J & J Snack Foods - Q4 2023

Transcript

Operator (participant)

Thank you for standing by. Welcome to the J&J Snack Foods fiscal 2023 fourth 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 this session, you will need to press star one one on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja (Head of Investor Relations)

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods fiscal 2023 fourth 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. 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 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 nor guarantees that involve known and unknown risks, uncertainties, and other important factors that may cause results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Factors discussed in our annual report on Form 10-K for the year ended September 30, 2023, and our other filings with the Securities and Exchange Commission, could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. Any such forward-looking statements represent management's estimates as of the date of this call, November 16, 2023. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause expectations to change. In addition, we may also reference certain non-GAAP measures on the call today, including Adjusted EBITDA, operating income or earnings per share, all of which are reconciled to the nearest GAAP measures 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, and good morning, everyone. We appreciate you joining us this morning to discuss J&J Snack Foods' fiscal 2023 fourth quarter and full year results. J&J had a great ending to our fiscal year. We delivered record high net sales and profitability for both the 3 and 12-month periods, with improved gross profit margins. Our results underscore the tremendous progress we are making across the organization, thanks to the dedicated efforts of our employees and the positive impact of the strategic initiatives undertaken over the past two years. Our top-line results marked the sixth consecutive quarter and the third consecutive year of double-digit net sales growth, totaling $443.9 million, up 10.8% for the quarter, and $1.56 billion, up 12.9% for the year, reflecting $178 million in incremental sales.

More importantly, our results were driven by continued growth across all three of our business segments on both a quarterly and a full year basis, highlighting the health of our business and consumer appeal for our products and brands. I am pleased with the success of our work to improve margins and drive profitability. Gross margin improved to 32.8% and 30.1% for the quarter and year, respectively, and we lowered distribution expense as a percentage of revenue for both periods. This led to operating income and Adjusted EBITDA increasing by 93% and 55.2%, respectively, for the fourth quarter, and 77.2% and 46.3%, respectively, for the full year. Ken will review our financial performance in more detail in just a few minutes.

As I reflect on the year, our company has never been more aligned in its vision and strategy. We ended this year with strong momentum across our business segments, guided by five core strategies: grow and protect our brands, dominate core categories, sell across the portfolio, invest in our future, and embrace our culture. We are collaborating better than ever and finding new sales opportunities across our portfolio. This strategy is aligned to our financial goals to grow sales above the market, create expense leverage and grow profits faster than sales. I would like to highlight a few of the successes from the fourth quarter that support our strategy. Let me start with our focus on our strategies to grow our core brands and products, and how we are collaborating and cross-selling across the organization.

We increased our marketing investments and added new production lines to support growing opportunities with SUPERPRETZEL. In the fourth quarter, we launched filled jalapeño knots nationwide with a major theater customer and introduced a private label Bavarian pretzel with a major food service distributor. In retail, I am pleased to report that we gained SUPERPRETZEL availability with Walgreens, while also expanding pretzel dogs with new retail customers. In addition, we launched frozen SUPERPRETZEL Bavarian sticks with major grocery and mass merchant customers. Looking ahead to fiscal 2024, we are planning to launch a system-wide pretzel croissants with a strategic convenience customer. We also expect to be able to further expand frozen SUPERPRETZEL products among major retailers throughout the year, and have plans to add fresh-baked SUPERPRETZEL Bavarian sticks and buns to the in-store bakery category of several strategic customers.

Moving on to our ICEE brand. I'm so proud of our frozen beverage team for delivering a record quarter and year of sales and profitability. We continue to make progress growing consumption and placement of our ICEE and SLUSH PUPPiE brands in amusement, mass merchandisers, and restaurants. Also, the theater industry continues to gain momentum, and our Mexico team delivered another stellar quarter and year. As we look forward, our team is rolling out a self-serve program to a major club store customer in early fiscal 2024, and we continue to have positive momentum with tests in QSR and family entertainment channels. Turning to ¡Hola! Churros, we are really pleased with the success of this brand in its first year. Sales grew over 23% for the year and 8% for the fourth quarter.

With the production capacity we added this year, we have a strong pipeline of growth opportunities. This quarter, we commenced the retail rollout of ¡Hola! Churros in the Northeast with several regional grocery retailers. We also successfully completed a market test with a major QSR sandwich chain for churros that will begin to roll out system-wide in early calendar 2024. The best example of how we are executing product development and leveraging cross-selling opportunities is in Dippin' Dots. You may recall, we closed the acquisition of Dippin' Dots in June 2022. In the first year under J&J's ownership, the brand achieved all-time record high sales and profitability, growing over 13% and 80% respectively. We are bringing new flavors to the market, like the recently launched ICEE Cherry and Blue Raz ICE flavor, the best new flavor launch in Dippin' Dots history.

We are looking forward to next year's launch of a new cookie dough offering called Frozeti Dough. Our rollout for Regal Cinemas is almost complete, and we are adding test locations for two other major theater chains and expect to continue building our presence in the theater channel in 2024. Also, we are testing a vending program in amusement parks, clubs, theaters, and entertainment venues, and have an in-store freezer test with a major convenience store. We also remain laser focused on improving our go-to-market strategies, including finding added cross-selling opportunities, securing new client wins, and entering and growing in new geographic markets. We are excited about the opportunities ahead of us in the international markets, such as Mexico. We have recently added an international business development leader to identify opportunities to expand key products and brands like SUPERPRETZEL, ¡Hola! Churros, and Dippin' Dots into new markets.

Our product portfolio extends across over a dozen product categories, from soft Pretzels, churros, and handhelds to bakery goods, dog treats, Italian ice, and frozen beverages. We also sell into more than a dozen distinct venues, including school cafeterias, theaters, amusement parks, airports, stadiums, and supermarkets, as well as restaurants and convenience stores. Our team is aligned and focused on driving plans to leverage our portfolio of products to add growth across our many channels and customers. As we've discussed for the last couple of years, one of our core strategies is to build capability and invest in our future. Let me begin with our warehousing network. I am pleased to report that we now have two new regional distribution centers open, one in Texas and the other in New Jersey. We are on track to open the third RDC in Arizona in early calendar 2024.

The three RDCs will be used to store and distribute most of our products as we decrease our points of distribution from over 30 to less than 10. This will include added freezer storage capacity for Dippin' Dots, which is really the key to our growth plans for that brand. It will also result in improved customer service and lower distribution costs. We expect this initiative to provide at least $10 million in annual cost savings as we ramp up over the next 2 years. As you know, we are partnered with NFI over a year ago to manage our logistics and transportation network... and are seeing efficiency improvements that are lowering shipping, handling, and storage costs. NFI now manages all of our transportation network, improving truck capacity and routing and enhancing customer service.

We are also just beginning to leverage the six recently added state-of-the-art production lines as we add production capacity to our core products, such as Pretzels, churros, and Frozen Novelties. And not only do these lines provide more capacity, they are creating production efficiency and higher output metrics through better automation. Transitioning to M&A, we continue to be highly disciplined in our approach. We evaluate opportunities that complement our brand portfolio and business model and that offer attractive shareholder returns. Financially, we have the resources and the balance sheet to invest in growth when opportunities align. In summary, our momentum is strong, and we are aligned on a strategy that positions us well for continued success in fiscal 2024 and beyond. I am so proud of the J&J teams and their relentless focus on satisfying the consumer every time they enjoy one of our products.

Our focus on cross-selling is opening up new opportunities and channels, which creates new selling opportunities across our portfolio. The diverse nature of our business, along with the power of our brands and the affordable price point of our products, is something that we are confident will continue to serve us well. We believe this momentum, together with improved operational efficiency, positions J&J to deliver long-term value to our employees, partners, and shareholders. Our success is anchored by a winning culture, and I want to thank our J&J employees for their efforts to deliver a record 2023 year. With that, I would now like to pass the call over to Ken to review our financial performance in more detail. Ken?

Ken Plunk (CFO)

Thank you, Dan. To echo Dan's comments, J&J ended fiscal 2023 on a strong note, including record fourth quarter and annual net sales and profitability. I'd like to take a few minutes to walk you through the results. Net sales for the quarter totaled $443.9 million, a 10.8% increase versus the prior year, and sales for the full year totaled $1.56 billion, a 12.9% increase versus full year fiscal 2022. Our sales results this quarter and fiscal year included an extra week compared to the prior year and contributed an estimated 6.8% and 2% to sales growth respectively.

Food service, our largest segment, saw Q4 2023 sales exceed Q4 2022 by $13.5 million to $270.3 million, or an increase of 5.3%, including approximately $35.2 million in sales from the recent acquisition of Dippin' Dots. We saw continued strong sales across all of our product lines, including a 14.6% increase in Pretzels, 9.7% increase in Frozen Novelties, an 8.1% increase in churros, and a 2.2% increase in bakery. Dippin' Dots sales increased almost 12% in the quarter. Handheld sales decreased 21.8%, driven primarily by a contractual cost true-up agreement. Volume for core food service handhelds increased for the quarter.

This led to Q4 2023 food service segment operating income of $17.5 million, or an increase of 175.8% versus the prior year period, reflecting top line growth as well as improvement in margins and added leverage from lower distribution expenses. Moving to our retail segment, Q4 2023 retail sales increased 21.2% to $64.8 million compared to Q4 2022. Retail sales were driven by a 205.5% growth in handheld sales, a 32% increase in biscuit sales, and a 16.7% increase in Frozen Novelty sales, led by LUIGI'S, Dogsters, and ICEE Sticks. Soft Pretzel sales grew by 6.7% versus the prior year period, led by the expanded placement of SUPERPRETZEL Bavarian Sticks by the Mini Dogs with several retail customers.

This resulted in Q4 2023 retail segment operating income of $3.6 million, or an increase of 237% versus the prior year period, driven by top line growth as well as improvements in margin and lower distribution expenses. As it relates to our third segment, frozen beverages, segment sales were $108.7 million and beat Q4 2022 sales by 20.6%. Beverage sales grew 24.8% or $14.2 million higher than Q4 2022, led by double-digit volume growth and healthy consumer trends across key channels, including convenience, amusement parks, mass merchants, restaurants, and theaters. The Barbenheimer effect drove strong theater performance above pre-pandemic levels, as well as higher food and beverage consumption per visit.

Machine service revenues increased 6% versus the prior year period, reflecting strong maintenance call-off while equipment sales increased 33.2%, representing our second largest year ever, and was driven by strong growth from new clients and convenience customers. Q4 2023 operating income in the frozen beverage segment also improved to a record $20.6 million, a $6.4 million increase compared to Q4 2022. Overall, we've made significant progress in improving gross margin and distribution expenses. Our focus on improving gross margins through an improved mix of core products, better calibration of cost and price, and cost of goods efficiency is clearly benefiting our results. For the quarter, gross profit totaled $145.7 million, a 25.8% increase compared to Q4 2022.

This led to a gross margin of 32.8%, favorably comparing to 28.9% in Q4 2022. This allowed us to reach our goal of 30% gross margin for the full year, a marked improvement from 26.8% for the full year in 2022. Overall, we experienced slight deflation for the quarter. The cost of key ingredients, including flour, oils, dairy, and meats, have declined, though we are still experiencing double-digit inflation in sugar sweeteners, which continues to impact products such as Frozen Novelties and baked goods. Looking at expenses, total operating expenses increased $9.8 million, or 10.4%, representing 23.4% of sales for the quarter, compared to 23.5% in Q4 2022.

Distribution costs was 10.8% of sales in the quarter, much improved compared to 12.4% in the prior year period. Marketing and selling expenses represented 7% of sales versus 6.4% in the prior period, driven primarily by incremental promotional and marketing support on core brands and new products. Administrative expenses were 5% of sales in Q4 2023 compared to 4.3% in Q4 2022, attributable to higher performance-based bonus payments compared to the prior year and investments in capability. This led to an operating income of of $41.7 million, or a 93% increase compared to $21.6 million in Q4 2022. Adjusted operating income was $45.8 million or a 77.8% increase compared to Q4 2022.

For the quarter and the year, the extra week contributed an estimated $2 million in operating profit. After the impact of income taxes of $11.3 million compared to $3.9 million in Q4 of fiscal 2022, net earnings increased to $30.4 million, resulting in reported earnings per share of $1.57 or $4.08 for the full year. This compares to $0.90 and $2.40 in the prior year periods. Adjusted diluted earnings per share were $1.73 for the quarter and $4.50 for the full year, compared to $1.05 and $2.76 in the prior year periods.

Adjusted EBITDA increased 55.2% to $62.2 million from $40.1 million in the prior year period, and our effective tax rate was 27% in the fourth quarter. Looking at our liquidity position, I'm pleased with our ability to quickly delever on the back of the Dippin' Dots acquisition. We were able to reduce our debt from approximately $125 million when we acquired Dippin' Dots, to $27 million at the end of fiscal Q4. Our focus will continue to be on maintaining a healthy balance sheet and prudent leverage positioning, which positions us to continue investing in the growth of our business and returning value to our shareholders. Our cash and marketable securities at the end of the quarter were $49.6 million.

In addition, we have ample availability under our revolver of approximately $188 million in additional borrowing capacity. In summary, we are confident that the decisions we are making and the steps we are taking to transform our company are driving results and laying the foundation for future success. I would now like to turn the call over to the operator for Q&A.

Operator (participant)

Thank you. As a reminder, to ask a question at this time, 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 our Q&A roster. Our first question is gonna come from the line of Jon Andersen with William Blair. Your line is open. Please go ahead.

Jon Andersen (Partner and Equity Research Analyst)

Hi, good morning, everybody. Congrats on the quarter.

Ken Plunk (CFO)

Thank you very much, Jon. Thanks, Jon.

Jon Andersen (Partner and Equity Research Analyst)

I wanted to, you mentioned in the prepared comments that, I think it was kind of a, a forward-looking, thought around maybe an algorithm, longer term algorithm. You mentioned sales growth above that of your principal end markets, expense leverage, and earnings growth as a result above the rate of sales. Could you talk a little bit more about that? Did I read that right, as, maybe kind of a new way to communicate how you think about the growth of the business top and bottom line going forward? And, perhaps then, you know, kind of narrowly in on, 2024... using that as a framework in how you're thinking about end market growth, your own growth, and perhaps margin expansion. Thank you.

Ken Plunk (CFO)

Yeah. Hey, Jon, this is Ken. Great, great question. Yeah, we've been operating kind of under this, you know, what I call financial formula for really the last couple of years, and probably haven't stated it as clearly as we did in this script. But it really gets to what I've talked about before, is we're focused on the entire P&L. And we've kind of foundationally set the goal that sales wise, we wanna drive our business to grow sales faster than the market. As we're doing that, and as we're investing in capabilities and efficiencies, our job is really to leverage the P&L. As those sales grow at that pace, that obviously provides you a better ability to do that.

At the same time, a lot of the initiatives that we've undertaken have been done to improve, say, distribution expenses as a rate of sales, to figure out how we can operate more efficiently in our plans. So day in and day out, we kind of operate under that kind of financial formula to think about how we should kind of hold ourselves accountable, to managing this business, both now and yes, going forward.

Jon Andersen (Partner and Equity Research Analyst)

And then that's helpful. And, you know, as we look ahead to fiscal 2024, I mean, it sounds like you have a tremendous amount of new, you know, new business activity. You know, a lot of cross-selling going on, a lot of new distribution for, I guess, new items in both food service and at retail, ICEE placements, you know, in food away from home venues, et cetera. I mean, how should we be thinking, you know, broad strokes about, you know ... What are your growth expectations for 2024, given just kind of what seems like a really strong pipeline? And then, could you talk also about maybe price and volume? Are you still benefiting from price right now?

Would you expect going forward that, you know, the growth is gonna largely be volume driven?

Dan Fachner (CEO)

They're good questions, Jon. You know, we're feeling good about, and you saw that in my comments, feeling really good about the momentum that we have going into 2024. We've talked a lot about the different areas of our business that we're working on, and one of those is the cross-selling effect across our businesses. We have such great relationships in different areas that we're able to bring, you know, other sides of our businesses in and introduce the products, and we really see that working. As I talked about, we have a really nice pipeline coming into 2024, so we're feeling pretty good about that. From a price and volume standpoint, we were fortunate in this past quarter to see volume really increase across our categories, just about all of them.

And we think that there's an opportunity for us to continue to do that. I'll let Ken talk about the pricing, but I think we've pretty well lapsed that pricing effect now, and we'll be looking at some additional pricing in some of the areas in 2024 as well.

Ken Plunk (CFO)

Yeah, Jon, if you recall from prior calls, the last price increase we took was last, gonna call it September, October, so we've lapsed. You know, the other two, we've certainly lapsed and we've lapsed portions of that. But there was a little bit of price increase, benefit in the past, in this quarter, Q4. But a really good sign, as Dan said, is, you know, much more of that growth, is coming from volume, particularly in retail and frozen beverages, had really nice volume quarters. And yes, you're correct, you know, given where the kind of the inflation, deflationary environment is right now, as we look forward, we would expect probably more of our growth to be from volume than from price as we look to the next year.

Jon Andersen (Partner and Equity Research Analyst)

Okay. One more from me, and I'll get back in the queue. You were able to achieve kind of your gross margin, I guess, near term or medium-term gross margin objective of getting, you know, to 30%, you know, in this fiscal year. And you finished really strong in the back half, you know, north of, I guess, in the second half of the fiscal, probably north of 33%. And I know there's some seasonality in there, et cetera, but I guess not to put you under the gun, but what's the ... Is there kind of a new interim target, or should we, you know, is there more room to move in a constructive direction in terms of gross margin?

I'm just thinking about your commentary around 6 new production lines that are scaling and more efficient, the focus on core brands in the mix of your business and that being beneficial. It would just seem there's more room for improvement on that gross margin line, but I don't wanna get ahead of myself in thinking about that. Thanks.

Dan Fachner (CEO)

Right. You know, another good question, and you know, we've been talking about this now for over a couple years, and our goals that Ken and I have wanted to drive the business to, and to get to that 30% gross profit margin. Really proud of the teams to have followed the strategies to allow us to get there.... And yes, Jon, we, you know, we might be a little even more bullish there. We think our strategies are working. We think some of the new lines allow us to make products more efficiently. We think our teams are working hard in every facet and are starting to look at that 30% as a floor on which we can grow from. How quickly? You know, again, we have some seasonality to it.

We're coming off the back end of the summer months, where Dippin' Dots and ICEE are a big part of our sales, and as you get into the winter months, that isn't as strong. But we think we can continue to grow from where we landed this year, for sure.

Jon Andersen (Partner and Equity Research Analyst)

Great. Thanks. Thanks, thank you, guys, and congrats again. Good luck.

Dan Fachner (CEO)

Thank you, Jon.

Operator (participant)

Thank you. And one moment as we move on to our next question. And our next question is gonna come from the line of Connor Rattigan with Consumer Edge. Your line is open. Please go ahead.

Connor Rattigan (Senior Equity Research Analyst)

Hey, guys, good morning. Thanks for taking our question.

Dan Fachner (CEO)

Good morning, Connor. Good morning, Connor.

Connor Rattigan (Senior Equity Research Analyst)

Yeah. So, so Dan, I think I just heard you mention that you're expecting some pricing next year. And, so if I'm not mistaken, you guys are pretty much back to pre-pandemic margins with deflation plus commodities. I guess, just how do you go to customers and sort of push that pricing through while they know you're experiencing deflation? And I guess maybe could you provide a little color into your visibility into your input costs for next year, and, you know, maybe any hedging you have in place, and I guess, should we kind of expect that deflation to continue next year? Thanks.

Dan Fachner (CEO)

Good question, Connor, and we are experiencing deflation in some of the areas, and yet we are having double-digit inflation in others, like sugars and sweeteners. And that impacts some of our business pieces like the ICEE side or the Dippin' Dots side or pieces of our Frozen Novelties. And so, you know, there will be some areas that we will be able or will be taking price increases in, and probably need to, maybe have needed to already. And yet there will be other areas that will be taken a look at, and I'm sure we'll be challenged in, and we're prepared for those areas as they come. So there will be some pricing that we'll take. ICEE is pretty consistent about doing that at the first of the year.

I believe that we're scheduled for that again. Ken, do you wanna mention the other piece of that?

Ken Plunk (CFO)

Yeah, Connor, in terms of kind of contract coverage, I couldn't say enough good things about the procurement organization. So whether it's flour, whether it's sweeteners, whether it's, you know, something like eggs or whatever, I think they're managing that very well. In some cases, you know, we've got contracts out for the next 3 months, some cases it would be 6-9 months, but think we're really well positioned to kind of maintain and manage and minimize, you know, any other inflation or maximize deflation in that, in how we buy. You know, in terms of the outlook, I mean, that's always hard to say. You've seen, you know, different political and just international things happen that can drive things pretty quickly, whether it's the Ukraine situation.

So, you know, those wild cards I think are still out there. But absent any of that, I think it's gonna be a pretty stable environment. I mean, I don't see a lot of significant more deflation, but I think most of these categories will hold pretty well. But I don't expect to see a lot of inflation. CPI, I think, came out yesterday at around 2%. Production CPI is generally about 100-150 basis points higher than that, 'cause there's a bit of a trail there. As we look forward, I think the forecast on inflation is in that, you know, 1.5%-2% range.

You know, that's probably how we kinda feel about it, and how we're trying to manage what we do in terms of procuring materials and how we do that.

Connor Rattigan (Senior Equity Research Analyst)

Okay, perfect. Very thorough. And then I guess just, just one more from me. So, Dan, in your prepared remarks, you mentioned targeting international growth, especially down in Mexico. I guess first, can you remind us if you currently have any international operations? And I guess just, is this more of an exploratory project, and at worst, we expect this to be like a tangible 2024 impact? And then, I guess, just kind of stepping back as well, you know, we've seen a lot of CPGs, you know, that are U.S. focused, kind of attempt to migrate to international markets and would really run into issues gaining distribution and also experiencing some profitability challenges, you know, given the skew to more, traditional retail and also just a lack of scale.

I guess, just sort of what is the plan in place to sort of, you know, drive that distribution growth maybe and maybe minimize those profitability headwinds?

Dan Fachner (CEO)

Yeah, and down in Mexico, our operation is really centered around ICEE today. And they've really had a tremendous year. They had a record year in both sales and profits, and proud of what that team's doing down there. We wanna be able to expand on some of their business. We wanna be able to maybe take some of our products that they aren't operating with today and expand them down there, such as Dippin' Dots or some of our snack food items, and think that there's a real opportunity for us to grow. We do do a little business internationally today, and feel like there's an opportunity for growth for us. And so for kinda really the first time, we've brought on an international business leader to help us identify that and to do some.

Steps along that way. I don't see that being impactful to our 2024 year. I think it will build over a period of time, and we have enough experience to know to be careful about how we do that. And so, we're excited about the opportunity. We're excited about the opportunity of bringing on this business leader and had some experience with him in the past and think that he will hit the ground running for us. But I probably would caution not to be overly optimistic about that in 2024.

Jon Andersen (Partner and Equity Research Analyst)

Okay, got it. Sounds good to me. Thanks, guys.

Dan Fachner (CEO)

Thank you, Connor.

Operator (participant)

Thank you. And one moment as we move on to our next question. And it looks like our next question is gonna come from the line of Todd Brooks with The Benchmark Company. Your line is open. Please go ahead.

Todd Brooks (Senior Analyst and Managing Director)

Hey, thank you, and congrats on a strong quarter and a strong year.

Dan Fachner (CEO)

Thank you very much, Todd. It's a great way to end the year, for sure.

Ken Plunk (CFO)

Yeah. Thank you, Todd. Good morning.

Todd Brooks (Senior Analyst and Managing Director)

Good morning. Dan, I wanted to start off, when you started rattling off new opportunities for 2024, and John kind of hit on this, it was quite the laundry list. I don't necessarily remember that much internal momentum at J&J. Could you maybe highlight for us the two or three most impactful opportunities as you see it for 2024, that investors should be most focused on?

Dan Fachner (CEO)

You know, we really do have a great pipeline. You know, our snack food side, led by Bjoern Leyser, is doing such a good job identifying opportunities as we are building capabilities to be able to grow within, you know, some of our core markets. You've heard that talked about in our, you know, core strategies. So some of the great opportunities we have are right within our core. I love what we're doing. We released our SUPERPRETZEL sticks this past quarter, and they sold really, really well. And not surprised by that either, Todd. I knew that was gonna be a good hit, and it was, and I think we have some great opportunities there within the retail environment. Also, within the retail environment, we released the ¡Hola!

Churros and early readings on that are strong, and I think that will continue to grow alongside the growth of the SUPERPRETZEL hot dogs that we make that I think have a real opportunity. So some really good things inside retail. On the food service side, you heard me touch on a test that we had over this past quarter with a large sandwich chain that is gonna roll out come January of 2024. Think that has a really big impact that can make a difference for us in this coming year. Again, able to do those things because we've built that capacity out there. On the bakery side, I love what they're doing there.

You know, we've been reshaping that piece of our business, but we're gonna be able to release some of our core products, the sticks and the buns inside the bakery, and think that has some real opportunities for growth in 2024. And ICEE keeps chugging along. ICEE has an opportunity with a club store to move our machines from a pre-serve to a self-serve. And early tests on that, and we've been in the test mode for a while, are really strong, have a great impact on those sales. And they're in tests with a couple of QSR chains that I think have the opportunity to come through for this coming year. So I love where we're heading. The pipeline looks good.

The sales teams led by Bjoern Leyser on snack foods and Aaron Winkelman in the ICEE side, and Matt Inderlied on Dippin' Dots side, are all kind of hitting on all cylinders. We had a sales meeting last week and had the three of them on stage. It was really impressive to see the kind of pipeline they have built. And so it gives us good confidence going into 2024.

Todd Brooks (Senior Analyst and Managing Director)

That's great. Thanks, Dan. A follow-up: You talked about the six new lines that have been put in place for the core products over the course of this year. I don't think you've ever sized the revenue unlock, that those lines could represent for J&J, but can you maybe at least talk from a percentage basis, how much of the benefit was realized in fiscal 2023, versus how much of that benefit you could see harvested in 2024 and 2025? Just looking at the overall opportunity.

Dan Fachner (CEO)

Yeah, 2023, not so much. I mean, we're, we're kind of building those out during 2023, and it really was, much of it came even in the back half of the year, so not too, not too impactful in the 2023 year. Feel like we have a chance for it to grow in 2024 with the pipeline that I just talked about. Some of those opportunities required those investments that we made in the six new lines. And so, happy, happy with where, where they're at there. I think what we had said before, Todd, is that the opportunity of those six new lines allows us to grow sales by $150 million or above, right? And so I think that's where we're really shooting for.

I think that we will see a piece of that come through in 2024 with those opportunities that I just talked about.

Todd Brooks (Senior Analyst and Managing Director)

Great. And then one for Ken, and I'll turn back in queue. John kind of pointed out the seasonal nature of gross margins. I just wanted to see if we could maybe level set for our modeling purposes. I know last year we saw basically a 300 basis point-ish gross margin dip in the first half of the fiscal year versus second half of fiscal 2022. We're obviously working off a higher base. Would you expect that magnitude of retrenchment in the first half of fiscal 2024? Our modeling is kind of down to that 30% level from the 33% you put up in the back half year.

Ken Plunk (CFO)

Yeah, that's a good question, Todd. I think the way to think about that is you're right. You know, as we got towards the end of this year, you know, and we got our mix humming, and we got price caught up, you know, inflationary was a bit more of our friend than it was earlier in the year. You start to see us get to those marks that we said were guard wires. You know, we ended up finishing the full year at 30.1% gross margin. And I think Dan and I talked about... That was kind of the, the floor. We had to get back there. And I think we expect to be able, as this goes forward, to get beyond that number. But yes, there is a seasonal impact.

So as you look at Q1 and Q2, I think the way to think about that is the trajectory of being better than the prior year will, should continue. But you know, we're not all of a sudden gonna do 30% in Q1, you know, because of the slowdown those winter months of some of those high margin areas like Dippin' Dots and ICEE. But we should, on kind of an equivalent or premium basis, be better than we were Q1 of a year ago and Q2 of a year ago. And then probably as we get into the back half of the year, you'll probably see gross margins probably pretty similar to what they were in Q3 and Q4 this year.

Todd Brooks (Senior Analyst and Managing Director)

Okay, perfect. Thanks, Dan.

Operator (participant)

Thank you, and one moment as we move on to our next question.

Todd Brooks (Senior Analyst and Managing Director)

Oh.

Operator (participant)

Our next question is gonna come from the line of Andrew Wolf with CL King. Your line is open. Please go ahead.

Andrew Wolf (SVP and Senior Equity Analyst)

Good morning. And Dan, congratulations on your election as Chairman of the Board.

Dan Fachner (CEO)

Thank you very much, Andrew. Good morning to you as well. Thanks for joining us.

Andrew Wolf (SVP and Senior Equity Analyst)

So I wanted to ask, you know, given the current grocery environment, you know, you guys are having good volume growth, you know, particularly shipping, and on the shelves, I assume. But, you know, as you look to the current planning year, fiscal 2024, is, you know, is it fair to say the predominant or maybe even all of the planned volume is gonna come from new doors and new distribution, maybe line extensions, or are you guys planning any velocity gains as you kind of ramp up the marketing spend as well?

Dan Fachner (CEO)

I think we'll have a little bit of both. I do think we have some great opportunities for continued expansion on some of our core products, like what we talked about, the pretzel sticks. I believe that will continue to grow. I think the Luigi's is continuing to grow. Our ICEE frozen novelty is growing well. So I think we'll have that continue. Dogsters is doing really well. Dogsters did well in the fourth quarter, and think that we have some good opportunities for new outlets with that. But I also think that we'll see a little bit of increase in some of our core products, too. I think we fit a niche in an area that allows us to be able to do that.

We're watching that consumer really closely and watching what, you know, others are saying and doing and we'll be prepared for whatever, you know, headwind comes our way. But we think we have some good opportunities for continuing to not just grow volume of what we have today, but by garnishing new outlets as well.

Andrew Wolf (SVP and Senior Equity Analyst)

Okay. I also wanted to kind of follow up to Todd's questioning on the unlock. When you get the third RDC open on Dippin' Dots, you know, you've referenced a few times that, you know, you really, that business needs, you know, national frozen capability to be fully distributed. Any chance you could help us, you know, a feeling for how much the addressable market increases or what it really does for the business, either quantitatively or qualitatively, in terms of how much more of the market you can go after?

Dan Fachner (CEO)

Yeah. I love what the team is doing at Dippin' Dots. We had the best year, sales and profits in its history and feel like we're still just scratching the surface. That team really gelling together, fit really nicely. Synergies from their organization to ours is, it's just really fit good. I love what they have in tests today. I talked about this in the opening. The Regal Cinemas now is pretty much completely rolled out. A couple other big theater chains expanding their tests. And the team is out there knocking on a lot of doors and having some great success. I think that will continue to grow nicely for us. Love what they're doing. Really happy with that acquisition.

Dan, I don't know if you want to add any color to that at all.

Ken Plunk (CFO)

Yeah, I, I think Dan summarized it well. I think the thing to think about with Dippin' Dots is, one, we just came out of having them for a full year. We'll have -- I think we even mentioned this, double-digit growth in that business. We expect to be able to grow that business next year, double digits. Production capacity, we have plenty of capacity to hit those numbers and produce that. It was really the freezer and storage space that we had to address to be able to move faster and to keep up with that growth. And with the added freezer space at Terrell and at Woolwich, the two facilities that are now open, we feel really good about really meeting any kind of opportunity in the foreseeable future.

I don't have an exact number on what that means. All I can tell you is it's a part of the enablement of helping us continue to grow this business, double digits.

Andrew Wolf (SVP and Senior Equity Analyst)

Okay. Fair enough. And the last thing is for you, Ken, as well. Could you just size up the true-up expense that you had to record against sales and tell us if that was also a full flow through as a reduction to earnings as well? You know, the cost plus arrangement in the handhelds.

Ken Plunk (CFO)

The way to speak to that, I think we may have said this before, Andrew, is we have an agreement with a customer that we make a handheld for, where we pass on any cost increases or decreases. It's a quarterly true up for that customer. As you can probably appreciate, really benefited us when we were going through 20%+ inflation. And but now that we've had deflation, we've passed those cost reductions back to that customer. But the profit of that stays whole. So we continue to make the same profit because we're kind of locked into a profit margin in the contract, and the volume of those core SKUs, you know, continues to grow.

Andrew Wolf (SVP and Senior Equity Analyst)

Okay, so that was all interquarter. It wasn't for previous accrual rates that were too high?

Ken Plunk (CFO)

No, that was-

Andrew Wolf (SVP and Senior Equity Analyst)

Okay.

Ken Plunk (CFO)

No. Yeah, that was interquarter. You know, that will happen. Each quarter, give or take, you know, if things stay stable, then you wouldn't see much of any movement there.

Andrew Wolf (SVP and Senior Equity Analyst)

So are handheld sales down this quarter and last quarter, basically because of deflation and the contract arrangement, or is there other reasons, the sales dollars were down?

Ken Plunk (CFO)

The sales dollars are mainly down because of the contractual pass-through of those costs back to the, to the customer.

Andrew Wolf (SVP and Senior Equity Analyst)

Got it. Thank you.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Rob Dickerson with Jefferies. Your line is open. Please go ahead.

Rob Dickerson (Managing Director of Consumer Staples Equity Research)

Great, thanks so much. So guys, I'm just curious, I mean, maybe it's on me, but I didn't really realize there was going to be a 53rd week. So once we back out the 53rd week, right, you get to sales growth about 4% a quarter. So while I respect that you don't always break out kind of pricing volume, you know, relative to other companies, I'm just curious if I could maybe add some color. Would you say of the 4%, like, most of that still is pricing? I'm just trying to gauge kind of volume trajectory, especially just vis-a-vis kind of the overall backdrop, you know, we're seeing right now and kind of food market in the U.S.

Ken Plunk (CFO)

Yeah. Rob, let me kind of explain it this way. And there's a lot into that in terms of really trying to narrow down to the puts and takes of one extra week. And so we summarized that, you know, in the release, based on our business overall. But if you take two parts of our business, retail and frozen beverages, both up over 20%, you back out the extra week, both of those businesses were up double digits, and both would have been at or near double-digit volume growth. So very healthy quarters there. If you look at food service, given the 5.3%, but you've got the handheld, you know, negative against that, that I just explained to Andrew, which was really more of a cost pass-through, not a volume thing.

You start to break that out, food service would have grown 8.5% without that effect. If you focus on the core categories in food service, Pretzels, churros, and Frozen Novelties, those are up 11.5%. So you start to see, even peeling back the extra week, a very strong quarter and really volumes up across the board, probably other than bakery. And that's really a part of what we've been talking about. In bakery, we've been dialing in on SKUs and, and getting out of some SKUs that weren't profitable. So that's probably the best way to kind of think about each of those segments, and the 53rd week.

Rob Dickerson (Managing Director of Consumer Staples Equity Research)

Okay, great. So then that's still positive volume growth, kind of despite pricing you've taken, kind of overall?

Ken Plunk (CFO)

Yeah. Yeah.

Rob Dickerson (Managing Director of Consumer Staples Equity Research)

Fair.

Ken Plunk (CFO)

Absolutely.

Rob Dickerson (Managing Director of Consumer Staples Equity Research)

Okay. That's great. And then I guess just, you know, kind of more broadly, speaking, just kind of want to get, you know, your, your feel around kind of current consumption behavior, like what you've been seeing, right? We've, we've heard from, let's say, some confection companies that might say, "Well, you know, maybe we've seen a little recent pressure, and consumers might be shopping the perimeter of the store, or maybe they're looking for products that are more satiating in quality. Everyone's kind of shopping for more value. There's been channel shifts." Right? Walmart this morning, right, saying the last couple weeks of the quarter definitely felt some pressure. But it sounds like kind of given that a positive volume, but consumers, you know, are still kind of, you know, walking into a Wawa and, you know, buying a snack.

They're going to the movie theater and getting, you know, an icy drink. So I'm just kinda curious, kind of what you're feeling, you know, around consumption behavior with your products. Like, like, why are, are you still able to generate this volume growth? Is it because it, it's value proposition, right, that tastes good, it's satiating, or just anything, anything you have will be very helpful. Thank you.

Dan Fachner (CEO)

Right. Good morning, Rob. How are you doing?

Rob Dickerson (Managing Director of Consumer Staples Equity Research)

... I'm great. Thank you.

Dan Fachner (CEO)

Good. And, I think it's a great question and kind of expected and anticipated to get something along that line. We're watching the customer and the consumer really closely and watching that behavior. We've faced a lot of headwinds since we've been in this position. We're prepared as a company to kind of be able to pivot in any direction that we need to pivot. You know, we've talked a lot about the resiliency of the J&J portfolio. Partly, we sell across a lot of different channels with a lot of products, many of them with tremendous brand that people follow and use as a treat or a reward.

And I really believe it's that diversification that we have across channels, across brands, that allows us to be resilient during times like this, right? You watched it even as we've been in charge here and led the organization. You know, there's been times when the theater business is down, but the retail is way up, right? And then we go through a year like last year, where theaters are way up and we're challenged in other areas. We're really proud of the diversification that we have and the products that we have and the following that the brands are, and I think that allows us to withstand periods like this.

Rob Dickerson (Managing Director of Consumer Staples Equity Research)

All right. Super. Fair enough. Thank you, guys.

Dan Fachner (CEO)

Thank you, Rob. Thanks, Rob.

Operator (participant)

Thank you. I would now like to turn the conference back over to Dan Fachner for any closing remarks.

Dan Fachner (CEO)

Great. Thank you very much. In closing, in 2023, we delivered the strongest year in the history of the company. It took tremendous hard work, perseverance, and agility from every one of our employees and partners, and I could not be prouder of what we've accomplished or more excited about what lies ahead. We expect to deliver another year of strong sales and earnings growth in fiscal 2024, as we invest in our amazing portfolio of brands, additional capacity, and capabilities. We look forward to updating you on our progress in the new year. Have a wonderful Thanksgiving and holiday season. Thank you very much.

Operator (participant)

This concludes today's conference call. Thank you for participating.