J & J Snack Foods : 3rd Quarter Earnings Call

50194143- J&J Snack

Foods- Third Quarter

Earnings Call - 07-27-

2021

50194143- J&J Snack Foods- Third Quarter Earnings Call - 07-27-2021

Operator: Welcome to the J&J Snack Foods Third Quarter Earnings Call. My name is Danielle[?]. I'll be your operator for today's call. At this time, all participants are in a listen- only mode. Later, we will conduct a question-and-answer session. During the question-andanswer-session, if you have a question, please press star, then one on your touchtone phone. Please note that this conference is being recorded. I will now turn the call over to Dan Fachner. You may begin.

Dan Fachner: Good morning. I'm Dan Fachner, and welcome to our third quarter earnings call. We are delighted to have you listening in with us. Let me start with some obligatory comments. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on these forward- looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect the events or circumstances that arise after the date hereof.

Again, I'd like to welcome you and thank you for your interest in J&J Snack Foods. We are thrilled to take you to talk today about our Q3 performance. We'd like to begin by thanking our employees across the business for helping deliver a strong, strong quarter. Our business performance is really starting to benefit from an economy that is moving much closer to pre covered activities. The strength of our product and brand portfolio enables us to quickly leverage consumer traffic across multiple food service and retail customers. Consumers are embracing the opportunities they missed over this past year, whether that is enjoying a SuperPretzel at the game, or sipping an Icee at the beach with their family. Financially, we continue to strengthen our balance sheet and invest in our growing business. I remain extremely confident in our business and future growth opportunities. So joining me today are Ken Plunk, senior vice president and CFO; Marjorie Roshkoff, vice president and general counsel; Bob Pape, senior vice president of sales; Bob Kramer, vice president of operations; and James Hamill, vice president, corporate controller.

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50194143- J&J Snack Foods- Third Quarter Earnings Call - 07-27-2021

Let me take a few minutes to review our exciting results. Results of operations. Net sales were $324.3 million for the quarter, an increase of 51%. Our business improved across all three segments, led by our core soft pretzels, churros, Icee and frozen novelty product categories. Both our food service and retail segments returned to pre-COVID sales volume, beating fiscal 2019 sales by 1% and 30%, respectively. Frozen beverage sales improved significantly, beating prior year, same quarter by 83%. Operating income was $38.1 million for the quarter, an increase of $57.6 million when compared to last year. Improved sales volume, favorable product mix and a strong focus on cost efficiencies helped drive improved gross margins and profitability when compared to last quarter.

Now I'd like to review the results of each of our business segments. Food service - just an outstanding quarter for them. Sales to food service customers increased 68% for the quarter and exceeded the pre-COVID 2019 Q3 sales by 1%. Traffic in our key customer venues return to pre-COVID levels as anxious consumers embraced activities they had missed over this past year. Sales accelerated through our key channels, led by schools, amusement and recreation, restaurants, C-stores and theaters. Consumers are also spending more in many of these venues, driving improved average ticket sales. Soft pretzel sales increased 138%, and frozen juices and ices increased 60%. Churro sales and bakery products increased 174% and 24%, respectively. Our handheld business had a strong sales quarter, exceeding last year by $11.5 million, or 155%, and was driven by a new product developed for one of our wholesale club customers. Operating income in our food service segment increased $35.9 million in the quarter, driven by higher sales volume, product mix and cost of goods efficiencies. Gross margin rate improved 380 basis points over the last quarter.

Retail supermarkets continue the strong showing. Our retail supermarket business remains strong, even as consumers enter back out into the food service venues. While our sales for the quarter were 6% below last year, this was against a 38% growth in last year's third quarter. Also, sales for the quarter were 30% better than the same quarter of 2019, which is probably a better comparison of true performance.

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50194143- J&J Snack Foods- Third Quarter Earnings Call - 07-27-2021

Our frozen novelty business continues to perform well, growing 11% over last year. Soft pretzels decreased 12%, biscuits 44% and handhelds 63% in the quarter as retail traffic decline compared to 2020. Operating income, however, increased $1.2 million, or 15% in the quarter, driven by improved gross margins and operating expense management. Operating income margins were 16.9%, over 300 basis points better than last year.

Frozen beverages - we're seeing some great momentum here. Sales for the frozen beverage business segment increased 83% this quarter compared to last year. Beverage-related sales increased 157%, driven primarily by increase in traffic and gallons[?]. This was led by our amusement channel that experienced sales above pre-COVID 2019 levels, and it continued traffic increase in our mass merchandisers, QSRs and theater channels. The theater channel continued to improve this quarter, but still lags 2019 sales by over 50%. This is a big improvement from our prior Q2, with expectations that this will continue as consumers return to the movies. Service revenue increased 32% as customers accelerated equipment maintenance in the quarter to support the post-COVID recovery. Machine revenue also increased 32% as customers started to invest more heavily in growth and replacement opportunities. Our frozen beverage segment realized an operating profit for the quarter of $11.4 million, led by strong sales increases, gross margin improvement and operating efficiencies. Operating margins improved to 15.4% in the quarter.

Consolidated. Gross profit as a percentage of sales was 29.7% this quarter, almost a 600 basis points improvement compared to our second quarter. Gross profit performance was driven by improved sales volume in our higher margin product categories, the overall efficiency benefit of higher sales and continued focus on managing cost. Total operating expense as a percentage of sales was 17.9% in the quarter, leveraging 850 basis points when compared to last year's 26.4%. AS Sales volume accelerates, the business is doing a great job managing marketing and SG&A expenses, even below pre-COVID spending. Net earnings for the quarter were $28.9 million. That's up $41.5 million when compared to last year.

Capital spending and cash flow. Our cash and investment securities balance was $305 million as of 26th June 2021, an increase of $27 million from September's year-end, led by our 4

50194143- J&J Snack Foods- Third Quarter Earnings Call - 07-27-2021

strong earnings growth. Our balance sheet remains strong and we are well positioned to drive growth for our shareholders. We continue to look for acquisition opportunities and remain focused on the long-term growth opportunity for our business. We spent $34.5 million in capital expenditures through the nine months ended 26th June 2021, as we continue to invest in plant efficiencies and growing our business. We estimate our spending for the year to be about consistent with prior years. A cash dividend of $0.63 a share was declared by our board of directors and paid on 12th July 2021. That cash dividend represents an increase of 10% from the previous quarterly dividend rate of $0.575 per share. We did not buy back any shares for our stock during this quarter. Our investment income this year was $0.5 million, $0.8 million less than prior year's second quarter, as market stabilized and more money was held in cash reserves.

I want to thank you for your continued interest in J&J Snack Foods, and I'm excited to deliver these great numbers to you today. I will now open up the meeting for any questions. Thank you.

Operator: Thank you. We will not begin the question-and-answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. And we have a question from Ryan Bell. Please go ahead.

Ryan Bell: Hey, everyone.

Dan Fachner: Hey, Ryan.

Ryan Bell: Hey, congrats on a good quarter. Just had a question around the frozen beverage business. Would you guys provide a bit of color about how much the base has reopened? We appreciate the business is seeing some more consistent structural pressures on some of your other business units. Amusement channels seem to be doing well. The commentary was that

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