J&J Snack Foods Corp Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the J&J Snack Foods Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Operator instructions were provided. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Norberto Aja, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods fiscal 2024 third 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 fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, expectations and objectives and/or anticipated financial performance. These statements are neither promises nor 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 the forward-looking statements made today. Any such forward-looking statements represent management's estimates as of the date of this call, Tuesday, August 6, 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 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 you can find in our Investor Relations section of the website. Joining me on the call today is Dan Fachner, our 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. Dan Fachner. Please go ahead, Dan.

Thank you, Norberto. Good morning, everyone, and thank you for joining us today. J&J Snack Foods delivered an excellent third quarter, building on our strong momentum from the first half of the year. I'm so proud of the J&J team and employees who continue to execute our strategy while delivering consistent results. These results continue to validate that the investments we have made and the strategies that we have implemented are having a positive impact on the sales and earnings power of our business, and it's positioning J&J to win in what remains a dynamic consumer and operating environment. To further illustrate our success, I will share a few highlights from the quarter followed by a review of our sales performance and operations. Our record third quarter net sales of $440 million marked the second highest quarterly net sales performance in our company's 53-year history. This impressive result was led by strong sales in our Foodservice and Retail segments, offset by temporary challenges in the Frozen Beverages segment, which were impacted by softer sales in the theater channel. Our ability to grow the top line 3.3% while maintaining a healthy 33.6% gross margin underscores the strength of our strategy, led by improved operating efficiencies and a balanced and diverse portfolio of products, brands, and customer channels. We continued our trend of growing profits faster than sales with third quarter operating income and net earnings growth of 3.8%. This resulted in a record high quarterly earnings per diluted share in the quarter. Ken will provide more insights into our financial performance in just a few minutes. Our strategies to leverage innovation and cross-selling opportunities to expand placements of our core products and brands continue to deliver positive results. Taking a closer look at our sales performance: third quarter net sales growth was driven by higher volumes across most of our core products and brands as well as strong business performance in our Foodservice and Retail segments. As we had anticipated, production delays related to the 2023 actors' strike had a negative effect on this quarter's film slate as compared to last year, especially in April and May. The theater industry reported declines in attendance during the quarter of approximately 30%, which impacted fiscal third quarter sales of Frozen Beverages, Soft Pretzels, and Churros. We estimate that these temporary challenges impacted sales by approximately $7 million compared to the same period last year. While the theater channel declined in the third quarter, I do want to highlight the impact of great movie releases in the market and why we remain so confident in growing sales in this channel. The opening of Inside Out 2 in mid-June created momentum as we closed the quarter, resulting in a record month of Frozen Beverage sales with gallons up 4% and overall sales increasing 6% compared to last year. Inside Out 2 was the first of several strong releases planned for Q4 and the remainder of the year. This momentum should also benefit our Dippin' Dots business as they complete the rollout to AMC, Cinemark, and Marcus Theatres over the next few months. Looking ahead, our movie theater customers as well as industry observers expect box office and attendance trends to begin to recover in the second half of calendar 2024. These positive trends are expected to continue into calendar 2025 with a greater number of titles, including a diverse offering of proven franchise films and highly anticipated new titles. As a result, we expect sales of our products and brands to significantly improve in this channel as attendance trends recover. Moving on to our segments. In Foodservice, frozen novelties sales increased 9.1%, led by the continued growth of Dippin' Dots, which increased 5.3%. Bakery sales increased 6.8%, driven by unit volume growth in cookies, new products, encouraging Thinsters results, and expanded customer placements. In addition, we saw a meaningful improvement in handheld sales, up 25.3%. Overall, the Foodservice segment sales grew 3.7% with the increase in these product categories, partially offset by softness in soft pretzels and churros due to the previously mentioned challenges in the theater channel. We continue to see strong growth in Churros with the third largest QSR and remain confident in this opportunity going forward. Moving to Retail, we experienced broad-based growth across nearly all of our product categories, resulting in a 12.4% increase in sales for the quarter. Handhelds grew approximately 70%, driven by expanded placements with a major mass merchant. Frozen novelties sales increased 11%, led by growth of Luigi's, Icee Tubes, and Dogsters, which was driven by unit volume growth and incremental placements in the club channel. Soft pretzel sales increased 8.2%, led by our continued expansion of SuperPretzel products, largely reflecting strong demand for SuperPretzel Bavarian sticks. Biscuit sales were down slightly in the quarter. The Frozen Beverage segment declined 2.6% for the quarter, driven by the previously discussed softness in the theater channel. Frozen Beverages decreased 1.1% due to a 6% drop in gallons. However, gallons increased 3% in Q3 excluding the impact of theaters. Let me just say that one more time. Gallons increased 3% in Q3, excluding the impact of theaters, driven by strong performance in mass merchandisers, amusement and QSR. We continue to diversify our customer portfolio, finding growth opportunities in channels like QSR. In fact, we are very encouraged with the current test at KFC that was recently highlighted on local TV as they market this new program and new flavors like Sweet Lightning and Blackberry Lemonade in the local Lexington market. Repair and maintenance revenues decreased 1.6%, reflecting lower preventative maintenance call volumes. Machine sales, while exceeding our internal budget for the quarter in some areas, were down 15.4% as we lapped a large QSR rollout from last year. Let me quickly highlight a couple of other important focus areas as we continue to cross-sell our brands and products across channels. Starting with SuperPretzel, this iconic brand is outperforming the snack category and continues to provide opportunities for growth, new product extensions, and new points of sale. We are expanding across retail led by the launch of Bavarian Sticks, which remains the number two seller in the SuperPretzel portfolio reaching an ACV now of 28% and growing. I'm so pleased with the incremental distribution we are achieving with leading retailers. In late fiscal Q4, we expect to double our store count with a major grocery retailer under the SuperPretzel and Auntie Anne's brands. Let's talk about Dippin' Dots. Summer promotions are underway with Regal and Chuck E. Cheese resulting in higher volumes and increased brand awareness. We also continue to roll out Dippin' Dots at AMC, Cinemark and Marcus Theatres with expectations to be in approximately 930 locations by the end of the calendar year. Currently, we have installed Dippin' Dots in 176 AMC locations, 134 Cinemark locations and 51 Marcus locations. Also, we're actively testing new opportunities with convenience store customers and will be installing freezers in approximately 230 locations with a major food service customer. We remain confident in our plans to expand Dippin' Dots across customers and channels. I'd like to spend some time highlighting the significant impact of our operational investments over the last couple of years. The investments we have made in manufacturing and distribution capabilities are resulting in improvements across key efficiency metrics. Starting with our supply chain strategy: all three RDCs are exceeding expectations and will enable us to continue driving productivity improvements. At this time, 85% of our sales orders are shipped from the new distribution network versus only 26% a year ago with the average length of haul decreasing by 38% and on-time performance improving to over 82% versus 73% a year ago. Line haul cost per pound decreased 17% compared to the same quarter last year in our snack food business. We have reduced the number of cold storage locations to 10, driving efficiencies in how we ship products and reducing transfers across our network by 9%. Shifting to operations, the addition of six new production lines has significantly expanded our capacity. This has enabled added efficiencies and given us the ability to better support growth opportunities across our core products such as pretzels, churros and frozen novelties. The expanded capacity has created production efficiencies and higher output metrics through better automation, which improves product margins, decreases waste over time, and provides the flexibility to respond to new sales opportunities. Fill rates have reached 98.5%, a high point for J&J's business and high relative to overall industry trends. Finally, as many of you likely saw in our 8-K filing, our CFO, Ken Plunk, will be retiring at the end of this calendar year. The company will be conducting a thorough search process to identify a successor and to ensure a smooth transition. Ken's been a great partner and leader to both me and the organization. I want to thank Ken for his help and support as we transformed the business over these past four years. The entire J&J team, the Board of Directors, and I wish him and his family the very best in his new chapter of his life. Thank you, Ken. In summary, I'm pleased with our ability to post record third quarter sales and profits while managing through continued challenges in the consumer environment. I'm so proud of how the J&J team continues to execute on our growth agenda. While we expect our 2024 fiscal fourth quarter results to be impacted by one less sales week versus the comparable prior year period, it is clear that our strategies to maximize sales across our customer channels and improve operating efficiencies are working. We have a strong portfolio of beloved products and brands with tremendous growth opportunities ahead of us, and we remain confident in our ability to deliver long-term value to our employees, our partners and our shareholders. With that, I would now like to pass the call over to Ken to review our financial performance in more detail. Ken?

Thank you, Dan, and good morning everyone. I will start by saying that it has been a tremendous honor to serve as CFO for J&J Snack Foods and I am truly blessed to have worked alongside Dan and his amazing team to improve and grow this business. I'm proud of the finance and IT organization that we have developed over the last four years and confident that the foundation is set to continue delivering strong financial discipline, business performance and system capabilities. Turning to our results, I'm pleased with our ability to deliver strong performance for the quarter, including record fiscal third quarter net sales. This combined with gross margins of 33.6% contributed to significant profit growth, with profits growing faster than sales. Net sales for the quarter totaled $440 million, an increase of 3.3% versus the prior year. As Dan mentioned, top-line performance was led by higher volumes and new business performance in our Foodservice and Retail segments, more than offsetting softer sales in our Frozen Beverages segment. Foodservice, our largest segment, saw sales increase 3.7% to $264 million. Handhelds sales increased 25.3% to over $21 million. Bakery and frozen novelties increased 6.8% and 9.1%, respectively, driven by unit volume growth in cookies and a 5.3% increase in Dippin' Dots sales. Growth across the segment was offset by a decrease in Soft Pretzels and Churros sales of 6.3% and 0.7%, respectively, driven primarily by the challenges in our theater channel that Dan referenced earlier. In addition, sales of new products and added placement with new customers totaled approximately $6.4 million driven primarily by the addition of Churros to the menu of a major QSR customer. This led to third quarter operating income of $20.2 million, a decrease of 2.6% versus the prior year period reflecting a less favorable sales mix. Moving to our Retail segment: Q3 '24 retail sales totaled $68.7 million, an increase of 12.4%, driven by handheld sales growth of 69.9% as we expanded product placement with a major mass merchant. In addition, frozen novelty sales increased 10.9% led by the growth of Luigi's, Icee Novelties, Dogsters and an overall higher shipment as customers added inventory for the peak spring and summer seasons. Soft pretzel sales increased 8.2%, led by our continued expansion of SuperPretzel products in retail, while biscuit sales decreased 5.8% in the quarter. We also benefited from new product innovation and customer placement in this segment of approximately $3.1 million in the quarter. This was largely the result of the SuperPretzel Bavarian Sticks launched earlier in the year into the retail segment. We expect continued growth of this product as a major retailer expands placement in the fourth quarter. This led to operating income of $7.8 million, an increase of $3.6 million versus the prior year period reflecting the improved sales product mix and higher gross margin. As it relates to our third segment, Frozen Beverages, sales were $106.8 million, a 2.6% decrease compared to a record Q3 2023. Beverage sales were down 1.1% or approximately $800,000 below prior year, reflecting weakness in the theater customer channel. Overall, gallons sold declined 6% in the quarter but did increase 3% excluding the impact of the theater channel, led by growth in amusement, convenience and mass merchandisers. As Dan mentioned, we expect volumes to experience a significant improvement in the back half of the calendar year given the stronger schedule of film releases. Repair and maintenance revenues also decreased by 1.6% as we saw lower preventive maintenance call volumes. Machine sales were down 15.4% as we lapped a significant customer rollout from last year. This led to operating income of $22.1 million compared to Q3 '23 operating income of $23.3 million, with the decrease driven by weaker top-line sales. 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 quarter, gross profit totaled $147.8 million, a 3.4% increase compared to Q3 '23. This led to a gross margin of 33.6%, flat versus prior year despite a less favorable sales mix. We remain confident in our ability to deliver strong and consistent profit margins and expect to achieve a gross margin of 30% or better for the full year. As it relates to inflation across our portfolio of raw materials, we saw net low- to mid-single-digit inflation increases with the net increase primarily driven by increases in the cost of cocoa/chocolate and, to a lesser extent, increases in the cost of sugar and sweeteners. Those increases were somewhat offset by deflationary trends seen in flour, cheese, dairy mixes, and eggs. Pricing adjustments and contractual cost true-ups will minimize the majority of the impact on our gross margins in the quarter. Our procurement team continues to effectively manage buying costs. We are well positioned to respond to any impacts. Looking at expenses, total operating expenses increased $3.1 million or 3.2%, representing 22.2% of sales for the quarter, flat with the prior year. Distribution costs were 10.2% of sales in the quarter compared to 10.4% in the prior year period as the investments we have made to increase efficiency across our distribution network and supply chain continue to drive expense savings. Marketing and selling expenses were 7.4% of sales, flat versus the prior period as we continue to invest in our product innovation, brand promotions, and new selling opportunities. Administrative expenses were 4.5% of sales in Q3 '24 compared to 4.4% in Q3 '23. This led to operating income of $50.1 million, a 3.8% increase compared to $48.3 million in Q3 '23. Adjusted operating income was $53.1 million, a 3.9% increase compared to Q3 '23. After the impact of income taxes of $14.1 million compared to $12.6 million in the comparable prior year, net earnings increased 3.8% to $36.3 million, resulting in record quarterly earnings per diluted share of $1.87 compared to $1.81 in the prior year period. Adjusted earnings per diluted share were $1.98 for the quarter compared to $1.92 in the prior year period. Adjusted EBITDA increased 6.3% to $70.9 million from $66.6 million in the prior year period and our effective tax rate was 27.9% in the third quarter. Looking at our liquidity position, we continue to have a healthy balance sheet and overall strong liquidity with $64 million in cash and approximately $12 million in debt. Our ability to improve cash flow through working capital initiatives and stronger profitability is generating more cash to pay down debt, pay dividends, and continue investing in our business. Our focus will continue to be on maintaining a healthy balance sheet and prudent leverage position, which enables us to continue investing in the growth of our business and returning value to our shareholders. In addition, we have ample availability under our revolver of approximately $203 million in additional borrowing capacity. To sum it all up, while we recognize we still have much work to be done to capture the vast opportunities in front of us, we are encouraged by our results to improve every aspect of how we do business. We are confident that the power of our brand portfolio and the unwavering dedication of our employees will continue to deliver strong results and added value for our shareholders. I would now like to turn the call over to the operator for Q&A. Operator?

Thank you. At this time, as mentioned, we'll conduct a question-and-answer session. Operator instructions were provided. Our first question comes from the line of Todd Brooks with The Benchmark Company. Your line is now open.

Hey, thanks for taking my question and nice results in the quarter here, kind of absorbing some of that pressure in the theater channel.

Thank you, Todd.

Yes. Thanks, Todd.

First question is on that theater channel and I think this might be helpful for all of us. Can you size if you think about Foodservice and Frozen Beverage what percentage of each of those segments is made up by the theater channel?

We don't have that exact number on the Foodservice side. We know on the beverage side, it's about 25% of the Icee beverage sales. The Foodservice side is much less than that, but growing. It's a nice piece of business for us that continues to grow and we've even added some people from a company standpoint into that group to try to energize it.

Okay. Great. Thanks, Dan. Secondly, the churro success with Subway has obviously been a great story. I look at that sidekick line and I see three products that J&J would be well suited to make, not just the churro. Have you had any luck making inroads with either the cookie offering there or the soft pretzel offering?

We've built a really nice relationship with that company through this program that they have and with their buying arm. We're continuing to have conversations and absolutely believe that in the future we'll have the opportunity to be making some of those products or some others. There's some nice opportunities for us coming.

Okay, great. And then a final one, and you touched on the KFC test a little bit, Dan, but I was just wondering if you look forward a couple of calendar quarters here. What we're seeing either on the new product launch side, the distribution side or maybe some tests that are out there that can help you continue — you drove I think a little over $9 million in revenues from new placements and new products, which is great to see. I'm just wondering what you can share with us in the go-forward look for what may continue to drive that?

I'm not sure I can share specific names, but I will tell you we have a tremendous pipeline. In retail, we've got a couple of things that are really strong for us and a lot of customers expanding distribution. On the Foodservice side, whenever a particular customer like Subway comes out with a churro product, there's lots of others who are watching that. We have some tests in play that some will even kick in before the year's end with other large organizations that we'll see continue to grow. We're really happy there. The bakery side, as you watch those numbers, we've got some good things in private label areas that we're continuing to grow. And then with KFC, as you mentioned, that's a really big opportunity for us. So far the test has gone extremely well with a lot of press and attention. I love our pipeline right now. I think we've got a really good chance of having a really strong 2025.

Okay, great. Thanks.

Thank you. Our next question comes from the line of Connor Rattigan with Consumer Edge. Your line is now open.

Hey, guys. Good morning. Congrats on a great quarter.

Thank you, Connor. Good morning to you as well.

Great. So you guys called out the weakness in Frozen Beverages driven by the theater channel. I'm curious, could you share how trends looked across the other channels to give us a better sense of relative performance across those channels? Was performance relatively even outside the theaters or was there quite a bit of volatility by channel?

We were up in volume in most of our big brands and products. It was a pretty good quarter overall. Even inside the beverage side of our business, if you took the theater channel out, we would have been up by 3%. Overall, a pretty good quarter with all of our products and we're seeing some nice growth.

Connor, we were purposeful in making that comment about what the gallon increase was without theaters. That tells you amusement was up, QSR was up, and mass merchandise was up as it relates to Frozen Beverages. So again, this was really a tale of the theater industry in April and May where releases were impacted. Outside of that, it was a really, really good quarter for us in that side of the business.

Awesome. So also in the press release, you guys noted some strength in amusement parks, specifically with Dippin' Dots. I'm curious, what did you really see as the driver there? Was it just strong summer seasonal traffic? Maybe was there some pricing, distribution gains? Any color on that would be great.

Our teams do a great job getting into the amusement park industry and making sure we're well positioned when the season comes. The Dippin' Dots team really excels in that area. I toured one of our amusement parks last week with a group of leaders and the Dippin' Dots presentation across that Six Flags park was tremendous. They do a really good job making sure we're positioned right and that it's marketed appropriately. It certainly helps when you have a nice warm summer, and that industry seems to be doing really well in all facets of our business right now.

Awesome. And then just one last quick follow-up. You guys have previously mentioned that about 80% of your products were flowing through the new RDC system. Did that tick up a little bit during the quarter?

I think it ticked up, maybe a couple of 100 basis points. I want to think Q2 was around 78%, so yes, it ticked up somewhat from Q2.

Okay great. Thanks guys. I'll pass it on.

Thank you. Our next question comes from the line of John Anderson with William Blair. Your line is now open.

Hi, thanks for the question. And Ken, thanks for your help the past few years and best to you in your retirement down the road.

Thank you, John.

I wanted to ask a big-picture question around the consumer: what you're seeing in terms of any macro impacts on your business relative to the consumer. Are they exhibiting more value-seeking behavior or any kind of channel shift you're seeing across the various channels that you serve that suggest either the consumer remains healthy or there are pockets of weakness?

We talk about this a lot, and I'd probably use the same term again today: the consumer is a little fickle. They react to what has been said in the media. For example, when markets move or when interest rate expectations shift, consumers react. We still see a tale of two cities. The lower-end consumer still is under pressure and they're cautious about spending. On the opposite end, we see consumers looking for premium or experiential spending. It's typical consumer behavior during uncertain times, and with the upcoming election we're going to watch trends closely. They're discerning about where they spend their money.

It makes sense. So if you kind of stripped out the theater channel this quarter, it looks like your sales would have been up about 5%. Historically that has been an area the company has grown organically. Is that a reasonable mid-single-digit organic growth rate expectation as you look to the fourth quarter and fiscal 2025? You've got tests in the works, good new products expanding distribution, a lot of cross-channel initiatives. How does that roll up into a top-line view?

That's a really good way to look at it. We are working hard to be right around mid-single-digit growth year-over-year, and I think we're well positioned for that in the future. Theater performance can be a big swing: a few strong movie releases can really lift our sales. When you combine new product releases, distribution gains, growth in core products and the theater business returning — which indications suggest it will in the back half of '24 — we feel well positioned to be in that mid-single-digit growth range going forward. There are several big movie releases still to come in the back half of the year and into 2025 that should help us.

That's helpful. And is it fair to say that the products you sell in theaters are a margin-accretive part of your business?

Yes, absolutely. And we're growing with the Dippin' Dots side of that with AMC, Cinemark and Marcus Theatres and a couple of regional chains. As you know, the margins through Dippin' Dots are really healthy.

I would add, when we add over 900 theaters between now and the end of the year for Dippin' Dots, that's going to be a really nice business and accretive to margins as we go into the winter months. That's another reason we feel optimistic heading into the end of the year and into next year.

Also, you reaffirmed the outlook for gross margin this year to be above 30%, which I think was an interim target at one point. Given your operational work and productivity improvements, have you given any thought to what gross margin might look like longer term?

Yes. Dan and I discussed this last quarter. We have a desire — this may not be next year, it may be two to three years out — to get up closer to the mid-30% range. As we focus on plans where profits grow faster than sales, gross profit will play a big role. We expect to keep inching that number up by focusing on the core growth of higher-margin products and improving margins of lower-margin businesses, where we've made nice progress this year. I feel good about where we're going to land for this fiscal year given the first three quarters and think that will build from there.

Great. Thanks so much, guys.

Thank you, John.

Thank you. Our next question comes from the line of Andrew Wolf with C.L. King. Your line is now open.

Hi, good morning. I wanted to ask about the gross margin. Back of the envelope, if the $7 million of movie theater business had comped, the gross margin would have expanded maybe 10 to 20 basis points. Is that reasonable?

Yes. That's a good estimate, Andrew.

Okay. The other thing I wanted to ask about gross margin was pricing power. Some big retailers have customers who are hurting, and inflation for you is running low- to mid-single-digits on ingredients. There's an offset with productivity improvements, but what do you feel about pricing power? There are contractual things in Foodservice, but maybe in retail and in general, your ability to pass through costs — not to chase margin but to hold production economics?

You have to be careful with pricing in this environment. We do have contractual mechanisms to pass through certain costs, such as increases in cocoa or chocolate. Outside of that, we need to earn any pricing by delivering value. Our new RDCs and increased efficiency and capacity allow us to earn some of that, but we'll be diligent and disciplined. We were able to pass through pricing on chocolate, and we'll continue to watch other key items closely.

Lastly, since you mentioned Thinsters, is there an opportunity for a quite small brand like that to get meaningful distribution given your relationships?

We love to buy. We've talked about larger acquisitions, but Thinsters was an easy acquisition because it's a great product and very well received. We believe we have an opportunity to grow it. Our teams are excited about representing and growing it. We'll continue to look for larger deals like Dippin' Dots, but smaller add-ons that are easy to integrate and grow can be attractive as well.

Okay. That's it for me. Thank you.

Thank you, Andrew.

Thanks, Andrew.

Thank you. Our last question comes from the line of Robert Dickerson with Jefferies. Your line is now open.

Great. Thanks so much. Hey, guys.

Good morning, Rob.

Just a couple of quick clarification questions. In the Retail segment, operating margin was around that 11% level. We've seen some volatility in that segment the past few years. I'm assuming that was more cost and price related. If we think about the 11% in Q3, are we back on track to a more normalized run rate going forward or are there puts and takes?

That's a great question. I do think we're back on track. I won't commit to 11% every quarter, but I think being much more in that range is realistic. We've gotten things dialed in as it relates to how we manage margin in retail products and are moving and growing more in higher-margin Frozen Novelties and soft pretzels. As long as we continue that mix shift, it should mix out much better than it was a few quarters or a couple of years ago.

Got it. Fair enough. And then a broader question on margin mix vis-à-vis new distribution. For example, KFC: once you're in more stores, do you get normal margin on that product from day one, or is there scalability — incremental volume leverage and scalability benefits in the overall business as you increase distribution?

There is scalability. Volume gives you some scalability. For Dippin' Dots, producing more product yields efficiencies in the plant. For Icee, scalability is different — there's the cost of equipment and the ability to place more machines — but we can get advantages around equipment purchasing and managing labor. So yes, some scalability exists, though it may not be as sizable as in a manufacturing plant.

I'm asking because you've spent a lot on the efficiency side, which gives you benefits, and you're getting more distribution in major channels. Usually that leads to margin expansion. Is that fair color?

Yes. That falls right into what we've talked about with the RDCs and efficiencies. For Dippin' Dots, we invested early enough in the distribution center footprint to build capacity that we can now grow into, which will help us gain efficiencies going forward.

These are all pieces that increase our ability and confidence to continue to move the gross margin number up as we grow volume in these areas and leverage automation to create efficiency that captures basis points of margin over the next two to three years.

Great. All right. That's all. Thanks so much.

Thank you, Rob.

Thanks, Rob.

Thank you. I'm showing no further questions at this time and would now like to turn it back to Dan Fachner for closing remarks. Go ahead.

Thank you, operator. In closing, we remain extremely confident in our path forward and in our ability to continue to execute at a high level. We're building a culture that emphasizes improving every aspect of our business in order to leverage the opportunities in front of us as well as to create some new opportunities of our own. We look forward to updating you on our progress later this Fall. In the interim, should you have any questions or wish to speak to us, please contact our Investor Relations firm JCIR at 212-835-8500. Thank you and have a great morning.

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.