J & J Snack Foods - Q1 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Snack Foods fiscal 2023 first quarter 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. To ask a question during the conference, you will need to press star 11 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Norberto Aja, Investor Relations. Norberto, please begin.

Norberto Aja (Investor Relations)

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods fiscal 2023 first quarter conference call. We'll start in just a minute with management's comments and the questions. Before doing so, let me take a minute to read the safe harbor language. This call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to the matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives, and our anticipated financial performance, industry-wide supply constraints, and the expected impact of COVID-19 on our business.

These statements are neither promises nor guarantees that involve known and unknown risks, uncertainties and other important factors that may cause results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Facts are discussed in our annual report and Form 10-K for the year ended September 24th, 2022, and other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management's estimates as of the date of this call, January 31st, 2023. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change.

In addition, we may also reference certain non-GAAP metrics on the call today, including Adjusted EBITDA, operating income, or earnings per share, all of which are reconciled to the nearest GAAP metric in the company's earnings press release, which can be found in the investor relations section of our website. Joining me on the call today is Dan Fachner, our Chief Executive Officer, as well as Ken Plunk, our Chief Financial Officer. Following management prepared remarks, we will go ahead and open the call for a question-and-answer session. I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Foods's Chief Executive Officer. Please go ahead, Dan.

Dan Fachner (CEO)

Thank you, Norberto. Good morning, everyone. We appreciate you joining us this morning to discuss our fiscal 2023 fiscal quarter results. We are pleased to report the seventh consecutive quarter of double-digit top-line growth and remain confident in our plans to continue growing sales. We are investing in our brands, accelerating the cross-selling strategy with our customers and across our channels, expanding our production capacity, and building a strong pipeline of product innovation. We've hit the ground running with our Dippin' Dots business, having already gained placement at Regal Cinemas, the second-largest movie theater chain in the United States. In fact, we increased unit sales in our Dippin' Dots business over 14% in the first quarter. We recently launched ¡Hola! Churros brand and are seeing strong momentum, including over 30% sales growth in the first quarter.

This positions us well to grow our churro business, including the introduction of new products and entry into new channels. These are just a couple of examples of the opportunities ahead of us. In the first quarter, our industry experienced some softness in spending and traffic across retail, restaurants, and food service as consumers adapt to the changing economy. Also, the historic winter storm that hit most of the country during two key selling weeks prior to Christmas did impact volume sales, especially in theaters and outdoor venues. Despite these challenges, many of our strategic categories, including ICEE, Dippin' Dots, and ¡Hola! Churros, grew volume during the quarter. As it relates to our income performance, ongoing inflationary pressures and the softening consumer environment impacted our year-over-year bottom-line results.

Our recent pricing actions helped deliver improved gross margins of approximately 100 basis points above Q1 last year. We are confident that this will continue throughout the year. We continue to manage cost pressures on the expense side when compared to prior year, most notably our distribution expense. We expect to see improvement in distribution expenses as we cycle through these high inflationary periods later in the year. Dippin' Dots is a seasonal business. As expected, it negatively impacted our results in the first quarter. This business will drive most of its profitability in the H2 of the year. Ken will provide some more insights to our financial performance in just a few moments. Switching to our three business segments, starting with food service, Q1 revenue was up 13%, even as we managed through the challenging winter weather events in December.

This, combined with a weaker slate of movie releases, had some impact on our sales. Soft pretzel sales increased 4% this quarter. We see expanded growth opportunities throughout the year as we introduce momentum Knots and Pretzel Bites focused on the entertainment, theater, QSR, and convenience channels. We also saw continued strong momentum in our churro business with sales increasing 32% as we introduced our new ¡Hola! Churro brand to food service. The sales team expanded placement of churros with major distributors, large regional QSRs, and fast-casual restaurants. We are confident that there are still significant growth opportunities across QSR, fast casual, convenience channels, and with major distributors, including a significant opportunity with a major QSR burger chain going into test in the H1 of 2023. ¡Hola! Churros will have a full selling and marketing support plan throughout the year.

Frozen Novelties was relatively flat in Q1, excluding sales from Dippin' Dots. The first quarter is a slow seasonal period for this category and was further impacted by the challenging weather conditions. We have strong incremental sales plans in place starting in the second quarter and remain very confident in growing this category throughout the year in theme parks, healthcare, and convenience channels. We have also added 2 new production lines to support these growth opportunities. Transitioning to our bakery business, sales increased 1%, driven by strong growth of handhelds and cookies with a major club customer, and we expanded business with a strategic convenience store customer as well. Looking forward, we see additional growth opportunities for our ICEE cookies and our frozen cookie dough.

Our strategy to improve margins in the bakery business is working as we shift mix to more profitable products and customers and rationalize less productive items in our portfolio. Very pleased with our bakery group. We continue to forecast added gains in key items such as handhelds and Funnel Cake Fries. Moving to our retail segment, sales increased 1% for the quarter as the industry started to experience softness and macroeconomic spending for consumables. In our soft pretzel segment, we saw continued strength in our flagship SUPERPRETZEL brand, driven by distribution gains and organic growth. Overall pretzel sales declined 11% in the quarter, primarily in licensed and private brand products as we executed planned SKU rationalization of lower margin items.

As the year progresses, our strong focus on SUPERPRETZEL brand, including new SUPERPRETZEL Pretzel Bite flavors, launch of SUPERPRETZEL Knots, and SUPERPRETZEL Bavarian Pretzel Sticks, is expected to lead a full year revenue growth in the soft pretzel category. In Frozen Novelties, we saw a 1% sales increase for the quarter. As we enter the second quarter, we are planning for incremental growth in this category, including the launch of ICEE and SLUSH PUPPIE Pops, Whole Fruit in the weekly distribution gains, and further expansion of our Dogsters brand in grocery. We are also confident with our plans to bring ¡Hola! Churro to retail later this year. We added capacity. This will be a big growth opportunity for this category.

Regarding our third segment, Frozen Beverages, Q1 revenue was up 9%, driven by a 15% increase in beverage sales and an 8% increase in service sales. This was partially offset by 11% decline in equipment revenue due to the timing of customer installations between years. However, we're excited to communicate that we have secured a contract with Checkers to buy approximately 800 machines, and these will be installed over the H2 of the year. This business also includes a service contract as well. ICEE-branded tests continue with large QSR customers, and we are in the process of rolling out ICEE across the Moto stores nationwide. In regard to Dippin' Dots business, our pipeline is strong.

Not only has it performed very well thus far, including a 14% increase in unit sales in the first quarter, but it holds significant potential for added growth, both in food service, where it's predominantly today, as well as in expanding into the retail sector. As an example, we recently signed a deal with Regal Cinemas, which as some of is the second largest theater chain in the United States with over 540 locations. The initial placement will cover over 230 locations, with the rest to come thereafter. The initial sales results are really encouraging. We also recently introduced ICEE Cherry and Blue Razz Dippin' Dots flavors, a new product launch with promising Q1 sales, which demonstrates our ability to leverage our strong brand portfolio across business channels.

I would now like to spend a few moments reviewing our strategic priorities as we remain focused on transforming the business. We have taken aggressive measures to offset the challenges facing us as we operate under this historic backdrop of inflationary pressures and to position the company for long-term success. We are aggressively focused on improving operational efficiencies through initiatives like implementing a new ERP system, adding 7 new, more automated production lines, outsourcing our shipping logistics, and building a more geographically optimized distribution network. In addition, we have now fully implemented various price increases across our portfolio, which will continue to drive improved gross margins. Let me start with our supply chain strategy priorities. We communicated last quarter that our logistics and distribution management responsibility have now been fully outsourced to NFI, a recognized expert in the industry.

They are now managing 100% of our business. We expect to generate approximately $4 million annualized benefit as we improve management of carriers, improve truckload efficiencies, and minimize miles through better network management. We are further investing in our supply chain process through the build-out of 3 geographically located distribution centers across the country. These RDCs will enable better location of inventory and simplify our warehouse network, moving from managing over 30 plant 3PL locations to approximately 6. 2 of these new RDCs will have a box-in-a-box, where we'll be able to store Dippin' Dots products, adding capacity for growing this business and getting product closer to the customer. Our first RDC will open up in June at a facility just outside of Dallas. The second RDC should open up later in the fiscal year.

The third RDC is still in development and expected to be opened in fiscal 2024. On the operations side, we have committed investments to add 7 new production lines that will add capacity and drive efficiency through better automation. To date, we have opened 2 new frozen novelty lines and 1 additional churro line. Over the next 6 months, we will activate 3 additional lines focused on expanded pretzel production. As it relates to M&A, we are currently working on integrating Dippin' Dots into the J&J systems, processes, customer channels, and operations. At the same time, we continue to evaluate potential M&A opportunities that complement our brand portfolio and our business model. In summary, we will remain focused on building this business for the long-term growth.

Strategically, we are transforming the business, investing in our brands and capacity to grow while implementing initiatives to help us operate more efficiently. Our leadership team is aligned. The organization is excited about the opportunities ahead of us to continue building on the great history of J&J Snack Foods. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken.

Ken Plunk (CFO)

Thank you, Dan. Good morning, everyone. As Dan mentioned earlier, we continue to experience double-digit sales growth across our business. We remain optimistic about the balance of the year given the many initiatives we have underway and their expected impact on our business from the top line to the bottom line. Net sales for the quarter were $351.3 million, growing by 10.3% versus the prior year period. Starting with food service, our largest segment representing approximately 68% of our total sales, revenue of $238.3 million exceeded Q1 2022 by $26.6 million, or an increase of 13%. That included approximately $13.4 million in Dippin' Dots sales.

The healthy performance in food services was driven by a 157% increase in frozen novelty sales, benefiting the market of the Dots business as well, 32% increase in churro sales, and 27% increase in handheld sales. We also saw growth in soft pretzels in our bakery business of 4% and 1% respectively. The retail segment posted sales of $43.1 million or an increase of 1% compared to the same period in fiscal 2022. Handhelds continued their strong performance with a 127% increase in sales, while frozen novelties increased 1%. Soft pretzels and biscuits decreased 11% and 4%, respectively, versus the prior year.

Frozen beverages sales were $70 million, including 9% versus Q1 2022, led by beverage sales growth of 15%, as well as repairs and maintenance service revenue growth of 8%. Equipment sales declined 11% due to the timing and installation between years. Gross profit for the quarter was $9.9 million, or an increase of over 14% compared to the previous year period. Gross margin was 25.9% in the quarter, favorably comparing to 20.9% in Q1 of fiscal 2022. Moving down the income statement. Total operating expenses increased to $81.5 million, representing 23.2% of sales for the quarter compared to 20.3% in Q1 of 2022. These results largely reflect the persistent inflationary pressures across all our expense lines, in particular distribution expenses.

Distribution expenses were 12% of sales compared to 10.5% in fiscal 2022. This did improve compared to Q3 and Q4 of 2022 when they were 12.7% and 12.4% respectively. The 150 basis points higher distribution costs as a percent of sales contributed approximately $5 million additional expense for the quarter on an equivalent basis when compared to a year ago. Marketing and selling expenses represented 6.7% of sales versus 6.6% in prior year period, while administrative expenses were 4.7% of sales in Q1 2023 compared to 3.3% in Q1 of 2022. Also, Dippin' Dots is a seasonal business and as expected, negatively impacts our results in the first quarter.

This business will drive most of its profitability in the H2 of the year with higher sales, better leverage expenses in those quarters. This led to an operating income of $9.3 million compared to $14.8 million in Q1 2022 or a year-over-year decline of 37%. Adjusted EBITDA was $11.2 million and adjusted earnings for the lead share was $0.42. After considering income tax of $2.3 million compared to $4 million in Q1 of fiscal 2022, net earnings decreased to $6.6 million, resulting in reported diluted earnings per share of $0.34. That compares to $0.58 in the prior period. Adjusted EBITDA decreased 8% to $25.3 million. Our effective tax rate was 26% for the first quarter.

Taking a look at our liquidity position, even with the Dippin' Dots acquisition, we continue to have a healthy balance sheet and overall strong liquidity position with $61.2 million in cash and marketable securities and approximately $92 million in debt. In addition, we have ample availability under our revolver with approximately $123 million of additional borrowing capacity. In summary, we are excited about the opportunities ahead and remain confident that our portfolio of brands, investments in our business and strategic initiatives will continue to fuel growth. Our efforts to gain added efficiencies and effectiveness has placed J&J in a position of added strength and improved our ability to leverage opportunities ahead of us. With $55 million in cash and ample available liquidity, we have the means to adequately support, invest in the growth drivers of the business.

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

Operator (participant)

Ladies and gentlemen, if you have a question or comment at this time, please press star 11 on your telephone keypad. Again, if you have a question, please press star 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, you may press star 11 again. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Andrew Wolf from CLT. Mr. Wolf, your line is open.

Andrew Wolf (Managing Director, Senior Equity Research Analys)

Hi. Thank you. Good morning. I want to start-

Ken Plunk (CFO)

Morning, Andrew.

Andrew Wolf (Managing Director, Senior Equity Research Analys)

Morning, gentlemen. On the, kind of, your volume results and maybe what you saw with consumer behavior, elasticity of demand. , I think seems like you were kind of outperforming most on elasticity in particular. This quarter you referenced the industry slowing and seems like to some extent, perhaps the business itself kind of caught up to the industry and experienced some negative consumer behavior. Could you just kind of give us a qualitative sense of that and a quantitative sense too, like where where your volumes are maybe adjusted for SKU rationalization as well, so you don't get penalized by that? That'd be great.

Ken Plunk (CFO)

Right. I'll talk to some of that, Andrew. Thanks for your question. Yeah, it's much like what you said. When we ended our last quarter, our volumes were strong. Even as we entered into this quarter, they were strong. Then as the quarter went on, they trailed off. We're watching that really closely. I tend to personally think, and we do as a company, that we were affected pretty greatly in the December month and mainly as we got into the really two or three weeks of cold weather. We never like to blame anything on weather and I won't allow our people to do that, but it does have an effect, especially as during the holiday shopping season.

We experienced that as we got late into the quarter. Now we're watching it really closely as we move into a new quarter and are gonna be mindful and watching it with a close eye to see what happens from there on out. I don't personally think that we have hit the issue of elasticity. I think the pricing that we took was well within line of what others in our categories might have taken and maybe even slightly below that. I don't think that that's the issue. I really believe that we hit into a period of time where there's threats of a recession and you got cold weather and people aren't out shopping as much as they might have done under different conditions.

Andrew Wolf (Managing Director, Senior Equity Research Analys)

Thanks. Very helpful. Ken, I alluded to the, I think , SKU rationalization, where you got out of some unproductive SKUs, I think in soft pretzels. Is that a pretty somewhat significant number worth calling out, or just a rounding error?

Ken Plunk (CFO)

I wouldn't call it significant, Andrew . In certain categories it had a bigger impact than others. Again, with some of the trail off of volume in other places that we didn't expect because of some of the things Dan said it kind of magnified that a little bit more, but it's not the key driver. I think as we tried to comment, we really were taking that quarter to sharpen the pencil a bit . There's places in bakery you mentioned, places in pretzel, where we feel really good about our business model, what we're focused on to grow. There are some things from a margin standpoint that we wanted to do to get that kind of recalibrated a little bit.

Anyway, the answer to your question is, yeah, it had an impact on a couple of categories, but I wouldn't call it significant on the quarter total.

Andrew Wolf (Managing Director, Senior Equity Research Analys)

Got it. Just one other question, really on capital allocation, which first of all you reported a pretty big increase in cash capital expenditures. Kind of seems to comport with your pretty aggressive plans for seven new lines. Can you kind of express to us what your capital budget is for the year? How , what you think you might be spending to invest in back in the business? The other side is the M&A that you alluded to. I guess my question there is more balance sheet related . How much debt leverage are is the board and the executive committee willing to take on to execute a deal? Thank you.

Ken Plunk (CFO)

Appreciate the question, Andrew. , again, we feel really good about where we're at in terms of the ability to continue investing in the business. To your point, as it relates to changes in debt, you saw on the balance sheet I think almost double capital spend for the quarter versus a year ago. We've been very clear that we're investing close to $100 million in 7 new lines and in these new RDCs. Obviously, that's gonna drive increases in CapEx versus two, three years ago . You'll see that I think the number was just south of $90 million that we spent in fiscal 2022 CapEx.

As we continue to execute these investments that we're making the 2023 number is gonna be probably in that range $90 million-$105 million, somewhere in there. It's really all focused on completing the execution of those key production lines and RDC investments that we're making. In terms of leverage with the board I wouldn't say there's an exact number that we've kind of landed on with the board of what we're willing to do. We're evolving as a company. , we moved from really no debt, starting to see that we can leverage our balance sheet health to go and grow this business and invest. I think the board is supportive of that.

I can't say that there's a specific leverage number that we've kinda got in mind at this point.

Andrew Wolf (Managing Director, Senior Equity Research Analys)

Okay. Thank you. I'll pass it on. Appreciate it.

Ken Plunk (CFO)

Thank you, Andrew.

Operator (participant)

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

Ken Plunk (CFO)

Morning, Todd.

Todd Brooks (Managing Director and Senior Equity Analyst)

A few quick questions for you. First of all, on Dippin' Dots. Obviously, with the seasonality of the business, is there a way that you can size for us so that we can gauge kind of the operating income trend outside of the Dippin' Dots impact, what the drag on operating income was in the first quarter from Dippin' Dots?

Ken Plunk (CFO)

Yeah. Hey, Todd, this is Ken. I think in last quarters, we had kind of tried to guide the group that almost all, I mean, you could even call it 100% of the profitability at Dippin' Dots is in Q3 and Q4. Again, no surprise given the seasonality of that business. Q1 is the slowest, and it has a negative impact. I think you'll see this spelled out in the 10-Q, just south of $1 million negative impact in this quarter from Dippin' Dots, and that's. Dippin' Dots actually had a great quarter and performed above expectations. That's the weight of fixed expenses and high SGA based on a low sales base create the deleveraging in Q1 that was certainly expected on our side.

That gives you a little bit of a round idea of kind of what that impact was in this quarter.

Todd Brooks (Managing Director and Senior Equity Analyst)

Thanks, Ken. Is that the right type of number to use for the March quarter as well as we're going into the June and September ramp?

Ken Plunk (CFO)

Slightly better than that, Todd. I would probably kinda guide you that should be positive, but less than $1 million positive.

Todd Brooks (Managing Director and Senior Equity Analyst)

Okay. That's helpful. Thank you. Secondly, just wanted to get back to, and we'll follow up on Andre's question about volumes. I was wondering two things. One, and this would be outside of the consumer, did you see any destocking of inventories from your retail or obviously you've got the clubs and mass in the food service business. Were those customers working down inventories at all at the end of the year? Is that part of why the volume may have dipped later in the quarter?

Dan Fachner (CEO)

Yeah, Todd, that's a good question and a good observation. We absolutely believe that. We did feel that a little bit as what I discussed with our own business. I think many of the retailers out there found themselves in the same situation and are smart retailers and started to drive inventories down. Yes, I think that was a portion of what came into play in that December month.

Todd Brooks (Managing Director and Senior Equity Analyst)

Okay.

Ken Plunk (CFO)

Yeah, I would

Todd Brooks (Managing Director and Senior Equity Analyst)

Oh, sorry, Ken. Go ahead.

Ken Plunk (CFO)

I was just gonna add, there's data out there, and there's a lot of data. I'm sure you guys are reading the same thing, but I did read one that said, spending at grocery stores was slightly down. I think you're starting to see people be a bit more frugal on the basket. The other thing that I read was a pretty pronounced increase in traffic and shopping at dollar stores and a little bit less traffic at some of the bigger retailers, particularly the higher-end grocery stores. I think there's something in there where some of that on the retail side is impacting buying of our products. Then, to your first question, does start to kind of drive different decisions on inventory.

, we've got too much for now, they push back on us, we slow down production and all of that. As you're trying to calibrate it it can create a little bit of inefficiency.

Todd Brooks (Managing Director and Senior Equity Analyst)

Okay. This is just, I was wondering if this was part of the volume compare as well. Obviously, you had the ERP conversion in the March quarter of fiscal 2022. Did any customers kind of preload inventory in advance of the conversion that would've benefited the December quarter last year, but made for a tougher volume compare this year?

Dan Fachner (CEO)

No, Todd, that's a great question, but that really did not happen. Maybe in 2020 hindsight at this point we might have encouraged that last year, but I can't say that that's what happened.

Todd Brooks (Managing Director and Senior Equity Analyst)

Okay, great. Final question, I'll pass it along. The strength in Churros was the ¡Hola! launch at food service, was that in place for the full quarter? Did it roll out over the quarter? Actually that strength when you have a full quarter of selling it into the food service channel could actually accelerate a bit going forward.

Dan Fachner (CEO)

We believe it can continue to be accelerating. We're putting a lot of push behind it. Much like what we've talked about separately, ¡Hola! Churros have really come of age. We love the new brand. We love the opportunity sale there, not just with large customers out there, but even through the distribution network. we're we've got a lot of marketing behind it. We feel really good about it. I think it can continue to build momentum throughout the year.

Todd Brooks (Managing Director and Senior Equity Analyst)

Was it available for the full quarter, Dan, or did it roll out over the quarter?

Dan Fachner (CEO)

It really rolled out throughout the quarter, but it would've been started early . It would've been early in the quarter, so I'm not sure how to guide you on that . It was a good quarter. We had 32% increase and plus 30% increase. It was a good quarter. I expect the same thing, if not greater, in the coming quarter.

Ken Plunk (CFO)

Yeah.

Todd Brooks (Managing Director and Senior Equity Analyst)

Okay, great. Thanks.

Ken Plunk (CFO)

There's even stronger promotional plans around that brand. I wouldn't say we've kind of really hit and executed every part of our marketing plan around that. There's more to come, and we're really excited about it, Todd.

Dan Fachner (CEO)

We've got some really good things in test with it as well.

Todd Brooks (Managing Director and Senior Equity Analyst)

Excellent. Thanks, Dan.

Dan Fachner (CEO)

Thank you, Todd.

Operator (participant)

Thank you. Our next question or comment comes from the line of Connor Rattigan from Consumer Edge. Mr. Rattigan, your line is now open.

Connor Rattigan (Senior Equity Research Analyst)

Cool. Hey, guys. Good morning.

Dan Fachner (CEO)

Good morning, Connor.

Connor Rattigan (Senior Equity Research Analyst)

Just quickly on Dippin' Dots, it sounds like the $13.4 million in sales generated was a lot more, decently ahead of your expectations. By my math, it's about 13% of historical sales in the first quarter. That puts the brand on about a $100 million or so run rate or about 10% higher than last quarter. Could you kind of maybe quantify your expectations for the brand over the year? Just trying to get a sense of how big we should expect this thing to be given planned distribution rollouts.

Ken Plunk (CFO)

I think your math is good, Connor. Good job with that.

Connor Rattigan (Senior Equity Research Analyst)

Thank you.

Ken Plunk (CFO)

I'm not gonna give you, like, an exact number, but I think our expectations are in that ballpark that you just came out with. We feel really, really good about what we're doing with Dippin' Dots . And we just mentioned one example, in the release in the script, the operational things we're doing, other things in the pipeline. Yeah, we're aligned with you on kinda what we think we can do with that business this year.

Dan Fachner (CEO)

We are. That's good math on your part, and really excited about the team and what they're doing. In fact, the whole sales team is here in the office this week at a sales meeting, and we're just really thrilled with the way that they're responding.

Connor Rattigan (Senior Equity Research Analyst)

Awesome. That's, that's great, guys. Also just quickly on some of the efficiency efforts that you mentioned. That $4 million figure is that expected to be fully realized this year or is that more of a fiscal 2024 goal? Also on the automation efforts, just to be clear, are these fully new automated lines replacing manual lines or are these just purely incremental capacity?

Dan Fachner (CEO)

You wanna go first?

Ken Plunk (CFO)

Well, on the lines, it is added capacity, so this is not replacing current lines. It's new lines, but lines that are obviously more modern and with better automation than existing. We expect to be more efficient in how we move product through those lines. I'm sorry, what was your first question?

Connor Rattigan (Senior Equity Research Analyst)

Just on the $4 million in incremental savings from the logistics and distribution outsourcing, is that expected to be fully realized this year or is that more of a, like, a fiscal 24 goal?

Ken Plunk (CFO)

Yeah. I think the way we've spoken about it before, it really took us until around September, October to get all of our business on NFI. The key to managing all this is for them to be kind of pulling the strings on how we manage product and distribution across our entire network. Secondarily, their job will get even easier as we execute this RDC strategy. On an annualized basis, yeah, if I had to make a guess for 2023, given what we've got in motion, yeah, I'd probably say some of that formula is gonna carry into 2024, but I think we should realize a good portion of that in this fiscal period.

Dan Fachner (CEO)

Connor, let me just touch on the line question that you had. They are in addition to the lines that we have today, but it also allows us to do some shifting of where we make some products to become much more efficient in different areas. Our intention is not to shut down the former lines, but to be able to use that for more capacity.

Connor Rattigan (Senior Equity Research Analyst)

All right. That's great, guys. Thank you so much. I'll go ahead and pass it on.

Dan Fachner (CEO)

Thank you, Connor.

Operator (participant)

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

Jon Anderson (Partner, Managing Director and Senior Equity Research Analyst)

Great. Thanks. Hi, hi, everybody. Good morning.

Dan Fachner (CEO)

Good morning, Jon.

Ken Plunk (CFO)

Morning.

Jon Anderson (Partner, Managing Director and Senior Equity Research Analyst)

Morning. Maybe just I'll stick with that last question since we're on it. On the new production lines, how much capacity in aggregate will these 7 new lines kind of unlock? Are there also margin benefits associated with it? I guess the second part of the question, Dan, gets to some of your comments around shifting or optimization of production. Again, how much capacity are you unlocking with these 7 new lines and are there productivity benefits as well?

Dan Fachner (CEO)

, I don't have the exact number to give you on the capacity, but it does allow us to grow our core products, right? One of the things we really experienced was outgrowing our core, which is our churros and pretzels and frozen novelties, and even our PretzelDogs side of the business. We have addressed that to be able to have enough capacity to get our sales team back out there and really selling new lines and new opportunities. It does help on the margin side because we are becoming much more efficient in different areas. Even making products, like in our novelty side, making products where they're sold, as opposed to maybe making them in one part of the country and shipping them across to another side.

There are margin improvements that we think that we can realize as we open these up.

Jon Anderson (Partner, Managing Director and Senior Equity Research Analyst)

That's helpful. Thank you. Organic growth in the first quarter was about 6%. Can you help us kinda gauge how much of that 6% organic growth was volume-based and how much was price? Then you kind of laid out a lot of very interesting demand generation initiatives that are kind of kicking in through the year. The cross-selling opportunities, the new account, new channel, opportunities that seem to be kind of lining up. Should we kind of think about organic growth accelerating through the balance of the year or kind of maintaining at a level in this mid-single digit range?

I know it's a difficult question, just trying to get a sense for your confidence in some of the initiatives that you have lined up and what that might do to the organic growth profile of the company during coming quarters.

Dan Fachner (CEO)

I'm gonna let Ken talk a little bit about the numbers, if he can. I just wanna say this about our sales teams . We talked about it for two or three quarters now about cross-selling and getting people engaged in the different companies on selling the products across channels and across customers, and couldn't be more proud of the way that they're responding to that. That is happening more and more, and I get to see it firsthand, and that will be helpful. It's certainly helpful as we're starting to look at the Dippin' Dots business, being able to leverage our relationships and our customer contacts that we have to accelerate that growth. Just really pleased with the progress that is happening on that side, led by our sales teams.

Really happy with that.

Robert Dickerson (Managing Director)

Ken, I don't know if you have some numbers you could help him with that.

Ken Plunk (CFO)

Well, I'll just add this. Jon, I'm glad you picked up on it, but we were very intentional to really go maybe even a little bit deeper on highlighting what we see as a lot of growth opportunity, when we sprinkled in examples of some Dippin' Dots to SUPERPRETZEL to frozen novelties to churros. , yes, we still remain very, very confident in our ability in the next 3 quarters to grow the organic side of our business. If you just take out Dippin' Dots for a second. , like every other company out there, I mean, we're watching things like GDP and data on consumption and you see a little bit of that being dialed back. You see savings rates going up.

There's some consumer things that we're watching, which obviously impact our business if consumers pull back. Aside from that, I don't know a time at J&J where we haven't felt more confident about what we're doing in innovation and with our brands and cross-selling. We remain very very confident in what we're gonna be able to do for the rest of the year.

Jon Anderson (Partner, Managing Director and Senior Equity Research Analyst)

Okay, that's helpful. One more. It's kind of a similar question, but more from an earnings perspective. When I look at EBITDA or Adjusted EBITDA in the first quarter, and even adjust, I guess, for a bit of the impact of Dippin' Dots, the deleverage, it looks like EBITDA came in around 15% or so of what the street anticipates full year EBITDA to be. If I kind of look back pre-pandemic to some more typical years, it looks like first quarter EBITDA might have trended more in the 20%-22% of the year range. Just kind of optically, it would look like maybe you're starting the year a little bit slower this year from an EBITDA perspective, at least relative to what the street is modeling for the full year.

Again, there's so many great cross-selling things going on. There are a lot of good things happening on the operational efficiency front, margin catch-ups from pricing, et cetera. Am I thinking about it right that, hey we're in a pretty good position exiting Q1 and entering Q2, despite those metrics I mentioned, to kind of deliver on a full year expectation?

Ken Plunk (CFO)

Yeah. Yeah. Again, we tried to explain this a little bit. Two headwinds right off the bat in terms of comparing a year ago EBITDA, or even if you went back to 19, I don't have this number in my head, but I think the number would be even bigger. You've got roughly $5 million of impact on distribution expenses. If you just on an equal basis, that would impact profitability this year versus a year ago. Then I mentioned the impact when you bring on a Dippin' Dots business that has a loss in the quarter, and again, expected, then that starts to create a a $6 million kind of bogey right there, just from two things.

Then I do think as we end the quarter, we expected to do a little bit better than that because we weren't expecting volumes to tail off in December with some of the weather challenges that we talked about. It's in a quarter where if you don't create the sales, then you deleverage pretty quickly. , keep in mind that even for total J&J, 75% of the sales and really profitability for J&J is going to be in the Q3, Q4 . That should play out if you go years back. That's just kind of the seasonality of the business.

Jon Anderson (Partner, Managing Director and Senior Equity Research Analyst)

Okay. Thanks so much, guys. Appreciate it.

Ken Plunk (CFO)

Thanks, Jon.

Operator (participant)

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

Robert Dickerson (Managing Director)

great. Thanks so much. Can you hear me okay?

Ken Plunk (CFO)

We can. Good morning, Rob.

Robert Dickerson (Managing Director)

All right. Great. Thanks a lot. Yeah, I guess just kind of follow up to the last question that was asked and just ask it a little differently. Ken, to your point, right? There's a little volume deleverage that comes through. Input cost inflation is still a little bit high. On the COG side, it sounds like there could be other pricing offsets. And then as you keep mentioning, right, good innovation, distribution opportunities as you get through the back half. , Q1 understands kind of the drivers behind what happened, not just in the EBITDA margin, but , I'm speaking more specifically to the growth side. I don't know, you go back 2 quarters, right?

Kinda the feel was as we kinda got into Q2 this year, maybe more back half-ish, we could kinda get back a little bit more of those pre-pandemic margins. It seems like you were making pretty decent progress on that goal in the back half of last year, right? then December kinda hit, maybe a little softer volume, maybe some consumer behavior shifts to some extent. I guess as you sit here now, right? If we're thinking about Q2 one, right? Just point one, just because I do think you're kind of lapping, right? That ERP issue you had last year. I would think there'd be some nice margin progression.

When we're thinking about the back half of this year, it kind of what I'm hearing, I feel like, is like it's still a little bit of a moving target, right? Some of this is gonna be contingent, obviously, on consumer behavior as we get into the summer, right? Which is still kind of a far way away. Sounds like some pricing might come through to offset some of the cost inflation. Maybe there's also some incremental distribution innovation that could help offset maybe some consumer weakness. A lot in there. I'm just trying to gauge kind of where, like, how you want the market to be thinking about kind of that margin recovery potential this year.

Is it something that maybe we're kinda we're just pushing the floor a little bit kinda because maybe there's a little less clarity. That's all I have. This is a lot. Thank you.

Dan Fachner (CEO)

Thank you, Rob.

Ken Plunk (CFO)

Rob, you just did my job for me.

Dan Fachner (CEO)

Right. He did it pretty well, though.

Ken Plunk (CFO)

Yeah. Well, that all well. yeah we've, I think, been clear as we had these meetings, even going back to last quarter, that we can go on a trajectory to get this business up to those 30% margins. As I sit here now I still feel confident in our ability to do that, particularly as we get to Q3 and Q4 'cause I believe the things we're doing, the initiatives, the getting all this inflationary stuff behind us getting into peak season when I think we'll start to see volumes really kick back in and some of these new products and new ideas and new innovations are gonna drive growth. I still sit here seeing that as a pretty good benchmark, Rob.

, we manage this business long term. If I could emphasize anything as we come together each quarter, our jobs are to continue to demonstrate from an investment standpoint, from where we're driving growth, the long-term aspects of what we're doing, are gonna pay dividends for us. We then occasionally get into a quarter like this where you get into some economic challenges and weather and that pulls back on volume, and then you have to kind of recalibrate inventory and production a little bit. So that can hit a quarter. Still feel really good about the back half of the year.

Dan Fachner (CEO)

Yeah, Rob, I would echo that as well. I would just also add to it that we still have some pricing coming on the ICEE side. We talked about that in other quarters. ICEE takes pricing once a year, there's a pricing that was taken January 1 on the ICEE side. Yeah, I think we're still feeling pretty confident about getting back to those pre-COVID %. That's part of the conversation that we have amongst all of our groups and all of our conversations.

Robert Dickerson (Managing Director)

Perfect. Super. Thank you so much.

Dan Fachner (CEO)

Thank you.

Ken Plunk (CFO)

Thanks, Rob.

Operator (participant)

Thank you. Our next question or comment is a follow-up from Mr. Andrew Wolf from C.L. King. Mr. Wolf, your line is now open.

Andrew Wolf (Managing Director, Senior Equity Research Analys)

Hello. My first is on your outlook for commodity cost inflation slowing, which I think you said in the release. You might have talked about this, but if I didn't hear it, well, if you did. Could you be a little more specific on what you're thinking the cadence is gonna be? Maybe what % of your costs are locked in through forward contracts and things like that. I think a lot of folks in the supply chain manufacturers and others are looking to the June quarter to really when the relief really comes in on the year-over-year comparisons, where pricing is unambiguously a lot better than cost and COGS inflation. What's your sense of that for the business? The other, the second follow-up is very straightforward.

It's just like it's been 5 full weeks and a couple more days since the quarter ended. Have you seen any changes either way in the volume trends pretty much in January? Thank you.

Dan Fachner (CEO)

You wanna handle the commodity, Tom?

Ken Plunk (CFO)

Yeah. On the commodities, I look at so much data on that Andrew, and I think we said this. Trends are getting better. Sometimes they seem too gradual, but they are getting better. Just give you a couple of examples. , wheat while it's 60% higher than it was a year ago, quarter-over-quarter, it went up just 40 basis points. It did go up, but it only went up 40 basis points. The outlook on wheat is that we do expect that to continue to decline. I think as we look at the second quarter I pick on wheat because it's our biggest commodity. We think it may go down 3%-4% is kind of our best guess right now as we look at Q2.

You kind of go across with the eggs. Obviously, we use a lot of eggs. Eggs is up triple digits year-over-year. It went up 43% quarter versus quarter. Eggs continue to go up . It's kind of depending on what commodity you're talking about, it's a different answer. Collectively, we do expect them to continue to go down. I don't have a crystal ball. I think our best guess next quarter is maybe somewhere in that 3%-5% range. As we look further out hopefully better than that. I think wheat, diesel are two big ones that are supposed to continue to go down quite a bit. sugar it's not as high as it was, it's still not showing signs of heavy decline, I assume.

Dan Fachner (CEO)

Andrew, on the weeks ahead, we're watching that cautiously, being careful about what's happening out in the industry. We do have some really bright spots, though. One of those bright spots would be, where the theater business was really off into December month. They've come back pretty strong in the January month. We're encouraged, by what we're seeing so far.

Ken Plunk (CFO)

Great. Thank you, guys.

Dan Fachner (CEO)

Thank you, Andrew.

Operator (participant)

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

Dan Fachner (CEO)

Great. Thank you, operator. In closing, we wanna assure you that more than ever, our teams are focused on effectively managing through these dynamic market conditions while serving our customers and partners. As we have outlined on the call today, we've taken aggressive measures to offset these various challenges and to position the company for long-term success. Our momentum remains strong with our core brands and new products continuing to resonate with customers. As we progress through 2023, we are confident that our strategies will have a marked and positive impact on our business and our results. We wanna also take this opportunity to acknowledge the hard work and dedication of our talented teams across the entire business unit. Thank you everyone for joining us today on the call. We appreciate your interest and your continued support.

Should you have any questions or wish to speak to us, please contact our investor relations firm, JCIR, at 212-835-8500. Thank you very much.

Operator (participant)

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