort of back of the envelope. Movie Theater Business Head, COM. The gross margin would have expanded by, I don't know, 10 to 20 basis points, something in that range. That's a good estimate, Andrew. Okay, the other thing I wanted to ask about gross margin was just pricing power. Some of the big retailers, their customers are hurting, at least a lot of them, and, you know, they're mass marketers. We have everybody.

John Anderson: Thank you.

Speaker Change: Our next question comes to the line of Andrew Wolfe with C.L. King. Your line is now open.

Andrew Wolfe: Hi, good morning. I also wanted to ask about the gross margin.

Speaker Change: Just sort of back of the envelope.

Speaker Change: Looks like if, you know, the 7 million of...

Speaker Change: Movie Theater Business Head, Com.

Speaker Change: The gross margin would have expanded, I don't know, 10 to 20 basis points, something in that range.

Speaker Change: That's a good estimate, Andrew.

Speaker Change: You know, their customers are hurting, at least a lot of them, and, you know, they're mass marketers, so they have everybody.

Andrew Wolf: And, you know, inflation for you, I guess, is running, you said, low to mid-single digits on the ingredient side. Obviously, there's an offset with your productivity, but, you know, what do you feel about pricing power out? You know, there's contractual things, I think, www.snackfoods.com. It's the ability to pass through, not to pass through, trying to get margin out of price, but just to kind of make yourself holes in the production. Well, I mean, it's a great question.

Andrew Wolfe: and you know inflation for you I guess is running you said mid low to mid single digits on the ingredient side

Speaker Change: Obviously, there's an offset with your productivity improvements. But you know, what do you feel about pricing power? Oh, you know, there's contractual things, I think, certainly a food service, but maybe in retail, and just sort of in general, just the ability to pass through not to, you know,

Speaker Change: Try to get margin out of price, but just to kind of make yourself holes on the production side.

Dan Fachner: I think you have to be really careful with pricing in this environment that we're in. As you talked about, we do have some contractual things that we're able to pass on, and we're able to do that with rice and cocoa or chocolate. And then you have to earn prices outside of that, right?

Speaker Change: Well, I mean, it's a great question. I think you have to be really careful with pricing during this environment that we're in. As you talked about, we do have some contractual things that we're able to pass on, and we're able to do that with rice and cocoa or chocolate.

Dan Fachner: We have to be really careful about where we price and how we price and making sure that we have earned that price increase. You know, our new three RDCs and the efficiencies that we're gaining there and the new capacity that we have and making sure that we're delivering to customers on time and efficiently allow us to be able to earn some of that. But we're going to have to be really careful how we price that. You know, I think, like I said, we were able to do that with chocolates.

Speaker Change: And then you have to earn pricing outside of that, right? We have to be really careful about where we price and how we price and making sure that we have earned that price increase.

Speaker Change: Our new three RBCs and the efficiencies that we're gaining there, and the new capacity that we have, and making sure that we're delivering to customers on time and efficiently, allow us to be able to earn some of that, but we're going to have to be really careful how we price that on.

Speaker Change: I think, like I said, we were able to do that with chocolates, and we'll watch any other of those key items in the future to make sure that we're being diligent and disciplined about how we do it.

Andrew Wolf: And we'll watch any other of those key items in the future to make sure that we're being diligent and disciplined about how we do it. Okay, and the last thing I just kind of... And I think you mentioned Finster's. You know, is there an opportunity for a quite small brand like that to actually get some meaningful distribution given your relationships and that we love the products? Yeah, we love the products. That's why I thought of an M&A strategy or something. Yeah. Yeah, or do you need bigger brands like Dippin' Dots when it comes to M&M's? Well, you know, I'd love to find bigger brains.

Speaker Change: Is there an opportunity for a quite small brand like that

Speaker Change: Given your relationships and

Speaker Change: We love the product. Yeah, we love the product.

Dan Fachner: You know, we've talked about that all along, but Finster's was such an easy acquisition to make because it's such a great product and very well-received. And we believe that we do have an opportunity to grow that. I don't know how big that can be, but our teams are really excited about getting out there and representing it and growing it. And we see some opportunities in the short term with it. We'll continue to look for larger ones like Dippin' Dots, but it doesn't mean we won't look for something like this that's easy to kind of strap on and grow.

Speaker Change: Or do you need bigger brands like a Dippin' Dots when it comes to M&A?

Speaker Change: Well, you know, I'd love to find bigger brands, you know, we've talked about that all along, but Pinsters was such an easy acquisition to make because it's such a great product.

Speaker Change: and very well-recepted. And we believe that we do have an opportunity to grow that. I don't know how big that can be, but our teams are really excited about out there and represent it and growing it. And we see some opportunities in the short term with it. We'll continue to look for.

Speaker Change: larger ones like Dippin' Dots, but it doesn't mean we won't look for something like this that's easy to kind of strap on and grow.

Andrew Wolf: Okay, that's it for me. Thank you. Thank you, Andrew. Thank you. Our last question comes from the line of Robert Dickerson with Jeffries. Your line is now open. Great. Thanks so much.

Speaker Change: Okay, that's it for me. Thank you. Thank you, Andrew.

Andrew Wolfe: Thank you.

Andrew Wolfe: Our last question comes from the line of Robert Dickerson with Jeffries. Your line is now open.

Robert Dickerson: Hey guys, just a couple, just a couple quick clarification questions, a little perspective. I guess just in the retail segment, operating margin, you know, is around kind of that 11% level. We have seen some kind of decent volatility the past few years in that segment. I'm assuming that was kind of more cost price related. If we kind of think about the 11%, you know, ish, in Q3. Is that like, are we kind of like back on track to get to kind of like a more normalized kind of, you know, standard kind of run rate going forward?

Robert Dickerson: Great, thanks so much.

Robert Dickerson: Hey guys, just a couple of quick clarification questions, a little perspective. I guess just in the retail segment,

Speaker Change: You know, op margin, you know, was around kind of that 11% level.

Speaker Change: We have seen some kind of decent volatility.

Speaker Change: the past few years in that segment. I'm assuming that was kind of more cost price.

Speaker Change: related.

Speaker Change: If we kind of think about the 11%, you know, ish.

Speaker Change: in Q3. Is that like, are we kind of like back on track to get to kind of like a more normalized kind of

Speaker Change: you know, standard kind of run rate going forward or other puts and takes, etc.

Robert Dickerson: Or are there puts and takes, etc.? Yeah, no, Rob, that's a great question. I do think we're back on track. I mean, I'm not going to commit to 11 every quarter, but I think much more in that range.

Speaker Change: Yeah, no Rob, that's a great question. I do think we're back on track. I mean, I'm not going to commit to 11 every quarter, but I think much more in that range. I think we've finally gotten

Ken Plunk: I think we've finally gotten things dialed in as it relates to how we manage margin in those retail products. We're moving and growing more in those higher cores, frozen novelties, and soft pretzels. As long as we do that, that's going to mix out much better than it was, you know, a few quarters ago or a couple of years ago. So I do think this is more realistic about what we ought to be able to do there versus, say, a year or so ago. All right, fair enough.

Speaker Change: Things dialed in as it relates to how we manage margin in those retail products. We're moving and growing more in those higher cores, frozen novelties, soft pretzels.

Speaker Change: As long as we do that, that's going to mix out much better than it was, you know, a few quarters ago or a couple of years ago. So I do think this is more realistic to what we ought to be able to do there versus, say, a year or so ago.

Robert Dickerson: It seems we're, Okay, and then I guess just kind of a broader question on the margin mix, kind of vis-a-vis new distribution. You know, like I heard you say, got, you know, more distribution to mass retailers. I think there's more distribution coming, more stores from a bigger grocer, we talk about Subway, got the KFC launch. Potentially coming at some point Like as you enter those new stores, like let's just take KFC as an example. You know, let's say okay, we're in two stores now, and then we go to 100, and maybe we go to 500, whatever it is. And this would be, I guess, a similar dynamic on different dots Once you're in, let's say, a movie theater or KFC with those products, Is Or is there scalability in this business? It seems like there usually is, but I'm asking because I'm not really sure if there is.

Speaker Change: All right, fair enough. It seems more realistic. Okay, and then I guess just kind of a broader question on the margin mix.

Speaker Change: kind of vis-a-vis

Speaker Change: New Distribution.

Speaker Change: You know, like I heard you say...

Speaker Change: Got, you know, more distribution to mass retailer. I think there's more distribution coming, more stores from a bigger grocer. We talk about

Speaker Change: Subway got the KFC launch.

Speaker Change: Potentially coming at some point.

Speaker Change: Like, as you enter those, those new stores, like, let's just take KFC, as an example, you know, let's say, okay, we're, we're in two stores now, and then we go to 100, and maybe we go to 500, whatever it is. And this would be, I guess, a similar dynamic on Dippin Dots.

Speaker Change: Once you're in, let's say, a movie theater or KFC with those products,

Speaker Change: Is that just kind of you get your normal kind of, you know, margin rate on that product and that dollar per product?

Speaker Change: from the start? Or is there scalability in this business? It seems like there usually is, but I'm asking because I'm not really sure if there is. Maybe it's just...

Dan Fachner: Maybe it's just day one, that's what we get. And yes, the more we sell, the more profit we make. Or the more you sell in movie theaters or KFC or Subway or what have you, you actually are getting kind of incremental volume leverage and scalability benefits overall. Boy, it's a really good question.

Speaker Change: Day one, that's what we get. And yes, the more we sell, the more profit we make. Or, you know, the more you sell, you know, in movie theaters, or KFC, or Subway, or what have you, you actually are getting kind of incremental volume leverage and scalability benefits in the overall business.

Dan Fachner: You know, anytime you have volume, you do get some scalability. You're talking about a couple of areas that are a little bit different when you're talking about IC or Dippin' Dots. It's not quite the same thing, but, you know, if you're growing Dippin' Dots and you're able to produce more products, you're getting some scalability inside that plant where we produce them. So you do get some advantages there. On the IC side, you know, we're always very, very conscious of what the cost is there typically for a piece of equipment.

Speaker Change: Well, it's a really good question. You know, anytime you have volume, you do get some scalability. You're talking about a couple areas that are a little bit different when you're talking about IC or dip and dots.

Speaker Change: It's not quite the same thing, but you know, if you grow in Dippin' Dots and you're able to produce more products, you're getting some scalability inside that plant where we produce it, so you do get some advantages there.

Speaker Change: On the I.C. side, you know, we're always very, very conscious, you know, what the cost is there, typically, is the piece of equipment, and so you get some scalability around buying large numbers of pieces of equipment, and

Dan Fachner: And so you get some scalability around buying large numbers of pieces of equipment, and hopefully, you're able to be careful about how many people you have to hire to take care of that business. And so there's some scalability that happens there, but it's not quite the same as in a manufacturer. I hope that answers your question. It's a little bit different, but the answer is, yes, there is some scalability, but maybe not as sizable.

Speaker Change: And hopefully you're able to be careful about how many people you have to hire to take care of that business. And so there's some scalability that happens there, but it's not quite the same as in a manufacturing plan.

Speaker Change: I hope that answers your question. It's a little bit different of a question, but the answer is yes, there is some scalability, but maybe not as sizable as you might think.

Robert Dickerson: Okay, yeah. And, you know, Dan, I mean, I'm also asking because, I mean, look, clearly, you don't provide long-term guidance, right? But you've spent a lot of money, you know, on the efficiency side, it gives you a lot of benefits, and then I'm also hearing that getting a lot of distribution kind of across pretty much all channels, at least all major channels, really is, yeah, right, which, and then there's like a volume-driven story. Right, so kind of like usually what follows is a margin expansion story. I just don't have a slide that's showing us that. But, I mean, it seems like that's clearly the idea here. Is that it?

Speaker Change: Okay yeah and you know Dan I mean I'm also asking because I mean look clearly you don't provide long-term guidance right but you've spent a lot of money you know on the efficiency side you know

Dan Fachner: That gives you a lot of benefits, and then I'm also hearing, well, we're also getting a lot of distribution, kind of across pretty much all channels, at least all major channels.

Dan Fachner: really are yeah right which and then there's like a volume-led story

Speaker Change: Kind of like usually what follows is a margin expansion story. I just don't have a slide that's showing us that so I mean It seems like that's clearly

Dan Fachner: It is, you know, it is, and it falls right into what I've talked about with the RDCs and the efficiencies that we're gaining from that. And, you know, if you think about the Dippin' Dots side, we caught those RDCs early enough to be able to build a box inside a box, and maybe we're even a little bit ahead of ourselves. We knew that that was something that needed to happen to be able to grow that piece of business, and now we're growing into that box in a box, which will help us gain some efficiency in the future.

Speaker Change: The idea here is that it is, you know, it is and it falls right into what I've talked about with the RDCs and the efficiencies that we're gaining from that and

Speaker Change: And, you know, if you think about the Dippin' Dots side.

Speaker Change: We caught those RDCs early enough to be able to build a box inside a box.

Speaker Change: and maybe we're even a little bit ahead of ourselves. We knew that that was something that needed to happen to be able to grow that piece of business.

Speaker Change: And now we're growing into that box-in-a-box, which will help us gain some efficiency in the go-forward. Yeah, Rob, these are all pieces in our ability and confidence to continue to move that gross margin.

Dan Fachner: Yeah, Rob, these are all pieces in our ability and confidence to continue to move that gross margin number up. As we grow volume in these areas, leverage automation, that's going to create bits of efficiency that grab basis points in margin that should help us evolve to a higher gross margin rate over the next two or three years. Yeah, great. Alright, that's all. Thanks so much.

Rob: number up. As we grow volume in these areas, leverage automation, that's going to create bits of efficiency that grab basis points and margin that should help us evolve to a higher gross margin rate over the next two or three years.

Operator: Thank you, Rob. Thank you. I'm showing no further questions at this time and would now like to turn it back to Dan Fachner for closing remarks. Go ahead.

Rob: Yeah, great. All right, that's all. Thanks so much. Thank you, Rob.

Rob: Thank you. I'm showing no further questions at this time and would now like to turn it back to Dan Fachner for closing remarks. Go ahead.

Operator: Thank you, operator. In closing, we remain extremely confident in our path forward and in our ability to continue to perform at a high level. We are building a culture that emphasizes improving every aspect of our business in order to leverage the opportunities in front of us, as well as to create some new opportunities of our own. We look forward to updating you on our progress later this fall. 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.

Dan Fachner: Thank you, operator.

Dan Fachner: In closing, we remain extremely confident in our path forward and in our ability to continue to execute at a high level.

Dan Fachner: We are building a culture that emphasizes improving every aspect of our business in order to leverage the opportunities in front of us, as well as to create some new opportunities of our own.

Dan Fachner: We look forward to updating you on our progress later this fall. 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 and have a great morning.

Operator: Thank you, and have a great morning! Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Welcome to the J & J Snack Foods third quarter 2024 conference call. At this time, all participants are in a listen-only mode.

Speaker Change: Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

Operator: After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. You'll then hear an automated message advising that your hand is raised.

Speaker Change: Good day and thank you for standing by. Welcome to the J & J Snack Foods third quarter 2024 conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session.

Speaker Change: I would now like to hand the conference over to your first speaker today, Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja: Thank you, operator, and good morning, everyone. Thank you for joining the J & J Snack Foods Fiscal 2024.

Norberto Aja: This call contains forward-looking statements within the meaning of the Private Security Litigations Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, expectations, and objectives, and their anticipated financial performance. These statements are neither promises or guarantees and involve known and unknown risks, uncertainties, and other important factors that may cause results.

Speaker Change: third quarter conference call. Before getting started, let me take a minute to read the Safe Harbor language.

Speaker Change: This call contains forward-looking statements within the meaning of the Private Security Litigations Reform Act of 1995.

Norberto Aja: performance or achievements expressed or implied by the forward-looking statement. Risk factors and other items discussed in our annual report on Form 10-K for the year ended September 30, 2023, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the four forward-looking statements made today. Any such forward-looking statements represent management's estimates as of the date of this call, Tuesday, August 6, 2024.

Speaker Change: 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, expectations, and objectives, and or anticipated financial performance.

Speaker Change: These statements are neither promises or guarantees, and involve known and unknown risks, uncertainties, and other important factors that may cause results.

Speaker Change: performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward looking statements.

Speaker Change: Risk factors and other items discussed in our annual report on Form 10-K for the year ended September 30, 2023, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made today.

Speaker Change: Any such forward-looking statements represent management's estimates as to the date of this call, Tuesday, August 6, 2024.

Norberto Aja: While we may elect to update for looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cause expectations to change. In addition, we may also reference certain non-GAAP measures on the call. Including Adjusted EBITDA, Adjusted Operating Income, or Adjusted Earnings Per Share, all of which are reconciled to the nearest gap measure in the company's earnings press release, which you can find in our investor relations section of the website.

Speaker Change: While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even subsequent events cause expectations to change.

Speaker Change: In addition, we may also reference certain non-GAAP measures on the call today, including Adjusted EBITDA, Adjusted Operating Income, or Adjusted Earnings Per Share, all of which are reconciled to the nearest GAAP measure in the company's earnings press release, which you can find in our Investor Relations section of the website.

Speaker Change: Joining me on the call today is Dan Fachner, our Chief Executive Officer, along with Ken Plunk, our Chief Financial Officer.

Speaker Change: Following management's prepared remarks, we will open the call for a question and answer session.

Speaker Change: With that, I would now like to turn the call over to Mr. Dan Fachner. Please go ahead, Dan.

Dan Fachner: Thank you, Norberto. Good morning, everyone, and thank you for joining us today.

Dan Fachner: These results continue to validate that the investments we have made, and the strategies that we have implemented, are having a positive impact on the sales and earnings power of our business.

Dan Fachner: And it's positioning J & J to win in what remains a dynamic consumer and operating environment. To further illustrate our success, I will share a few highlights from the quarter, followed by a review of our sales performance and operations. A record third-quarter net sales of $440 million marked the second highest quarterly net sales performance in our company's 53-year history.

Dan Fachner: And it's positioning J & J to win in what remains a dynamic consumer and operating environment.

Dan Fachner: To further illustrate our success, I will share a few highlights from the quarter, followed by a review of our sales performance and operations.

Dan Fachner: Our record third quarter net sales of $440 million marked the second highest quarterly net sales performance in our company's 53-year history.

Dan Fachner: This impressive result was led by strong sales in our food service and retail segment, offset by temporary challenges in frozen beverages, which were impacted by softer sales in the theater channel. Our ability to grow the top line 3.3% while maintaining a healthy 33.6% gross margin underscores the strength of our strategy, led by improved operating efficiencies and a balanced and diverse portfolio of products, brands, and customer channels. We continued our trends of growing profits faster than sales, with a third quarter operating income and net earnings growth of 3.8%. This resulted in a record-high quarterly earnings per diluted share for the quarter.

Dan Fachner: Our ability to grow the top line, 3.3%.

Dan Fachner: While maintaining a healthy 33.6% gross margin underscores the strength of our strategy led by improved operating efficiencies and a balanced and diverse portfolio of products, brands, and customer channels.

Dan Fachner: We continued our trends of growing profits faster than sales, with a third quarter operating income and net earnings growth of 3.8%.

Dan Fachner: This resulted in a record high quarterly earnings per diluted share in the quarter. Ken will provide more insights into our financial performance in just a few minutes.

Ken Plunk: Our strategies to leverage innovation and cross-selling opportunities to expand placements of our core products and brands continue to deliver positive results.

Ken Plunk: taking a closer look at our sales performance.

Ken Plunk: Third quarter net sales growth was driven by higher volumes across most of our core products and brands.

Ken Plunk: as well as strong business performance in our food service and retail segments.

Speaker Change: The theater industry reported declines in attendance during the quarter of approximately 30%, which impacted fiscal third-quarter sales of frozen beverages,

Speaker Change: soft pretzels, and churros, we estimate that these temporary challenges impacted sales by approximately 7 million compared to the same period last year.

Speaker Change: While the sales theater channel declined in the third quarter, I do want to highlight the impact of great movie releases in the market and why we remain so confident in growing sales in this channel.

Dan Fachner: The opening of Inside Out 2 in mid-June created momentum as we closed the quarter, resulting in a record month of frozen beverage sales with gallons up 4%, an overall sales increase of 6% compared to last year. Inside Out 2 was the first of several strong releases planned for Q4 and the remainder of the year. This momentum should also benefit our Dippin' Dots business as they complete the rollout to AMC, Cinemark, and Marcus Theatres over the next few months.

Speaker Change: The opening of Inside Out 2 in mid-June created momentum as we closed the quarter, resulting in a record month of frozen beverage sales with gallons up 4%, an overall sales increase of 6% compared to last year.

Speaker Change: Inside Out 2 was the first of several strong releases planned for Q4 and the remainder of the year.

Speaker Change: This momentum should also benefit our Dippin' Dots business as they complete the rollout to AMC, Cinemark, and Marcus Theatres over the next few months.

Dan Fachner: Looking ahead, our movie theater customers, as well as industry observers, expect box office and attendance trends to begin to recover in the second half of calendar 2024. These positive trends are expected to continue into calendar 2025 with a greater number of titles, including a diverse offering of proven franchise films and highly anticipated new titles.

Speaker Change: Looking ahead, our movie theater customers as well as industry observers expect box office and attendance trends to begin to recover in the second half of calendar 2024.

Speaker Change: These positive trends are expected to continue into calendar 2025 with a greater number of titles, including a diverse offering of proven franchise films and highly anticipated new titles.

Dan Fachner: As a result, we expect sales of our products and brands to significantly improve in this channel as attendance trends recover. Moving on to our segments, in food service, frozen novelty sales increased 9.1%, led by the continued growth of Dippin' Dots, which increased 5.3%. Bakery sales increased 6.8 percent, driven by unit volume growth in cookies, new products, encouraging Finster results, and expanded customer placement.

Speaker Change: As a result, we expect sales of our products and brands to significantly improve in this channel as attendance trends recover.

Speaker Change: Moving on to our segments. In food service, frozen novelty sales increased 9.1%, led by the continued growth of Dippin' Dots, which increased 5.3%.

Speaker Change: Bakery sales increased 6.8% driven by unit volume growth in cookies, new products, encouraging Finster results, and expanded customer placements.

Dan Fachner: In addition, we saw a meaningful improvement in handheld sales, up 25.3%. Overall, food service segment sales grew 3.7%, with the increase in these product categories partially offset by weakness in soft pretzels and churros due to the previously mentioned challenges in the theater. We continue to see strong growth in TROs with the third largest QSR and remain confident in this opportunity going forward. Moving to retail, we experienced broad-based growth across nearly all of our product categories, resulting in a 12.4% increase in sales for the quarter.

Speaker Change: In addition, we saw a meaningful improvement in the handheld sales, up 25.3%.

Speaker Change: We continue to see strong growth in TROs with the third largest QSR and remain confident in this opportunity going forward.

Speaker Change: Moving to retail, we experienced broad base growth across nearly all of our product categories, resulting in a 12.4% increase in sales for the quarter.

Dan Fachner: Handhelds grew approximately 70%, driven by expanded placements with a major mass merchant. Frozen novelty sales increased 11%, led by growth for Louises, Icy Tubes, and Dogsters, which was driven by unit volume growth and incremental placements in the Club Channel. Soft pretzel sales increased 8.2%, led by our continued expansion of Super Pretzel products, largely reflecting strong demand for Super Pretzel Bavarian sticks. Biscuit sales were down slightly in the quarter. The frozen beverage segment declined 2.6% for the quarter, driven by the previously discussed softness in the theater channel. Frozen beverages decreased 1.1% due to a 6% drop in gallons. However, gallons increased 3% in Q3, excluding the impact of theaters. Let me just say that one more time.

Speaker Change: Handhelds grew approximately 70% driven by expanded placements with a major mass merchant.

Speaker Change: Frozen novelty sales increased 11%, led by growth of Louises, Icy Tubes, and Dogsters, which was driven by unit volume growth and incremental placements in the club channel.

Speaker Change: Soft pretzel sales increased 8.2% led by our continued expansion of super pretzel products, largely reflecting strong demand for super pretzel Bavarian sticks.

Speaker Change: Biscuit sales were down slightly in the quarter.

Speaker Change: The frozen beverage segment declined 2.6% for the quarter, driven by the previously discussed softness in the theater channel.

Speaker Change: Frozen beverages decreased 1.1% due to a 6% drop in gallons.

Dan Fachner: Gallons increased 3% in Q3, excluding the impact of theaters, driven by strong performance in mass merchandisers, amusement, and QSR. We continue to diversify our customer portfolio, finding growth opportunities in channels like QSR. In fact, we are very encouraged by the current test at KFC that was recently highlighted on Good Afternoon Kentucky as they market this new program and new flavors like Sweet Lightning and Blackberry Lemonade in the local Lexington market. However, repair and maintenance revenues decreased 1.6%, reflecting lower preventative maintenance call volume.

Speaker Change: However, gallons increased 3% in Q3, excluding the impact of theaters. Let me just say that one more time.

Speaker Change: Gallons increased 3% in Q3, excluding the impact of theaters, driven by strong performance in mass merchandisers, amusement, and QSR.

Speaker Change: We continue to diversify our customer portfolio, finding growth opportunities in channels like QSR.

Speaker Change: In fact, we are very encouraged with the current test at KFC that was recently highlighted on Good Afternoon Kentucky as they market this new program and new flavors like Sweet Lightning and Blackberry Lemonade in the local Lexington market.

Speaker Change: Repair and maintenance revenues decreased 1.6 percent, reflecting lower preventative maintenance call volumes.

Dan Fachner: Machine sales, while exceeding our internal budget for the quarter, were down 15.4% as we lapped a large QSR rollout from last year. Let me quickly highlight a couple of other important focus areas as we continue to cross-sell our brands and products across the channel, starting with super pretzels. This iconic brand is outperforming the snack category and continues to provide opportunities for growth, new product extensions, or new points of sale. We are expanding across retail, led by the launch of Bavarian Sticks, which remains the number two seller in the Super Pretzel portfolio, reaching an ACV now of 28% and growing.

Speaker Change: Machine sales, while exceeding our internal budget for the quarter, were down 15.4% as we lapped a large QSR rollout from last year.

Speaker Change #100: Let me quickly highlight a couple of other important focus areas as we continue to cross-sell our brands and products across channels.

Speaker Change #100: Starting with Super Pretzel.

Speaker Change #100: This iconic brand is outperforming the snack category and continues to provide opportunities for growth, new product extensions, or new points of sale.

Speaker Change #100: I'm so pleased with the incremental distribution we are achieving with leading retailers. In late fiscal Q4, we expect to double our store count with a major grocery retailer under the Super Pretzel and Annie Anne's brand.

Dan Fachner: Summer promotions are underway with Regal and Chuck E. Cheese, resulting in higher volumes and increased brand awareness. We also continue to roll out Dippin' Dots at AMC, Cinemark, and Marcus Theatres with expectations to be in approximately 930 locations by the end of the calendar year. Currently, we have installed Dippin' Dots at 176 AMC locations, 134 Cinemark locations, and 51 Marcus locations.

Speaker Change #101: Let's talk about Dippin' Dots.

Speaker Change #101: Summer promotions are underway with Regal and Chuck E. Cheese resulting in higher volumes and increased brand awareness.

Speaker Change #101: We also continue to roll out Dippin' Dots at AMC, Cinemark, and Marcus Theatres with expectations to be in approximately 930 locations by the end of the calendar year.

Speaker Change #101: Currently we have installed Dippin' Dots at 176 AMC locations, 134 CentiMark locations, and 51 Marcus locations.

Speaker Change #101: Also, we are actively testing new opportunities with convenience store customers and will be installing freezers in approximately 230 locations with a major food service customer.

Speaker Change #101: We remain confident in our plans to expand Dippin' Dots across customers and channels.

Speaker Change #101: I'd like to spend some time highlighting the significant impact of our operational investments over the last couple of years.

Speaker Change #101: The investments we have made in manufacturing and distribution capabilities are resulting in improvements across key efficiency metrics.

Speaker Change #101: starting with our supply chain strategy.

Speaker Change #101: All three RDCs are exceeding expectations and will enable us to continue driving productivity improvement.

Speaker Change #101: At this time, 85% of our sales orders are shipped from the new distribution network versus only 26% a year ago.

Speaker Change #101: with the average length of haul decreasing by 38 percent.

Speaker Change #101: in on-time performance, improving to over 82% versus 73% a year ago.

Speaker Change #101: Line haul cost per pound decreased 17% compared to the same quarter last year in our snack food business.

Dan Fachner: We have reached We have reduced the number of cold storage locations to 10, driving efficiencies in how we ship products and reducing transfer costs for transfers across our network by 9%. Shifting to operations. The addition of six new production lines has significantly expanded our capacity. This has enabled added efficiency and given us the ability to meet growth opportunities across our core products, such as pretzels, churros, and frozen novelties. The expanded capacity has created production efficiencies and higher output metrics through better automation, which improves product margins, decreases overtime, and provides the flexibility to respond to new sales opportunities.

Speaker Change #101: We have reduced the number of cold storage locations to 10, driving efficiencies in how we ship products and reducing transfers across our network by 9%.

Speaker Change #101: Shifting to operations.

Speaker Change #101: The addition of six new production lines has significantly expanded our capacity.

Speaker Change #101: This has enabled added efficiency and given us the ability to meet growth opportunities across our core products, such as pretzels, churros, and frozen novelties.

Speaker Change #101: The expanded capacity has created production efficiencies and higher output metrics through better automation, which improves product margins, decreases overtime, and provides the flexibility to respond to new sales opportunities.

Dan Fachner: Fill rates have reached 98.5%, a high point for J & J's business and high relative to the overall industry trend. Finally, as many of you likely saw in our 8K filing, our CFO, Ken Plunk, will be retiring at the end of this calendar year.

Speaker Change #101: Fill rates have reached 98.5%, a high point for J & J's business, and high relative to the overall industry trends.

Speaker Change #102: Finally, as many of you likely saw in our 8K filing, our CFO , Ken Plunk, will be retiring at the end of this calendar year.

Speaker Change #102: The company will be conducting a thorough search process to identify a successor and to ensure a smooth transition.

Speaker Change #103: Ken's been a great partner and leader to both me and the organization.

Speaker Change #104: I want to thank Ken for his help and support as we transformed the business over these past four years. The entire J & J team, the board of directors, and I wish him and his family the very best in his new chapter of his life. Thank you, Ken.

Speaker Change #105: In summary, I am pleased with our ability to post record third quarter sales and profits while managing through continued challenges in the consumer environment.

Speaker Change #105: I'm so proud of how the J & J team continues to execute on our growth agenda.

Speaker Change #106: Well, we expect our 2024 fiscal fourth quarter results to be impacted by one less sales week versus the comparable prior year period.

Speaker Change #106: It is clear that our strategies to maximize sales across our customer channels and improve operating efficiencies are working.

Speaker Change #106: We have a strong portfolio of beloved products and brands, with tremendous growth opportunities ahead of us, and we remain confident in our ability to deliver long-term value to our employees, our partners, and our customers.

Speaker Change #106: and our shareholders.

Speaker Change #106: With that, I would now like to pass the call over to Ken to review our financial performance in more detail. Ken?

Ken Plunk: Thank you Dan and good morning everyone. I will start by saying that it has been a tremendous honor to serve as CFO for J & J Snack Foods and I am truly blessed.

Speaker Change #107: You have worked alongside Dan and his amazing team to improve and grow this business. I'm proud

Ken Plunk: Turning to our results, I am pleased with our ability to deliver strong performance for the quarter, including record fiscal third quarter net sales. This, combined with gross margins of 33.6%, contributed to significant profit growth and profits growing faster than sales, meaning sales for the quarter totaled $440 million, an increase of 3.3% versus the prior year. As Dan mentioned, top line performance was led by higher volumes and new business performance in our food service and retail segments, more than offsetting softer sales in our frozen beverages segment. Through service, our largest segment saw sales increase 3.7% to $264 million; handheld sales increased 25.3% to over $21 billion. Bakery and frozen novelties increased 6.8% and 9.1%, respectively, driven by unit volume growth in cookies and a 5.3% increase in dip and dot sales.

Speaker Change #108: Turning to our results, I am pleased with our ability to deliver strong performance for the quarter, including record fiscal third quarter net sales.

Speaker Change #108: This combined with gross margins of 33.6% contributed to significant profit growth and profits growing faster than sales.

Speaker Change #108: that sells for the quarter, a total of $440 million, an increase of 3.3% versus the prior year. As Dan mentioned, top-line performance was led by higher volumes.

Speaker Change #109: and new business performance in our food service and retail segments, more than offsetting softer sales in our frozen beverages segment.

Dan Fachner: Food Service, our largest segment, saw sales increase 3.7% to $264 million.

Speaker Change #110: Handheld sales increased 25.3% to over $21 billion. Bakery and frozen novelties increased 6.8% and 9.1% respectively, driven by unit volume growth in cookies and a 5.3% increase in dip and dot sales.

Ken Plunk: Growth across the segment was offset by a decrease in salt pretzels and churro sales of 6.3% and 0.7%, respectively, driven primarily by the challenges in our theater channel that Dan referenced earlier. In addition, he sold up new products and added placement with new customers, totaling approximately $6.4 million, driven primarily by the addition of churros to the menu of a major QSR customer. This led to third quarter operating income of $20.2 million, a decrease of 2.6% versus the prior year period, reflecting a less favorable sales net income.

Speaker Change #110: Growth across the segment was offset by a decrease in soft pretzels and churro sales of 6.3% and 0.7% respectively, driven primarily by the challenges in our theater channel that Dan referenced earlier.

Dan Fachner: In addition, sales of new products and added placement with new customers totaled approximately $6.4 million, driven primarily by the addition of churros to the menu of a major QSR customer.

Dan Fachner: This led to third quarter operating income of $20.2 million, a decrease of 2.6%, versus the prior year period reflecting a less favorable sales mix.

Ken Plunk: Moving to our retail segment, Q3-24 retail sales totaled $68.7 million, for an increase of 12.4%, driven by handheld sales growth of 69.9%, as we expanded product placement with a major mass merchant. In addition, frozen novelty sales increased 10.9%, led by the growth of Luigi's Icy Novelties, Dogsters, and an overall higher shipment as customers added inventory for the peak spring and summer season. Pretzel sales increased 8.2%, led by a continued expansion of super pretzel products in retail, while biscuit sales decreased 5.8% in the quarter.

Dan Fachner: Moving to our retail segment, Q3-24 retail sales total $68.7 million, or an increase of 12.4%, driven by handheld sales growth of 69.9%.

Dan Fachner: as we expanded product placement with a major mass merchant.

Dan Fachner: In addition, frozen novelty sales increased 10.9% led by the growth of Luigi's, Icy Novelties, Dogsters, and an overall higher shipment as customers added inventory for the peak spring and summer seasons.

Dan Fachner: Salt pretzel sales increased 8.2% led by a continued expansion of super pretzel products in retail, while biscuit sales decreased 5.8% in the quarter.

Dan Fachner: We also benefited from new product innovation and customer placement in this segment of approximately 3.1 million in the quarter. This was largely the result of the Super Precious Bavarian Steaks launch earlier in the year into the retail segment.

Ken Plunk: We expect continued growth of this product as a major retailer expands placement in the fourth quarter. This led to an operating income of $7.8 million, or an increase of $3.6 million, versus the prior year period, reflecting the improved sales, product mix, and higher gross margin. As it relates to our third segment, frozen beverages, sales were $106.8 million, a 2.6% decrease compared to a record Q3 2023. Beverage sales were down 1.1%, or approximately $800,000 below prior years, reflecting weakness in the theater customer channel.

Dan Fachner: We expect continued growth of this product as a major retailer expands placement in the fourth quarter.

Dan Fachner: beverage sales were down 1.1% or approximately $800,000 below prior years reflecting weakness in the theater customer channel.

Ken Plunk: Overall, gallons sold declined 6% in the quarter, but they did increase 3%, excluding the impact of the theater channel. This was led by Grove in Amusement, Convenience, and Mass Merchandise. As Dan mentioned, we expect volumes to experience a significant improvement in the back half of the calendar year, given the stronger schedule of stem release. Parent maintenance revenues also decreased by 1.6% as we saw lower preventive maintenance call volumes.

Dan Fachner: Machine sales were down 15.4% as we left a significant customer rollout from last year.

Ken Plunk: Pricing adjustments and contractual cost true-ups helped minimize the majority of the impact on our gross margins in the quarter. Our procurement team continues to effectively manage flying costs. We are well positioned to respond to any impact. Looking at expenses, total operating expenses increased $3.1 million, or 3.2%, representing 22.2% of sales for the quarter, flat with the prior year.

Dan Fachner: pricing adjustments and contractual cost true-ups, but minimize the majority of the impact on our gross margins in the quarter.

Dan Fachner: Looking at expenses, total operating expenses increased 3.1 million, or 3.2 percent, representing 22.2 percent of sales for the quarter, flat with the prior year.

Ken Plunk: Distribution costs were 10.2% of sales in the quarter compared to 10.4% in the prior year period as the investments we have made to increase efficiency across our distribution network and supply chain continue to drive expense savings. Marketing and selling expenses were 70.4% of sales, flat versus the prior period, as we continue to invest in our product innovation, brand promotions, and new selling opportunities. Administrative expenses were 4.5% of sales in Q3-24, compared to 4.4% in Q3 of 23.

Dan Fachner: Marketing and selling expenses are 7.4% of sales flat versus the prior period as we continue to invest in our product innovation, brand promotions, and new selling opportunities.

Dan Fachner: Administrative expenses were 4.5% of sales in Q3 of 24 compared to 4.4% in Q3 of 23.

Dan Fachner: This led to operating income of $50.1 million or a 3.8% increase compared to $48.3 million in Q3-23.

Dan Fachner: Adjusted operating income of $53.1 million or a 3.9% increase compared to Q3'23.

Dan Fachner: After the impact of income taxes of $14.1 million compared to $12.6 million in the comparable prior year,

Dan Fachner: Net earnings increased 3.8% to $36.3 million, resulting in record quarterly earnings per diluted share of $1.87 compared to $1.81 in the prior year period.

Ken Plunk: Adjusted earnings per diluted share were $1.98 per quarter compared to $1.92 in the prior year period, adjusted EBITDA increased 6.3% to $70.9 million from $66.6 million in the prior year period, and our effective tax rate was 27.9% in the third quarter.

Speaker Change #111: Adjusted earnings for diluted share were $1.98 to the quarter compared to $1.92 in a prior year period.

Speaker Change #111: Adjusted EBITDA increased 6.3% to $70.9 million from $66.6 million in the prior year period and our effective tax rate was 27.9% in the third quarter.

Ken Plunk: Looking at our liquidity position, we continue to have a healthy balance sheet and overall strong liquidity with $64 million in cash and approximately $12 million in debt. Our ability to improve cash flow through working capital initiatives and stronger profitability is generating more cash to pay down debt, pay dividends, and continue investing in our business. Our focus will continue to be on maintaining a healthy balance sheet and a prudent, leveraged position which enables us to continue investing in the growth of our business and returning value to our shareholders. In addition, we have ample availability under our revolver of approximately $203 million in additional borrowing capacity.

Speaker Change #111: Looking at our liquidity position, we continue to have a healthy balance sheet and overall strong liquidity with $64 million in cash and approximately $12 million in debt.

Speaker Change #111: Our ability to improve cash flow through working capital initiatives and stronger profitability is to generate more cash to pay down debt, pay dividends, and continue investing in our business.

Speaker Change #111: Our focus will continue to be on maintaining a healthy balance sheet and a prudent, leveraged position, which enables us to continue investing in the growth of our business and returning value to our shareholders.

Speaker Change #111: In addition, we have ample availability under a revolver of approximately $203 million in additional borrowing capacity.

Speaker Change #111: To sum it all up, while we recognize there's still much work to be done to capture the vast opportunities in front of us, we are encouraged by our results to improve every aspect of how we do business.

Speaker Change #111: We are confident that the power of our brand portfolio and the unwavering dedication of our employees will continue to deliver strong results and added value for our shareholders.

Speaker Change #112: I would now like to turn the call over to the operator for Q&A. Operator?

Speaker Change #113: Thank you. At this time, as mentioned, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Operator: Please stand by while we compile our Q&A roster. Our first question comes from the line of Todd Brooks with The Benchmark Company. Your line is now open.

Speaker Change #114: Please stand by while we compile our Q&A roster.

Speaker Change #115: Our first question comes from the line of Todd Brooks with the Benchmark Company. Your line is now open.

Todd Brooks: Hey, thanks for taking my question and for the nice results in the quarter here, kind of absorbing some of that pressure on the theater channel. Thank you, Todd. Yes, thanks, Todd. Uh, the first question is on that theater channel, and I think this might be helpful for all of us. Can you size, if you think about food service and frozen beverages, what percentage of each of those segments is made up by the theater channel?

Todd Brooks: Hey, thanks for taking my question and nice results in the quarter here, kind of absorbing some of that pressure in the theater channel.

Speaker Change #116: Thank you, Todd. Yes, thanks, Todd.

Speaker Change #117: First question is on that theater channel, and I think this might be helpful for all of us. Can you size, if you think about food service and frozen beverage, what percentage of each of those segments is made up by the theater channel?

Todd Brooks: We don't have that exact number on the food service side, but we know on the beverage side, it's about 25% of IC beverage sales. The food service side is much less than that, but it's a nice piece of business for us that continues to grow, and we've even added some people from a company standpoint into that group to try to energize it. Okay, great. Thanks, Dan. Secondly, the true success with Subway has obviously been a great story. I look at that side kick line, and I see three products that J & J would be well suited to make, not just the churro.

Speaker Change #118: We don't have that exact number on the food service side. We know on the beverage side it's about 25% of the IC beverage sales.

Speaker Change #118: The food service side is much less than that, but growing. It's a nice piece of business for us that continues to grow. And we've even added some people from a company standpoint into that group to try to energize it.

Speaker Change #118: Okay, great. Thanks, Dan. Secondly,

Speaker Change #119: The Churro success with Subway has obviously been a great story. I look at that side kick line and I see three products that

Speaker Change #120: J & J would be well suited to make not just the churro. Have you had any luck making inroads with either the cookie offering there or the soft pretzel offering?

Speaker Change #121: We've built a really nice relationship with that company through this program that they have.

Speaker Change #122: Both that and their buying arm, we've built a great relationship. We're continuing to have conversations and absolutely believe that in the future, we'll have the opportunity to be making some of those products or some others. There's some nice opportunities for us coming.

Speaker Change #123: Okay, great. And then a final one.

Dan Fachner: I was just wondering, if you look forward a couple of calendar quarters here, what we're seeing either on the new product launch side, the distribution side, or maybe some tests that are out there that can help you continue. You drove, I think, almost a little over $9 million in revenues from new placements and new products. It was great to see.

Speaker Change #124: He touched on the KFC test a little bit, Dan, but I was just wondering if you look forward a couple of calendar quarters here, what we're seeing either on the new product launch side, the distribution side, or maybe some tests that are out there that can help you continue. You drove, I think, almost.

Speaker Change #124: a little over $9 million in revenues from new placements and new products, which

Speaker Change #125: It's great to see. I'm just wondering what you can share with us in the go-forward look for what may continue to drive...

Speaker Change #126: I'm not sure I can share some names, but I will tell you we have a tremendous pipeline in retail. We've got a couple things that are really strong for us and a lot of new, a lot of customers expanding the distribution.

Speaker Change #127: On the food service side, you know we've talked about this in the past, you know whenever a particular customer like Subway comes out with a churro product there's lots of others who are watching that and so we have some tests in play that some will even kick in before the year's in.

Speaker Change #127: with some other large organizations out there that we'll see continue to grow. And so, really happy there. The bakery side, as you watch those numbers, we've got some good things in some private label areas that we're continuing to grow that we're happy about. And then, you know, just the IC with the KFC, as you mentioned.

Speaker Change #127: That's a really big opportunity for us, and so far that test has gone extremely well with a lot of press around it, a lot of people, a lot of attention to it, so I love our pipeline right now. I think we've got a really good chance of having a really strong 2025.

Operator: I think we've got a really good chance of having a really strong 2025. Okay, great. Thanks. Thank you. Our next question comes from the line of Connor Rattigan with Consumer Edge. Your line is now open.

Speaker Change #128: Okay, great. Thanks.

Speaker Change #129: Thank you.

Speaker Change #130: Our next question comes to the line of Connor Rattigan with Consumer Edge. Your line is now open.

Connor Rattigan: Hey guys, good morning. Congratulations on a great quarter. Thank you, Connor. Good morning to you as well.

Operator: Great, great. Yeah, you guys called out the weakness in frozen beverages driven by the theater channel. So, um, I'm curious, could you guys maybe share how trends looked across the other channels to get to maybe give us a better sense of relative performance across those channels? Like, for example, was performance relatively even outside the theater, or was there maybe quite a bit of volatility?

Speaker Change #131: Hey guys, good morning. Congrats on a great quarter. Thank you, Connor. Good morning to you as well.

Connor Rattigan: Great, great. Yeah, so you guys called out the weakness in frozen beverages driven by the theater channel, so

Connor Rattigan: I'm curious, could you guys maybe share how trends looked across the other channels to maybe give us a better sense of relative performance across those channels, like, was performance relatively even outside the theater, or was there maybe quite a bit of volatility by channel?

Speaker Change #133: Well, you know, we were up in volume in most of all of our big brands and products. It was a pretty good quarter overall for us, and I mentioned this in my opening.

Speaker Change #133: Even inside the beverage side of our business, inside Icy, if you took the theater channel out, we would have been up by 3%. And so, overall, a pretty good quarter with all of our products, and we're seeing some nice growth.

Dan Fachner: Yeah, Connor, I mean, we were crucial in making that comment about what the gallon increase was without theaters. So that tells you amusement was up, QSR was up, mass merchandise was up as it relates to frozen beverages. Again, this was really a tell of, you know, particularly in April and May, where the theater industry was as related to releases, and you can read pretty much any publication from any of the theater companies.

Speaker Change #133: Yeah, Connor, I mean, we were purposeful in making that comment about what the gallon increase was without T-8ers.

Connor: So that tells you amusement was up, QSR was up, mass merchandise was up as it relates to frozen beverages.

Speaker Change #135: Again, this was really a tell of, you know, particularly in April and May, where the theater industry was as related to the leases and you can read pretty much any publication from any of the...

Speaker Change #135: theater companies. And you'll see that outside of that, really, really good quarter force on that side of the business.

Dan Fachner: And you'll see that outside of that, really, really good quarter force on that side of the business. Awesome. So also, in the press release, you guys noticed some strength in amusement parks, specifically with Dippin' Dots. So I'm curious, what did you guys really see as the driver there?

Speaker Change #136: Awesome. So also in the press release, you guys noted some strength in amusement parks, specifically with Dippin' Dots. So I'm curious, what did you guys really see as the driver there? Was it just, you know, strong summer seasonal traffic? Maybe was there some pricing, distribution gains? Any color on that would be great.

Dan Fachner: Was it just, you know, strong summer seasonal traffic? Maybe there were some pricing, or distribution gains? Any color on that would be great.

Speaker Change #137: Our teams do a great job, Connor, getting into the amusement park industry and making sure we're well positioned when the season comes. And the Dippin' Dots team really excels in that area. In fact, I toured one of our amusement parks last week with a group of leaders.

Speaker Change #137: And the Dippin' Dots presentation across that Six Flags Park was tremendous. They just do a really good job making sure we're positioned right, making sure that it's marketed appropriately.

Dan Fachner: It certainly helps when you have a nice warm summer, and we're having that, but that industry seems to be doing really well in all facets of our business. Awesome, and then just one last quick follow-up. So you guys have previously mentioned that about 80% of your product was throwing the slogan through the new RDP system. I'm not sure if I missed it, but did that pick up a little bit during the quarter?

Speaker Change #138: It certainly helps when you have a nice warm summer, and we're having that. But that industry seems to be doing really well in all facets of our business right now.

Speaker Change #139: Awesome. And then just one last quick follow-up. So you guys have previously mentioned that about 80% of your product was flowing through the new RDC system. I'm not sure if I missed it, but did that pick up a little bit during the quarter?

Dan Fachner: I think it picked up, I want to say, Connor, maybe a couple hundred basis points. Uh, I think... Again, doing this by memory, I want to think Q2 was around 78%, so yeah, it ticked up somewhat from Q2.

Speaker Change #139: I think it picked up, I want to say Connor, maybe a couple hundred basis points. I think.

Connor: Again, doing this by memory, I want to think Q2 was around 78%. So yeah, it picked up somewhat from Q2.

Operator: Okay, great. Thanks, guys. I'll pass it on.

Operator: Thank you, Connor. Thank you. Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.

Speaker Change #140: Okay, great. Thanks, guys. I'll pass it on. Thank you, Connor.

Jon Andersen: Hi, thanks. Thanks for the questions. And Ken, thanks for your help the past few years and best to you in your retirement down the road. Yeah, you bet. I guess I wanted to first ask just a big picture question around the consumer and what you're seeing. In terms of any macro impacts on your business relative to the consumer, are there any? Are they exhibit more value-seeking behavior or any kind of channel shift you're seeing across the various channels that you serve that suggests either, you know, the consumer remains healthy, or you're seeing some pockets of weakness. Jon, we talked a lot about this.

Connor: Thank you.

Speaker Change #141: Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.

Speaker Change #142: Hi, thanks for the questions, and Ken, thanks for your help the past few years, and best to you in your...

Speaker Change #142: retirement down the road. Thank you, Jon.

Ken Plunk: Yeah, you bet.

John Anderson: I guess I wanted to first ask just a big-picture question around the consumer, what you're seeing in terms of any macro impacts on your business relative to the consumer, are they...

Speaker Change #143: exhibiting more value-seeking behavior or any kind of channel shift you're seeing across the various channels that you serve that suggest either, you know, consumer remains healthy or you're seeing some pockets of weakness. Thanks.

Dan Fachner: And I used this term last quarter, and I probably will use it the same again today. I just still think consumers are a little fickle. I think, you know, they react to what has been said in the media.

Speaker Change #143: You know, Jon, we talked a lot about this, and I used this term last quarter, and I'd probably use it the same again today.

Speaker Change #144: I just still think that consumers are a little fickle. I think, you know, they react to what has been said in the media. I think even over the last 24 hours, we saw, you know, stocks plummet and then come back up. And, you know, I think when you don't...

Dan Fachner: I think even over the last 24 hours, we saw stocks plummet and then come back up. And, you know, I think when you don't, We expected some interest rate drop last week, and that didn't happen. The consumer, you know, reacts to that. I think, you know, what we see is still somewhat of a tale of two cities, right? I think the low-end consumer is still under pressure in a lot of ways, and they're cautious.

Speaker Change #144: We expected some interest rate drop last week and that didn't happen. The consumer, you know, reacts to that. I think, you know, what we see kind of still is somewhat of a tale of two cities, right? I think the low-end consumer still is under pressure in a lot of ways and they're cautious and

Dan Fachner: And they're careful about how they spend. And then I think we see the opposite end of that spectrum, where they're looking for a premium or expensive rental kind of environment to be able to spend on things. And, you know, I think it's still a typical customer, and I think it probably will remain that way, at least during this period of time as we go through an election. So we're gonna have to watch that really closely, right?

Speaker Change #144: And they're careful about how they spend. And then I think we see the opposite end of that spectrum, where they're looking for premium or air-expensarial kind of environment to be able to spend on things.

Speaker Change #144: I think it's still a fickle customer, and I think it probably will remain that at least during this period of time as we're going through an election, so we're going to have to watch that really close. I think they're just sorting on where they spend their money.

Dan Fachner: I think they're discerning about where they spend their money. Makes sense. So if you kind of stripped out the theater channel this quarter, it looks like your sales would have been up about 5%. I think historically, that has been kind of an area that... and do a top-line view here. Yeah, Jon, I think that's a really good way to look at it.

Speaker Change #145: Makes sense. So if you kind of stripped out the theater channel this quarter, it looks like your sales would have been up about 5%.

Speaker Change #145: I think historically that has been kind of an area that

Speaker Change #145: I think the company is kind of...

Speaker Change #146: Grown organically is that a reasonable kind of a mid single-digit organic growth rate expectation a reasonable way to think about the business as you look

Speaker Change #147: to not just the fourth.

Speaker Change #148: quarter, but you know fiscal 2025, like you've got a lot of great kind of tests in the works, you've got some good new products that are expanding distribution, just a lot of kind of cross selling stuff that's working, so we're trying to get a better sense for how that kind of all rolls up and do a top line view here.

Dan Fachner: You know, we are working really hard to be right about that mid single-digit growth year over year, and I think we're well positioned for that in the future. And you know, you mentioned the third theater, and I just want to kind of highlight the impact of what good movie releases can do for us. So the theater industry really struggled in April, struggled in May, and struggled most of June, but we get into the back half of June, and we get a couple of really good movie releases out there.

Speaker Change #148: Hey Jon, I think that's a really good way to look at it. You know, we are working really hard to be right in that mid-single-digit growth year-over-year.

John Anderson: And I think we're well positioned for that in the future. And you know, you mentioned the third theaters and I just want to kind of highlight kind of the impact of what good movie releases can do for us.

Speaker Change #149: So, theater industry really struggled in April , struggled in May, and struggled most of June . But we get into the back half of June , and we get a couple really good movie releases out there, and we just catapult our sales.

Dan Fachner: And we just catapulted our sales so much that IC ends up having a record month of June, right? And so what we're encouraged by is that we can continue what we've talked about with the new product releases and the new distribution and seeing growth in our core products. And then you get the theater business to come back, which all indications look like it will in the back half of 24. I think what I heard is, you know, they have 10 big movies, but only four of them have been released so far.

Speaker Change #149: So, so much.

Speaker Change #150: that I see ends up having a record month of June .

Speaker Change #150: Right, and so what we're encouraged by is that we can continue what we've talked about with the new product releases and the new distribution.

Speaker Change #150: and seeing the growth in our core products and then you get the theater business to come back which all indications look like it will.

Speaker Change #150: in back half of 24. I think what I heard is...

Dan Fachner: So we've got six of them in the back half of the year and then 2025, a great lineup. All of that combined, we feel pretty well positioned to be in that mid single-digit growth. That's helpful. And I guess following on that, is it fair to say that, because your products that you're selling in theaters are some of the core brands, that's a margin-accretive part of your business as well? Yeah, absolutely.

Speaker Change #151: You know, they have 10 big movies, only four of them have been released so far, so we got six of them in the back half of the year.

Speaker Change #151: and then 2025, a great lineup. All of that combined, we feel pretty well positioned to be in that mid-single-digit growth for the future.

Speaker Change #152: That's helpful. And I guess following on that, is it fair to say that

Speaker Change #153: because your your products that you're selling in theaters are some of the core core brands that it's that's a margin accretive part of your business as well?

Dan Fachner: And, you know, we're growing the Dippin' Dots side of that with AMC, Cinemark, and Marcus Theaters and a couple other regional chains and, as you know, the margins through Dippin' Dots are really helpful. Last one for me, sorry, go ahead. I was just going to add, and we stated this in Dan's script, but a really big deal, you know, when we add over 900 theaters between now and the end of the year for dips and dives, that's going to be a really nice business and then obviously be accretive to margins as we go into those winter months. So that's another reason we feel optimistic as we head into the end of the year and into This also ties into my last question.

Speaker Change #154: Yeah, absolutely. And, you know, we're growing with the Dippin' Dots side of that with AMC, Cinemark and Marcus Theaters and a couple other regional chains. And, and as you know, the margins through Dippin' Dots are really healthy.

Speaker Change #154: Last one for me. Go ahead.

Speaker Change #155: I was just going to add, and we stated this in Dan's script, but a really big deal, you know, when we add over 900 theaters between now and the end of the year for Dippin' Dots.

Speaker Change #156: That's going to be a really nice business, and then obviously be accretive to margins as we go into those winter months. So that's another reason we feel optimistic as we head into the end of the year and into next year.

Operator: You know, you kind of reaffirmed the, The outlook for gross margin this year to be, you know, above 30%, which I think was kind of an interim, target for you at one point, having kind of, You know, assuming you deliver on that this fiscal year and the work that you've done from an operational perspective, a productivity perspective, and again, centering your investments around some of the core higher margin parts of your business, have you given any thought to what, you know, gross margin might look like longer term? Yeah, I think Dan and I both talked last quarter, you know, we have a desire and this won't be next year may even be, you know, two, three years down the road, get us up close to that mid 30s range, but, As we focus on building plans where profits grow faster than sales, and obviously gross profit is going to play a big role in that, we expect to keep engine that number up and some of that will be based on focusing on really driving the core growth of those products that you mentioned earlier, and then improving the margins of our lower margin business, which we've really made nice progress in a couple of those areas this year. But that's kind of where we're headed.

Speaker Change #157: That's helpful. Also, ties into my last question.

Speaker Change #158: You know, you kind of reaffirmed the...

Speaker Change #159: The outlook for gross margin this year to be, you know, above 30%, which I think was kind of an interim

Speaker Change #160: target for you at one point, having kind of

Speaker Change #161: You know, assuming you deliver on that this fiscal year and

Speaker Change #162: the work that you've done from an operational perspective, a productivity perspective, and again, centering your investments around some of the core higher margin parts of your business. Have you given any thought to what, you know, gross margin might look like longer term?

Speaker Change #162: Yeah, I think Dan and I both talked last quarter, you know, we have a desire, and this won't be next year, it may even be, you know, two, three years down the road, to get us up close to that mid-30s range, but

Speaker Change #162: As we focus on building plans where profits grow faster themselves, and obviously gross profits are going to play a big role in that, we expect to keep engine that number up, and some of that will be based on

Speaker Change #162: focusing on really driving the core growth of those products that you mentioned earlier and then improving the margins of our lower margin business which we've really made nice progress.

Dan Fachner: I feel good about where we're going to land for this fiscal year, given the first three quarters, and I think that we'll build from there. Thanks so much, guys, for the help. Thank you, Jon. Thank you. Our next question comes from the line of Andrew Wolf with C.L. King. Your line is now open. Hi, good morning.

Speaker Change #162: And a couple of those areas this year, but that's kind of where we're headed. I feel good about where we're going to land for this fiscal year, given the first three quarters, and I think that will build from there.

Speaker Change #162: Great. Thanks so much, guys, for the help. Thank you, Jon.

I also wanted to ask about the gross margin, sort of back of the envelope. Movie Theater Business Head, COM. So the gross margin would have expanded by, I don't know, 10 to 20 basis points, something in that range. That's a good estimate, Andrew. Okay. The other thing I wanted to ask about gross margin was just pricing power, you know, some of the big retailers, their customers are hurting, at least a lot of them, and, you know, they're mass marketers. Have everybody.

John Anderson: Thank you.

Speaker Change #163: Our next question comes to the line of Andrew Wolf with C.L. King. Your line is now open.

Andrew Wolfe: Hi, good morning. I also wanted to ask

Speaker Change #164: Just sort of back of the envelope.

Speaker Change #165: It looks like if, you know, the 7 million of...

Speaker Change #166: movie theater business had come, you know, the gross margin would have expanded, I don't know, 10 to 20 basis points, something in that range. Is that?

Speaker Change #168: Yeah, that's a good estimate, Andrew. Yeah, outside the company. Okay, the other thing I wanted to ask about gross margin was just pricing power. You know, some of the big retailers have

Speaker Change #167: You know, their customers are hurting, at least a lot of them. And, you know, they're mass marketers, so they have everybody.

And, you know, inflation for you, I guess, is running, you said, low to mid-single digits on the ingredient side. Obviously, there's an offset with your productivity, and But, you know, what do you feel about pricing power out? There are contractual things, I think. Food Service, but maybe in retail and just sort of in general. The ability to pass through, not... Try to get margin out of price, but just kind of make yourself holes in the production. Well, I mean, it's a great question.

Speaker Change #169: and you know inflation for you I guess is running you said mid low to mid single digits on the ingredient side obviously there's an offset with your productivity improvements

Speaker Change #170: But you know, what do you feel about pricing power? Oh, you know, there's contractual things I think certainly a food service, but maybe in retail and just sort of in general Just the ability to pass through not to you know

I think you have to be really careful with pricing in this environment that we're in. As you talked about, we do have some contractual things that we're able to pass on, and we're able to do that with rice and cocoa or chocolate. And then you have to earn pricing outside of that, right? We have to be really careful about where we price and how we price and make sure that we have earned that price increase.

Speaker Change #170: Try to get margin out of price, but just to kind of make yourself holes on the production side.

Speaker Change #171: Well, I mean, it's a great question. I think you have to be really careful with pricing during this environment that we're in.

Speaker Change #171: As you talked about, we do have some contractual things that we're able to pass on, and we're able to do that with Rye's and Cocoa or chocolates.

Speaker Change #171: And then you have to earn pricing outside of that, right? We have to be really careful about where we price and how we price, and making sure that we have earned that price increase.

You know, our new three RBCs and the efficiencies that we're gaining there and the new capacity that we have and making sure that we're delivering to customers on time and efficiently allow us to be able to earn some of that. But we're going to have to be really careful how we price that. You know, like I said, we were able to do that with chocolates, and we'll watch any other of those key items in the future to make sure that we're being diligent and disciplined about how we do it in Q3.

Speaker Change #171: Our new three RBCs and the efficiencies that we're gaining there, and the new capacity that we have, and making sure that we're delivering to customers on time and efficiently, allow us to be able to earn some of that, but we're going to have to be really careful how we price that on.

Speaker Change #171: I think, like I said, we were able to do that with chocolates, and we'll watch any other of those key items in the future to make sure that we're being diligent and disciplined about how we do it.

Speaker Change #172: You know, is there an opportunity for a quite small brand like that to actually get some meaningful distribution?

Speaker Change #173: Given your relationships and

Speaker Change #174: We love the product. Yeah, we love the product.

Speaker Change #176: Or do you need bigger brands like a Dippin' Dots when it comes to M&A?

Speaker Change #177: Well, you know, I'd love to find bigger brands, you know, we've talked about that all along, but Pinsters was such an easy acquisition to make because it's such a great product.

Speaker Change #177: and very well-recepted. And we believe that we do have an opportunity to grow that. I don't know how big that can be, but our teams are really excited about out there and represent it and growing it. And we see some opportunities in the short term with it. We'll continue to look for.

Speaker Change #177: larger ones like Dippin' Dots, but it doesn't mean we won't look for something like this that's easy to kind of strap on and grow.

Speaker Change #177: Okay, that's it for me. Thank you. Thank you, Andrew.

Andrew Wolfe: Thank you.

Andrew Wolfe: Our last question comes from the line of Robert Dickerson with Jeffrey's. Your line is now open.

Robert Dickerson: Great, thanks so much.

Robert Dickerson: Hey guys, just a couple...

Robert Dickerson: Just a couple of quick clarification questions, a little perspective. I guess just in the retail segment,

Speaker Change #178: You know, op margin, you know, was around kind of that 11% level.

Speaker Change #179: We have seen some kind of decent volatility the past few years in that segment. I'm assuming that was kind of more cost price.

Is that like, are we kind of like back on track to get to kind of like a more normalized kind of, you know, standard kind of run rate going forward? Or are there puts and takes, etc? Potentially coming at some point Like as you enter those nose those new store, like let's just take KFC As an example, you know, let's say okay We're we're in two stores now and then we go to a hundred and maybe we go to 500 whatever it is And this would be I guess a similar dynamic on Dippin Dots Once you're in let's say a movie theater or KFC with those products

Speaker Change #180: related. If we kind of think about the 11%, you know, ish in Q3, is that like, are we kind of like back on track to get to kind of like a more normalized kind of

Speaker Change #180: you know, standard kind of run rate going forward, or are there puts and takes, etc.

Speaker Change #180: Yeah, no, Rob, that's a great question. I do think we're back on track. I mean, I'm not going to commit to 11 every quarter, but I think much more in that range. I think we've finally gotten

Speaker Change #180: things dialed in as it relates to how we manage margin in those retail products. We're moving and growing more in those higher core frozen novelties, soft pretzels.

Speaker Change #180: As long as we do that, that's going to mix out much better than it was, you know, a few quarters ago or a couple of years ago. So I do think this is more realistic to what we ought to be able to do there versus, say, a year or so ago.

Speaker Change #181: Alright, fair enough. It seems more realistic. Okay, and then I guess just kind of a broader question on the margin mix.

Speaker Change #182: New Distribution.

Speaker Change #183: You know, like I heard you say...

Speaker Change #184: Got, you know, more distribution to mass retailer. I think there's more distribution coming, more stores from a bigger grocer. We talk about

Speaker Change #185: Subway, you've got the KFC launch.

Speaker Change #185: Potentially coming at some point.

Speaker Change #186: Like, as you enter those, those new stores, like, let's just take KFC, as an example, you know, let's say, okay, we're, we're in two stores now, and then we go to 100. And maybe we go to 500, whatever it is. And this would be, I guess, a similar dynamic on Dippin Dots.

Speaker Change #186: Once you're in, let's say, a movie theater or KFC with those products,

Speaker Change #187: from the start, or is there scalability in this business? I mean, it seems like there usually is, but I'm asking because I'm not really sure if there is. Maybe it's just...

Speaker Change #188: Day one, that's what we get. And yes, the more we sell, the more profit we make. Or, you know, the more you sell, you know, in movie theaters, or KFC, or Subway, or what have you, you actually are getting kind of incremental volume leverage and scalability benefits in the overall business.

Speaker Change #189: Boy, it's a really good question. You know, anytime you have volume, you do get some scalability. You're talking about a couple areas that are a little bit different when you're talking about IC or dip and dots.

Speaker Change #189: It's not quite the same thing, but you know, if you grow in Dippin' Dots and you're able to produce more products, you're getting some scalability inside that plant where we produce it, so you do get some advantages there.

Speaker Change #189: On the I.C. side, you know, we're always very, very conscious, you know, what the cost is there typically is the piece of equipment, and so you get some scalability around buying large numbers of pieces of equipment.

Speaker Change #189: And hopefully, you're able to be careful about how many people you have to hire to take care of that business. And so, there's some scalability that happens there, but it's not quite the same as in a manufacturing.

Speaker Change #189: Okay yeah and you know Dan I mean I'm also asking because I mean look clearly you don't provide long-term guidance right but you've spent a lot of money you know on the efficiency side you know

Dan Fachner: That gives you a lot of benefits and then I'm also hearing over also getting a lot of distribution kind of across Pretty much all channels at least are all major channels

Dan Fachner: really are yeah right which and then there's like a volume-led story

Dan Fachner: Right, so...

Speaker Change #190: kind of like usually what follows is a margin expansion story. I just don't have a slide that's showing us that. So I mean it seems like that's clearly...

Speaker Change #191: The idea here is that it is, you know, it is, and it falls right into what I've talked about with the RDCs and the efficiencies that we're gaining from that and

Speaker Change #191: And, you know, if you think about the Dippin' Dots side.

Speaker Change #191: We caught those RDCs early enough to be able to build a box inside a box.

Speaker Change #191: and maybe we're even a little bit ahead of ourselves. We knew that that was something that needed to happen to be able to grow that piece of business.

Speaker Change #191: And now we're growing into that box-in-a-box, which will help us gain some efficiency in the go-forward. Yeah, Rob, these are all pieces in our ability and confidence to continue to move that gross margin.

Rob: number up. As we grow volume in these areas, leverage automation that's going to create bits of efficiency that grab basis points in margin that should help us evolve to a higher gross margin rate over the next two or three years.

Q3 2024 J&J Snack Foods Corp Earnings Call

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