J&J Snack Foods : 2024 4TH QUARTER EARNINGS CALL

JJSF

J&J Snack Foods(Q4 2024)

November 15, 2024

Corporate Speakers

Participants

PRESENTATION

Operator^ Good day. Welcome to the J&J Snack Foods Fiscal 2024 Fourth Quarter Conference Call.

(Operator Instructions) As a reminder, this call may be recorded.

I would now like to turn the call over to 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 2020 Fourth Quarter Conference call.

Before getting started, let me take a minute to read the safe harbor language.

This call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical 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.

Risk factors and other items 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 forward-looking statements made on the call today.

Any such forward-looking statements represent management's estimates as of the date of the call today November 14, 2024.

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 normalized sales, EBITDA, adjusted operating income or adjusted earnings per share all of which are reconciled to the nearest GAAP measure in the company's earnings press release, which can be found in our Investor Relations section of our website.

Joining me on the call today is Dan Fachner, Chief Executive Officer; along with Ken Plunk, our Chief Financial Officer.

Following management's prepared remarks, we will open the call for a question and answer session. With that, I would now like to turn the call over to Mr. Fachner.

Please go ahead, Dan.

Daniel Fachner^ Thank you, Norberto. Good morning, everyone.

Thank you for joining us today. J&J Snack Foods achieved another year of top and bottom line growth in fiscal 2024.

We not only achieved record annual sales and gross profit but also set new highs for adjusted

EBITDA.

We achieved our financial goals of improving gross margin rates, delivering improved supply chain metrics and growing profits faster than sales.

Adjusted EBITDA increased 10.2% in fiscal 2024. More importantly, these results were achieved during a dynamic consumer and economic environment that impacted traffic and spending in key channels including amusement, convenience, theaters, restaurant and retail.

Despite pressures on consumer spending, we continue to grow sales on a year-over-year basis, led by incremental placements of core products, brands, product innovation and new customer wins.

I'm so proud of our employees who continue to execute a well-aligned long-term strategy that positions J&J for continued profitable growth.

As we discussed our performance, it is important to remember that we had one less week of selling days in fiscal 2024 and compared to fiscal 2023. This impacted fourth quarter sales by an estimated $33 million.

We will refer to it as normalized sales in our discussions today to better explain what we feel is a more accurate apples-to-apples comparison.

For the year, we grew sales 1% on a reported basis. and 2.8% comparing results on a normalized basis.

I'm especially proud of our double-digit growth in adjusted EBITDA, led by an 80 basis points improvement in gross margins to 30.9%, along with a 110 basis point improvement in adjusted EBITDA margins for the full year.

Looking at our fourth quarter results. Reported sales decreased 3.9%.

However on a normalized basis, sales increased 3.9%.

Softer consumer trends, along with fewer selling days impacted sales of our higher-margin products during the quarter including soft pretzels, churros, frozen beverages, frozen novelties and Dippin' Dots. This resulted in a less favorable gross margin mix and created production inefficiencies and as we adjusted inventory levels across our plants and distribution centers.

As a result, our gross margin decreased 110 basis points for the quarter to 31.8% and compared to our record fourth quarter of fiscal 2023, while operating income and adjusted EBITDA decreased 4.5% and 4%, respectively. Despite these challenges in the fourth quarter, we managed operating expenses well improving by 110 basis points and achieving net earnings as a percentage of sales of 6.9% and consistent with the previous year. Ken will review financial performance for the fourth quarter and fiscal year in more detail in just a few minutes.

I'd like to emphasize the importance of our strategy and how it aligns with our results over the last year.

Our J&J team remains relentlessly focused on executing our strategy of growing core brands and creating cross-selling opportunities that drive incremental sales. Each quarter, we expanded new products and incremental placement even as consumer softness challenged sales in many of our key channels. This is a critical element of our strategy as it layers on growth during short-term periods of decline in traffic and attendance. As consumer trends improve, we are well positioned across our segments to continue driving growth and profitability.

Let's review our three segments with a focus on the year's results and why we are confident in our ability to continue driving growth.

In Foodservice, reported sales grew 0.3% for the fiscal year and 2.4% on a normalized basis. This included growth of frozen novelties, churros, handhelds and bakery on both a reported and normalized basis.

We did experience consumer softness in key channels in the fourth quarter but consider these challenges to be short term in nature and do not expect that they will continue into fiscal 2025.

Let me start with our frozen novelty business.

Frozen novelty sales grew on both a reported and normalized basis for the year despite channel performance in amusement and convenience, which are key sales venues for Dippin' Dots. Dippin' Dots sales grew low single digits on a normalized basis for the year as new theater locations were offset by declines in traffic and attendance in our core convenience and amusement channels. This was more pronounced in the fourth quarter after delivering stronger sales in the prior third quarter.

As it relates to Dippin' Dots, we remain optimistic with our growth opportunities, driven by added placements in theaters and indoor amusement together with expectations that the business will improve in our core channels.

Dippin' Dots is currently in just under 900 theaters as of the end of fiscal 2024, and we expect to add another 120 locations in the first quarter and 180 locations in our fiscal second quarter.

We will then have Dippin' Dots available in the four largest theater chains, AMC, Cinemark, Regal and Marcus and early feedback from some of our theater partners is that Dippin' Dots is exceeding the sales of other frozen novelties.

We are rolling out Dippin' Dots in all Dave-&-Buster's and made event locations.

We expect this rollout to be completed within our fiscal first quarter across roughly 220 locations.

We have significant opportunities in the Dippin' Dots business and we'll continue to expand placement and leverage innovation to add new flavors and packaging to drive growth.

Taking a look at Churos, we continue to be confident in our long-term performance and growth opportunities.

Sales growth for the full year was led by the addition of a major QSR customer launched earlier in the year. This business provides other opportunities for growth with this customer.

Looking forward, we are excited about a new opportunity to launch Churo Fries with a leading national hamburger chain. This product was successfully introduced in a recent LTO, and it exceeded expectations.

We are working with the customer on next steps and new opportunities.

We're also working on LTOs with two additional major QSR customers. There's a lot going on with our Churo business that provides us with added confidence in our ability to continue to grow this business.

Moving to bakery.

We had a strong year in the bakery business, led by expanded growth of cookies with both current and new customers.

Our bakery team has a well-thought-out plan to continue driving growth in 2025 that includes expanded production capacity, new products and incremental contract manufacturing opportunities.

Shifting to soft pretzels.

Sales declined for the year, driven by softness in the convenience, theaters, restaurant and amusement channels.

This was pronounced throughout the entire market. However, we continue to grow our market share within the industry.

We remain well positioned for growth as consumer trends improve in these key channels.

Recently, we gained incremental placements of Bavarian pretzel bites across all sectors of the food service industry.

We will continue to drive incremental opportunities through new innovations like Browhouse pretzels, and Bavarian Pretzel sticks and Bites along with the expectations for improving channel performance of our core Soft Pretzel business. Moving to our retail segment.

We grew reported sales 2.7% and normalized sales 4.4% for the fiscal year. This growth was driven primarily by continued expansion of our SUPERPRETZEL Bavarian and mini pretzel dogs, as a major customer continues to expand placements across their portfolio.

We have talked about this business before as being a great example of where cross-selling and leveraging our great brands across customer channels creates incremental opportunities.

We have invested marketing dollars and trade funds to drive this growth and we'll continue building this brand across retail in 2025.

Soft pretzel ACV grew over three points, driven by expansion of super pretzel mini pretzel dogs and Bavarian sticks.

Our soft pretzel products are well positioned in the retail sector, despite recent short-term softness in the fourth quarter.

Looking forward, we expect distribution expansion across our Super pretzel and Amiens brands and will enter the premium pretzel segment as we launch our Browhouse brand into retail.

Let's talk about Frozen novelty sales in retail.

For both the year and the quarter, sales declined on both the reported and normalized basis. This decline was primarily driven by softer sales in Luigi in an overall declining Italianized category.

Our marketing and sales teams are focused on improving Louise's performance in 2025 through improved marketing programs, enhanced consumer and product positioning and incremental customer opportunities.

Our Dogsters brand continues to perform well growing almost 20% in the quarter and adding over four points of ACV expansion.

We continue to see opportunities to build this brand, leveraging the growing demand for pet products.

We remain confident in this category and we're really excited about bringing a new Dippin' Dots retail product to the market in fiscal 2025.

Also we continue to grow our handheld business in retail.

Sales for the year grew over 58% on both a reported and normalized basis. This is a strong business for us, led by growth and incremental placements with a major mass merchant.

Finally, let's discuss our Frozen Beverage segment.

Sales increased 1.9% on a reported basis and 3% on a normalized basis for the year. The IT team grew this business despite volume declines in our theater and convenience channels throughout most of the year.

On a reported basis, Frozen beverage sales increased 2.4% for the year, even lapping an extra week in fiscal 2023. Theaters, a significant part of the ICEE business was down 5% compared to the prior year as the active strike impacted the volume and quality of movie releases.

We did, however see improvements in the theater channel in Q4, especially in July and September as strong releases hit the market.

In talking with our largest theater customers, the industry expects significant improvement starting in our first quarter with a slate of franchise films and titles such as Wicked, Gladiator two and Sonic The Hedgehog 3.

We see solid trends in the movie theater channel throughout fiscal 2025 with an improving movie slate and continuing strong concession consumption.

Repair and maintenance and equipment sales increased on both the reported and normalized basis for the year.

We continue to grow both of these categories, led by expanded placements of ICEE machines, and incremental service business across our customer portfolio.

We are excited about the prospects for ICEE. And as the theater business comes back, we are confident ICEE sales will as well.

In short, our strategies to leverage innovation and cross-selling opportunities to expand placements of our core products and brands continue to deliver positive results.

I'd like to take a moment to emphasize the impact of our operational investments over the past few years.

Enhancements to our manufacturing and distribution capabilities are leading to notable improvements in key efficiency metrics.

Our supply chain initiatives, anchored by the three new RDCs are working as planned, adding new capacity and creating efficiencies and how we move products to our customers.

We now operate out of the nine cold storage facilities simplifying logistics management across our network.

Today our sales orders are shipped from the new distribution network versus under 30% a year ago, with the average length of haul decreasing by over 30% and on-time performance improving to over 80% versus 63% a year ago. Linehaul cost per pound decreased 14% compared to the same quarter last year in our snack food business.

Shifting to operations. The combination of new lines and increased capacity in collaboration with new distribution centers has streamlined operations, leading to reduction in waste and overtime. This optimization has allowed us to enhance our service to customers more effectively than ever before. Notably, fill rates have improved to 98.7%.

I also wanted to mention that we are far along on our CFO search, and we'll be in a position to confirm a new hire shortly.

As you know our current CFO, Ken Plunk, will be retiring at the end of this calendar year.

In summary, we are pleased with the progress we are making to optimize sales across all customer channels and improve our operational efficiencies.

Our diverse portfolio of products and brands and our continued focus on innovation provides considerable growth opportunities across our customer base.

Additionally, our strong balance sheet and liquidity, along with our experienced leadership team, reinforce our confidence in generating long-term value for our employees, partners, and shareholders.

I'm incredibly proud of our senior team and employees who consistently carry out their jobs with dedication and skill. Their commitment to our goals has led to strong results that reflect their hard work and collaboration.

It's truly inspiring to see how each team member contributes to our success, driving innovation and operational excellence. Together, we are building a strong foundation for future growth and success.

As we enter fiscal 2025, we are optimistic about the growth potential of our core products and the success of our new product launches and client partnerships.

We expect performance trends to improve in our core channels like convenience, theaters, amusements and restaurants as consumer confidence and spending improves in fiscal 2025.

With a stronger film lineup ahead, we believe there will be significant growth opportunities for Dippin' Dots and ICEE and we anticipate improved sales across our other products as well. 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. And good morning, everyone.

I am pleased with our ability to deliver yet another record full year performance, even as many of our core customer channels faced a softer consumer environment.

As Dan just stated, we are executing a strategy that is working and confident our team is running the right place.

I would like to take a few minutes to walk you through our fourth quarter and fiscal year results.

Before reviewing our results, it is important to note that J&J's fiscal 2023 4th quarter and full year included an additional week, with reported results comparing 14 weeks in the fourth quarter of fiscal 2023 and to 13 weeks in the fourth quarter of fiscal 2024.

Likewise, reported results include 53 weeks for the full year 2023 results compared to 52 weeks for fiscal 2024.

For purposes of comparability, we'll refer to normal SLs more accurately explain [Informix] trends.

Looking at our fiscal fourth quarter results. Net sales decreased 3.9% as reported and increased 3.9% on a normalized basis. The loss of one week of sales had an even more pronounced impact

on the quarter compared to the prior year due to losing selling days in the first week of our July fiscal month.

These are peak seasonal sales days for our core business.

We estimate this impact to be approximately $33 million when comparing fourth quarter results for fiscal '24 to 2023. Reported net sales for the quarter totaled $426.8 million.

For the fiscal year, we grew sales 1% on a reported basis and added $15.9 million in incremental sales despite having one less week. Net sales grew an estimated 2.8% comparing results on a normalized basis.

I'll spend a few minutes reviewing fourth quarter results for each of our segments.

Foodservice, our largest segment, saw reported sales decreased 3% to $262.2 million during the fourth quarter compared to the prior year period.

Churo and soft pretzel sales declined 9.5% and 9.4%, respectively, while Frozen novelty sales declined 4.3%. This was partially offset by a 3.5% increase in bakery sales to just shy of $100 million and an 8.4% increase in handheld sales. The sales decline across most categories was attributed to the one less week this quarter and softer consumer spending in key channels like convenience amusement and restaurants.

Sales on a normalized basis increased an estimated 4.6%.

Sales of new products and added placement with new customers totaled approximately $8 million driven primarily by the addition of Churos to the menu of two major QSR customers.

This led to fourth quarter operating income in the food service sector of $15.3 million a decrease of 12.7% versus the prior year period, reflecting lower overall foodservice sales, a less favorable sales mix and production and supply chain efficiencies as we manage through softer consumer demand.

Moving to retail. Q4 reported net sales totaled $55.9 million or a decrease of 13.7% driven by 19.3% and 16.8% decline in Soft Pretzels and frozen novelties, respectively. This was partially offset by relatively flat biscuit sales and a 14.9% increase in handheld sales as we expanded product placement with a major mass merchant. Normalized sales decreased an estimated 5.7% as consumers tightened spending in key grocery and mass merchant retailers.

We continue to see pressure on discretionary spending from long-term food inflation impacts, higher interest rates, rising credit card balances and overall economic concerns.

This led to an operating income of $3.3 million or a decrease of $400,000 versus the prior year period, reflecting the drop in sales.

As it relates to our third segment, Frozen Beverages reported sales were $108.7 million, a 0.1% decrease compared to a record Q4 '23.

Overall segment sales increased an estimated 7.7% on a normalized basis. Beverage sales were flat at $71.3 million, but did increase on a normalized comparison, led by improvements in theaters so, especially in July and September as the volume and quality releases started to recover from last year's active strike.

Overall gallons sold increased an estimated 7% when adjusted for the extra week.

As Dan mentioned, we expect volumes to experience a significant improvement in calendar year 2025 and given the stronger schedule of film releases.

Repair and maintenance revenues declined 1.3% versus the prior year period electing the impact of one less week while machine sales were up 1.7% in the quarter. This led to a Q4 2024 operating income increase of 3.4% and to $21.3 million for the quarter compared to Q4 '23 operating income of $20.6 million.

This was driven by improved product mix and effective management of operating expenses.

Before moving on, I would like to point out that on a full year basis, all three segments experienced growth including 0.3% increase in food service, 2.7% in retail and a 1.9% increase in food beverage sales. Adjusting for the additional week in fiscal 2023, we estimate that normalized sales increased 2.4% and 4% and 3%, respectively, for the foodservice, retail and Frozen Beverages segments.

Our investments and initiatives over the last two years to enhance profit margins and drive efficiency across our business are proving to be successful.

For the year, we continue to deliver on our goal of improving gross profit.

In fiscal 2024, our gross profit increased 3.5% to $486.1 million, leading to a gross margin rate improvement of 80 basis points. to 30.9%. Due to the previously mentioned impacts, our fourth quarter gross profit did decline 7% to $135.5 million, leading to a gross margin rate of 31.8% and compared to 32.8% in Q4 2023.

We remain confident in our ability to deliver strong and consistent profit growth and expect to further improve our gross margin rate in 2025.

And as it relates to inflation across our portfolio of raw materials, we experienced net mid- single-digit inflation with the increase primarily driven by higher cost of cocoa, chocolate, and, to a lesser extent, increases in the cost of sugar, eggs and needs.

These increases were somewhat offset by deflationary trends seen in flower, cheese and dairy and mixes. Pricing adjustments at contractual cost true-ups help minimize the majority of the

Disclaimer

J&J Snack Foods Corporation published this content on November 15, 2024, and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on November 15, 2024 at 15:33:04.243.