J&J Snack Foods Corp. (NASDAQ:JJSF) Q4 2023 Earnings Call Transcript

J&J Snack Foods Corp. (NASDAQ:JJSF) Q4 2023 Earnings Call Transcript November 17, 2023

Operator: Good day and thank you for standing by. Welcome to the J&J Snack Foods Fiscal 2023 Fourth Quarter Conference Call. [Operator Instructions] 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: 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 may not relate to matters, historical fact 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 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 after 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, you 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: 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 three 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 topline 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 at 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 whole 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 investment and added new production lines to support growing opportunities with SUPERPRETZEL.

In the fourth quarter, we launched filled jalapeno nuts 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 a SUPERPRETZEL availability with Walgreens, while also expanding PretzelDogs 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 Croissant 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 convinced the retail rollout of Hola! brand 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 Ras ICEE flavor, the best smooth flavor launch in Dippin’ Dots’ history.

And we are looking forward to next year’s launch of a new cookie dough offering called Frozeti Dough. Our rollout for regal theaters is almost complete, and we are adding test locations for 2 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, the bakery goods, dog treats, italianized 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 3 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 two 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 6 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 are evaluating 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 in 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 efficiencies, 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: 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. Foodservice, our largest segment saw Q4 ’23 sales exceed Q4 ’22 by $13.5 million to $270.3 million or an increase of 5.3%, including approximately $35.2 million in sales from the amusement 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 and 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 contractual cost true-up agreement. Volume for core Foodservice handheld increased for the quarter. This led to Q4 ’23 Foodservice segment operating income of $17.5 million or an increase of 175.8% versus the prior year period, reflecting topline growth as well as improvement in margins and added leverage from lower distribution expenses. Moving to our Retail segment. Q4 ’23 retail sales increased 21.2% to $64.8 million compared to Q4 ’22. 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 novelties sales, led by Luigi’s, Dogsters and ICEE sticks.

So 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 ’23 Retail segment operating income of $3.6 million or an increase of 237% versus the prior year period, driven by topline growth as well as improvement in margin and lower distribution expenses. As it relates to our third segment, Frozen Beverages segment sales were $108.7 million and beat Q4 ’22 sales by 20.6%. Beverage sales grew 24.8% or $14.2 million higher than Q4 ’22, led by double-digit volume growth and in healthy consumer trends across key channels, including convenience, amusement parks, mass merchants, restaurants and theaters. The Barbenheimer effect drove strong theater performance of growth 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 volumes, while equipment sales increased 33.2%, representing our second largest year ever and was driven by strong growth from new clients in convenience customers. Q4 ’23 operating income in the Frozen Beverage segment had also improved to a record $20.6 million, a $6.4 million increase compared to Q4 ’22. Overall, we’ve made significant progress including gross margin and distribution expenses. Our focus on improving gross margins through an improved mix of core products, better calibration cost and price and cost of goods efficiencies is clearly benefiting our results. For the quarter, gross profit totaled $145.7 million, a 25.8% increase compared to Q4 ’22.

This led to a gross margin of 32.8%, favorably comparing to 28.9% in Q4 ’22. 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, oil, dairy and meats have declined. So 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 ’22. Distribution cost was 2.8% of sales in the quarter, much improved compared to 12.4% in the prior year period.

Marketing and selling expense 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% in sales in Q4 ’23 compared to 4.3% in Q4 ’22, attributable to higher performance-based bonus payments compared to the prior year and investments and capability. This led to an operating income of $41.7 million or a 93% increase compared to $21.6 million in Q4 ’22. Adjusted operating income was $45.8 million or a 77.8% increase compared to Q4 ’22. For the quarter and the year, the extra lead 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 ’22, 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 which — $2.40 in the prior year period. 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. The 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.

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Q&A Session

Operator: [Operator Instructions] And our first question is going to come from the line of Jon Andersen with William Blair.

Jon Andersen: Hi. Good morning, everybody. Congrats on the quarter.

Dan Fachner: Thank you very much, Jon.

Ken Plunk: Thanks, Jon.

Jon Andersen: I wanted to — you mentioned in the prepared comments that — I think it was kind of 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 kind of narrow in on 2024 using that as a framework and how you’re thinking about end market growth, your own growth, and perhaps margin expansion? Thank you.

Ken Plunk: Yes. Hey, Jon. This is Ken. Great question, yes. We’ve been operating kind of under this, what I’d call, financial formula for really the last couple of years and probably haven’t stated 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 want to drive our business to grow sales faster than the market. As we’re doing that and as we are investing in capabilities and efficiencies, our job is really to leverage the P&L. As those cells 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 plants.

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: And then — that’s helpful. And as we look ahead to fiscal ’24, I mean, it sounds like you have a tremendous amount of new business activity, a lot of cross-selling going on, a lot of new distribution for, I guess, new items in — both in food service and at retail, ICEE placements in food away from home venues, etc. I mean, how should we be thinking broad strokes about — what are your growth expectations for 2024, given just kind of the — 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? And would you expect going forward that the growth is going to largely be volume driven?

Dan Fachner: Good questions, Jon. We are 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 are able to bring 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 are 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 lapped that pricing effect now, and we’ll be looking at some additional pricing in some of the areas in 2024 as well.

Ken Plunk: Yes. Jon, if you recall from prior calls, the last price increase we took was last kind of call it September/October. So we’ve lapped — the other two we’ve certainly lapped, and we’ve lapped portions of that, but there was a little bit of price increase benefit in this quarter, Q4. But the really good sign, as Dan said, is 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, given where 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: Okay. One more for 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 to 30% in this fiscal year. And you finished really strong in the back half, north of — I guess, in the second-half of the fiscal, probably north of 33%. And I know there’s some seasonality in there, etc. 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 — is there more room to move in a constructive direction in terms of gross margin? I’m just thinking about your commentary around six 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 want to get ahead of myself in thinking about that. Thanks.