Earnings Call Transcript - JJSF Q3 2023

Operator, Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the J&J Snack Foods fiscal 2023 Third Quarter 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. Please be advised that today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Norberto Aja of Investor Relations. Sir, please begin.

Norberto Aja, Investor Relations

Thank you, Michelle, and good morning, everyone. Thank you for joining the J&J Snack's fiscal 2023 third quarter conference call. We will 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. Today's call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. As such, 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, expectations, and objectives as well as our anticipated financial performance. 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 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 on this call today. Any such forward-looking statements represent management's estimates as of the date of this call, August 1, 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 expectations 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 our 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 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.

Dan Fachner, CEO

Thank you, Norberto, and good morning, everyone. We appreciate you joining us to discuss our fiscal 2023, third quarter results. I'd like to start by thanking our employees across all J&J segments for a record quarter. I am so proud of our team and their efforts to continuously improve our business. Their hard work and dedication are allowing us to post record top and bottom line results and create added value for all our employees, partners and shareholders. For the fiscal third quarter, revenue increased 12% to $425.8 million and net earnings increased 124.8% to $35 million, led by strong gross margin performance and improved distribution expenses. Our gross margin initiatives and strategies are starting to gain momentum, helping us to drive improved profitability. Like most of our industry, we are beginning to see cost inflation stabilize and our pricing actions are now better aligned with costs. This combined with improved margin mix and adding efficiencies in our manufacturing plants should have us well positioned to deliver consistent margin performance. Tim will provide more details on our financial performance later in the call. Today, I'd like to begin by talking about the operations and supply chain side of our business. As we have discussed in prior quarters, our team has been focused on several initiatives to create more efficiencies in our business and enhance our capabilities. Combined, these initiatives will help us transform how we operate as a company. Here's a quick update on these key priorities. Our team has improved logistics management over shipping, warehousing and product distribution through our partnership with NFI. NFI now manages 100% of our transportation network and is helping us improve truck capacity, minimize miles, reduce stops, enhance customer service, helping us lower shipping, handling and storage costs. Next, we are transforming our warehouse network to simplify how we manage product through our warehouses. This includes the build-out of three geographically positioned regional distribution centers, adding freezer capacity, including more storage space for Dippin' Dots products in two of these three locations. The first of these three RDCs recently opened in Terrell, Texas in June and the other two locations are scheduled to open later this calendar year and early 2024. These initiatives will simplify our logistics network by moving from over 30 warehouse locations to less than 10, resulting in improved customer service and lower distribution costs. Also, we have rolled out six state-of-the-art production lines, adding capacity to support growth in our key product categories such as pretzels, churros and frozen novelties. These lines are more automated, creating production efficiencies and higher output metrics, all aligned to support our growth opportunity in these core products. Our operations team has implemented stronger discipline within the plant that is driving efficiency improvements in areas such as waste reduction, maintenance spend, SKU productivity and our utilization. And we have improved our financial and operational foundation via the implementation of a new ERP system last year. This has enabled us to integrate processes and controls across our operations and is now providing better data to manage the key KPIs across operations, supply chain and finance. We expect to continue to see additional benefits from this initiative. Together, these operational and supply chain initiatives are transforming our business and will play a pivotal role in reducing distribution and manufacturing costs and providing better service to our valued customers. One of our key strategies is to leverage the strength of our core products and brands to drive growth and improve profitability. Our team is working across segments and channels to create new selling opportunities and drive innovation. I'd like to highlight a few of our brand priorities. Dippin' Dots is quickly penetrating new markets and gaining placements in new channels. One of our biggest growth opportunities is in the theater channel, where we are now in approximately 375 Regal theaters and actively testing with the other two largest theater chains. Like we reported last quarter, we are leveraging our brand portfolio to create products like Dippin' Dots ICEE Cherry and Blue Raspberry, which is already the best new product launch for Dippin' Dots. Finally, we are pursuing numerous vending opportunities as we find new ways to serve our customers. Hola! Churros has exceeded our expectations with sales growing by over 19% in the most recent quarter and almost 30% year-to-date. We now have significant market share and are confident in our ability to maintain our leadership position. We are finding growth opportunities that include bringing all our churros into the retail space in the fourth quarter, and new business was made for U.S. food distributors, QSR and fast-casual channels. SuperPretzel is one of our most powerful brands with endless potential it seems. In the fourth quarter, we will be launching SuperPretzels Bavarian sticks, bites, and minidogs in the food service and retail, creating new snack indications and solidifying our dominant position within soft pretzels. ICEE continues to benefit from a recovering theater industry as well as from its strong consumer appeal across a growing number of occasions. There is recent momentum in the theater industry as attendance looks close to pre-pandemic levels and stronger movie releases are hitting the market. We continue to gain placement in QSR and are currently discussing a major opportunity with the club channel customer. On the marketing side, a new campaign is currently being tested in the Atlanta market called, Let the Kid Out. That includes out-of-home, curb-in and digital media support and is receiving very positive reviews. We continue to have strong plans to market and grow this brand across our portfolio. We have really built a business balanced across multiple products, channels and customer segments, which together helps us adapt to changing consumer and snacking occasions. We manage this portfolio to maximize our growth opportunities across foodservice, retail, and frozen beverage segments. This quarter is a great example of our flexible business model and our capabilities to continue driving both sales and profit growth. Before transitioning to Kim, let me highlight a few additional insights within each of our business segments. Food service continued its strong performance from prior quarters with sales up 11.9% to $255 million. SuperPretzels Bavarian pretzels and Jalapeño cheese filled dots launched this quarter, and we gained placements of a SuperPretzels Bavarian stick at a large family entertainment center. Also, we launched Hola chocolate-filled churros across food service, including incremental placements with distributors, cash and carry, national accounts, and individual operators. We're also testing a significant opportunity with a large QSR customer with full rollout scheduled in early calendar 2024. Funnel Cakes and Fries are a big opportunity in QSR and casual dining, growing 10% in Q3. Zaxby's, a fast-casual restaurant chain with over 900 locations across the U.S. recently informed us that they will move from a test of our five-inch funnel cake to a permanent menu item in Q4. As it relates to the retail segment, sales were up 0.2% to $61.2 million. For the quarter, the consumer environment was a bit soft in the first couple of months as retailers and grocery stores reported lower traffic in their stores and smaller baskets. This trend did improve in June but highlights the fluctuations we are seeing in retail consumer spending. We believe that impacted sales of soft pretzels and biscuits into Q3 as both were down 12.2% and 15.3%, respectively, compared to the prior year. We continue to see strong growth opportunities in retail, especially in our SuperPretzels frozen novelties and churros. The SuperPretzels brand continues to resonate with consumers with purchase intent up 50% versus the year ago. As previously discussed, we are currently launching SuperPretzels Bavarian sticks, bites, and minidogs in retail, supported by strong sales plans and marketing. Frozen novelties continue to be an opportunity led by Luigi's, Dogsters, and ICEE sticks as the performance of each product continues to outpace the category. Hola! Churros will begin shipping in the Northeast region this month as we bring this growing brand to retail. Moving to our third business segment, frozen beverages, we saw record Q3 sales of $109.6 million, reflecting the strong rebound in the theater channel as well as ongoing strength at our Mexico operations. There is a lot of excitement in the theater industry on the heels of stronger movie releases and higher food and beverage consumption per visit. Theater attendance is improving closer to pre-pandemic levels. Beverage sales grew 26.1% in Q3, driven by 9% volume increases in the quarter. Our maintenance and service sales grew 5.5% and equipment sales grew 17.1%, driven mostly by the continued rollout of checkers. Finally, we continue to make progress growing consumption and placements in amusement mass merchandisers and restaurants. As it relates to M&A, we continue to evaluate potential M&A opportunities that complement our brand portfolio and business model and that offer an attractive shareholder return. Financially, we are well positioned to invest in growth when the opportunities align with our business model. In summary, I applaud the excellent work everyone across the organization is doing to improve every aspect of our business. I am confident that our team is aligned on our core strategies and executing the right initiatives to grow our business and improve our operations. We are well positioned in the market with a long-term focus on growing sales and profits and delivering shareholder returns. I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Kim?

Ken Plunk, CFO

Thank you, Dan, and good morning, everyone. Like Dan, I am so proud of our J&J employees and the many contributions in helping us deliver a record quarter. We are executing the strategy across the organization with a focus on driving top line and bottom line growth. I am equally pleased that our ability to show more improvements across most of our operational KPIs, including gross margin and distribution expenses. We believe that we have the right employees to drive continued growth and deliver value to our shareholders. I would like to take a few minutes to walk you through our results. Net sales for the quarter totaled a record $425.8 million, a 12% increase versus the prior period and sales through nine months totaled $1.15 billion, a 13.7% increase versus the first nine months of fiscal '22. The strong top line result was driven by growth across all three of our business segments and across most of our core products and reflects the health and resiliency of our business. Our largest segment, food service, experienced an 11.9% increase in sales to $255 million, representing 59.9% of total company sales. This strong performance has resulted in healthy growth across the segment including a 176.4% increase in frozen novelties to $474 million, which included an incremental $29.2 million in Dippin' Dots sales and showcases the benefits from the Dippin' Dots acquisition. Also, there was a 19% increase in churros, a 13.6% increase in soft pretzels, and a decline in handheld and bakery of 33.9% and 3%, respectively. Moving to our Retail segment, sales increased 0.2% to $61.2 million compared to the same period in fiscal 2022. Handheld sales increased 182% driven by expanding growth with the major mass merchant. We did experience sales declines in soft pretzels, biscuits, and frozen novelties of 12.2%, 15.3%, and 0.4%, respectively, due to softness in traffic and basket size with the retailers and grocery chains. As it relates to our third segment, frozen beverages, sales grew to a record $109.6 million, a 12% increase versus Q3 '22, led by strong growth across all three subcategories. Beverage sales increased 26.1%, led by volume increases of 9%. Machine revenue increased by 17.1% and maintenance revenue increased 5.5% compared to the previous year period. As highlighted by Dan earlier, we made significant progress, including gross margins and distribution expenses, driving operating income growth of 127.2%, a $27 million improvement over last year. Starting with gross profit, Q3 gross profit improved to $142.9 million or a 31% increase versus the prior year. Gross profit as a percentage of sales was 33.6% in Q3 2023, comparing favorably to 28.7% in Q2 '22 and was driven by a combination of better product mix, alignment of pricing and costs, production efficiencies, as well as the stabilization of inflation pressures on the back of historic highs last year. Overall, we experienced low single-digit inflation for the quarter. Cost of key ingredients, including flour, oil, dairy, and meats have declined, though we are still experiencing double-digit inflation in sugar, sweeteners, and mixes, which continues to impact products such as frozen novelties and churros. Looking at expenses, total operating expenses increased $6.8 million or 7.7% and represented 22.2% of sales for the quarter compared to 23.4% in Q3 of 2022. Distribution costs were 10.4% of sales in the quarter, down sequentially from 11.3% and much improved from 12.7% in the prior year period. Our supply chain transformation initiatives along with declining diesel prices and carrier costs are starting to drive improvements in shipping efficiency, cost per truck, and cost per pound. Marketing and selling expenses represented 7.4% of sales versus 6.3% in the prior year period and 74% in Q2 '23 were primarily driven by the timing of spend for the trade shows and sponsorships. Administrative expenses were 4.4% of sales in Q3 '22 compared to 4.1% in Q3 '22 and 5.3% in Q2 of '22, driven mostly by the expected seasonal impact of adding Dippin' Dots. Listing operating income of $48.3 million was a 127.2% increase compared to $21.3 million in Q3 of 2022. Adjusted operating income was $51.1 million or a 104.8% increase compared to Q3 '22, after the impact of income taxes of $12.6 million compared to $5.6 million in Q3 of fiscal '22. Net earnings increased to $35 million, resulting in reported diluted earnings per share of $1.81 or $2.51 for the first nine months of fiscal 2023. This compares to $0.81 per share and $1.56 a share in the prior year period. Adjusted diluted earnings per share was $1.92 for the quarter and $2.76 for the first nine months compared to $0.95 per share and $1.72 in the prior year period. Adjusted EBITDA increased 73.3% to $66.6 million from $38.4 million in the prior year period, and our effective tax rate was 26.5% in the third quarter. Looking at our liquidity position, we continue to maintain a healthy balance sheet, including $70.2 million in cash and marketable securities. In addition to the investments we are making across our business, we also continue to pay down debt of approximately $125 million when we acquired Dippin' Dots to $83 million at the end of fiscal Q3 '23. We intend to continue returning value to our shareholders via dividend payments given the health of our balance sheet and our strong free cash flow generation. We have ample availability under our revolver of approximately $132 million of additional bond capacity. This affords us added flexibility to strategically invest and support our business. In summary, we are executing our strategy and key initiatives and setting the foundation to continue to grow. Our teams are aligned across the segments once we focus on growing our core brands, innovating and finding new opportunities in snacking occasions, cross-selling across our portfolio and channel and improving how we operate. This combination is helping us improve performance throughout the P&L and positions us well to drive strong returns and shareholder value. I would now like to open the call to questions, operator?

Operator, Operator

The first question comes from Connor Rattigan with Consumer Edge. Your line is open.

Connor Rattigan, Analyst

So, I guess just first things first, just on the top line. So obviously, results came in a little lighter than I think folks have expected. So, could you guys sort of break out what you saw there? Maybe if anything came in ahead or below your expectations, if you saw any weakness or softness had expectations there?

Ken Plunk, CFO

Yes. Connor, this is Ken. Good question. Yes, let me break that down a little bit. Take the Food Service segment and you've got to break it in because there are some different things going on here. So, if you look at soft pretzels, frozen novelties, excluding Dippin' Dots, and churros, that combination of products was up over 14%. So somewhat aligned with I think what you would expect and what we would expect. And this ties into what we talked about, emphasizing drilling those core products. If you look at handhelds and bakery, in handhelds, there's around $3.5 million in there that is cost passed based on an agreement we have with one of our club channel customers, so that's the units stay the same, but we passed on deflation that we got, we passed it on to the customer. Also, when you think about bakery and handheld, a big part of our business is sold through retail. And as we talked about in the retail segment, the retail industry saw a decline in traffic and softer baskets, and that pretty much aligned with what you need from some of the core retail grocery channels that have come out recently. So those behaved similarly. And if you add in Dippin' Dots, Dippin' Dots was an incremental $29.2 million, including novelties. Frozen beverages, we are really excited about what we saw there, beverage sales up 26%, the overall segment up 20% with volume up over 9% in the quarter. We talked about the recovering theater industry. So, you start to see the consumer come back to theaters in the last few weeks, having some of the biggest weekends they've had in a long, long time. So, all in all, we feel really good, but there are certainly some things going on with the consumer. There’s probably a little bit in the amusement area of impact from some of the hot weather, and some of our amusement customers have talked about the impact on traffic in that category. So, yes, kind of a quick overview; all in all, though, we feel like we're executing the plan we need to execute. We're quite pleased given all of that and where we ended up with sales.

Dan Fachner, CEO

Connor, I'd just add to that. We are confident where we ended up much like what we've seen throughout this year; there have been ups and downs throughout the year. Even in this quarter, April, as it started was off due to a consumer confidence issue going on at the same time with a lot of different things happening in our world, and it kind of grew again throughout the quarter. So, we've tracked that really closely, but I don't think we had any big surprises as you asked in the quarter.

Connor Rattigan, Analyst

Okay. Great. That was really helpful, guys. And then I guess just looking at the gross margin too, right? I mean, as you guys called out pricing mix, stabilized inflation, right? Could you maybe help us sort of help us understand the extensive impact on each one of those just to get a sense of that?

Ken Plunk, CFO

Well, there's a lot in that, Connor, in terms of kind of parsing all that out. I mean, the way I would answer your question is relative to mix, when you see us going in pretzels, churros, to frozen novelties, and our biggest segment we service, that mix will drive a stronger margin and it's a part of our strategy. At the same time, some of the declines in bakery and handhelds were strategic. We're sharpening the pencil on SKUs, and some SKUs we got out of that weren't driving the margins we needed, and we're tweaking that and investing in other products in those areas that we expect things to improve down the road. But the combination of both dialing down in that area and then growing in those high-margin areas helps improve mix, and a little bit of that is going on in retail as well. And then the other thing is when you mix in a record quarter for ICEE, together with the biggest quarter we've had, those are both very accretive to our top line margin and so that mix had a big role in our strong gross margin performance. You then add on inflation coming down; I think more than all of us expected. I think CPI was just shy of 3%. CPI, I think, was closer to 5%. That was about, I think, a 200 to 300 basis points decline just from quarter to quarter and benefited from that cost in some of our key commodities like flour, oils, and other things came down, and certainly, that played a role on that. And then the other thing we talked about is our initiatives to get better and how we operate, get better at producing products is start to drop some efficiencies. So, it all came together really nicely in this quarter, and I think it kind of sets the foundation going forward. We’ve somewhat guided through what has been an incredibly challenging 12 to 18 months of historic inflation.

Operator, Operator

The next question comes from Andrew Wolf with CL King. Your line is open.

Andrew Wolf, Analyst

Congratulations on the quarter and the results. Results speak for themselves, but I just wanted to ask about sort of what a prior question on the sales, and you guys kind of touched on, I guess, passing through some deflation to a large customer. But in the past, you talked about SKU rationalization and lower-margin lines, which I think bakery is and perhaps handhelds as well. Is there any deliberate, if you will, kind of portfolio management of the lines in that way where you're not bidding up for contracts that just don't make sense when you have other lines of products you can produce and distribute that maybe have 2x or 3x the margin?

Ken Plunk, CFO

Yes. Andrew, you heard us talk a lot about kind of our strategy of pushing our core products, and we continue to use that and we'll continue to do that, especially in the bakery side. But what we do have is a strategic initiative there to make sure what we're bidding on and what we make, and who we sell to also complement our strategy about getting to that 30% gross profit margin. So, absolutely has there been a strategy around it to reduce some SKUs that were operating in a low-margin area. The team in the maker’s division is very focused on new business and what they bring to the organization. As I said in the opening, I'm proud of all of our teams in the way that they are executing the strategy.

Andrew Wolf, Analyst

Is there any way to quantify beyond the pass-through on deflation at what SKU rationalization might have been as a drag to the sales growth?

Ken Plunk, CFO

No, I'm not going to quantify what that is exactly. I mean, the bulk of it is going to be in bakery. So, I think as you look at the bakery numbers, it's a combination of that SKU rationalization together with the fact that a lot of that bakery is sold in retail and grocery bakery groups where there has been some declines and softening of traffic in those venues.

Andrew Wolf, Analyst

Thank you, Ken. I understand. Dan, I wanted to return to your discussion about sales. Although you don't provide guidance, I'd like to know how you approach the sales budget for the Board. Specifically, as you think about the current quarter and into fiscal '24, where do you expect sales growth to come from in terms of pricing compared to increase in sales volume for existing products? It seems you're optimistic about gaining new placements in distribution. I'm not looking for a specific number since you don't give guidance, but I'm trying to understand where you anticipate growth, especially as inflation decreases in the economy. Since pricing will have less influence on sales growth, do you expect to see more volume growth from increased sales velocity or from expanding distribution?

Dan Fachner, CEO

Great question, Andrew. And to kind of highlight, I'd probably see it on both sides of it, right? I do think that we have the opportunity through some of the marketing activity that our team is doing to grow velocity in locations where we are. And I love, as we talked about, some of the new innovation that we have and some of the new products that we're releasing and their ability to complement and grow the business as well. The teams are working really hard and have what I consider a strong pipeline to look at for this next year. As I talked about before, there is some volatility in the market. We'll watch that closely. Part of what I love about our company is that we have a balanced portfolio, and you live through this with us; there is a period of time when theaters were down, but retail was up, and now we're living in a period where theaters are up and retail has come back to a more normal level. I like the way that this business has been built with great products and great customers around a portfolio that allows us to ebb and flow that way. I think this quarter, we'll continue to see some growth, and then I look forward to seeing the budgets as they roll up over the next month or so for next year.

Andrew Wolf, Analyst

I appreciate your insights. I would like to follow up on your comments regarding marketing and budgeting expenses. When discussing trade shows and sponsorships, are you referring to the effort to get products like churros into retail, which involves slotting fees? Is this related to that, or is it a different matter? Should we expect to see slotting fees included in the marketing expenses for the current quarter?

Ken Plunk, CFO

Yes. The outcome is largely influenced by the timing and the level of investment we are making in trade shows and sponsorships, particularly trade shows. If you've seen us at any recent events, you'll notice the strong brand presence we've been able to create. The marketing team has done an incredible job bringing all our brands together and showcasing them effectively. We are investing in this area, and we believe it is yielding results by opening new channels and initiating new conversations. So it's really focused on that. For the full year, we aim to stay within our usual range, and we feel that this investment is worthwhile. It aligns with our other strategies to generate interest in our brands.

Dan Fachner, CEO

I'll just add to that. Some of it is timing, Andrew, but we did make a really conscious decision at some of the major trade shows this year to really highlight all the great things that we do in our core products and I'm really proud of the team and the way that they put that together. You let us talk about one of our core strategies being cross-selling our portfolio; by doing what we've done, we've had some really tremendous efforts by the team and some of our customers have seen just how well they can complement one of our products to the next. We think that's working, and we're proud of that.

Operator, Operator

The next question comes from Robert Dickerson with Jefferies. Your line is open.

Robert Dickerson, Analyst

I have a question about Dippin' Dots. Over the past few months, I've noticed them being featured in various places like Wawa's, appealing to kids, and in handheld frozen novelty packaging designed for convenience. Given the distribution opportunities in food service and retail, is it reasonable to suggest that despite some innovations in the overall portfolio, the potential for revenue growth is primarily linked to Dippin' Dots? I don't mean this negatively; it just appears that there’s significant room for growth.

Dan Fachner, CEO

We love that acquisition. You've heard us talk about that, Rob. Again, I'm proud of that team, and we've worked hard at integrating and then cross-selling and getting out and introducing them to some of the great relationships that we have out in the industry. It's really working. We see a really nice opportunity for that to continue to grow and are happy with what it's done to date. And also just thank you for your kids buying the product too, alright, we appreciate that. But we are really happy with that acquisition. We're proud of the team and the way that they're managing it and the way that they have integrated with the whole J&J organization to find new growth. We have a lot of hopes for it.

Ken Plunk, CFO

Quick just to add to that. Everything Dan said is optimistic and aggressive in the way we believe we can grow Dippin' Dots. But Dan rattled off the script; we’re focused on churros, Hola! as a brand, Super-Pretzels as a brand, ICEE as a brand. All of those businesses have performed quite well in the quarter. Soft Pretzels and Food Service, which is the biggest area that we sell pretzels, went up about 13.5%, churros are up 19%, ICEE beverages by itself was up 26%. So, I certainly want to give credit to what we do as it is very significant. Our focus there is growing, and we feel really good about the opportunities down the road in those areas as well.

Robert Dickerson, Analyst

Alright, let's talk about margins. Gross margin has shown a strong recovery, and frozen beverages have reached some of the highest margins we've ever seen. As we look ahead to Q4 and into the next fiscal year, I’m interested in whether this margin mix shift in our portfolio is likely to persist. Was the performance we saw in Q3's frozen beverages a one-time occurrence? While the gross margin for the quarter is impressive, it’s also important to consider the operating margins, which are benefiting from these gains. This was the expectation as we entered the latter half of the year. Given the usual seasonality and these improved margins, I'm eager to see where we stand for the foreseeable future.

Ken Plunk, CFO

Yes. As we go into Q4, we feel very good about the position we're in from a gross margin standpoint. I think if you look at Q4 and Q2 historically, given a little bit of a slowdown as kids go back to school and that kind of thing, the margins will probably drop a little bit here in Q3, but they should still be very good because we think we've passed the hurdle of some of those things that have challenged us and most in the industry over the last several months. If theaters continue to perform the way they are, it's going to be a big boost in our ICEE business. As we penetrate theaters, again, those high-margin parts of our portfolio. Yes, I think we're pretty confident. I've told you we're going to make this business to get into the margin business year in, year out. This is a really good start to that, and we expect to have good momentum going into Q4. Obviously, as you get into Q1 and Q2, the seasonality of that, those margins won't be at that level, but they will be much better than over the last year or so.

Dan Fachner, CEO

Rob, you heard us talk about kind of working all angles of the P&L, and that's exactly what we're doing. We’re really proud of each and every one who's focused on that, right? We're certainly in the summer months where the mix helps us for sure. But also, just the movement in the ICEE business, not only domestically but also a really strong quarter out of our Mexico operations; we're proud of what that team is doing. We think that we can have those margins in that 30-plus area, like we've been talking about for a while. It certainly gets a boost when you're in the summer months, but we're proud of what the teams are doing at all angles of the P&L.

Robert Dickerson, Analyst

Alright. Great. Lastly, while it's clear that the overall basket and cost inflation have improved, there is a noticeable increase in sugar and sweeteners. Anyone with significant exposure to those commodities is observing the same trend. It appears that pricing in relation to your overall cost structure has indeed improved. However, we've also heard from others that if the prices of sweeteners stay high, the industry could consider implementing additional price increases. Has this topic come up internally regarding these two core commodities, or are you focusing more on the overall portfolio dynamics rather than just frozen novelties?

Dan Fachner, CEO

Yes, that's a great question, Rob. We do a monthly review with our different teams around the P&L, and our review in the snack food side of our business this last month, we talked a little bit about the frozen novelties and what we may or may not do. So, we will look at it individually like that. We're going to watch it closely. And you're right; if that doesn't come down, then we may have to approach that in a different manner.

Operator, Operator

The next question comes from Todd Brooks with Benchmark Company. Your line is open.

Todd Brooks, Analyst

Congrats on the results in the last quarter versus margin improvement that you delivered; so congrats. Two quick questions here, if I may. And this is just kind of getting this first year of Dippin' Dots correct. Can you talk about what the seasonality typically is for Dippin' Dots revenues in Q4 versus Q3? I'm just trying to triangulate you've talked about a couple of annual goals for Dippin' Dots and I think we'd be a little bit less than $30 million here in Q3. Would you expect that business to grow meaningfully in Q4? And if you look at overall company revenues, would you expect that Q4 will be our peak revenue quarter or Q3?

Ken Plunk, CFO

Yes, Todd, we've talked about we're very clear about the seasonality of Dippin' Dots, particularly on the profit side. I talked about that. I would say, Q4 is going to probably perform similar to Q3, maybe a little bit better like you. We're still kind of running this business, and we know what they did last year. We know what some of the new initiatives and things we have in place in some areas of growth, and you can probably look at Q4 that behaves somewhat similar to Q3 with Dippin' Dots.

Todd Brooks, Analyst

Okay, great. And then based on Dippin' Dots similar to a little bit better in Q4, more core products the SKU rationalization. Just trying to think about what the headwinds are; if revenues are relatively similar between the quarters, that would cause much of gross profit margin moderation sequentially.

Ken Plunk, CFO

Are you asking, Todd, about the headwind on sales or gross margin?

Todd Brooks, Analyst

Well, if sales are relatively similar quarter-over-quarter and you're getting a little bit more Dippin' Dots revenue and you SKU rationalize some lesser-margin products for core margin products. I'm just trying to figure out why gross profit should drop much from the 33% plus level that you did in Q3 when we get to Q4.

Ken Plunk, CFO

Yes. It's really more about kind of historical seasonality. As you get into mid to late August and certainly into September, a lot of kids who are, obviously, when they're out of school, active in theaters and amusement parks and others, our business skews a bit heavier in Q3 and Q4 in those areas. So, it's just more of the seasonal behavior of the consumer, which traditionally, we've seen a little bit lower gross margin in Q4 than Q3. But I wouldn't say it would be a dramatic drop.

Todd Brooks, Analyst

Okay, that's fair. And then one final follow-up question on the gross margin. I look back historically just to try to map that seasonal movement in gross margins. And you get back to '18, '19, and you were looking at maybe 200 to 300 basis points higher gross margins in the back half of the year than the front half of the year. Do you think that's where we normalize to? I know the Dippin' Dots is a new piece of business that may drag a little bit more in the first half. But what would you expect that go-forward type of gross margin spend spread to be between the first half and the after the year?

Ken Plunk, CFO

Yes. I believe the spread will likely remain similar over the next year, but each quarter should outperform the same quarters from last year, especially the two we've already completed. We expect Q1 to be an improvement over last year, as we have overcome some inflationary pressures, and our initiatives are starting to yield significant benefits. However, if you examine the margins on a quarter-to-quarter basis, they will be strongest in Q3 and Q4, then return to the historical trends observed in Q1 and Q2. Our focus, similar to our previous efforts in the ICEE business, is to increase Dippin' Dots' presence in venues like theaters, which will improve seasonality and benefit the brand. We anticipate this will lead to steady progress as we develop the business.

Todd Brooks, Analyst

Okay, great. And then, Dan, just a final one for you, and I'll jump back in. You talked about the six new production lines that have been launched over the course of this year. As you start looking out to 2024, how meaningful is that incremental capacity and throughput/productivity as a revenue driver for J&J because it's levered on those core categories where you're seeing the best growth around novelties, pretzels, and churros.

Dan Fachner, CEO

Yes, good question, Todd. We're really excited about those six new lines. We talked a little bit in the past about having capacity constraints in those core products that we think there's a lot of runway with. The teams are out there really actively being able to sell things like churros and different forms of pretzels and maybe even bringing some of that core into our bakery division as well, and that's being worked on right now. So they become really meaningful for us. They kind of are at the heart of the strategy that we have in place right now. We're being able to grow pretzels, churros, and frozen novelties and broaden that category with new products like pretzel bites, which we have had some great early interest in. So, I think it becomes very meaningful for us. It allows the team to get out there and sell on the things that we do best and on the things that help us drive the margin mix that we've been talking about.

Operator, Operator

I show no further questions. At this time, I would now like to turn the call back to Dan Fachner for closing remarks.

Dan Fachner, CEO

Well, thank you for your time today. In closing, we are excited about the opportunities to continue growing this great business of ours and confident that we have the right people, products, partners, and strategy to maximize these opportunities. We look forward to sharing our fiscal 2023 full year results later this year and updating you on the positive impact of various operational and strategic initiatives on our business. In the interim, should you have any questions or wish to speak to us, please contact our Investor Relations firm. Thank you, and have a great rest of the summer.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.