J&J Snack Foods Corp Q3 FY2022 Earnings Call

Welcome to the J&J Snack Foods Fiscal Third Quarter 2022 Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. As a reminder, this conference is being recorded. I will now turn the call over to Norberto Aja, Investor Relations for J&J Snack Foods. Sir, you may begin.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2022 Third Quarter Conference Call. We'll be starting 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 will contain forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. All statements made on this call that do not relate to matters such as historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals and objectives and anticipated financial performance, industry-wide supply constraints and the expected impact of COVID-19 on our business. These statements are neither promises nor guarantees, and involve known and unknown risks, uncertainties and other important factors that may cause our actual 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 25, 2021 and 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. Any such forward-looking statements represent management's estimates as of the date of this call, August 3, 2022. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP metrics, including adjusted EBITDA, operating income and earnings per share, which is reconciled to the nearest GAAP metric in the company's earnings release, which can be found in the Investor Relations section of our website. With us on the call today are Dan Fachner, our Chief Executive Officer; Ken Plunk, our Chief Financial Officer; and joining us remotely, we have Lynwood Mallard, our Chief Marketing Officer; Bob Cranmer, our Senior Vice President of Operations; Steve Every, our Senior Vice President and Chief Operating Officer of ICEE; Bjoern Leyser, Senior Vice President of Sales; James Hamill, VP and Corporate Controller; and Michael Palmer, our SVP and General Counsel. Following management's prepared remarks, we will open the call for a question-and-answer session. With that, I would now like to turn our call over to Dan Fachner, J&J Snack Foods Chief Executive Officer. Please go ahead, Dan.

Thank you, Norberto, and good morning, everyone. We appreciate you joining us this morning to discuss our third quarter results. We are pleased with our overall performance, which extends the top line growth we have seen across our business this fiscal year and further reflects the ongoing recovery of our customers. It is evident from our results that we have addressed the headwinds we encountered during our new ERP system launch in February, which temporarily impacted the fiscal Q2 performance of our Food Service and Retail segments. I want to give special thanks and recognition to the enormous effort of our team members who worked tirelessly to quickly resolve this issue. Thank you for that. Taking a look at the third quarter, revenue of $380.2 million was an all-time quarterly record, representing a 17.2% growth versus the prior year period and an over 35% increase versus our second quarter revenue. When compared to third quarter of 2019, revenue was up over 16%. On a year-to-date basis, revenue for the first 9 months of fiscal 2022 totaled $980.2 million or 19.3% increase versus the first 9 months of fiscal 2021. The top line results were led by market growth across all 3 business segments and across just about every product line. Sales were consistently strong across each month of the quarter. Starting with Food Service, we saw continued growth in this segment across the board, including soft pretzels, frozen novelties, churros, handhelds and bakery. Our business continues to leverage strong core products and innovation to capture new customer opportunities in channels like convenience, QSR and amusement. Our Retail segment also enjoyed strong growth, posting $61 million in sales and growing 13% compared to the same quarter last year and over 46% compared to the same period in fiscal 2019. As was the case with Food Service, sales were strong across all categories, including handhelds, frozen novelties, biscuits and soft pretzels. Frozen novelties is a great story this year as we add SKUs and gain additional placement in leading retailers led by Luigi's, Dogsters and ICEE. Our Frozen Beverages segment also saw strong growth with sales increasing 23.5% versus Q3 2021, led by beverages growing 37% and equipment up 17%. Volume in restaurants and amusements were up double digits versus the prior year, and theaters, while still down compared to pre-COVID performance, is improving as consumers go back to the movies to see top box office releases such as Top Gun, Minions and Jurassic World. We continue to see strong growth opportunities in QSR, fast casual and convenience for both beverages and service. We are winning new customers, bringing new products to market, continuing to find ways to leverage our brands, refining our go-to-market strategy and working to satisfy our customers each and every day. Our Q3 top line results only reinforce our confidence in our strategies and the potential we see for added growth. Our business is strong. We have made significant progress improving gross margins to 28.7% this quarter, but we continue to experience inflationary pressures across many areas of our business from sourcing key ingredients such as flour, eggs, dairy, oils, chocolates and meats to packaging and distribution costs. Cost of these key raw ingredients increased almost 10% versus the prior quarter, continuing to put pressure on our manufacturing. We've responded by implementing our second price increase early in the quarter and have already communicated a third, high single-digit increase that will take effect late in the fourth quarter. These actions, combined with our focus on improved margin mix and cost initiatives, led to higher gross margins this quarter and are expected to drive further margin improvements as we close the year. We also continue to face historic cost pressures in our supply chain where we saw both sequential and year-over-year increases driven by higher truck driver wages and rising carriers, storage and fuel costs. In order to offset these pressures, we have a number of cost reduction initiatives underway in R&D, procurement, plant operations and distribution that we expect to offset some of these cost pressures over the next few months and into the next year. Our team is focused on reducing costs across the business as we transform how we operate and improve efficiencies across the business. As it relates to customer wins, we continue to cultivate a healthy pipeline of new business, including a new recently launched churros LTO at Sonic, ICEE expansion with new customers such as Moe's and Peter Piper Pizza, a new Pretzel Stick with QuikTrip in the convenience channel and an introduction of a fantastic new Pretzels Dog at McAlister's Deli. Additionally, as we move to the back-to-school time of year, we're optimistic about recapturing business in the K-12 Channel in core snack categories that softened a bit during COVID. On our service side of our business, we are targeting new opportunities, leveraging our ICEE service network and continuing to see strong demand and growth opportunities with existing customers, including America's leading coffee retailers, convenience stores and movie theaters. Regarding product launches and innovation, we are leveraging the IT brand in sugar cookies in both in-store bakery and in individually wrapped single-serve packaging. And we remain highly focused on our Super Pretzel brand as we expand winning products at retail while introducing new filled pretzel bites and filled pretzel nuts in fiscal Q1 of 2023. Our Dogsters brand continues to see strong profitable growth as we expand the brand with key retailers. Our marketing team is focused on strengthening the brand's positioning and will launch an entirely new campaign in 2023, celebrating the special relationship that dog lovers have with their dogs, and reminding them not to forget their best friend when shopping the novelty aisle. We're anticipating continued strong growth driven by further expansion at retail and with a fully integrated marketing campaign. We will also launch our new brand, Hola! Churros, starting in fiscal Q4 after debuting the new brand at the National Restaurant Association in May. We're excited to roll out the new brand with a full suite of marketing and sales tools. Churros is a significant opportunity for us, having grown 38% in just the past 4 years across American menus. And according to Data Essentials, growth will continue in every segment within Food Service, including a projected 8.5% growth in casual dining restaurants, 4.5% in fast casual and nearly 4% in QSR. J&J is already the largest domestic producer of churros, and creating a new branded product provides us with a unique and valuable opportunity to grow share, strengthening at 78% awareness in the U.S., we offer strong margins, and are easy to prepare for operators such as quick-serve restaurants, movie theaters and adventure parks. Regarding the operating and consumer backdrop, from our vantage point, all indications point to consumers seeing value in our products, while spending more time outdoors including at leisure and entertainment venues as our results indicate, consumers are visiting restaurants, amusement parks, live venues, theaters and convenience stores, travel venues and public spaces in great numbers. For example, theme park attendance remains resilient despite recent macro volatility as domestic and international consumers are vacationing more with their families. Major live event organizers are reporting attendance above pre-pandemic levels, as well as higher spending on cool beverages. And in theaters, a significant revenue segment for us, we are seeing levels approaching 75% of pre-pandemic attendance level, while seeing marked upticks in new cap for spending and moviegoers indulge in their favorite snacks. As it relates to M&A, we could not be more excited to have completed the $223 million acquisition of Dippin' Dots. We believe the combination of the two companies will be a game changer given the almost seamless alignment of Dippin' Dots with our frozen novelty and our frozen beverages businesses. We have already begun to leverage our relationships in key Food Service and Entertainment channel, identifying opportunities to expand distribution of the Dippin' Dots brand. Operationally, we've already started working with Dippin' Dots team on integrating the two companies, and I'm pleased to report that everything is working just as planned. As we move further along the integration process, we are confident in our ability to gain meaningful revenue and cost synergies and create value for our shareholders. In closing, we remain extremely optimistic about our future, given the resilience of our products and brands, the strength across our core products, the success of our new product offerings, our ability to expand our customer footprint and a terrific addition to the J&J family with the acquisition of Dippin' Dots. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken?

Thank you, Dan, and good morning, everyone. Taking a look at the results for the third quarter of fiscal 2022, we are pleased with the continued strength and resiliency of the business surpassing pre-COVID levels for the fourth consecutive quarter. Net sales of $380.2 million grew by 17.2% versus the prior year, and by 75% sequentially. When compared to the third quarter 2019, revenue was up 16%. Our growth trend is further reflected in our year-to-date performance with revenue for the first 9 months of fiscal 2022 totaling $980.2 million or 19.3% increase versus the first 9 months of fiscal 2021. Starting with Food Service, which continues to be our largest segment representing 60% of total sales, revenue of $227.8 million grew by 16% versus Q3 2021 and by almost 18% compared to Q3 of fiscal 2019. The strong performance in Food Service was driven by a 35.7% increase in handheld sales, a 27.5% increase in churros sales and a 23.2% increase in frozen novelty sales. We also saw great momentum in our bakery and soft pretzels, with year-over-year growth of 11.4% and 9.9%, respectively. The Retail segment also posted a strong quarter with $61 million in sales compared to $53.9 million in the prior year period and growing by over 46% compared with the same period in fiscal 2019. Handheld sales increased with a 33.4% growth compared to Q3 of 2021 followed by biscuits and soft pretzels with sales growth of 33% and 4.5%, respectively. Frozen Beverages, sales were $91.4 million and grew 23.5% versus Q3 2021, led by beverage sales growth of 36.7% and machine sales growth of 17.4%. Machine service revenues were flat versus Q3 2021. Gross profit for the quarter was $109.1 million, an increase of over 13.4% compared to the previous year period and a gross margin of 28.7%. A slight drop compared to 29.7% in Q3 of fiscal 2021, however a marked improvement on a sequential basis. Despite the ongoing inflationary challenges, we are confident in our plans to resolve and manage the headwind as we move forward and expect gross margins to continue to improve. Moving down the income statement. Total operating expenses increased from $58 million to $87.8 million, representing 23.1% of sales for the quarter compared to 17.9% in Q2 of 2021. These results largely reflect the inflationary pressures across all of our expense line items, in particular, in distribution expenses which was 12.7% of sales compared to 8.4% of sales in fiscal 2021. Distribution expenses were driven by rise in carrier, driver wage, storage and fuel costs as supply chains remain constrained. Also impacting operating expenses was approximately $3.1 million in one-time transaction and closing fees related to the Dippin' Dots acquisition, which were captured in administrative expenses. This led to an operating income decline of 44.3% to $21.3 million for the quarter compared to the prior year. Excluding the one-time charges, adjusted operating income was $24.3 million, adjusted earnings per diluted share was $0.93 per share, and adjusted EBITDA was $38.4 million after considering income taxes of $5.6 million compared to $9.7 million in Q3 of fiscal 2021. Our net earnings decreased $215.6 million for the quarter, resulting in reported diluted earnings per share of $0.81 compared to $1.51 in the prior year period. Our effective tax rate was 26.6% for the third quarter. And on an adjusted EBITDA basis, we saw a decline to $38.4 million from $52.2 million in the prior year period on the back of the decrease in earnings. Year-to-date adjusted EBITDA totaled $84 million compared to $89.5 million for the first 9 months of fiscal 2021. Taking a look at our liquidity position. Even with the recent Dippin' Dots acquisition, we continue to have a healthy balance sheet, an overall strong liquidity position with $91.4 million in cash and marketable securities and approximately $125 million in debt. In addition, we have ample availability under our revolver. We have $91.2 million of additional borrowing capacity. So very confident in our financial position and our ability to adequately invest and support our business, while continuing to return value to our shareholders via quarterly dividends. In closing, our third quarter results reflect the ongoing resiliency and health of our business as sales continue to grow and gross margins continue to improve. We have a disciplined focus on executing our strategic initiatives to reduce costs, improve margins and continue to build on our sales momentum.

Our first question comes from Andrew Wolf.

Could you tell us how much of your sales was volume versus price?

Yes. We increased both volume and pricing during the quarter. As far as percentages, a little over 50%, somewhere in that 60% to 70% probably range is pricing, the rest is volume.

Yes. But Andrew, I will just add to that. Every segment, sales were up in both volume, as well as price obviously as we see price increases.

Okay. Great. And could you give us a flavor for how July is trending, given what's going on with the economy and some parts of Food Service at least softening?

We continue to see strong sales as we did for the third quarter as we enter into the fourth quarter. So we're encouraged by what we're seeing so far.

It's good to hear. I have a follow-up question related to pricing. Regarding the second price increase you mentioned during the quarter, as we model for the fourth quarter, should we expect additional pricing effects from the actions taken in the fiscal third quarter? That's the first part. The second part is about the high single-digit pricing that will be implemented late in the fourth quarter, which I assume is primarily a fiscal 2023 consideration for modeling. With some deflation expected in certain ingredient costs, how do you view recovery and price realization in relation to your gross margin as we move into 2023? I'm not asking for specific guidance, but do you anticipate a normalization in this area if ingredient costs stabilize?

All great questions, Andrew, I'm going to let Ken address some of those first.

Yes, Andrew, I would respond this way. With the recent price increases, similar to others in the industry, we're working to catch up. From Q2 to Q3, the cost of our key raw materials rose by an additional $10 million. The price increase we implemented in April certainly helped with those rising costs during the quarter. While some commodity projections indicate slight declines, our experts are still advising a wait-and-see approach. We’ve observed some stabilization and reductions, but it will take time for those changes to take effect. The price adjustments made in April are aiding our effort to catch up, but we need to implement another increase. We've already communicated this to our customers, and we're prepared to start executing that over the next few weeks. This will likely take effect in late August, continuing into September and through fiscal 2023.

Okay. So are you cautiously optimistic about gross margins, or do you think it's too soon to determine as you begin your budgeting process?

Yes. No, Andrew, I think we're absolutely cautiously optimistic. We like the position that we're in. We like where we landed even ending the third quarter. And as you put it, we're very cautiously optimistic as we move into the next quarter and beyond.

And I think the other thing that makes us optimistic is we're doing a better job, Andrew, as we drop sales, driving it in higher-margin areas. So our mix is getting better. And then we've got a number of cost of goods initiatives, reducing waste in plants, and we're starting to see the benefits of some of that. So all of that, combined with inflation that things that are slowing down and they even dipping a little bit, with the price increase we've taken, I think we're cautiously optimistic as we look forward.

Just one follow-up on your last comment, Dan, is on the positive mix shift, is that just what sort of related to Food Service recovery and those margins being higher overall? Or are you doing some kind of SKU rationalization of lower margin SKUs as well that will last beyond recovery in Food Service?

Yes. Andrew, great question. And we've done a little bit of both of that. We've done some rationalization. We have our focus on our core products, which we're being able to drive growth in that are higher margins. And so we feel good about the direction that our company is heading and the great work that our sales team is doing out there addressing those kinds of issues and feel like that will pay benefits as we move into 2023.

Our next question comes from Rob Dickerson.

Quick question, I guess, to ask you for a way a little bit more simply. It's just, I think, Ken, you had said previously that given the pricing that was coming through and where the costs were coming out of Q2 that you are hopeful at that point that maybe you could get back to that pre-COVID margin by Q2 of '23. It doesn't seem like that's necessarily off the table given the flow-through of the third round of pricing. Just want to kind of make sure that's still the case. And if not, it just sounds like maybe that gets pushed forward a little bit. So any color on that would be helpful. That's the first question.

Yes, I feel more positive today than I did after Q2, that's for sure. However, the market conditions we are facing remain somewhat uncertain. I am still inclined to reference Q2, but I had intended to answer in this manner, Rob. We are a bit more hopeful about achieving that goal and reaching it sooner than I anticipated two months ago.

Okay. Okay, super. And then just on the distribution side. I mean, obviously, it's a material step up in the quarter for all the obvious reasons. If you even think through into Q4 and then '23, what's hopeful to on that line item? Maybe that peak, at least as a percent of revenue, and hopefully, that starts to kind of trail off through Q4? Or there's just some stickiness in the cost on the supply side just outside of a standard issue fuel cost?

Well, we're certainly hoping that it's peaked at this point, Rob, we have a lot of initiatives. We have extra eyes on it. We're looking at it really, really closely. It's affected by fuel storage and outbound carriers, but we're watching it really closely. We hope that it's peaked and it is down as it relates to percent of sales.

I have one last question. Regarding the difference in operating margins between Food Service and Retail compared to Frozen Beverages, Frozen Beverages seems to have performed exceptionally well, possibly the best we’ve seen historically. Demand is returning, and revenues are back in line with pre-pandemic levels, alongside effective pricing which is benefiting margins. In contrast, Food Service and Retail are still facing some challenges. I'm curious if there has been a delayed effect on pricing compared to Frozen Beverages, or if there is simply less operating leverage in those segments. I’m trying to understand why these areas appear to be lagging compared to Frozen.

Yes. On the Frozen side, we implement price increases annually every January, which gives us an advantage over the Food Service and Retail segments where we made a small increase late last year, and most of the other increases took effect in April. Additionally, the costs from the recent acquisition are distributed between Retail and Food Service. There are also challenges with distribution expenses in these areas. Our business model is solid, with 16 plants and over seven pickup locations, making distribution management quite different from the Frozen Beverages side. These factors contribute to the differences between our Frozen segment and the performance in Food Service and Retail.

Our next question comes from Connor Rattigan.

So just to start, I was just wondering if you could comment on your thoughts on just the health of the consumer going forward? It sounds like your business isn't really seeing much of an impact. But we're hearing a lot of pressure on lower-income consumers specifically. And with a large portion of the business revolving around experiences like theme parks and stadiums and such, do you expect any real volume elasticity or maybe consider seeing price out of those experiences going forward?

We are committed to monitoring the situation very closely. So far, we haven't noticed any significant changes. Historically, our company has performed well in similar economic conditions. We offer great products that serve as snacks, treats, and rewards, which people tend to purchase even during recessions. Up to now, there has been no decline in sales, but we will remain vigilant and respond if that changes.

Okay. Great. That was helpful. And also just as far as the top line growth, could you just sort of maybe just share some color on sort of how that trended over the quarter? Was there maybe still somewhat of a hangover early in the quarter from that ERP system implementation?

There has to be a little bit of that. It's hard to identify it, but there has to be a little bit early in the quarter that we were able to benefit from what we did not get into the system in the second quarter. But really, we saw strong sales in each month of the quarter. So we feel like it's a great demand. We like some of the new products that we've released. I like the action that our sales team has taken out there in getting our core products to the customers and feel really strong about our sales going into the future.

Okay. Great. Great. And then also just a little bit on the pricing side, too. So I know you guys quantified that 60% to 70% of growth in pricing. I know you typically don't really quantify mix, but any chance you can sort of guide us as to maybe how substantial of an impact that mix shift was?

Can you say it one more time, Connor?

Yes, sure thing. So I know you guys quantified about 60% to 70% of growth in pricing. Any chance you can sort of guide us to about sort of how substantial the mix shift impact was just on the overall top line growth?

Yes. Well, it varies by segment. I think the way I would answer that, we're not going to get into specific details on it, is for every segment of our business, whether it be Frozen, Food Service, Retail, all of them grew volume and also grew in price, obviously. So we, as Dan just pointed out, we studied the elasticity very closely. As us and other competitors have raised prices and you start to see the pressure on consumers, you've got to watch kind of our decisions very closely that we'll have to do volumes. And we balance that very well and continue to see us growing both on the volume side, as well as the price side.

Our next question comes from Trevor Sahr.

This is Trevor on for Jon Andersen here. Just one from me today. I wanted to ask just on kind of fill rate and ability to meet demand in the quarter, kind of where you guys were from that front, maybe running through any challenges, specific channels or segments or if you lost anything on the table for the quarter?

Well, our operational team did a fantastic job throwing as much capacity through the plant as we possibly can. You know this because we've said it before and we have 7 new lines underway that will come into effect. A couple of them came to effect this year in the frozen novelty group. We have some coming into effect with both the pretzel and the churros at the end of this year and into next year, that will give us greater capacity. But certainly, with sales like this, that $380.2 million being a record quarter of all time, it certainly stretched our abilities, but our teams did a great job in getting the products to the customer.

Our next question comes from Todd Brooks.

A few questions for you, if I may. One, you're starting to get a little bit of the way into kind of getting into the Dippin' Dots opportunity here. I think, at the time of closure, you talked about it looking to be $0.30 to $0.40 accretive pre-synergies. But Dan, you kind of hinted at strong interest from the existing J&J customers to expand Dippin' Dots distribution there. I guess, what are the early reads about the synergy opportunity with the Dippin' Dots brand now under the J&J umbrella?

We think there's some significant synergies to be had. But I think, I've said this to you, Todd, and I'll just repeat it again. We bought this right in the middle of what I'll call harvest season. And so we really haven't wanted to disrupt what Dippin' Dots does today and has done so well and to make sure that we get the product to the customers in the appropriate fashion. Our people are working hand-in-hand with the groups there today at kind of identifying those synergies, and we'll start to see those probably late in the year, early 2023, late 2022. As you talked about with the expansion, we're having a lot of really good conversations with our customers out there. This is one of the things that we saw such a big opportunity with Dippin' Dots. They do business in many of the same places we do or at least in many of the same channels. And this allows us to have a pretty open conversation with our customers right away. And we have some great relationships out there. We're getting a lot of really good feedback and think that we are going to be able to grow those sales pretty rapidly in the next few years.

That's great to hear. And following up on another opportunity that seems to be growing pretty rapidly. Can you talk through how big the Dogsters business has gotten to be for you? Talk to maybe what would distribution doors look like this year versus last year? Future wins that could be there and then any plans in conjunction with the new marketing campaign next year to maybe broaden out the product line as well?

That brand, as you know, the pet industry has grown tremendously during COVID. A lot of people bought pets. And so we feel like we're in the right place, at the right time, with the right brand. We just did some brand understanding around that with a group who got together to really identify what the brand means and how to go to market with it. And so putting together some terrific plans for 2023 have got kind of a chance to the hood. Lynwood Mallard and his team are doing great with it. As far as sales in period 12, I think it was, we did around $5 million, something like that, somewhere in that range, and see just a wide-open space for us. We're continuing to gain opportunities with retailers, and we feel, as we're starting to look at packaging, starting to look at the brand, understand it better, that there's just a lot of room for growth there. I love that brand. I love what we're doing. The sales team likes it. It just feels like we have a lot of room for growth.

How substantial is doors growth on the distribution side currently versus last year? Have you opened up some of the bigger maybe pet concepts or more mass concepts and you're adding meaningful doors for Dogsters?

Well, I think if you're asking how many more SKUs, I think there's retail outlets where we've added 2 to 3 SKUs on the retail, Todd.

Yes, Ken, I was more asking the number of doors you're distributed in versus last year. How much has that expanded?

I don't know if we have that handy, Todd. I'm not sure I can give you that to you today.

Okay. Fair enough. And then back on Frozen Beverages, obviously, a very strong quarter. Last call, Dan, you talked about some interest coming out of the NRA show. Anything you can share about restaurant concepts that have come into the testing pipeline during the quarter or maybe the magnitude of those opportunities if they come into fruition?

I really like the progress we are making with ICEE right now. We are starting to roll out Moe's, which was previously in testing. As I've mentioned before, the ICEE product requires a lengthy testing and incubation period due to the significant commitment involved. We also have Peter Piper Pizza rolling out, along with two or three other quick-service restaurant opportunities that are still in testing and I can't disclose yet. However, I am optimistic about the momentum we have and foresee strong growth for ICEE as we enter 2023. Additionally, there is positive momentum on the service side as well.

Our next question comes from Jonathan McGraw Bentley.

Regarding the Dippin' Dots acquisition, did you also acquire the cryogenics licensing business?

We did not acquire that portion of it. When I looked at it first, I think I've talked about having an opportunity to meet with the owners and sit down and get a firsthand view of this purchase. That was one of the areas that I just didn't think fits within our kind of wheelhouse, I guess is what I would say. They had also had a couple of issues with that side of the business, and it just didn't feel like it was the right thing for us and that we can take it and grow it and mature in the way that we can on the Dippin' Dots side.

We have a follow-up question from Andrew Wolf.

Given the scale of inflation and distribution costs, could you elaborate on the main drivers? You've mentioned several factors. How much of this is influenced by third parties? For instance, with the trucking sector being tight, pricing is likely going up due to limited supply, compared to areas where you have more control, like your drivers and the potential benefits from falling fuel prices? I also have a follow-up regarding some of the initiatives mentioned in your release.

Yes, Andrew, it breaks down this way. I would estimate that about 75% of the cost increase is due to the fees we pay to outbound carriers for moving the product, as we rely on third parties for this. Storage costs rose by more than 100% year-over-year. Additionally, there were also price increases on certain products, which likely accounted for another 15% to 20%. Fuel costs have increased significantly too, with direct fuel expenses rising over 100%. So, those are the three main factors contributing to the year-over-year increase.

Do you have any insight on the future of outbound rates? Do you anticipate a decrease as the economy declines? Are rates starting to go down at all? What is the current situation?

I can say that we're observing stabilization. Some experts are mentioning a decrease in certain rates, and there appears to be a more balanced demand from carriers compared to a few months ago. This trend looks more encouraging. However, considering everything that was done last year regarding costs, I am cautious and want to see actual improvements. I believe we are hearing positive developments and moving in a better direction, but we need to see that reflected in reality.

And we have no further questions in the queue. At this time, I'll turn the call back to Dan Fachner for closing comments.

Thank you, operator. We have the right people focus on business strategies to continue building on our fifth year legacy, and I'm confident that our best days are still ahead of us. We will continue to make the necessary investments to accelerate profitable growth. I want to take this opportunity to thank all of our employees. Our accomplishments are due to their extraordinary dedication and efforts. Thank you, everyone, for joining us on the call today. We appreciate your interest and continued support. Should you have any questions or wish to speak with us, please contact our Investor Relations firm. Thank you very much.

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