Welcome to the J & J Snack Foods First Quarter Earnings Call. My name is Richard and I will 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. Please note that this conference is being recorded. I will now turn the call over to Gerry Shreiber. Mr. Shreiber, you may begin.

Thank you, Richard. Good morning, everybody. And welcome to our first quarter conference call of J & J Snack Foods. I am Gerry Shreiber. You should be familiar with my name as I have been in the same position now for close to 50 years, much to my pleasure and privilege. Let me begin with some commentary for the first quarter and I will start with our forward-looking statements. 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 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 events or circumstances that arise after the date hereof. Results of operations, net sales were $241 million for the quarter, a decrease of 15%. Sales continue to be challenged by the impacts of COVID-19, especially in our Food Service and Frozen Beverage business segments. Despite this environment, we are seeing gradual improvements in sales trends since quarter four of 2020 where sales were 19% worse than last year. Our retail business responded well, driving 33% growth. Operating income was $578,000 for the quarter, a decrease of $21.1 billion as declining sales pressured production efficiency and expense leverage. Now I’d like to review the results of each of our business segments. Our Food Service business, which represents about 70% of our total sales was significantly impacted during the past year due to sports and leisure cancellations and sales reductions, particularly in movie theaters and, to a lesser extent, schools. Sales from Food Service customers decreased by 30% for the quarter, showing an improving trend compared to quarter four 2020, which declined 21% versus the prior year. Key customer venues and channels like theme parks, schools, restaurants, sports and leisure, and theaters continue to operate at limited capacity, impacting Food Service sales. Soft pretzel sales decreased 35%, and frozen juices and ices decreased 11%. Churro and funnel cake sales were down 30% and 49%, respectively. Sales of bakery products declined 8% as the virus impacted traffic, purchase choices, and frequency in this part of our business.

Roughly. Yeah.

Great. Thank you. Good morning. And thank you for joining us on our first quarter conference call. We are thrilled to have you listening in and we thank you for your interest in J & J Snack Foods. With us today in the room, in addition to myself and Ken Plunk, we also have Marjorie Roshkoff, our Vice President and General Counsel; Bob Pape, our Senior Vice President of Sales; and Bob Radano, our Senior Vice President and COO. I’d like to make just a few more additional comments before we open it up for questions. As many of you know, we are living in unprecedented times. Our lives have been impacted, not to mention our business this past year. In particular, how we work, how we communicate, our shopping habits, how we entertain ourselves and simply how we stay connected with one another such as the Zoom calls we are all going through. I believe our company has done an excellent job working through the challenges. It’s been a consistent daily focus on the basics of our operations and our business. I have to tell you, I am so proud of our employees and their unwavering commitment to serve our customers each and every day. We continue to make progress despite the challenges of COVID-19. In this first quarter, traffic and key Food Service revenues, which comprise two-thirds of our sales, continue to operate at substantially reduced or limited capacity. This was even more pronounced during the holiday season where many of these venues rely on seasonally higher traffic and sales. Consumers simply stayed at home during this time. However, our retail business continues to thrive with another 33% growth this quarter. Unfortunately, that wasn’t quite enough to overcome the impact on our Food Service and Frozen Beverages, but we are delighted with the performance of that group.

Hi. Great. Thank you so much.

Good morning, Rob.

Good morning.

Good morning, Rob.

Good morning. So, I guess, my first question was around the cadence of the quarter. I think last quarter you mentioned that, let's say, the first four weeks, sales were down approximately 25%, but perhaps they improved a little bit in November and December given the total Q4 result. However, you are saying there was some pressure during the holidays. So just curious if you could provide some color, if you saw things maybe improve a little bit or maybe improved less than you had thought, and what kind of position you are in now versus where you thought you might be just a few months ago?

Right. Rob, your statement was really accurate. We did see continual improvement as we came into the quarter, and October and November held up pretty strong. However, when we got into the holiday season, some of our key customers, especially theaters and some mass merchandisers, did not perform as well as they anticipated during that time. Additionally, as you know, we also experienced another spike in COVID during that period which did not help. But we are confident that shoppers will return as those locations open back up, and we think that this quarter will continue to improve again.

All right. Great. Thanks. I was in a movie theater this past weekend with my family. I noticed they have a new beverage top-off option in the store that makes it easier to order large ICEE frozen drinks. Given the recent news about AMC's financing, it seems there is still long-term demand for movie theaters. However, I wonder if there is a way to adjust your strategy regarding offerings, not just in high-traffic areas, but overall. Let's hope movie theaters bounce back and that traffic increases again, as that's the general expectation. Given the length of time we’ve been in this situation, I would think you are considering how to adapt your strategy and product offerings. Is there a way to modify those offerings or the overall approach? Just curious about your thoughts on this.

Right. You are kind of reading from our playbook, Rob. You are absolutely right. We are adjusting to look at other avenues outside of the theaters and are having some success with that. That’s not a particularly quick fix, because there’s a period of time where you have to sell, install, and test. However, we have some really good tests going on in the ICEE business right now, and that sales group is really focused on other channels to grow our business within. We believe we will achieve success doing that, and along the way, we anticipate these theaters will continue to open. But you're right; we can’t just sit back and wait for that. We have to actively do something about it, and that’s exactly what we are doing.

All right. Great. Thank you so much. I will pass it on.

Hi.

Good morning, Ryan.

Did you hear that?

No. Ryan, I didn’t quite understand the last section of your question. It faded out a little bit. Can you repeat that?

Sure. The last part that I was asking was, quarter-to-date how are your business segments performing? Is there maybe any number you could provide about the actual size of the improvement or how the decline is faring quarter-to-date in terms of Food Service and the ICEE business?

Quarter-to-date meaning quarter two?

Yeah. Through January.

Yeah. Ken, do you want to touch on it?

Interesting question. I think probably the right answer to that, Ryan, is it’s about the same. If you think about Food Service, it was about 13% less than last year. That was an improvement versus Q4, where Q4 was 21% below last year. It’s early in Q2 so regarding your modeling, I would probably still think around that 13% to 15% below the base year until we see more widespread access to the vaccine and recovery. But it’s still a bit early just to kind of get into the entire quarter right now.

This is Gerry Shreiber. I have to comment. I assume most of you are sports fans. Do you remember the year 1994, when suddenly all of baseball went on strike and it did not recover until two years later? We are not having quite that impact, but basically so many of our venues were completely shut down. Now they are opening up, and we fully expect that we will be back to last year’s levels over the next year or so.

Okay. That’s helpful. And would you be able to provide some broad guidance or insights about the expectations for cost management throughout the balance of the year? I know that we are going to be lapping some significant declines last year where the closures are being felt more poignantly. Is there any way we can think about the trajectory of gross margins throughout the year?

Yeah. I mean, we pointed this out in the press release particularly around gross margin. Those margins get challenged when the biggest contributors to your sales declines are soft pretzels and ICEE beverages, both of which have some significantly healthier gross margins. So when that mix changes, it impacts gross margin, and until we see those businesses turn around, they will continue to have a similar mix impact. Another point particularly looking at Q1, as we think about the magnitude of the impact of COVID, obviously, the more that heightens, the more that impacts our labor force. When it does, and people are concerned about coming to work, we often look for ways to manage that labor differently, sometimes resulting in higher costs, whether that’s temp labor or overtime, just due to the concerns the virus is creating.

Ryan, that certainly had an impact in our first quarter, and it’s something we are working really hard at for the remainder of the year to get a better handle on. Like Ken said, the labor shortage is a challenge as we are all aware, and when COVID spikes again, that increases. We are still certainly dealing with that issue and hope that some of those pressures will ease as the vaccine becomes more prevalent.

Yeah. And then the other point I’d add, we spent approximately $730,000 on various health and safety matters related to COVID. It actually heightened from mid-November to the end of December with the virus getting worse. That’s about a $0.035 per share impact on expenses. If you were to take that $730,000 out of our expenses compared to last year, we would be much closer to leveraging. I am quite proud of how we pulled back on expenses as sales have started to recover. We took $6.6 million out of expenses in Q1, needing to take roughly $7 million out to stay leveraged with last year’s results. So you can view that as the COVID impact. A way to think forward is that as long as the virus remains at its current levels, we will likely continue to spend roughly $150,000 to $200,000 on all health and safety matters. That will be a lingering impact on expenses until we can move past that.

Thanks. I think one last question for me. I am considering capital allocation now. Has anything changed? Could you talk about acquisitions in Food Service versus retail? Also, a broader perspective on the M&A landscape now versus prior to COVID?

That's a great question, Ryan. We are working hard to understand capital allocation, probably better than we ever have. We have assembled a good group that is evaluating each of our plants and where we can best invest in ourselves to yield good returns and savings. We are going to continue this process and have done some things this past quarter that I am really pleased with. Regarding M&A, we will continue looking. We have had several conversations and will be careful in our approach. When we find the right opportunity, we will be ready and prepared. Part of the advantage we have is a strong balance sheet and cash position which enables us to act wisely. There have been opportunities presented to us, and we will continue to seek the right ones.

But I might add that as part of the retail surge due to closures across the board in the Food Service sector, if you consider that there has been no sports, leisure, amusement parks shutting down, and movie theaters, that was a significant impact. Fortunately, some of that demand spilled over, as our brands, such as SUPERPRETZEL and ICEE, not only lead their categories but also face significant barriers to entry against potential competition. We will prioritize and continue to build upon that.

Okay. Thanks for the questions. That’s it for me.

Thank you, Ryan.

Thanks, Ryan.

Hey, good morning, everybody. Gerry, and congratulations. Dan and Ken, it’s good to hear your voices on the call.

Yeah. Thanks, Jon.

Likewise, yours too.

Got a few questions. I will start with just the sales cadence. I know it’s been asked a couple of times, but I will approach it from a different angle. Looking at the balance of fiscal 2021, we have experienced two quarters now, both the fourth quarter of 2020 and the first quarter of 2021, where we have seen some sequential improvement, and the downtrend has become more moderate. As you look forward through the remainder of the year, do you expect that trend to continue at the same pace? Where might you anticipate ending the fiscal year? Any kind of insight you could provide?

Jon, that’s a great question, and I’m glad you asked it. Our sales have continued to grow even during this COVID period as a percentage against prior years, and we did that during this quarter as well. I would expect at this point that you will see similar trends as we move forward. We have a lot of good developments underway that I believe will continue to support sales growth. If we can gain a lift from COVID – which is unpredictable – through vaccinations and the opening of locations, our Food Service, both on the ICEE and the J & J side, may even exceed where we currently are. Overall, we feel good about our position and our outlook.

Yeah. I would agree. I think we are very optimistic about improvements. A significant factor is that customers and consumers are figuring out how to adapt and manage under these conditions as best as they can. Even if the virus doesn’t respond rapidly, I believe individuals will continue to adapt because they are eager to return to normalcy and to engage in activities. Currently, we still have schools operating at just over 50% who are still studying from home, but this is an improvement compared to a few weeks ago. More kids are going back to school, which will also positively impact sales.

There definitely is pent-up demand for people to go out and enjoy their activities again. We saw this even at Universal Studios over the holidays, where they had to shut their doors three or four different days because they reached capacity. People are learning how to adapt, and we believe conditions will improve throughout the year.

That makes sense. You mentioned earlier some adjustments to reposition the portfolio to take advantage of current opportunities, focusing on ICEE. Can you elaborate on those adjustments, and also share insights on any new product activity that excites you, such as handheld products that appear to be performing quite well?

Absolutely. I would also like to reiterate how proud we are of the retail group, which experienced a sales increase of 33% this quarter. Notably, our SUPERPRETZEL brand saw a 41% increase on the retail side, while our frozen juices and ices were up 52%. We are effectively addressing those areas to continue that growth. Regarding the ICEE, we are aware of the challenges with theaters reopening and are shifting our focus to new sales and channels. One specific area we are targeting is fast casual and QSR restaurants. Our team is actively knocking on doors, and we have some promising tests being conducted in that area. We are ensuring that our capital is used strategically to gain efficiencies on the J & J side as well. We are initiating sales efforts to grow that business with significant potential.

Great. That’s terrific insight. Thanks to both of you. One last question; your dividend has gone flat after a long history of growth due to COVID impacts on earnings, so I wonder if the board – is management and the board now in a position to feel comfortable raising the dividend again? Will we see that sooner rather than later?

That’s a fair question, Jon. We discussed this thoroughly when maintaining it at $0.575. We are proud to have sustained that figure during these times instead of having to decrease it. Discussions regarding future increases will continue. Can we predict exactly what the Board will decide? No. However, if we assess that increasing it is right for the company, we will take action accordingly. We are working to build up our cash reserves, which could provide options for distributions like that.

It seems fair to assert that as your business recovers from COVID and your earnings do eventually rise again, the dividend policy that has historically involved consistent year-over-year increments remains intact?

Yes, I'll let Gerry weigh in on that.

Nothing is guaranteed, of course. However, we initiated dividends around 10 or 11 years ago, growing it consistently for nine straight years. I would draw from that as a benchmark for our future. We believe we will reclaim lost sales and consequently see our earnings grow. You all are astute and know that we generally follow through with our commitments, so I would suggest factoring that into your models. While it’s not a certainty, it’s certainly a relaxed trend we aim to support.

Fair enough. I have one last question if I could squeeze it in.

Go ahead.

With inflation impacting specific inputs like commodities and distribution, what are you observing and how are you planning around that? Will pricing become necessary? If so, are you prepared to adjust pricing?

I will touch on pricing and let Ken address commodity pricing. Regarding pricing, we are closely monitoring it to determine what is feasible with our customers given this COVID environment. In some cases, we can impose pricing increases, while in others, it is challenging. We are adjusting prices on the ICEE side as we feel we can manage that. Furthermore, we are vigilantly observing commodity trends and have a group dedicated to that. I know Ken has reviewed this in detail, and I will let him elaborate.

I can assure you, Jon, we are facing similar challenges. To Dan’s point, monitoring price consistency is essential as prices fluctuate often. We have identified certain areas where we are experiencing increases and will be strategizing on how to adapt based on longer-term trends of these fluctuations. We have teams devoted to tracking this very issue, so we will proceed carefully.

Thank you very much for your insights, and I look forward to hearing from you soon. Good luck, everyone.

Thank you, Jon.

Thanks, Jon.

Hey. Good morning, everybody. Great to talk to you. Appreciate it.

Good morning.

Likewise.

I have a few questions this morning if I could. One, I was pleased to see the sequential improvement in the Food Service segment. You mentioned that some of your Food Service customers, traditionally strong in the holiday season, saw a drop-off in December as COVID flared. May I ask whether we can view Food Service and its sequential improvement as a sign that you are gaining market share with existing customers, or is it more a result of new verticals and new customers being opened, or a combination of both?

Yeah. I believe it's a great combination of both, Todd. I know we are seeing new customers coming into the fold, and it's encouraging to see that at 13% as opposed to 20% or 21% previously. We are hopeful with this business segment that it’s regaining momentum more quickly than perhaps the ICEE side, which has been heavily impacted by theater closures. Overall, we are seeing a positive uptick in business, and we are both gaining ground and capturing new opportunities.

Regarding those market share gains, are you observing any trends of survivor bias within your industry? Perhaps smaller players are unable to maintain service levels, thus allowing you to grab a larger share?

The challenge is keeping up with demand amid our changing mix, and maintaining that effectively can be difficult for everyone. I believe our careful management over the years has created an advantage; our strong balance sheet allowed us not to cut too deep, meaning we remained well-positioned to fulfill the rising demand that is returning.

Okay. Great. Following up on that, since we last convened for an earnings call, we’ve seen the announcement and approval of vaccines. Considering the pace of vaccinations, have you noticed any changes in discussions with your customers regarding future planning and orders? Have they started looking ahead more optimistically?

Yes. We're fortunate our sales team has actively engaged with customers throughout this period. With the announcement of vaccines and hope surrounding their roll-out, our conversations are noticeably more encouraging. The return and optimism this provides are precisely why we want to ensure we are set up to capture market share moving forward.

Two final questions on ICEE to wrap up my queries for the day. One, you indicated earlier that a loss of a service customer was a significant factor in the revenue decline you mentioned in the quarterly report. Could you elaborate on whether that was a periodic loss, or is it something we need to account for going forward?

No, we probably didn’t explain that well. It was primarily a loss of a preventative maintenance program with that customer. During COVID, many customers chose to cut costs, which included scaling back on those maintenance agreements. At some stage, I believe this will improve, and we may see an uptick in service work as their non-service business rebounds.

Understood. And those preventative maintenance contracts you mentioned, are they typically annual agreements, so the impact felt here is mainly for this specific quarter?

Correct. We generally establish quarterly preventative maintenance. One of our significant customers has shifted to biannual maintenance agreements, while many of the theater customers we support have either reduced or halted those processes during this time.

This falls under the non-contractual service responsibilities we provide, which typically bases pricing on hourly rates plus time. When we establish a preventative maintenance service agreement, it accommodates their needs and allows for predictable cash flow.

Great. Lastly, with the ICEE business and its challenges from COVID, have you found efficiencies or ways to run the business such that, looking ahead, what revenue base do you foresee as necessary to achieve breakeven? Is it still in that mid-$60 million range, or is it evolving?

We haven’t defined a specific dollar figure for breakeven. However, we continue to identify efficiencies and implement cost reductions wherever feasible within that business segment. I must commend our operational teams for their diligent work. Despite the challenges, we are focused on controlling expenses as we adapt to this significant sales decline. I am proud to say the operational team is doing a great job in this regard.

It’s important to look at the P&L across the business holistically. We need to find strategies for leveraging and managing expenses efficiently overall. We monitored our expenses closely and were able to reduce them by just under $7 million, despite the additional COVID-related expenses of $730,000. The team has responded admirably, and if sales maintain their current levels, further efficiency improvements will be necessary.

Thank you all for your insights, and I look forward to the time we can start speaking about the aftermath of this pandemic.

As do we, Todd. Thank you.

And thank you. Our last question on the line comes from Robert Costello. Please go ahead. Your line is open.

Hello.

Hi Bob, this is Gerry. How have you been?

Good. Good. I have a couple of questions regarding the manufacturing facilities. One of your major convenience store customers is establishing operations in Florida. Are we any closer to servicing them on the bakery side?

We are servicing them in the Northeast for all their bakery needs including pretzels and Frozen Beverages. We remain in consistent communication with the Southeast region group, and we look forward to ongoing discussions about growing our sales, which we expect to develop in the coming years.

Regarding the facilities, you mentioned rationalizing costs, and I noted you have 18 warehouses in your annual report and 177 tied to the Frozen Beverage segment. Is that number expected to decrease as you evaluate?

I believe that number will stay the same for now. We shut down a plant in Chicago earlier in 2020 and have consolidated that into our existing plants. We are still producing the same products, just within our active facilities.

Understood. Last question regarding your retail customers, are there closures we should be aware of? For example, driving to work today, I noticed a pizza chain announcing bankruptcy. Any concerns about your customers financially?

Nothing significant. We feel comfortable regarding our customer base. The most notable concern would be theater chains but not based on current observations. AMC recently acquired more funding, and their CEO stated that they believe they are secure through 2021. That is our primary concern, but it seems to be stabilizing.

Thank you once more.

Thank you.

You're welcome.

We have no further questions at this time.

Thank you very much, Richard, and thank you to everyone for joining our call today. We greatly appreciate your interest in our company and look forward to reconnecting in three months.

Take care, everybody.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.