Earnings Call Transcript - JJSF Q2 2023

Operator, Operator

Good day, everyone, and thank you for joining us. Welcome to the J&J Snack Foods Fiscal Year 2023 Second Quarter Earnings Conference Call. I would like to hand the call over to Mr. Norberto Aja of Investor Relations. Please proceed.

Norberto Aja, Investor Relations

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods' fiscal 2023 Second Quarter Conference Call. We'll start 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 contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including statements regarding management's plans, strategies, goals and objectives and our anticipated financial performance as well as industry-wide supply constraints and the ongoing impact of COVID-19 on our business. These statements are neither promises nor guarantees that 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. Factors discussed in our annual report on Form 10-K for the year ended September 24, 2022, 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 today. Any such forward-looking statements represent management's estimates as of the date of this call, May 2, 2023. 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 earnings to change. In addition, we may also reference certain non-GAAP metrics on the call today, including adjusted EBITDA, operating income or earnings per share, all of which are reconciled to the nearest GAAP metric in the company's earnings press release, which can be found in the Investor Relations section of our website. Joining me on the call today is Dan Fachner, our Chief Executive Officer; along with Mr. Ken Plunk, our Chief Financial Officer. Following management's prepared remarks, we will go ahead and open the call for a question-and-answer session. With that, I would now like to turn the call over to Mr. Dan Fachner, J&J Snack Foods' Chief Executive Officer. Please go ahead, Dan.

Daniel Fachner, CEO

Thank you, Norberto, and good morning, everyone. We appreciate you joining us to discuss our fiscal 2023 second quarter results. I'm pleased to report that our positive momentum continued in the fiscal second quarter, as sales this quarter were the highest second quarter sales in company history and were driven by strong demand across all three business segments. While the year began with ongoing economic and inflationary challenges for our industry, it is clear that consumers continue to show strong demand for iconic brands and diverse offerings of fun and indulgent products. We saw marked improvements in unit volumes in fiscal Q2, including strong performances in soft pretzels, churros, frozen novelties and frozen beverages. Higher volumes, combined with the impact of price increases enacted in fiscal 2022, resulted in a 20% increase in net sales to $337.9 million. J&J also generated healthy year-over-year improvements across several key performance metrics, including gross margins and distribution expenses, resulting in strong earnings growth for the quarter. Taking a closer look at our segment performance. Food Services increased 23.8% to $218.3 million, including approximately $16 million in Dippin' Dots sales and $3.3 million of sales related to new products and expanded customer placements. Overall, segment growth reflects a 28.3% rise in soft pretzels, a healthy 42.8% increase in churros, and a more than 264% increase in frozen novelties, including incremental Dippin' Dots sales. Retail sales increased 13.7% to $46.4 million, including $2.5 million of sales related to the recent launch of our SuperPretzel filled knots and the expansion of handhelds with a major retailer. Retail segment growth was also driven by strong sales in frozen novelties, soft pretzels, and biscuits. Frozen beverage sales increased 13.7% to $73.2 million, reflecting an 18.2% rise in beverage sales, led by strong consumption trends across amusement, restaurant, retail and food service venues as well as a healthy rebounding theater channel. Machine repair and maintenance revenues increased 7.5% versus the prior year while equipment sales increased 9.4% on the back of healthy customer installation volume. While overall inflation has stabilized, we continue to experience year-over-year pressures on key commodity inputs, such as flour, oils, eggs, mixes, and sugar. We estimate inflationary impacts of approximately 9% compared to a year ago, as our industry continues to manage through these historically high cost pressures. Despite these continued challenges, we delivered a 26.8% gross margin in fiscal Q2 '23, which compares favorably to the 23.2% gross margin in the prior year. Overall gross margin improvement reflects the benefits of our pricing action last year and the early impact of our initiatives to improve cost management and productivity. We are aggressively investing and positioning J&J for its next phase of growth, and it is clear that our strategy is delivering results. So before turning the call over to Ken, I'll briefly touch on the excellent work our teams have done and continue to do to optimize our business for the future. Starting with sales, marketing and product innovation, I am very proud of this group. We remain focused on leveraging consumers' affinity for our brands to prioritize growth of our core products while also capitalizing on opportunities for increased product innovation and extensions across all three business segments. We are gaining placements in key channels, including theaters, QSR, casual dining and retail, leading to market share gains in our core products with several notable achievements in Q2. ICEE, America's #1 frozen beverage brand, continues to gain share in the QSR and fast casual channels. The team is currently working on several customers to test the placement of ICEE in the venues, representing incremental placement opportunities. The ICEE rollout across Moe's Southwest Grill is also progressing well, with 95 locations installed to date and a total of 200 locations by calendar year-end. In terms of product innovation, we launched ICEE and SLUSH PUPPIE branded frozen pops across major retailers in late Q2, and the initial response has been very positive. Last quarter, we announced a new relationship with Checkers to install 800 new machines. To date, we've installed about 250 machines with the remainder targeted to be completed by the end of July. Our SUPERPRETZEL brand remains the soft pretzel category leader across channels. We continue to see significant growth opportunities in both foodservice and retail channels. We are expanding placement of our existing pretzel products and are excited to be launching new SUPERPRETZEL branded filled knots, Bavarian sticks, and mini dogs in retail later this summer. Our expanded production capabilities enable us to aggressively grow our SUPERPRETZEL business. Our frozen novelty brand, including Luigi's Italian Ice, WHOLE FRUIT, and Dogsters also experienced healthy dollar and unit growth during the second quarter. We're also seeing solid sales momentum of these brands with key retail partners. We are also extremely pleased with the early success of our Hola! Churros brand, with sales growing 43% this quarter and a healthy 37% year-to-date. As America's #1 producer of Churros, we see significant near- and long-term growth opportunities of our branded products with major U.S. food distributors, as well as the QSR, fast casual, and retail channels. We expect to launch the Hola! Churros brand in our retail channel in 2023 with the first shipments to commence in September. Finally, while the second quarter was a seasonally slow period for Dippin' Dots, we've made significant progress expanding into new channels and positioning the business for a very strong summer. The Dippin' Dots team worked quickly to install freezers in over 290 Regal theaters and plans for additional locations in the third quarter. The team also secured a test with AMC theaters and another theater chain, which plans to be in 200-plus locations in the back half of the year. We have a strong pipeline of opportunities as we leverage the breadth of our customer base and execute our cross-selling strategy. In terms of product innovation, we continue to find new ways to leverage the combined power of our brands by recently launching an ICEE branded Cherry and Blue Raspberry ICEE Dippin' Dots flavor in March. This new product is Dippin' Dots' best product launch ever, exceeding the best by over 40% unit growth. Also, we continue to evaluate Dippin' Dots branded frozen novelty products for the retail channel. Turning to our operating initiatives. We have taken a number of actions over the last couple of years to increase efficiency and expand our capabilities to grow this business. Operationally, we continue to expand our production capacity and now have 5 new automated lines supporting growth opportunities in churros, pretzels, and frozen novelties. A sixth line will be added in Q3. This added capacity supports our aggressive plans to grow sales of our core products. In addition, we are completing the geographic optimization of our distribution and warehousing network by consolidating to a handful of locations, including three new state-of-the-art distribution centers. The first RDC will open in June in Terrell, Texas, while the other two are expected to come online later this year and early next year. The opening of these new RDCs will allow us to go from 30-plus shipping locations to somewhere between 6 and 8 strategically located facilities and will significantly reduce our reliance on third parties for storage and logistics management. Two of these RDCs will also include freezer capacity for Dippin' Dots products to support expanding growth opportunities and more efficient distribution capabilities. This aligns with our strategic initiatives announced in fiscal 2022, including the implementation of a new ERP system and the outsourcing of our shipping logistics to NFI. This supply chain transformation will play a pivotal role in reducing distribution costs and providing better service to our customers. We are confident that these combined initiatives position us for strong sales growth and improved operational efficiencies and reduced distribution costs and provide the platform to deliver incremental profitability. As it relates to M&A, the integration of Dippin' Dots into the J&J systems, processes, customer channels, and operations is going just as planned. Also, we continue to evaluate potential M&A opportunities that complement our brand portfolio and our business model. In summary, we are confident that the foundation we are building is further strengthening the long-term competitiveness of our business and positioning J&J to deliver new levels of growth and shareholder returns. We have strong growth momentum heading into the back half of fiscal 2023, supported by our core brands and products. Strategically, the team is focused on transforming the business, investing in our brands and capacity to grow, while implementing initiatives to help us operate more efficiently. Our leadership team is aligned around these strategic initiatives, and the organization is excited about the opportunities ahead of us to continue building on J&J Snack Foods' long-term record growth and success. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken?

Ken Plunk, CFO

Thank you, Dan, and good morning, everyone. I am pleased with our financial results for the quarter. More importantly, I am pleased with the opportunities we have in front of us to grow and improve these results. Hopefully, it is evident that we are making progress across our various initiatives and are well positioned for long-term success. Taking a look at the fiscal second quarter, net sales for the quarter totaled $337.9 million, a 20% increase versus the prior year period and a 15% increase versus the first six months of fiscal 2022. The strong top line result was driven by growth across all three of our business segments, reflecting the health and resiliency of our business. Our largest segment, Food Service, experienced a 23.8% increase in sales to $218.3 million, representing 65% of total company sales. The strong performance was a result of healthy growth across the segment, including a 264.2% increase in frozen novelties, which also benefited from the Dippin' Dots acquisition, a 42.8% increase in churros, a 28.3% increase in soft pretzels and a relatively flat performance by both handheld and bakery, down 1% and up 1.6%, respectively. These results included approximately $16 million in Dippin' Dots sales, in line with our expectations, given the seasonality of this business. Moving to our Retail segment, sales increased 13.7% to $46.4 million compared to the same period in fiscal 2022. Growth in this segment was driven by contributions from all subcategories, including a 283.4% increase in handhelds, a 9.8% increase in frozen novelties and 3% and 1.7% increases in biscuit and soft pretzel sales, respectively, versus the prior year. As it relates to our third segment, Frozen Beverages, sales were $73.2 million or a 13.7% increase versus Q2 '22, led by growth across all three subcategories. Beverage sales increased 18.2%. Repair and maintenance revenue increased 7.5%, and machine revenue rose 9.4% compared to the previous year period. Moving down to the income statement. Gross profit came in at $90.4 million or a 38.3% increase versus prior year, leading to a gross margin for fiscal 2023 second quarter of 26.8%, favorably comparing to 23.2% in Q2 of fiscal '22. In fact, this marks the highest Q2 gross margin since Q2 of fiscal 2019. While overall inflation has stabilized, we continue to experience year-over-year pressures on key commodity inputs, such as flour, oil, eggs, mixes, and sugar. As Dan mentioned earlier, we estimate our inflation at approximately 9% compared to a year ago. So we were pleased with our gross margin improvement in the face of these continued inflationary headwinds and see these results as further affirmation that our operational initiatives are beginning to have the expected results and positive impact on our business. Taking a look at expenses, total operating expenses increased $18.9 million or 30.9% and represented 23.7% of sales for the quarter compared to 21.8% in Q2 of 2022. The increase largely reflects the addition of Dippin' Dots to our business compared to a year ago and ongoing inflationary pressures across many of our expense lines, in particular distribution expenses. Distribution expenses increased from 34.7% versus the prior year, representing 11.3% of sales compared to 10.1% in fiscal '22. However, we saw a significant improvement on a sequential basis compared to fiscal 2023 Q1 and fiscal 2022 Q4 when distribution expenses represented 12% and 12.4% of sales, respectively. These improvements were led by a stabilizing inflationary environment and improved logistics management across our business. Marketing and selling expenses represented 7.1% of sales versus 7.5% in the prior year period, as the marketing team continues to do a great job driving efficiencies and targeting how we allocate marketing dollars. Administrative expenses were 5.3% of sales in Q2 2022 compared to 4.1% in Q2 of last year, reflecting the addition of Dippin' Dots in this year's expenses. As a reminder, Dippin' Dots is a highly seasonal business, with most of its profitability taking place over the second half of the year. As such, and as expected, it had a negative impact on our results in the second quarter. This led to an operating income of $10.2 million, favorably comparing to $4.1 million in Q2 2022, representing a year-over-year increase of 149.3%. Adjusted operating income was $12.1 million, also comparing favorably to $4.7 million in Q2 2022. After considering income taxes of $2.4 million compared to $0.9 million in Q2 of fiscal '22, net earnings increased to $6.9 million, resulting in reported diluted earnings per share of $0.36. This compares to $0.17 in the prior year period. Adjusted diluted earnings per share was $0.43 compared to $0.19 in Q2 of 2022. Adjusted EBITDA increased 52.5% to $27.5 million from $18 million in the prior year period, and our effective tax rate was 26% in the second quarter. Taking a look at our liquidity position, we continue to maintain a healthy balance sheet, including $47.7 million in cash and marketable securities and approximately $92 million in debt. In addition, we have ample availability under our revolver of approximately $123 million of additional borrowing capacity. This affords us the flexibility to strategically invest and support our business. We are currently investing close to $100 million in the year across various growth initiatives, including completing the execution of new product lines and the investments in RDCs. In summary, these results reaffirm the health, resilience and potential of our business. As we enter the second half of the fiscal year, we continue to raise the bar in every aspect of how we do business and feel confident in our ability to effectively navigate this dynamic environment and deliver on our goals to create added value for our shareholders. I would now like to open the call to questions. Operator?

Operator, Operator

Our first question or comment comes from Connor Rattigan from Consumer Edge.

Connor Rattigan, Analyst

I want to take a moment to discuss food service traffic. It appears that things have rebounded well, particularly in theaters. Quick-service restaurants seem to be performing well across the board. Could you provide some insights on traffic by venue and whether anything has exceeded your expectations?

Daniel Fachner, CEO

That's a great question, Connor. Traffic is one of those things that we're keeping a really close eye on. As you know, when we ended the first quarter, we were a little concerned about it. And then as we entered into the second quarter here, the traffic patterns seemed to rise throughout the quarter, and we're really pleased about that. But it's something that we're going to watch really, really closely. It may have started to slow in the quarter and ended strong. But now we're into that all-important next six months for this business. And so we're going to watch it really closely with threats of a recession out there and the things that we all read day-to-day are one of those things that we have to be really mindful of. And so we're doing that. I don't know if I feel like we're completely out of the woods, but I love where we're at right now.

Connor Rattigan, Analyst

That makes total sense. It sounds like things are going really well with Dippin' Dots, achieving about $13 million in sales last quarter and $16 million this quarter. I understand that business is very heavily backloaded. Regarding the distribution rollout and adding more theaters, are we approximately where you expected, or are we perhaps ahead of schedule?

Daniel Fachner, CEO

Well, you know what, when we bought it, we were pretty aggressive about what we think we can do with that business, and I remain really aggressive about what we're doing with it. So I would say we're right about on par with where we think we need to be. I put a lot of pressure on that team. The group is a really solid group. They've integrated very well with the total J&J company. We're doing a great job in cross-selling activity across all of our channels. I like what we have coming in. And I would say they're right about on par with what we would have expected.

Connor Rattigan, Analyst

Okay. Great. Good stuff, guys. And then just one more for me here at the end. So I mean, in any other world, COGS inflation of 9% would be but at last here we are. So just a bit of a two-parter here. So I'm not sure if you quantified COGS inflation last quarter, if so, can you remind us what that was? And also just sort of looking at your inputs and maybe where you're hedging these at right now, should we sort of expect that 9% to be more of an annual run rate, given the movement in ag and other commodities? Or just how should we think about that?

Ken Plunk, CFO

Yes. Connor, this is Ken, great question. And there's always going to be variations of what's happening with inflation. There's year-over-year comparison, which, again, you're comparing to kind of the pre-storm of inflation a year ago, at least so far. And then we're going to get to overlapping that later in Q3 and Q4. But that's what's creating the really pronounced continued inflation year-over-year because of what last year was. Flour has come down since last quarter. Cheese and dairy has come down since last quarter. Diesel has come down, but only $0.10 since last quarter. So there are things moving. They're just not moving as fast, and they're lapping kind of the pre-inflation time of the same quarter a year ago. We came out of Q1 with our internally measured inflation still in the mid-teens, and now we're at 9%. And we kind of calibrate that also with external metrics. If you look at recent data on CPI, food, whether it's at-home or in a restaurant, that's still at 8.5% to 9%, Production Price Index still in the upper 8s. So that kind of compares to our internal measurements of that 9% in the current quarter. As we go forward, again, we're still expecting gradual improvement but not as much as what I would have thought two quarters ago. And that could change. Eggs are a wild card. I think sugar is kind of the new problem. It's up near double digits and projected to go higher. But it will be a marginal improvement, I think. And then you will get the benefit later in Q3 and Q4 of lapping double-digit inflation of a year ago. I think that's where the year-over-year comparison will change a little bit.

Operator, Operator

Our next question or comment comes from the line of Jonathan Andersen from William Blair.

Jon Andersen, Analyst

And just following up on that last question about inflation. I guess one of the things I'm curious about is where you are today with respect to pricing to offset that inflation? And I know it's kind of a year-over-year comparison that you provided 9% in the quarter, how does your pricing and the pricing contribution in the quarter kind of marry up with the inflation that you're experiencing now? And would you expect to make any adjustments to pricing one way or the other in the near to medium term?

Daniel Fachner, CEO

Jon, let me start, and then I'll let Ken talk a little bit about it. We've had the conversation around pricing. And over the last year, we took an awful lot of pricing, right, as so did many other people. To date this year, as a reminder, we took pricing in January in the ICEE Group and have not done anything on the Snack Foods side to date. We are looking at it very closely. We're going to watch it closely. And we might do some spot increases where needed in different areas, but there's a real balance to making sure that you have the right pricing and watching the elasticity of your products. And so we're going to be careful as we do that, but we're going to watch it really closely. Ken, maybe you want to touch on the numbers there.

Ken Plunk, CFO

Yes. If you recall, in the last few quarters, we implemented a price increase late in 2021, followed by another in March or April of 2022, and a third one around September or October. We've now surpassed the impact of one price increase and have partially exceeded the second. In terms of your question about pricing, Dan and I often think that if we had anticipated the developments over the next month or quarter, we might have been more aggressive, particularly last year. In the first quarter, there were still slight increases in inflation from the fourth quarter, estimated at around 40 to 50 basis points. We're always assessing the right timing for price adjustments. There was likely more opportunity to take action in some areas, especially in retail. However, we believe we're adequately aligned with our pricing in the ICEE, Dippin' Dots, and Food Service businesses. The retail aspect is something we continue to monitor closely; it’s challenging as competition for volume and space increases, and many retailers are currently resistant. We will keep a close eye on developments, and there may be situations where adjustments will be necessary if conditions do not stabilize.

Jon Andersen, Analyst

That's really helpful. I'm trying to focus on a specific number here. The organic growth for the quarter was strong at around 14% to 15%, excluding the Dippin' Dots contribution. Would it be accurate to say that the majority of that growth, about two-thirds, is due to volume, but perhaps not at the same level from price?

Ken Plunk, CFO

Yes, I think that price is probably a reasonable estimate. It varies by category and situation. For the ICEE Frozen business in beverages, they experienced volume growth of just over 10% and total growth around 18.2%. That's a very encouraging sign, especially with the theater industry rebounding and having a positive outlook. I want to emphasize that we had a significant increase in volume growth in this quarter, mainly driven by ICEE and even Food Service. Retail also saw volume growth, but it was slightly lower. We're quite proud of this achievement, especially considering that most of retail has been reporting declines in volumes, while we managed a small increase in retail volume.

Jon Andersen, Analyst

Sure, that’s truly helpful. The last question I have is about gross margin. You mentioned that you've made significant progress, both year-over-year and sequentially. You've previously discussed the goal of restoring the gross margin rate to 30% or better, similar to pre-pandemic levels. What timeline are you considering for this? Is that still a target, and how should we approach thinking about the timeline for achieving it?

Daniel Fachner, CEO

Great question, Jon. Yes, we're still bullish on getting ourselves to that 30% gross profit margin. We believe that we have a really good chance of getting there still, as we've been saying in the back half of the year probably as soon as the third quarter. And we think that's still a reality. So we're going to continue to fight for that and think we have a good chance to have it.

Operator, Operator

Our next question or comment comes from the line of Todd Brooks from The Benchmark Company.

Todd Brooks, Analyst

A few quick questions for you. One, the organic growth that we saw in the second quarter, which was very impressive, can we talk to how much of that has been unlocked by the new lines coming on so far this year, Dan? Or is most of the incremental growth from what those new lines will unlock from a capacity standpoint to benefit the company more in the second half of the year?

Daniel Fachner, CEO

I think that we'll continue to build those new lines, with the exception of a couple of the frozen novelty lines that just came on over this past quarter. And so we'll continue to see a nice build from those. The frozen novelty lines came on more in that first quarter-ish timeframe or slightly one before that. And that will help us keep up with the level of business that we do during the summer months in the frozen novelty side, but I love what we're doing with the new lines around churros and you see that growth happening there by the numbers and also on the pretzel side and being able to release some new innovative products. And so I think most of the growth is still yet to come from those lines.

Todd Brooks, Analyst

Is there a way, Dan or Ken to think about what these new lines can contribute to organic growth as we're looking over the next, let's say, 2 to 4 quarters just from the capacity to either launch new products or meet demand that maybe you weren't meeting last year?

Ken Plunk, CFO

I don't have an exact number, Todd, as it can get quite complex when considering all the impacts, including new products and innovation. However, I can share that once those lines reach the expected capacity, we believe they could represent a $150 million to $200 million opportunity, assuming all other factors remain consistent. Our target capacity is in the 80% to 85% range, and it will take us some time to achieve that, with some lines ramping up faster than others. The business cases we evaluated show that the typical returns on these investments are in the range of 2 to 4 years, depending on the specific circumstances. This is the potential outlook once we're fully able to utilize these lines.

Todd Brooks, Analyst

That's great. Second question, it sounds like now you found your West Coast RDC, you're giving us some timing for when the 3 facilities should roll out. Can we just talk about the consolidation into the 3 facilities and the consolidation of shipping points? And if you're looking at a longer-term view of where distribution expenses can get back to, can we get back to the high single digits that we saw historically with this new facility structure?

Daniel Fachner, CEO

Todd, that is the absolute goal for the leadership team, and we talk about that a lot. We do expect to get back to those high single digits and in hopes that as we have this all in place, that we'll be able to get maybe even something better than what used to be. You're right, we did identify a West Coast RDC, and that one is on schedule to open up early in 2024, somewhere around February 1. And we're really excited about the way that that's coming together. We think we've spaced them out appropriately to be able to handle it, as we move to them, and we think that can have a really big impact on our business.

Todd Brooks, Analyst

That's great. And then final one for me. If we look at the product newness and successes at retail, can you just talk about slotting fees maybe, would slotting fees run in the quarter? And what does the year-over-year comparison look like in slotting fees with all the new product activity that you have?

Ken Plunk, CFO

Yes. Well, we're definitely investing in placement, Todd. And we think long term, that will benefit us. I don't have an exact comparison in terms of what we spent in slotting fees a year ago versus now here with me. But I can tell you that we're spending more. And I think we're spending in the right places, but it's something that as we get into this quarter and the back half of the year, we'll look to figure out the right way to balance all that to ensure that we're getting ultimate value for the space we're in. There's a lot of retailers doing a lot of LTO-type promotions, and I don't know if you've been in any of the retail stores recently, you may have seen us on some of the end caps. But it's an investment in that space and in marketing those brands that we think will ultimately pay off for us. But I do not have here in front of me kind of what it was a year ago.

Operator, Operator

Our next question or comment comes from Andrew Wolf from CL King.

Andrew Wolf, Analyst

The sales pipeline appears to be quite strong, as noted in your release. From my experience, when an organization lacks sufficient capacity, the sales process tends to slow down. Sales personnel aren't operating at their maximum potential if they know fulfillment is an issue. Is it the case that now, with better capacity, there is a more aggressive overall sales campaign because products can be fulfilled, allowing salespeople to earn their commissions?

Daniel Fachner, CEO

Well, no, that's absolutely correct, Andrew. We've talked about this. And we've gotten to a pretty high level of capacity in our plants on our core products. And any good salesperson wants to absolutely deliver excellent service to their customers. And we've struggled a little bit with that to keep up with the kind of volume that we've had. It is really the core reason for investing in ourselves and investing in these new lines. And we are now being able to aggressively go out and sell those things that we want to sell and continue to grow the business. And we have just a really great pipeline coming on all fronts, really, not just the Snack Foods side, but the churros, now that being able to make those at the rate and pretzels in different shapes and sizes, and we're really excited about what the future holds with that. And the team is out there aggressively selling and it's nice to see.

Andrew Wolf, Analyst

Okay. You mentioned the retail launch of Hola! Churros. Is that going to be a national or regional effort? Is this a major launch or more of a gradual rollout? What should we expect for that specific line?

Daniel Fachner, CEO

Well, we're out there selling it very heavily. And we've had a lot of good feedback on it already. I think it's too soon to tell whether it will be a national launch or not and how big that will be but I will say that when you just think about the product line and churros coming of age, that we're really excited about it. And as we sell it to our retailers out there, we're getting a lot of good feedback from it. And so we think that's going to go very well.

Andrew Wolf, Analyst

I would like to follow up on the 30% goal for gross margin. It's encouraging to hear that it might be achieved as early as this quarter. Ken or whoever is able to speak on this, there have been a lot of different factors causing variability and pressure on gross margin. However, it seems that many of these challenges are either easing or becoming favorable, especially regarding input cost inflation and your pricing. Looking at the second half, if you've reached over 30% then, is it reasonable to expect that could continue into 2024? There is also significant seasonality to consider. You mentioned in the release and some comments about increased promotional activity that seems to stem from retailers with low volumes asking for it. There are many factors to consider, so could you outline some of the key ones as you plan for your gross margin?

Ken Plunk, CFO

Yes. I mean, first of all, I think Dan spoke about it, Andrew, as we look to Q3 and Q4, we like the trajectory we're on. We're getting better at managing some of the costs, some cases, inflation, deflation is helping a little bit. And also I think we're doing some things to manage that and improve margins that way. We're also going to be mixing out the business really strongly in Q3 and Q4 with the growth that we're having in ICEE and then adding really the peak seasons for Dippin' Dots. So the combination of all that makes us feel pretty confident that we're going to get to that 30% range here in Q3 and Q4. As we go further on and get into Q1, Q2 of next year, I think we're going to be much better, much closer at that. There may be a quarter or two, and it's in the winter and sales of high-margin items, like ICEE and Dippin' Dots fall a bit, where those margins might not quite reach 30%, but I think our goal is that we're a business that year in and year out is in totality doing 30% or more gross margin, and I feel like we're heading in that direction.

Operator, Operator

Our next question or comment comes from the line of Todd Brooks from The Benchmark Company.

Todd Brooks, Analyst

So let me squeeze one more in here. We've talked about over the last couple of quarters, the negative impact that Dippin' Dots has had on operating expense because it just those incremental expenses against relatively seasonally soft revenues, we get into these next two quarters where there are strong quarters for Dippin' Dots. What do we see for sequential improvement in kind of the operating expense lines between marketing distribution and administration as Dippin' Dots instead of a drag turns into either a neutral or a contributor to maybe some leverage on those lines as we get to Q3 and Q4?

Ken Plunk, CFO

Yes, Todd, this is Ken. You summarized that very well. I just want to add a couple of points. Over 70% of Dippin' Dots sales will occur in Q3 and Q4, which highlights the seasonality in that business. With increased sales and good margins, this will positively impact the overall business and will offset the additional selling, general and administrative costs associated with Dippin' Dots. This quarter, we are pointing out that we added just over $10 million in SG&A costs for Dippin' Dots compared to last year, when we didn't have those expenses. Excluding Dippin' Dots, our SG&A expenses were roughly the same as last year, at about 4.1% of sales. We expect this to improve as sales grow in that segment. Regarding distribution expenses, as mentioned, they came in at 11.3% overall for the company, down from previous levels around 12% to 12.4%. We anticipate further improvement, especially if diesel prices continue to decrease, as they have recently fallen by about $0.10. While I won't provide an exact figure, I expect distribution expenses to be below 11.3%. Additionally, our profit and loss statement will gain leverage as we historically see during strong sales periods for Dippin' Dots.

Operator, Operator

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to Mr. Fachner and management for any closing remarks.

Daniel Fachner, CEO

Great. Thank you, and thank you for your time today. I hope our results and our comments clearly reflect why we are optimistic about the future of J&J Snack Foods and our ability to create value for employees, partners, and shareholders. I'm so proud of the teams and all the hard work that they're doing out there. I mentioned earlier about being out of CinemaCon last week, where we were awarded Supplier of the Year by one of the largest theater chains, and that just feels good to have that happen. We look forward to sharing our fiscal 2023 third quarter results with you later this year. And in the interim, should you have any questions or wish to speak to us, please contact our Investor Relations firm. Thank you very much, and thanks for being on the call today.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.