J & J Snack Foods - Q2 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, thank you for standing by. Welcome to the J&J Snack Foods fiscal year 2023 second quarter earnings office call. At this time, all participants are on a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone keypad. At this time, I would like to turn the conference over to Mr. Norberto Aja of Investor Relations. Sir, please begin.

Norberto Aja (VP of Investor Relations)

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

These statements are neither promises or guarantees that involve known and unknown risks, uncertainties and other important factors that may cause results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors discussed in our annual report and Form 10-K for the year ended September 24, 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 to the date of this call, May 2, 2023. While we would like to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause earnings to change.

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, along with Mr. Ken Plunk, our Chief Financial Officer. Following management's prepared remarks, we will go ahead and open the call for a question and answer session. With that, I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Foods Chief Executive Officer. Please go ahead, Dan.

Dan Fachner (CEO)

Thank you Norberto. Good morning everyone. We appreciate you joining us to discuss our fiscal 2023 second quarter results. I'm pleased to report that our positive momentum continued in the fiscal second quarter, as sales this quarter was the highest second quarter sales in company history and was driven by strong demand across all three business segments. While the year began with ongoing economic and inflationary challenges for our industry, it is clear that consumers continue to show strong demand for our iconic brands and diverse offerings of fun and indulgent products. We saw marked improvements in unit volumes in fiscal Q2, including strong performances in soft pretzels, churros, frozen novelties, and frozen beverages. Higher volumes, combined with the impact of price increases enacted in fiscal 2022, resulted in a 20% increase in net sales to $337.9 million.

J&J also generated healthy year-over-year improvements across several key performance metrics, including gross margins and distribution expenses, resulting in strong earnings growth for the quarter. Taking a closer look at our segment performance. Food services increased 23.8% to $218.3 million, including approximately $16 million in Dippin' Dots sales and $3.3 million of sales related to new products and expanded customer placements. Overall, segment growth reflects a 28.3% rise in soft pretzels, a healthy 42.8% increase in churros, and a more than 264% increase in frozen novelties, including incremental Dippin' Dots sales.

Retail sales increased 13.7% to $46.4 million, including $2.5 million of sales related to the recent launch of our SUPERPRETZEL, Dippin' Dots, and the expansion of handhelds with a major retailer. Retail segment growth was also driven by strong sales in frozen novelties, soft pretzels and biscuits. Frozen beverage sales increased 13.7% to $73.2 million, reflecting an 18.2% rise in beverage sales led by strong consumption trends across amusement, restaurant, retail, and food service venues, as well as a healthy rebounding theater channel.

Machine repair and maintenance revenues increased 7.5% versus the prior year, while equipment sales increased 9.4% on the back of healthy customer installation volume. While overall inflation has stabilized, we continue to experience year-over-year pressures on key commodity inputs such as flour, oil, eggs, mixes, and sugar. We estimate inflationary impacts of approximately 9% compared to a year ago as our industry continues to manage through these historically high cost pressures. Despite these continued challenges, we delivered 26.8% gross margin in fiscal Q2 2023, which compares favorably to the 23.2% gross margin in the prior year. Overall gross margin improvement reflects the benefits of our pricing action last year and the early impact of our initiatives to improve cost management and productivity.

We are aggressively investing and positioning J&J for its next phase of growth, and it is clear that our strategy is delivering results. Before turning the call over to Ken, I'll briefly touch on the excellent work our teams have done and continue to do to optimize our business for the future. Starting with sales, marketing, and product innovation. Very proud of this group. We remain focused on leveraging consumers' affinity for our brands to prioritize growth of our core products while also capitalizing on opportunities for increased product innovation and extensions. Across all three business segments, we are gaining placements in key channels, including theaters, QSR, casual dining, and retail, leading to market share gains in our core products with several notable achievements in Q2. ICEE, America's #1 frozen beverage brand, continues to gain share in the QSR and fast casual channels.

The team is currently working on several customers to test the placement of ICEE in the venues representing incremental placement opportunities. The ICEE rollout across Moe's Southwest Grill is also progressing well, with 95 locations installed to date and a total of 200 locations by calendar year end. In terms of product innovation, we launched ICEE and SLUSH PUPPiE branded frozen pops across major retailers in late Q2, the initial response has been very, very positive. Last quarter, we announced a new relationship with Checkers to install 800 new machines. To date, we've installed about 250 machines with the remainder targeted to be completed by the end of July. Our SUPERPRETZEL brand remains the soft pretzel category leader across channels. We continue to see significant growth opportunities in both food service and retail channels.

We are expanding placement of our existing pretzel products and excited to be launching new SUPERPRETZEL branded Filled Knots, Bavarian Sticks, and Mini Dogs in retail later this summer. Our expanded production capabilities enable us to aggressively grow our SUPERPRETZEL business. Our frozen novelty brand, including Luigi's Italian Ice, Whole Fruit, and Dogsters, also experienced healthy dollar and unit growth during the second quarter. We're also seeing solid sales momentum of these brands with key retail partners. We are also extremely pleased with the early success of our ¡Hola! Churros brand, with sales growing 43% this quarter and a healthy 37% year to date. As America's number one producer of churros, we see significant near and long-term growth opportunities of our branded products with major U.S. food distributors as well as the QSR, fast casual, and retail channels.

We expect to launch the ¡Hola! Churros brand in our retail channel in 2023, with the first shipments to commence in September. Finally, while the second quarter is a seasonally slow period for Dippin' Dots, we've made significant progress expanding into new channels and positioning the business for a very strong summer. The Dippin' Dots team worked quickly to install freezers in over 290 Regal Cinemas and plans for additional locations in the third quarter. The team also secured a test with AMC Theatres and another theater chain, which plans to be in 200+ locations in the back half of the year. We have a strong pipeline of opportunities as we leverage the breadth of our customer base and execute our cross-selling strategy.

In terms of product innovation, we continue to find new ways to leverage the combined power of our brands by recently launching an ICEE branded cherry and blue raspberry ICEE Dippin' Dots flavor in March. This new product is Dippin' Dots best product launch ever, exceeding the best by over 40% unit growth. We continue to evaluate Dippin' Dots branded frozen novelty products for retail channel. Turning to our operating initiatives. We have taken a number of actions over the last couple of years to increase efficiency and expand our capabilities to grow this business. Operationally, we continue to expand our production capacity and now have FIVE new automated lines supporting growth opportunities in churros, pretzels, and frozen novelties. A sixth line will be added in Q3. This added capacity supports our aggressive plans to grow sales of our core products.

In addition, we are completing the geographic optimization of our distribution and warehousing network by consolidating to a handful of locations, including three new state-of-the-art distribution centers. The first RDC will open in June in Terrell, Texas, while the other two are expected to come online later this year and early next year. The opening of these new RDCs will allow us to go from 30+ shipping locations to somewhere between six and eight strategically located facilities, and will significantly reduce our reliance on third parties for storage and logistics management. Two of these RDCs will also include freezer capacity for Dippin' Dots products to support expanding growth opportunities and more efficient distribution capabilities. This aligns with our strategic initiatives announced in fiscal 2022, including the implementation of a new ERP system and the outsourcing of our shipping logistics to NFI.

This supply chain transformation will play a pivotal role in reducing distribution costs and providing better service to our customers. We are confident that these combined initiatives position us for strong sales growth, improved operational efficiencies, and reduced distribution costs, and provide the platform to deliver incremental profitability. As it relates to M&A, the integration of Dippin' Dots into the J&J systems, processes, customer channels, and operations is going just as planned. We continue to evaluate potential M&A opportunities that complement our brand portfolio and our business model. In summary, we are confident that the foundation we are building is further strengthening the long-term competitiveness of our business and positioning J&J to deliver new levels of growth and shareholder returns. We have strong growth momentum heading into the back half of fiscal 2023, supported by our core brands and products.

Strategically, the team is focused on 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 around these strategic initiatives. The organization is excited about the opportunities ahead of us to continue building on J&J Snack Foods' long-term record growth and success. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken.

Ken Plunk (CFO)

Thank you, Dan. Good morning, everyone. I am pleased with our financial results for the quarter. More importantly, I am pleased with the opportunities we have in front of us to grow and improve these results. Hopefully, it is evident that we are making progress across our various initiatives and well-positioned for long-term success. Taking a look at the fiscal second quarter, net sales for the quarter totaled $337.9 million, a 20% increase versus the prior year period and a 15% increase versus the first six months of fiscal 2022. The strong top-line result was driven by growth across all three of our business segments, reflecting the health and resiliency of our business.

Our largest segment, food service, experienced a 23.8% increase in sales to $218.3 million, representing 65% of total company sales. The strong performance was a result of healthy growth across the segment, including 264.2% increase in frozen novelties, which also benefited from the Dippin' Dots acquisition, a 42.8% increase in churros, a 28.3% increase in soft pretzels, and a relatively flat performance by both handheld and bakery, down 1% and up 1.6% respectively. These results included approximately $16 million in Dippin' Dots sales, in line with our expectations given the seasonality of this business. Moving to our retail segment, sales increased 13.7% to $46.4 million compared to the same period in fiscal 2022.

Growth in this segment was driven by contributions from all subcategories, including 283.4% increase in handhelds, 9.8% increase in frozen novelties, 3% and 1.7% increase in biscuit and soft pretzel sales, respectively, versus the prior year. As it relates to our third segment, frozen beverages, sales were $73.2 million or a 13.7% increase versus Q2 2022, led by growth across all three subcategories. Beverage sales increased 18.2%. Repair and maintenance revenue increased 7.5%. Machine revenue rose 9.4% compared to the previous year period. Moving down to the income statement.

Gross profit came in at $90.4 million or a 38.3% increase versus prior year, leading to a gross margin for fiscal 2023 2Q of 26.8%. Favorably comparing to 23.2% in Q2 of fiscal 2022. This marks the highest Q2 gross margin since Q2 of fiscal 2019. While overall inflation has stabilized, we continue to experience year-over-year pressures on key commodity inputs such as flour, oil, eggs, mixes, and sugar. As Dan mentioned earlier, we estimate our inflation at approximately 9% compared to a year ago. We were pleased with our gross margin improvement in the face of these continued inflationary headwinds and see these results as further affirmation that our operational initiatives are beginning to have the expected results and positive impact on our business. Taking a look at expenses.

Total operating expenses increased $18.9 million, or 30.9%, and represented 23.7% of sales for the quarter, compared to 21.8% in Q2 of 2022. The increase largely reflects the addition of Dippin' Dots to our business compared to a year ago and ongoing inflationary pressures across many of our expense lines, in particular, distribution expenses. Distribution expenses increased by 34.7% versus the prior year, representing 11.3% of sales, compared to 10.1% in fiscal 2022. However, we saw a significant improvement on a sequential basis compared to fiscal 2023 Q1 and fiscal 2022 Q4, when distribution expenses represented 12% and 12.4% of sales, respectively. These improvements were led by a stabilizing inflationary environment and improved logistics management across our business.

Marketing and selling expenses represented 7.1% of sales versus 7.5% in the prior year period, as the marketing team continues to do a great job driving efficiencies and targeting how we allocate marketing dollars. Administrative expenses were 5.3% of sales in Q2 2022, compared to 4.1% in Q2 of last year, reflecting addition of Dippin' Dots in this year's expenses. As a reminder, Dippin' Dots is a highly seasonal business with most of its profitability taking place over the second half of the year. As such, and as expected, it had a negative impact on our results in the second quarter. This led to an operating income of $10.2 million, favorably comparing to $4.1 million in Q2 2022, or a year-over-year increase of 149.3%.

Adjusted operating income was $12.1 million, also comparing favorably to $4.7 million in Q2 2022. After considering income taxes of $2.4 million compared to $0.9 million in Q2 of fiscal 2022, net earnings increased to $6.9 million, resulting in reported diluted earnings per share of $0.36. This compares to $0.17 in the prior year period. Adjusted diluted earnings per share was $0.43, compared to $0.19 in Q2 of 2022. Adjusted EBITDA increased 52.5% to $27.5 million from $18 million in the prior year period, our effective tax rate was 26% in the second quarter. Taking a look at our liquidity position, we continue to maintain a healthy balance sheet, including $47.7 million in cash and marketable securities and approximately $92 million in debt.

We have ample availability under our revolver of approximately $123 million of additional borrowing capacity. This affords us the flexibility to strategically invest and support our business. We are currently investing close to $100 million in the year across various growth initiatives, including the completing the execution of new product lines and the investments in our RDCs. These results reaffirm the health, resilience, and potential of our business. As we enter the second half of the fiscal year, we continue to raise the bar in every aspect of how we do business and feel confident in our ability to effectively navigate this dynamic environment and deliver on our goals to create added value for our shareholders. I would now like to open the call to questions. Operator?

Operator (participant)

Ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star one one. If you have a question or comment, please press star one one on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Connor Rattigan from Consumer Edge. Mr. Rattigan, your line is open.

Connor Rattigan (VP and Senior Equity Research Analyst)

Good morning, guys. Thanks for the question.

Ken Plunk (CFO)

Good morning, Connor.

Dan Fachner (CEO)

Good morning, Connor.

Connor Rattigan (VP and Senior Equity Research Analyst)

Yeah. I wanted to spend a little time talking about food service traffic. It really seems like things rebounded nicely, especially in theaters. I mean, QSRs really seem to be holding up nicely across the space. I mean, I guess maybe could you maybe parse out by venue sort of what you're seeing traffic wise and maybe if anything is coming in ahead of your expectations?

Dan Fachner (CEO)

You know, that's a great question, Connor. Traffic is one of those things that we're keeping a really close eye on. As you know, when we ended the first quarter, we were a little concerned about it. As we came into the second. Is that coming through us?

Connor Rattigan (VP and Senior Equity Research Analyst)

I don't think so.

Dan Fachner (CEO)

All right. As we.

Connor Rattigan (VP and Senior Equity Research Analyst)

At the top.

Dan Fachner (CEO)

-the second quarter here, the traffic patterns seem to rise throughout the quarter. We're really pleased about that, but it's something that we're gonna watch really, really closely. It maybe started slow in the quarter and ended strong, but now we're into that all important, you know, next six months for this business. We're gonna watch it really closely. With threats of a recession out there and the things that we all read day to day, you know, that's one of those things that we have to, we have to be really mindful of, and so we're doing that. I don't know if I feel like we're completely out of the woods, but I love where we're at right now.

Connor Rattigan (VP and Senior Equity Research Analyst)

That makes total sense. Then, typically those next six critical months, right? It sounds like things are going really well with Dippin' Dots. With about $13 million in sales last quarter and $16 million this quarter, and I know that business is very heavily backloaded, but I mean, I guess just as far as that distribution rollout goes, you know, adding incremental theaters and whatnot, are we sort of right around where you expected or, you know, are we maybe ahead of schedule on that distribution rollout?

Dan Fachner (CEO)

You know what, when we bought it, we were pretty aggressive about what we think we can do with that business, and I remain really aggressive about what we're doing with it. I would say we're right about on par with where we think we need to be. I put a lot of pressure on that team. The group is a really solid group. They've integrated very well with the total J&J company. We're doing a great job in cross-selling activity across all of our channels. I like what we have coming in, and I would say they're right about on par with what we would have expected.

Connor Rattigan (VP and Senior Equity Research Analyst)

Okay, great. Good stuff, guys. Just one more from me here at the end. I mean, in any other world, COGS inflation of 9% would be shocking, but you know, you know, alas, here we are. Just a bit of a 2-parter here. I'm not sure if you quantified COGS inflation last quarter. If so, can you remind us what that was? Also just sort of looking at your inputs and maybe where your hedging is at right now, should we sort of expect that 9% to be more of like an annual run rate given the movement in eggs and other commodities, or just how should we think about that?

Ken Plunk (CFO)

Yeah, Connor, this is Ken. Great question. There's always so many variations of what's happening with inflation. You know, there's year-over-year comparison, which again, you're comparing the kind of the pre-storm of inflation a year ago, at least so far. We're gonna get to overlapping that later in Q3 and Q4. That's what's creating the really pronounced continued inflation year-over-year, because of what last year was. You know, flour has come down since last quarter. Cheese and dairy has come down since last quarter. You know, diesel has come down, but only $0.10 since last quarter. There are things moving. They're just not moving as fast, and they're lapping kind of the pre-inflation time of, you know, the same quarter a year ago.

You know, we came out of Q1 with our internally measured inflation still in the mid-teens, you know, and now we're at 9%. We kind of calibrate that also with external metrics. You know, if you look at recent data on CPI food, you know, whether it's at home or in a restaurant, that's still at 8.5%-9%. Producer Price Index, still in the upper eights. That kind of compares to our internal measurements of that 9% in the current quarter. As we go forward, again, we're still expecting gradual improvement, but not as much as what I would have thought two quarters ago. That could change. You know, eggs is a wild card, I think. Sugar is kind of the new problem. You know, it's up near double digits and projected to go higher.

It'll be a marginal improvement, I think. You will get the benefit later in Q3 and Q4 of lapping double-digit inflation of a year ago. I think that's where the year-over-year comparison will change a little bit.

Connor Rattigan (VP and Senior Equity Research Analyst)

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

Dan Fachner (CEO)

Thank you, Connor.

Operator (participant)

Thank you. Our next question or comment comes from the line... Again, ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone keypad. Our next question or comment comes from the line of Jon Andersen from William Blair. Mr. Andersen, your line is open.

Jon Andersen (Partner)

Hi. Good morning, everybody. Thanks for the question.

Dan Fachner (CEO)

Good morning.

Ken Plunk (CFO)

Good morning, Jon.

Jon Andersen (Partner)

Hey, just following up on that last question about inflation. I guess, one of the things I'm curious about is, you know, where you are today with respect to pricing to offset that inflation. I know it's kind of a year-over-year comparison that you provided 9% in the quarter. How does your pricing and the pricing contribution in the quarter kind of marry up with the inflation that you're experiencing now? Would you expect to make any adjustments, you know, to pricing one way or the other in the near to medium term?

Dan Fachner (CEO)

Jon, let me start, and then I'll let Ken talk a little bit about it. You know, we've had the conversation around pricing and, you know, over the last year, we took an awful lot of pricing, right? As so did many other people. To date this year, as a reminder, we took pricing in January in the ICEE group. Have not done anything on the snack food side to date. We are looking at it very closely. We're gonna watch it closely. We might do some spot increases where needed in different areas. You know, there's a real balance to making sure that you have the right pricing and watching the elasticity of your products. We're gonna be careful as we do that, but we're gonna watch it really closely. Ken, maybe you wanna touch on the numbers there.

Ken Plunk (CFO)

Yeah. Well, I think if you remember kind of the last few quarters, you know, we had a price increase late in 2021. We had second one in the March, April timeframe, 2022, and then we had the third one around the September, October. We've lapped one of those, and we've lapped pieces of the second one. Just to kind of remind everybody of that. In terms of your question on pricing, I think Dan and I always sit here and kinda say, "Well, if we'd have known kinda what's happening in the next 30 days, in the next quarter, we might have, in some cases, been more aggressive, you know, even late last year." From Q4 to Q1, there was still slight increases in inflation. I think the number was around 40-50 basis points.

You know, we're always kind of saying, "When's the right time?" I think as we sit here, there was probably a little bit more opportunity to take in some spots, particularly in retail. I think we're pretty well calibrated with price in the ICEE business and the Dippin' Dots business and really the food service business. I think the retail side is just something we continue to watch, and it's tricky with, you know, how we're, how we're competing in retail for volume and space. You know, a lot of the retailers are pushing back right now. You watch it day by day, and I think there may be pockets where, you know, we may need to do something at some point if things don't stabilize.

Jon Andersen (Partner)

That's really helpful. Thanks. Would it be... I'm trying to kinda hone in on a number here. I'm not sure if it's gonna be possible, but, you know, the organic growth in the quarter was strong at, I think, around 14%-15%, you know, excluding the Dippin' Dots contribution. You know, would it be fair to say that the price right now is maybe, you know, the majority of that or two-thirds of that and volume positive as well, but maybe not contributed at the same level as price?

Ken Plunk (CFO)

Yeah. I mean, price, you know, that's probably a fair number, I would say. You know, again, it depends on category and situation. I mean, I'll just tell you, for the ICEE frozen business on the beverage side, you know, they had volume growth of just over 10%. Total growth of 18.2%, I think. That is a really good sign, and a lot of that is the theater industry, as we mentioned, that really is starting to rebound, and the outlook from theater folks is really positive as well. I do wanna be clear, you know, there is a really nice influx of volume growth in our quarter this quarter, led by ICEE and even food service. Retail had volume growth, but it was a little bit lower.

You know, candidly, we're very proud of that because if you look at recent data on all of retail, most of them are reporting still declines in volume. We had a slight increase in volume in retail.

Jon Andersen (Partner)

For sure. Yeah, that's really helpful. The last one that I'll ask is related to gross margin. You, as you pointed out, made good progress, both year-over-year and progress sequentially. I think, you know, you've talked a bit in the past various times about restoring the gross margin rate to 30% or better, kind of pre-pandemic levels maybe. You know, what's the, as you sit here today, kind of the timeline that you're thinking about? Is that still, or, you know, kind of a target or what's the target? What's a reasonable way to think about the timeline for perhaps getting there? Thanks so much.

Dan Fachner (CEO)

Yeah. Great question, Jon. We're still bullish on getting ourselves to that 30% gross profit margin. We believe that we have a really good chance of getting there, still, as we've been saying, in the back half of the year, probably as soon as the third quarter. We think that's still a reality. We're gonna continue to fight for that and think we have a good chance at it.

Jon Andersen (Partner)

Thank you.

Dan Fachner (CEO)

Thank you, Jon.

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 open.

Todd Brooks (Senior Analyst and Managing Director)

Hey, thanks. Good morning, everybody.

Dan Fachner (CEO)

Good morning, Todd.

Todd Brooks (Senior Analyst and Managing Director)

A few quick questions for you. One, the organic growth that we saw in the second quarter, which was very impressive, can we talk to how much of that has been unlocked by the new lines coming on, so far this year, Dan? Or is most of the incremental growth from what those new lines will unlock from a capacity standpoint to benefit the company more in the second half of the year?

Dan Fachner (CEO)

I think that will continue to build. Those new lines, with the exception of a couple of the frozen novelty lines, just came on over this past quarter, and so we'll continue to see a nice build from those. The frozen novelty lines came on more in that first quarter-ish timeframe or slightly one before that. That will help us keep up with the level of business that we do during the summer months in the frozen novelty side. I love what we're doing with the new lines around churros, and you see that growth happening there by the numbers and also on the pretzel side and being able to release some new innovative products. I think, I think most of the growth is still yet to come from those lines.

Todd Brooks (Senior Analyst and Managing Director)

Is there a way, Dan or Ken, to think about what these new lines can contribute to organic growth as we're looking over the next, let's say, two to four quarters, just from the capacity to either launch new products or meet demand that maybe you weren't meeting last year?

Ken Plunk (CFO)

Yeah. I mean, I don't have an exact number, Todd. It gets pretty hairy, you know, when you kinda try to look at all the impacts, whether it's new products, innovation. I think what I could tell you is if those lines, you know, and when those lines get up to the capacity we expect, you know, everything else being equal, we think those probably present, you know, a $150 million-$200 million opportunity, once all those lines are at capacity. And that capacity for us is really in the 80%-85% range. It's gonna take us a bit of time to get there, some faster than others. You know, when we did the business cases on these investments, I mean, the returns are typically, you know, two to four years, depending on the situation.

That's kinda what the outlook could be once we're able to leverage these lines completely.

Todd Brooks (Senior Analyst and Managing Director)

That's great. Thanks, Ken. Second question. It sounds like now you've found your West Coast RDC. You're giving us some timing for when the three facilities should roll out. Can we just talk about the consolidation into the three facilities and the consolidation of shipping points? If you're looking at a longer term view on where distribution expenses can get back to, can we get back to the high single digits that we saw historically with this new facility structure?

Dan Fachner (CEO)

Todd, that is the absolute goal for the leadership team, and we talk about that a lot. We do expect to get back to those high single digits, and hopes that as we have this all in place, that we'll be able to get maybe even something better than what used to be. You're right, we did identify a West Coast RDC, and that one is on schedule to open up early in 2024, somewhere around February 1st. We're really excited about the way that that's coming together. We think we've spaced them out appropriately to be able to handle it as we move to them. We think that can have a really big impact on our business.

Todd Brooks (Senior Analyst and Managing Director)

That's great. Thanks, Dan. Then a final one from me. If we, if we look at the product newness and successes at retail, can we just talk about slotting fees maybe? What slotting fees run in the quarter, and what does the year-over-year comparison look like in slotting fees with all the new product activity that you have? Thanks.

Ken Plunk (CFO)

Yeah. Well, we're definitely investing in placement, Todd, we think long term that will benefit us. I don't have an exact comparison in terms of what we spent in slotting fees a year ago versus now, here with me, I can tell you that we're spending more and I think we're spending in the right places. It's something that as we get into this quarter and back half of the year, you know, we'll look to figure out the right way to balance all that to ensure that we're getting ultimate value for the space we're in. You know, there's a lot of retailers doing a lot of LTO type promotions, I don't know if you've been in any of the retail stores recently, you may have seen us on some of the end caps.

You know, it's an investment in that space and in marketing those brands that we think will ultimately pay off for us. I do not have here in front of me kinda what it was a year ago.

Todd Brooks (Senior Analyst and Managing Director)

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

Dan Fachner (CEO)

Thanks, Todd.

Operator (participant)

Thank you. Our next question or comment comes from the line of Andrew Wolf from C.L. King. Mr. Wolf, your line is now open.

Andrew Wolf (Senior Equity Analyst)

Thanks, and good morning.

Dan Fachner (CEO)

Good morning, Andrew.

Ken Plunk (CFO)

Good morning.

Andrew Wolf (Senior Equity Analyst)

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

Dan Fachner (CEO)

Well, no, that's absolutely correct, Andrew Wolf. We, you know, we've talked about this and, you know, we had gotten to a pretty high level of capacity in our plants on our core products. Any good salesperson wants to absolutely deliver excellent service to their customers. We've struggled a little bit with that to keep up with the kind of volume that we've had. That is really the core reason for investing in ourselves and investing in these new lines. We are now being able to aggressively go out and sell those things that we wanna sell. Continue to grow the business. We have just a really great pipeline coming on all fronts really.

Not just the snack food side, but, you know, the churros, now that being able to make those at the rate, and pretzels, in different shapes and sizes and, we're really excited about what the future holds with that. The team is out there aggressively selling, and it's nice to see.

Andrew Wolf (Senior Equity Analyst)

Okay. Thank you. Just specifically, you mentioned, you know, a retail launch of ¡Hola! Churros. You know, is that gonna be a national or regional or, you know... I mean, is this a sort of a big launch or sort of a crawl, walk, run? I mean, what how should we think about expectations for that specific launch?

Dan Fachner (CEO)

Well, we're out there selling it very heavily. We've had a lot of good feedback on it already. I think it's too soon to tell whether it will be a national launch or not, and how big that will be. I will tell you know, when you just think about the product line, and churros coming of age, that we're really excited about it. As we sell it to our retailers out there, we're getting a lot of good feedback from it. We think that's gonna go very well.

Andrew Wolf (Senior Equity Analyst)

All right. I'd like to follow up on, you know, the 30% goal on the gross margin. It's great to hear you say it could happen as soon as this quarter. You know, maybe Ken or Dan, whoever, whichever you guys or both of you. You know, there's a lot of different puts and takes that cause a lot of variability and pressure on gross margin. To me it looks like, you know, and I think people have been kind of poking at this. Looks like a lot of these headwinds are either abating or turning into tailwinds, particularly input cost inflation and your pricing. As we look at the back half, you know, I mean, if you hit 30%+ in the back half, is that reasonable that that can be into 2024?

There's also a lot of seasonality in there. You know, I think you alluded to in the release and in some of the commentary, you know, there's some increased promotionality. It sounds like maybe the retailers who, you know, with their volumes not being good are asking for that. You know, there's a lot of puts and takes. You know, if you could just walk us through some of those major ones as you guys think about your, you know, how you're planning your gross margin.

Ken Plunk (CFO)

Yeah. I mean, first of all, I think Dan spoke about it, Andrew, as we look to Q3 and Q4, we like the trajectory we're on. We're getting better at managing some of the costs. Some cases, inflation/deflation is helping a little bit. Also, I think we're doing some things to manage that and improve margins that way. We're also gonna be mixing out the business really strongly in Q3 and Q4 with the growth that we're having in ICEE and then adding really the peak seasons for Dippin' Dots. The combination of all that, you know, makes us feel pretty confident that we're gonna get to that 30% range here in Q3 and in Q4. As we go to further on and get into Q1, Q2 of next year, I think we're gonna be much better, much closer to that.

There may be a quarter or two when, you know, it's in the winter and sales of high margin items like ICEE and Dippin' Dots fall a bit where those margins might, you know, might not quite reach 30%, you know. I think our goal is that we're a business that year in and year out is, in totality, doing 30% or more of gross margin, and I feel like we're heading in that direction.

Andrew Wolf (Senior Equity Analyst)

Thank you. I'm sorry, I was on mute. Can I ask another question around your distribution commentary?

Dan Fachner (CEO)

Sure.

Andrew Wolf (Senior Equity Analyst)

You know, if you're going to realize, you know, an ultimate, you know, taking it back down to where you were, so that's hundreds of basis points of lower margin, you know, single-digit hundreds, but it's a, it's a, you know, big numbers. How much of that is, you know, rationalizing, you know, the sprawling, you know, distribution network that the company currently operates out of? How much of that is sort of NFI doing what they're doing? Lastly, how much of that is just the market kind of normalizing diesel prices coming down, maybe, you know, perhaps labor getting a little less tight? You know, can you just help us apportion, how you guys think about, you know, this really big bucket of cost savings that you anticipate?

Dan Fachner (CEO)

Well, you know, this has been one of our top five strategies for a while, the company potentially outgrew the distribution network that it had at one time. It was pretty clear to see that we needed to do something early on. It's a big undertaking. Getting ourselves from 30+ distribution points down to, call it six to eight, somewhere in that neighborhood, is gonna have a significant impact on the business. You kinda touched on all the three things that will make it better and allow us to get down to our goal of that single high digit number again. I don't know if we have it broken down, Andrew, about how much each one of those three areas will impact it.

I know that we're confident that all three of those areas will allow us to make some significant gains in that area. We're excited about the opportunity of opening these three new DCs. We get a chance to kind of touch and feel the first one here in July. Teams are working really hard at making sure that we open that with excellence.

Ken Plunk (CFO)

Yeah. There are various pieces to it. I think I've said this before, I'll add this. You know, we talked about our business case on the RDC strategy kind of going from this 30-ish to six to eight and having these three dedicated RDCs. You know, at the time, we estimated that as at least a $10 million savings opportunity. We talked about, you know, the work with our partner and basically moving logistics management to them and thought that was around a $4 million opportunity. Again, those were projections based on business cases, we still feel very good about what we're gonna get out of all that. You add that in, there will be some deflation. It helps with some other things we're doing around things like inventory management and metrics we're putting in place.

All of that combined gives us a lot of confidence that we're gonna get this back down to that, you know, 9%, you know, hopefully below that range. I think that is, that is certainly within our, you know, our targets here, and we believe we'll eventually get there once all this starts working in tandem.

Operator (participant)

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

Robert Dickerson (Managing Director of Consumer Staples Equity Research)

Great. Thanks so much. Just two quick questions from me. I guess, you know, we're sitting here now, early May. I think Ken, you had a couple comments on, you know, mixed impact as we think about, you know, kind of the latter part of this fiscal year into next year. I would assume kind of conversations have been had, right, with some of your, or let's just say, you know, kind of across channels as we get into these kind of heavier demand months. You know, any color you have, either Dan or Ken, on just, you know, kind of how those conversations have been going, let's say, with like, with amusement parks, right? Last year there was some pent-up demand. Seemed like it was kind of a banner year.

This year, I don't know, maybe the economic backdrop is a little bit more pressured, but maybe going to amusement park is more cost effective than taking a trip to Europe. I'm just trying to kind of gauge, kind of how you've, you know, kind of feel demand as you start to enter kind of this core season. I have a quick, profitability question. Thanks.

Dan Fachner (CEO)

I'll kind of touch on this. Amusement park industry has been very good for us, for quite some time. As you talk to them today, they still feel pretty bullish about what's coming this year. So much of it is dependent on weather and the weather conditions throughout the next few months. Our big customers feel like they've got a really strong year coming. It was impacted in a negative way over this past quarter, with all the rain and hard weather we had on the West Coast. Our amusement park industry was impacted. Overall, we think that we'll continue to have a strong year. I just got back from CinemaCon, the theater industry, and they're feeling really, really strong about what's to come.

They feel like they have a great lineup of some tremendous movies that are gonna be released over the year and really even released over the next three, four months. It was good to feel that momentum with that group and the hopes of it coming back really strong this year. We're encouraged by that. I guess what I would say, Rob, is we feel good about what's coming over the next 6 months. We feel like we're positioned well. I like each segment of our business. I like what Dippin' Dots is doing, I like what ICEE is doing, and I like what the snack food side of the business is doing. We feel good about what's to come.

Robert Dickerson (Managing Director of Consumer Staples Equity Research)

Lovely. Cool. Just, I guess on the margin side, as it kind of pertains to each of the segments, right? I mean, we're seeing, you know, a little bit of differentiation in kind of how your operating margin has been coming in at food service and retail supermarket. While, you know, Q2 frozen beverages, I don't know, maybe that's the best you've op margin you've put up in any Q2. I'm just curious, like, you know, as we think, you know, on the go forward, you know, is kind of the expectation here that, you know, the frozen beverage margin actually, you know, can continue to surpass what we've seen historically?

Back to kind of a comment I think Ken made, you know, that in itself can provide some of the margin mix positive, while maybe kind of the ramp, you know, and reversion back to the margins we used to see in food service and retail supermarket could be a little slower. It's like basically as we look at the back half of the year, right, frozen beverages always perform better on a margin side. For the full year, right, food service and retail supermarket actually were pretty good too. Just trying to gauge really just the next couple quarters. There's probably more acceleration on frozen beverages, maybe a little less acceleration of food service and retail. Thanks.

Ken Plunk (CFO)

Yeah. I think you're spot on with your observations, Rob. On frozen ICEE, yeah, we feel really good about where we're at in terms of sales and opportunities and where our margins are at, and do expect them to continue to be, you know, where they're at. I don't know if they're at historical levels. Off the top of my head, Rob, but I can tell you they're meeting our expectations right now in terms of where we're at with rate on ICEE. On food service and retail, you know, we're progressing but slower. I feel better about the ground we're making up on food service. You know, that business segment operates a little bit differently in terms of how you kind of manage cost and price increases.

You know, I think we probably, you know, have come closer on that one. Retail, I do expect us to get better, and we're looking at some things right now on areas to improve margin. I mentioned earlier what some of that impact was, which is us, you know, being a bit more promotional. We think that there are good long-term advantages to that. There's also some cases where, you know, the pricing environment is a little bit tougher to navigate on the retail side, and we're probably not yet covering all the cost increases from a year ago. As those come down, we should continue to see that margin get better.

Robert Dickerson (Managing Director of Consumer Staples Equity Research)

Perfect. Thank you.

Ken Plunk (CFO)

Thank you, Rob.

Norberto Aja (VP of Investor Relations)

Thank you, Rob.

Operator (participant)

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

Todd Brooks (Senior Analyst and Managing Director)

Thanks. Let me squeeze one more in here. We've talked about over the last couple of quarters, the negative impact that Dippin' Dots has had on operating expense because it's just those in-incremental expenses against relatively seasonally soft revenues. We get into these next two quarters where they are strong quarters for Dippin' Dots. What do we see for sequential improvement in kind of the operating expense lines between marketing, distribution, and administration as Dippin' Dots, instead of a drag, turns into either a neutral or a contributor to maybe some leverage on those lines as we get to Q3 and Q4? Thanks.

Ken Plunk (CFO)

Todd, this is Ken. You know, you characterize that really well. Just to add a couple of things to that. You know, just over 70% of the sales of Dippin' Dots will be in Q3 and Q4, that gives you kind of a magnitude of the seasonality of that. Obviously as you have higher sales at really nice margins, that's going to mix out, you know, well across the business. It's also gonna cover on a rate basis, the incremental, you know, SG&A cost of Dippin' Dots. You know, that's the point we're making in this quarter is you really add just a little over $10 million in SG&A costs this year for Dippin' Dots versus a year ago when we didn't have Dippin' Dots.

If you take that out, we came in roughly where we were last year, about 4.1% sales for SG&A expenses. You know, that will get better in terms of a leverage standpoint when you put more sales in that business. You know, the way I would kinda answer the other part of your question, distribution expenses, you know, we talked about came in 11.3% overall for the company. It was at 12%, 12.4%. I think we'll continue to see that improve, particularly if diesel prices get a bit more aggressive on declining. You know, they only went down around $0.10. We expect that to continue to move down and, you know, I'm not gonna throw out an exact number, but it should be below 11.3%.

The other parts of the PNL will certainly leverage, a bit closer, I think, what we do historically when we get into strong sales periods for Dippin' Dots.

Todd Brooks (Senior Analyst and Managing Director)

That's perfect. Thanks, Ken.

Ken Plunk (CFO)

Thanks, Todd.

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. Fachner and management for any closing remarks.

Dan Fachner (CEO)

Great. Thank you, and thank you for your time today. I hope our results and our comments clearly reflect why we are optimistic about the future of J&J Snack Foods and our ability to create value for employees, partners, and shareholders. I'm so proud of the teams and all the hard work that they're doing out there. I mentioned earlier about being out at CinemaCon last week, where we were awarded Supplier of the Year by one of the largest theater chains, and that just feels good to have that happen. We look forward to sharing our fiscal 2023 third quarter results with you later this year. In the interim, should you have any questions or wish to speak to us, please contact our investor relations firm, JCIR, at 212-835-8500. Thank you very much, and thanks for being on the call today.

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.