J & J Snack Foods - Q3 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Snack Foods Fiscal 2023 Third 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 session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Norberto Aja of Investor Relations. Sir, please begin.

Norberto Aja (Director of Investor Relations)

Thank you, Michelle. Good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2023 Third Quarter Conference Call. We will start in just a minute with management's comments and your questions, but before doing so, let me take a minute to read the safe harbor language. Today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As such, all statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, expectations, and objectives, as well as our anticipated financial performance. These statements are neither promises or guarantees and involve known and unknown risks, uncertainties, and other important factors that may cause results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Factors discussed in our annual report on Form 10-K for the year ended September 24, 2022, and/or other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management's estimates as of the date of this call, August 1, 2023. While we may like to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause expectations to change. 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 our 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 Ken Plunk, our Chief Financial Officer. Following management 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 third quarter results. I'd like to start by thanking our employees across all J&J segments for a record quarter. I am so proud of our team and their efforts to continuously improve on our business. Their hard work and dedication are allowing us to post record top and bottom line results and create added value for all our employees, partners, and shareholders. For the fiscal third quarter, revenues increased 12% to $425.8 million, and net earnings increased 124.8% to $35 million, led by strong gross margin performance and improved distribution expenses. Our gross margin initiatives and strategies are starting to gain momentum, helping us to drive improved profitability.

Like most of our industry, we are beginning to see cost inflation stabilize and our pricing actions are now better aligned with costs. This, combined with improved margin mix and added efficiencies in our manufacturing plants, should have us well positioned to deliver consistent margin performance. Ken will provide more details on our financial performance later in the call. Today, I'd like to begin by talking about the operations and supply chain side of our business. As we've discussed in prior quarters, our team has been focused on several initiatives to create more efficiencies in our business and enhance our capabilities. Combined, these initiatives will help us transform how we operate as a company. Here's a quick update on these key priorities. Our team has improved logistics management over shipping, warehousing, and product distribution through our partnership with NFI.

NFI now manages 100% of our transportation network and is helping us improve truck capacity, minimize miles, reduce stops, enhance customer service, helping us lower shipping, handling, and storage costs. Next, we are transforming our warehouse network to simplify how we manage product through our warehouses. This includes the build-out of three geographically positioned regional distribution centers, adding freezer capacity, including more storage space for Dippin' Dots products in two of these three locations. The first of these three RDCs recently opened in Terrell, Texas in June, and the other two locations are scheduled to open later this calendar year and early 2024. These initiatives will simplify our logistics network by moving from over 30 warehouse locations to less than 10, resulting in improved customer service and lower distribution costs.

Also, we have rolled out 6 state-of-the-art production lines, adding capacity to support growth in our key product categories such as pretzels, Churros, and Frozen Novelties. These lines are more automated, creating production efficiencies and higher output metrics, all aligned to support our growth opportunities in these core products. Our operations team has implemented stronger discipline within the plant that is driving efficiency improvements in areas such as waste reduction, maintenance spend, SKU productivity, and hours utilization. We have improved our financial and operational foundation via the implementation of a new ERP system last year. This has enabled us to integrate processes and controls across our operations, and is now providing better data to manage the key KPIs across operations, supply chain, and finance. We expect to continue to see additional benefits from this initiative.

Together, these operational and supply chain initiatives are transforming our business and will play a pivotal role in reducing distribution and manufacturing costs and providing better service to our valued customers. One of our key strategies is to leverage the strength of our core products and brands to drive growth and improve profitability. Our team is working across segments and channels to create new selling opportunities and drive innovation. I'd like to highlight a few of our brand priorities. Dippin' Dots is quickly penetrating new markets and gaining placements in new channels. One of our biggest growth opportunities is in the theater channel, where we are now in approximately 375 Regal Theaters and actively testing with the other two largest theater chains.

Like we reported last quarter, we are leveraging our brand portfolio to create products like Dippin' Dots Icy Cherry and Blue Raspberry, which is already the best new product launch for Dippin' Dots ever. Finally, we are pursuing numerous vending opportunities as we find new ways to serve our customers. ¡Hola! Churros has exceeded our expectations, with sales growing by over 19% in the most recent quarter and almost 30% year to date. We now have significant market share and are confident in our ability to maintain our leadership position. We are finding growth opportunities that include bringing ¡Hola! Churros into the retail space in the fourth quarter, and new business with major U.S. food distributors, QSR, and fast casual channels. SUPERPRETZEL is one of our most powerful brands, with endless potential it seems.

In the fourth quarter, we will be launching SUPERPRETZEL Bavarian Sticks, Bites, and Mini Dogs into food service and retail, creating new snacking occasions and solidifying our dominant position within Soft Pretzels. ICEE, it continues to benefit from a recovering theater industry, as well as from its strong consumer appeal across a growing number of occasions. There is recent momentum in the theater industry as attendance moves close to pre-pandemic levels and stronger movie releases are hitting the market. We continue to gain placements in QSR and are currently discussing a major opportunity with a club channel customer. On the marketing side, a new campaign is currently being tested in the Atlanta market called Let the Kid Out. That includes out-of-home, curb-in, and digital media support, and is receiving very positive reviews. We continue to have strong plans to market and grow this brand across our portfolio.

We have really built a business balanced across multiple products, channels, and customer segments, which together helps us adapt to changing consumer and snacking occasions. We manage this portfolio to maximize our growth opportunities across food service, retail, and frozen beverage segments. This quarter is a great example of our flexible business model and our capabilities to continue driving both sales and growth and profit growth. Before transitioning to Ken, let me highlight a few additional insights within each of our business segments. Food service continued its strong performance from prior quarters, with sales up 11.9% to $255 million. SUPERPRETZEL Bavarian Soft Pretzel Bites and SUPERPRETZEL Jalapeno Cheese Filled Soft Pretzel Knots launched this quarter, and we gained placement of a SUPERPRETZEL Bavarian Soft Pretzel Sticks at a large family entertainment center.

Also, we launched ¡Hola! Churros Chocolate Filled across food service, including incremental placements with distributors, cash-and-carry, national accounts, and individual operators. We're also testing a significant opportunity with a large QSR customer, with full rollout scheduled in early calendar 2024. Funnel Cake Fries. Funnel Cake Fries are a big opportunity in QSR and casual dining, growing 10% in Q3. Zaxby's, a fast-casual restaurant chain with over 900 locations across the U.S., recently informed us that they will move from a test of our 5-inch funnel cake to a permanent menu item in Q4. As it relates to the retail segment, sales were up 0.2% to $61.2 million. For the quarter, the consumer environment was a bit soft in the first couple of months, as retailers and grocery stores reported lower traffic in their stores and smaller baskets.

This trend did improve in June, highlights the fluctuation we are seeing in retail consumer spending. We believe this impacted sales of Soft Pretzels and biscuits into Q3, as both were down 12.2% and 15.3% respectively compared to the prior year. We continue to see strong growth opportunities in retail, especially in our SUPERPRETZEL, Frozen Novelty, and Churros. The SUPERPRETZEL brand continues to resonate with consumers, with purchase intent up 50% versus a year ago. As previously discussed, we are currently launching SUPERPRETZEL Bavarian Sticks, Bites, and Mini Dogs into retail, supported by strong sales plans and marketing. Frozen Novelties continue to be an opportunity led by LUIGI'S, Dogsters, and ICEE sticks, as the performance of each product continues to outpace the category. Hola!

Churros will begin shipping in the Northeast region this month as we bring this growing brand to retail. Moving to our third business segment, Frozen Beverages. We saw record Q3 sales of $109.6 million, reflecting the strong rebound in the theater channel, as well as ongoing, ongoing strength in our Mexico operations. There's a lot of excitement in the theater industry on the heels of stronger movie releases and higher food and beverage consumption per visit. Theater attendance is improving closer to pre-pandemic levels. Beverage sales grew 26.1% in Q3, driven by 9% volume increases in the quarter. Our maintenance and service sales grew 5.5%, and equipment sales grew 17.1%, driven mostly by the continued Checkers rollout.

Finally, we continue to make progress growing consumption and placement in amusement, mass merchandisers, and restaurants. As it relates to M&A, we continue to evaluate potential M&A opportunities that complement our brand portfolio and business model, and that offer an attractive shareholder return. Financially, we are well positioned to invest in growth when the opportunities align with our business model. In summary, I applaud the excellent work everyone across the organization is doing to improve every aspect of our business. I am confident that our team is aligned on our core strategies and executing the right initiatives to grow our business and improve our operations. We are well positioned in the market with a long-term focus on growing sales and profits and delivering shareholder returns. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken?

Ken Plunk (CFO)

Thank you, Dan, good morning, everyone. Like Dan, I am so proud of our J&J employees and their many contributions in helping us deliver a record quarter. We are executing the strategy across our organization with a focus on driving top line and bottom line growth. I am equally pleased with our ability to show marked improvements across most of our operational KPIs, including gross margin and distribution expenses. We believe that we have the right plans in place to drive continued growth and deliver value to our shareholders. I would like to take a few minutes to walk you through our results.

Net sales for the quarter totaled a record $425.8 million, a 12% increase versus the prior period, and sales through nine months totaled $1.115 billion, a 13.7% increase versus the first 9 months of fiscal 2022. The strong top line result was driven by growth across all three of our business segments and across most of our core products, and reflects the health and resiliency of our business. Our largest segment, food service, experienced an 11.9% increase in sales to $255 million, representing 59.9% of total company sales.

This strong performance was a result of healthy growth across the segment, including a 176.4% increase in Frozen Novelties to $37.4 million, which included an incremental $29.2 million in Dippin' Dots sales and showcases the benefits from the Dippin' Dots acquisition. Also, a 19% increase in Churros, a 13.6% increase in Soft Pretzels, and a decline in Handheld and Bakery of 32.9% and 8.3%, respectable. Moving to our retail segment. Sales increased 0.2% to $61.2 million, compared to the same period in fiscal 2022. Handheld sales increased 180.2%, driven by expanding growth with a major mass merchant.

We did experience sales decline in Soft Pretzels, biscuits, and Frozen Novelties of 12.2%, 15.3%, and 4% respectively, due to softness in traffic and basket, basket size with retailers and grocery chains. As it relates to our third segment, frozen beverages, sales were a record at $109.6 million, or a 20% increase versus Q3 2022, led by strong growth across all three subcategories. Beverage sales increased 26.1%, led by gallon increases of 9%. Machine revenue increased by 17.1%, and maintenance revenue increased 5.5% compared to the previous year period. As highlighted by Dan earlier, we made significant progress, improving gross margins and distribution expenses, driving operating income growth of 127.2%, a $27 million improvement over last year.

Starting with gross profit, Q3 gross profit improved to $142.9 million, or a 31% increase versus the prior year. Gross profit as a percentage of sales was 33.6% in Q3 2023, comparing favorably to 28.7% in Q3 2022. It was driven by a combination of better product mix, alignment of pricing and costs, production efficiencies, as well as the stabilization of inflation pressures on the back of historic highs last year. Overall, we experienced low single-digit inflation for the quarter. Cost of key ingredients, including flour, oil, dairy, and meats have declined, though we are still experiencing double-digit inflation in sugar, sweeteners, and mixes, which continues to impact products such as Frozen Novelties and Churros. Looking at expenses, total operating expenses increased $6.8 million, or 7.7%.

It represented 22.2% of sales for the quarter, compared to 23.1% in Q3 2022. Distribution costs were 2.4% of sales in the quarter, down sequentially from 11.3%, and much improved from 12.7% in the prior year period. Our supply chain transformation initiatives, along with declining diesel prices and carrier costs, are starting to drive improvements in shipping efficiency, cost per truck, and cost per pound. Marketing and selling expenses represented 7.4% of sales, versus 6.3% in the prior year period, and 7.1% in Q2 2023, and were driven primarily by the timing of trade shows and sponsorships.

Administrative expenses were 4.4% of sales in Q3 2023, compared to 4.1% in Q3 2022, and 5.3% in Q2 2023. Driven mostly by the expected seasonal impact of adding Dippin' Dots. This led to an operating income of $48.3 million, or a 127.2% increase compared to $21.3 million in Q3 2022. Adjusted operating income was $51.1 million, or a 104.8% increase compared to Q3 2022.

After the impact of income taxes of $12.6 million, compared to $5.6 million in Q3 fiscal 2022, net earnings increased to $35 million, resulting in a, in reported diluted earnings per share of $1.81, or $2.51 for the first nine months of fiscal 2023. This compares to $0.81 a share and $1.56 a share in the prior year periods. Adjusted diluted earnings per share was $1.92 for the quarter and $2.76 for the first nine months, compared to $0.95 per share and $1.72 in the prior year period. Adjusted EBITDA increased 73.3% to $66.6 million from $38.4 million in the prior year period, and our effective tax rate was 26.5% in the third quarter.

Looking at our liquidity position, we continue to maintain a healthy balance sheet, including $70.2 million in cash and marketable securities. In addition to the investments we are making across our business, we also continue to pay down debt from approximately $125 million when we acquired Dippin' Dots to $83 million at the end of fiscal Q3 2023. We intend to continue returning value to our shareholders via dividend payments, given the health of our balance sheet and our strong free cash flow generation. We have ample availability under a revolver of approximately $132 million of additional borrowing capacity. This affords us added flexibility to strategically invest and support our business. In summary, we are executing our strategy and key initiatives and setting the foundation for continued growth. Our teams are aligned across the segments.

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

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. The first question comes from Connor Rattigan with Consumer Edge. Your line is open.

Connor Rattigan (Senior Equity Research Analyst and Vice President)

Good morning, guys.

Ken Plunk (CFO)

Good morning, Connor. How are you doing?

Connor Rattigan (Senior Equity Research Analyst and Vice President)

I'm doing well, thank you. Thank you. I guess just first, first things first, just from the top line, you know, obviously, the results came in a little lighter than, you know, I think we and other folks had expected. I mean, I guess maybe could you guys sort of maybe break out what you saw there, maybe if anything came in, you know, ahead, below your expectations, if you saw any pockets of, you know, weakness or softness ahead of expectations there?

Ken Plunk (CFO)

Yeah, Connor, this is Ken. Good question. Yeah, let me break that down for you a little bit. You know, take the food service segment, and you got to kind of break it in because there's some different things going on here. If you look at Soft Pretzels, Frozen Novelties, excluding Dippin' Dots, Churros, that combination of products was up over 14%. Somewhat aligned with, I think, what you would expect and what we would expect, and ties into what we talked about in emphasizing growing those core products. If you look at handhelds and bakery, in handhelds, there's around $3.5 million in there that is a cost pass-through based on an agreement that we have with one of our club channel customers.

That's the units stay the same, but we pass on inflation that we got, we pass that on to the customer. When you think about bakery and handheld, a big part of their business is sold through retail. As we talked about in the retail segment, the retail industry saw declines in traffic, saw softer baskets, and then that pretty much aligns with, I think, anything you read from some of the core retail grocery channels that have come out recently. Those behaved similar to that. And then if you add in Dippin' Dots, Dippin' Dots is an incremental $29.2 million in those novelties. Frozen beverages, really excited about what we saw there. Beverage sales up 26%, the overall segment up 20%, volume up, you know, over 9% in the quarter.

We talked about the recovering theater industry, so you're starting to see the consumer come back to theaters, the last few weeks having some of the biggest weekends they've had in a long, long time. All in all, we feel really good, but there's certainly some things going on with the consumer. There's probably a little bit in the amusement area of impact from some of the hot weather. You know, some of our amusement customers have talked about some impact on traffic, in that category. You know, it's kind of a quick overview. All in all, though, we feel like we're executing the plan we need to execute and, you know, we're quite pleased, you know, given all of that and where we ended up with sales.

Dan Fachner (CEO)

Yeah, Connor, I just add to that, we, we are confident in where we ended up. Much like what we've seen throughout this year, there's been some ups and downs throughout the year. Even this quarter, April, you know, as it started, was, was off. There was a consumer confidence issue, I think, going on at the time with a lot of different things happening in our world, and it kind of grew again throughout the quarter. We've watched that really closely, but I, I don't think we had any big surprises as you asked, in the quarter.

Connor Rattigan (Senior Equity Research Analyst and Vice President)

Okay, great. That was really helpful, guys. Then I guess just, just looking at the gross margin too, right? I mean, you know, any of these you guys called out, you know, pricing, mix, you know, stabilized inflation, right? I mean, I guess could you maybe help us sort of, I guess, dimensionalize the, the extent of the impact in each one of those, just to kind of get a sense of that?

Ken Plunk (CFO)

Well, there's a lot in that, Conor, in terms of kind of parsing all that out. I mean, the way I would answer your question is relative to mix, you know, when you see us growing in pretzels, Churros, Frozen Novelties, in our biggest segment, food service, that mix, you know, really drives stronger margin, and it's a part of our strategy. At the same time, you know, some of the declines in bakery and handhelds are, are strategic. You know, we're sharpening the pencil on SKUs and some SKUs we got to have that weren't driving the margins we needed, and we're tweaking that, and we're investing in other products in those areas that we expect to see growth down the road. The combination of both dialing down in that area and then growing in those higher ones helps mix.

A little bit of that going on in retail as well. The other thing is, when you mix in a record quarter for ICEE together with the biggest quarter for Dippin' Dots, those are both very accretive to our top-line margin, and so that mixed in, you know, had a big role in our strong gross margin performance. You add on inflation coming down, I think, more than all of us expected. You know, the CPI was just shy of 3%. PPI, I think, was closer to 5%. That was about a, I think, a 200 basis points decline just from quarter-to-quarter. We benefited from that. You know, costs in some of IT, commodities, flour, you know, oils, things of that nature came down and, and certainly that played a role in that.

Then the other thing we talked about is our initiatives to get better in how we operate and get better in, you know, in how we produce product and start to drive some efficiencies. You know, it all came together really nicely this quarter, and I think it kind of sets the foundation going forward, and we've somewhat moved out of that really crazy 12-18 months of historic inflation.

Connor Rattigan (Senior Equity Research Analyst and Vice President)

Okay. All right. Thank you as always, guys. I'll go ahead and pass it on.

Dan Fachner (CEO)

Thanks, Connor. Thanks, Connor.

Operator (participant)

Please stand by for the next question. The next question comes from Andrew Wolf with C.L. King. Your line is open.

Andrew Wolf (Senior Vice President and Senior Equity Research Analyst)

Well, thank you. Good morning, and congratulations on the, the quarter and the results.

Dan Fachner (CEO)

Thank you very much, Andrew.

Andrew Wolf (Senior Vice President and Senior Equity Research Analyst)

My pleasure. The results speak for themselves. Just wanted to ask you about, sort of what, kind of a prior question on, on the sales, and you guys kind of touched on, you know, I guess, pass through some deflation to a large customer. In the past, you've talked about SKU rationalization, you know, in lower margin lines, which I think bakery is, and, perhaps handhelds as well. Is there any, you know, deliberate, if you will, you know, kind of portfolio management of the lines in that way where you're, you know, not bidding up for contracts that just, you know, don't make sense when you have, you know, other lines of, you know, products you can produce and distribute that maybe have 2 or 3 times the, the margin?

Dan Fachner (CEO)

Yeah, you know, Andrew, you've heard us talk a lot about kind of our strategy of pushing our core products, and we continue to do that, and we'll continue to do that. Also in the bakery, which we're real fond of the bakery and, and what happens there, but what we do have a strategic initiative there, to make sure what we're bidding on and, and what we make and who we sell to, also complements our strategy of what we've been talking about, getting to that 30% gross profit margin. So absolutely has there been a strategy around it to reduce some SKUs that weren't operating there. Then the team, that bakery team, is really focused on new business and, and what they bring to the organization.

As I, as I said in the opening, I'm proud of, of all of our teams and the way that they're executing the strategy.

Andrew Wolf (Senior Vice President and Senior Equity Research Analyst)

Is there any way to quantify, beyond the, you know, the pass-through of some deflation of what the, this SKU rationalization might have been as a drag against the sales growth?

Ken Plunk (CFO)

No, I, I, I'm not going to quantify what that is exactly. You know.

Andrew Wolf (Senior Vice President and Senior Equity Research Analyst)

Mm-hmm.

Ken Plunk (CFO)

It comes in rows with decisions you make, you know, month to month. I mean, the bulk of it is going to be in bakery. You know, I think as you look at the bakery numbers, it's a combination of that SKU ride together with the fact that a lot of that bakery is in, is in retail and grocery bakery groups, where, you know, there has been some declines, often in the traffic in those venues.

Andrew Wolf (Senior Vice President and Senior Equity Research Analyst)

Okay. Thanks, Ken. I understand. Dan, if I could just get back to, you know, the way you're talking about your sales and just kind of I know you don't guide to us, but, just wanted to ask, like, how when you're thinking through your sales budget for the board or however, you know, how are you thinking about, you know, the current quarter and going into fiscal 2024, for your budget about, you know, where the sales growth comes from in terms of price versus velocity gains, on existing products? It sounds like you're really bullish on new placements and your, you know, new distribution.

I'm not trying to fish a number out of you, but I know you don't guide, but I am trying to get sort of a sense of where you see the growth, you know, as, as, especially as economy is showing, you know, less inflation. Obviously, price is gonna be less and less of a driver of sales growth. You know, where, where would your volume. You know, I guess to focus more on the volume growth, do you see it more in, velocity in this kind of economy or more in your distribution gains? Thank you.

Dan Fachner (CEO)

Great, great question, Andrew. To kind of highlight, I probably see it on both sides of it, right? I do think that we have the opportunity through some of the marketing activity that our team is doing, to grow velocity in locations that we're already in. Then I love, as we've talked about some of the new innovation that we have and some of the new products that we're releasing and their ability to complement and grow the business as well. The teams are working really hard and have, what I consider a really strong pipeline, to look at for this next year. You know, as I talked about before, there's some volatility in the market. We'll watch that closely. Part of what I love about our company is that we have a really balanced portfolio.

And you've lived through this with us. There was a period of time when, when theaters were down, but retail was up, and now we're living in a period of time where theaters are up and, and retail's come back to more of a normal level. I like the way that this business has been built with great products, and great customers around a, a portfolio that allows us to ebb and flow that way. I think, this quarter we'll continue to see some growth, and then I look forward to seeing the budgets as they roll up over the next month or so for next year.

Andrew Wolf (Senior Vice President and Senior Equity Research Analyst)

Great. I appreciate that, that color. If I can add just one kind of follow-up on your commentary on the marketing budget being, you know, expenses being up, excuse me. When you talk about trade shows and sponsorships, and I think in the past you said, you know, to get some of the products like Churros, all the Churros into retail, you know, there would be slotting and things like that. Is that kind of what's this is about, or is this separate from that? In the current quarter, we should look for, you know, the slotting fees as part of the, the marketing spend.

Ken Plunk (CFO)

Yeah. It's really driven by kind of what we mentioned is both timing and, and I would even say kind of the level of investment we're making in trade shows and sponsorships, particularly trade shows. I don't know if you've been to one recently that we're at, but, you know, kind of the level of kind of bringing together, you know, good brand presence and, and, and, and event, you know, we really blowing that out. I mean, it's really amazing what the marketing team has done to bring all our brands together and display it in a way. We're making investments there, and we believe that's paying off. You know, it's driving new channels in, it's driving new conversations. It, it's really about that.

I mean, full year, you know, we'll probably be in the ballpark of where we typically are, maybe a hair above that, Andrew, but it's money well spent. I think it's starting to really tie into all the other strategies we're doing, to drive, you know, interest in our brands.

Dan Fachner (CEO)

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

Andrew Wolf (Senior Vice President and Senior Equity Research Analyst)

Okay. Thank you.

Ken Plunk (CFO)

Thank you.

Operator (participant)

Please stand by for the next question. The next question comes from Rob Dickerson with Jefferies. Your line is open.

Rob Dickerson (Senior Equity Research Professional)

Great. Thanks so much. Good morning.

Dan Fachner (CEO)

Good morning, Rob.

Rob Dickerson (Senior Equity Research Professional)

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

you know, as you talk about all the distribution opportunities, you know, whether it's in food service, retail, what have you, I mean, is, is it fair to say at this point, you know, kind of despite some of the innovation of the overall portfolio, that, I mean, it seems like kind of the more highly likely, more highly probable kind of revenue generation upside here at J&J is kind of primarily being driven by Dippin' Dots? I don't mean that as a negative, but just sounds like the runway is pretty long.

Dan Fachner (CEO)

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

We're proud of the team and the way that they're managing it, and the way that they have integrated with the whole J&J organization, to find new growth and, have a lot of hopes for it in 2024. Go ahead.

Ken Plunk (CFO)

I've got two real quick just to add to that. Everything Dan said, yeah, optimistic and aggressive in the way we believe we can grow Dippin' Dots, but, you know, Dan rattled off in the script, you know, his focus on Churros as a, ¡Hola! as a brand, SUPERPRETZEL as a brand, ICEE as a brand. All of those businesses performed quite well in the quarter, you know, Soft Pretzels and Quick Service, which is the biggest, you know, area that we sell Pretzels in, was up 13.5%. Churros was up 19%. ICEE beverages by themselves was up 26%. you know, I certainly wanna give credit to what we do in Dippin' Dots, but our, our focus areas are growing, and we feel really good about the, the opportunities down the road in those areas as well.

Rob Dickerson (Senior Equity Research Professional)

All right. Super. Then I guess just to jump to the margin side, you know, clearly gross margin's back strong. Then also, you know, like, frozen beverage, I think that's, like, maybe the highest margin I've ever seen. So I, I'm just curious, you know, as we think forward into Q4, then, you know, clearly we start thinking about next fiscal year, kind of where things sit today, you know, is some of this kind of margin mix shift in the portfolio sticky? You know, like, is there anything, you know, that we saw in Q3 in frozen beverages maybe like a one-off, so we don't wanna get ahead of ourselves?

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

Ken Plunk (CFO)

Yeah. As we go into Q4, we feel very good about the position we're in from a gross margin standpoint. I think if you look at Q4 and Q3 historically, getting, you know, a little bit of slowdown as kids go back to school and that kind of thing, you know, the margins will probably be a little bit south of what we were in Q3, but they should still be very good, because we think we've passed the hurdle of some of the things that challenged us and most in the industry, over the last several months. And if theaters continue to perform the way they are, you know, it's going to be a big shot in the arm with both our IG business and as we penetrate theaters, in Dippin' Dots, again, those high margin parts of our portfolio.

Yeah, I think we're pretty confident. You know, we told you we're gonna lead this business to getting it to be a very margin business year in, year out. This is a really good start to that, and we expect to have good momentum going into Q4. Obviously, as you get into Q1 and Q2, there's a seasonality of that. Those margins won't be at that level, but they will be much better than, you know, over the last year or so.

Dan Fachner (CEO)

Rob, you've heard us talk about kind of working all angles of the P&L, that's exactly what we're doing, we're, we're really proud of each and everyone who's, who's focused on that, right? We're certainly in the summer months where the mix helps us for sure. Also, you know, just the, the movement in the IG business, not only domestically, but a really strong quarter out of our Mexico operations. Proud of what that team is doing. We think that we can have those margins up in that 30-plus area like we've been talking about for a while. It, it certainly gets a boost when you're in the summer months, but we're proud of, of what the teams are doing at all angles of the P&L.

Rob Dickerson (Senior Equity Research Professional)

All right, great. Then maybe just lastly, you know, I know, clearly kind of overall basket and cost inflation size improved, like you're saying. Also, you know, seeing, you know, some kind of material step-up in sugar and sweeteners and, kind of, anybody with decent exposure to those commodities have been saying the same thing, and we all see, we all see it. You know, it sounds like overall, clearly kind of pricing relative to your overall cost structure has really improved. We've also heard from others that, you know, look, if some of these inputs on the sweetener sides remain elevated, the industry overall could potentially, you know, think about incremental pricing. Is there anything in that that's kind of come up internally in terms of kind of those two core commodities?

You know, you're thinking about it, you know, more from an overall portfolio dynamic versus kind of, let's say, Frozen Novelties. That's it. Thanks.

Dan Fachner (CEO)

Yeah, no, it's a great question, Rob. We do a monthly review with our different teams around the P&L. In our review in the snack food side of our business this, this last month, we talked a little bit about the Frozen Novelties and what we may or may not do. So we will look at it individually like that. We're gonna watch it closely. You're right, if that doesn't come down, then, you know, we may have to approach that in a different manner.

Rob Dickerson (Senior Equity Research Professional)

All right. Super. Thank you so much.

Dan Fachner (CEO)

Thank you.

Ken Plunk (CFO)

Thanks, Rob.

Operator (participant)

As a reminder, to ask a question, please press star one one on your keypad. Please stand by for the next question. The next question comes from Todd Brooks with Benchmark Company. Your line is open.

Todd Brooks (Managing Director and Senior Analyst)

Hey, good morning, guys, and congrats on the, the results in the last quarter. It was very surprising, margin improvement that you delivered. Congrats.

Dan Fachner (CEO)

Thank you, Todd.

Todd Brooks (Managing Director and Senior Analyst)

Two quick questions here, if I may, and this is just kind of getting this first year of Dippin' Dots correct. Can you talk about what the seasonality typically is for Dippin' Dots revenues Q4 versus Q3, and I'm just trying to triangulate. You've talked about a couple annual goals for Dippin' Dots, and I think we did a little bit less than $30 million here in Q3. Would you expect that business to grow meaningfully in Q4? And if you look at overall company revenues, would you expect that Q4 will be your peak revenue quarter or Q3?

Ken Plunk (CFO)

Yeah, Todd, you know, we've, we've talked about and been very clear about the seasonality of Dippin' Dots in Q4, particularly on the profit side, you know, I talked about that. I would say Q4 is going to probably perform similar to, to Q3, you know, maybe a little bit better. Like you, we're still kind of running this business, but we know obviously what we did last year. We know what some of the new initiatives and things we have in place and some of the areas of growth, but you're probably looking into Q4. That behavior is somewhat similar to Q3 for Dippin' Dots.

Todd Brooks (Managing Director and Senior Analyst)

Okay, great. Thanks, Todd. Based on Dippin' Dots, similar to, to a little bit better in Q4, more core products, the SKU rationalization, just trying to think about what, what the headwinds are, if revenues are relatively similar between the quarters, that would cause much of a gross profit margin moderation sequentially.

Ken Plunk (CFO)

Are you asking, Todd, about the headwind on sales or on gross margin?

Todd Brooks (Managing Director and Senior Analyst)

Well, if, if, if sales are relatively similar, quarter-over-quarter, and you're getting a little bit more Dippin' Dots revenue, and you've SKU rationalized some lesser margin products for core margin products, I'm just trying to figure out why gross profit should drop much from the 33%+ level that you did in Q3 when we get to Q4?

Ken Plunk (CFO)

Yeah, it's, it's really more about kind of historical seasonality. You know, as you get into mid to late August and certainly into September, you know, a lot of kids who are obviously, when they're out of school, active in theaters and amusement parks and others, your business is just hugely heavier in Q3 and Q4 in those areas. It's just more of the seasonal behavior of the consumer, which traditionally we've seen a little bit lower gross margin in Q4 than Q3, but I wouldn't say it would be dramatic, Todd.

Todd Brooks (Managing Director and Senior Analyst)

Okay. That's fair. One final follow-up question on the gross margin. I looked back historically just to try to map that seasonal movement in gross margins, you get back to 2018, 2019, and you were looking at maybe 200-300 basis points higher gross margins in the back half of the year than the front half of the year. Do you think that's where we normalize to? I know that Dippin' Dots is a new piece of business that may drag a little bit more in the first half, but what would you expect that go forward type of gross margin spend spread to be between the first half and the second half of the year?

Ken Plunk (CFO)

Yeah, I think the spread, certainly, I would say the next year or so will be similar. I think all quarters, relative to what it was a year ago, particularly the two that we've already gone through, you know, should be better. So Q1 is coming up here, should be better than Q1 of last year because, you know, we've gotten past some of the inflationary impacts and, you know, and some of our initiatives are starting to pay dividends. If you just look quarter to quarter and think about the behavior of margin, you know, it'll continue to be strongest in Q3 and Q4. Then, you know, more relative to history in Q1 and Q2.

What we're focused on, like we did the action business years ago, is as we grow the penetration Dippin' Dots into places like theaters, that provides a bit better seasonality for us and helps those winter months in Dippin' Dots. Which we think will pay dividends for us down the road. That'll be kind of a gradual move to that, I think, as we build that business up.

Todd Brooks (Managing Director and Senior Analyst)

Okay, great. Then, Dan, just a final one for you, and I'll jump back in. You talked about the 6 new production lines that have been launched over the course of this year. As you start looking out to 2024, how meaningful is that incremental capacity and throughput/productivity as a revenue driver for J&J? Because it- it's levered on those core categories where you're seeing the best growth around novelties, pretzels, and Churros. Thanks.

Dan Fachner (CEO)

Yeah, good, good question, Todd. We're really excited about those six new lines. We've talked a little bit in the past about having capacity constraints in those core products that we think there's a lot of runway with. The teams are out there really actively being able to sell things like Churros and different forms of pretzels and maybe even bringing some of that core into our bakery division as well, and that's being worked on right now. They become really meaningful for us.

They, they kind of are at the heart of the strategy that we have in place right now with being able to grow pretzels, Churros, Frozen Novelties, and being able to broaden that, like releasing a new pretzel bite or a pretzel stick, that we have had some great early interest in. So I think it becomes very meaningful for us. It, it allows the teams to get out there and sell on the things that we do best and on the things that help us drive the margin mix that we've been talking about.

Todd Brooks (Managing Director and Senior Analyst)

Okay, great. Thanks. See you, Todd.

Dan Fachner (CEO)

Thanks, Todd. Tom?

Operator (participant)

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

Dan Fachner (CEO)

Thank you for your time today. In closing, we are excited about the opportunities to continue growing this great business of ours and confident that we have the right people, products, partners, and strategy to maximize these opportunities. We look forward to sharing our fiscal 2023 full year results later this year and updating you on the positive impact the various operational and strategic initiatives are having on our business. In the interim, should you have any questions or wish to speak to us, please contact our investor relations firm, JCIR, at 212-835-8500. Thank you, and have a great rest of the summer.

Operator (participant)

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