Welcome to the J & J Snack Foods Third Quarter Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. [Operator Instructions]. I will now turn the call over to Gerry Shreiber. Sir, you may begin.

Good morning, everybody, and welcome to our third quarter conference call. With me today are Bob Radano, our Senior Vice President and Chief Operating Officer; Bob Pape, Senior Vice President of Sales; Marjorie Roshkoff, Vice President, Secretary and In-House Counsel; and remote is Dennis Moore, our Senior Vice President of Finance; and Dan Fachner, President of our J&J Group, but Dan is calling in from Tennessee. I think I got everybody. Let me begin. I'll begin with the obligatory statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after this date. Results of operations. Net sales decreased 34% for the quarter. Without sales from the acquisition of two ICEE groups in October 2019 and February 2020, sales decreased 35% for the quarter. We had an operating loss of $19.4 million compared to operating income of $39 million a year ago. Food Service. Sales to Food Service customers decreased 40% for the quarter and 14% for the nine months. Our sales decrease for the quarter was due to decreased sales of soft pretzels, frozen juices and ices sales and churros, as well as funnel cake and handhelds and bakery products. We had an operating loss of $18.2 million in the quarter in our Food Service segment compared to operating income of $21 million a year ago, primarily because of lower production and sales volumes due to COVID-19, which had a devastating impact on our customers and on ourselves. This year's quarter…

Thank you. [Operator Instructions]. Our first question comes from Jon Andersen. Your line is now open.

Hi, Jon.

Hi, Gerry. Good morning, everybody. Hope everyone is well.

We are well. We just hope that the sports and leisure and movie industry and schools get well.

Yeah. Don't we all. I miss all of that. So, you mentioned that your sales during the quarter, at least the rate of decline, got better improved. I think you had previously said that, in April, sales were trending down 45%. Sounds like June, you're much better trending down, but 25%, nearly cut that in half. And I guess my question for you is, do you anticipate – at this point, given what you're seeing in your Food Service customer base and your Frozen Beverage customer base, do you anticipate that that rate of decline continues to improve in the second half of the calendar year, which would correspond with the fourth quarter and the first quarter of your fiscal year? Is there reason to believe that the sequential trend should continue to improve from here

We are cautiously optimistic. We are hopeful. Once the sports and leisure venues get back to full-time, that's going to make a big difference. The movie theaters are open and schools are coming back and that represents a significant part of our business.

The improvement that you have seen from April to June, which segments or venues or locations have driven that improvement?

Any of the ones that were closed. This is new business that we were able to secure.

New business.

We would have had a hell of a year if we had not lost all of our sports and leisure and movie theaters.

Okay.

This is Dennis. There is some new business, but it's new business related to what was closed. It is the biggest improvement, it was because of venues opening up. There were a lot more venues that are open now than there were in April. But there was also, I guess, the shock of the initial shutdown. So, a lot of distributors held back their orders and whatnot, but over time, as more and more opened up, it's the primary reason why we had the improved sales, not new business per se.

Right, right, right. Okay, okay. There is cautious optimism, I think, is the word you used that we could see sequential improvement from here, that the trough is in the June quarter in terms of the sales.

Yeah. At this point, we certainly hope that's the case. And if things continue to – these venues are continuing to open up, and we hope that that continues, but we don't know where we are going to – in fact, whether we will continue to increase till it's being down zero or somewhere in between 25% and 0%. It depends obviously on what continues to open up.

Fair point. And then, on the profitability side, I think on the prior conference call, you mentioned, you thought you could be profit neutral to maybe a modest profit loss. Where you kicked in with an operating loss of, I think, $19 million in the quarter, was that in line with your expectations? I understand you're balancing the need to kind of maintain your capacity and your capabilities for the other side of this, but at the same time also trying to manage costs to some extent as we move through it? Was the profit in line with your expectations and are there additional steps you're taking to reduce costs as we move forward?

I would say that – yeah, I would say that initially, from back in April, the loss is higher than what we would – that we anticipated at the time. And we went into the quarter, we had two primary, I guess, things that we wanted to accomplish – many things we wanted to accomplish. One was to keep our employees safe and that entailed lot of additional expense, not only $5 million of direct expenses in terms of setting up barriers, spacing people apart, having safety gear or personal protective equipment, taking temperature, right, screening all the employees every single day for temperature and to make sure that they're okay. So, there were all those direct costs, but also inefficiencies because plants were not able to run as often as we would have liked, one, because of lower volume, also because of actual screening, shutdown and the like. So, all that added more costs than we had anticipated. The other primary goal that we wanted to make sure we attained in the quarter was to meet our customer requirements and fill all the orders. And to some extent, we had to do things that entailed additional cost. We had some bottlenecks because of increased volumes in certain segments of the business, which meant, for example, we might have had – not might have. We did have to make product on the West Coast that normally we would make on East Coast both at a higher cost and with higher distribution costs. We had to individually rack products instead of shipping bulk. So, there were a bunch of costs that were added that were extra costs. But having said all that, we did reduce our operating expenses, backing out the impairment charge for the plant shutdown. We reduced them by…

That's helpful.

Jon, this is Dan Fachner. I also just want to add to that two things. One, you asked about sales. And sure, we're not exactly sure of what the future holds. But as you said, May was better than April, June was better than May, and July has held up to that number so far as well. So, we're encouraged by that fact. And then, your second question around expenses, we are going to continue to monitor and look under every rock that we can. We want to be careful not to cut into the bone because, as Dennis said, we really don't have to. But we're going to be diligent about looking at every spot that we can, so that we're prepared for the future the best that we can.

That's helpful. Thank you. And then, you mentioned a manufacturing facility that you closed in the Midwest. Has that been completed at this point? And the $7 million to $8 million in annualized savings associated with that, does that begin in the fiscal fourth quarter? Or are there some additional work there before you start to realize the benefits of that?

Actually, it was completed at the end of this month. Dennis, you want to answer the question about the savings? But the plan will be completed at the end of the month.

Yeah. As Dan said, it is shutting down right now or this week actually. So, the savings will start to kick in. It won't be – in August. But they won't be at the run rate of $7 million to $8 million right off the bat, but beginning of the next fiscal year, they should be.

Okay, great. Last one from me. Gerry, you mentioned M&A still – you're really looking for deals. I suppose in this environment, no one would wish this environment on anyone, but it probably creates – puts some pressure on companies that aren't as well capitalized as you are and – I don't know – maybe that presents some opportunities. Any thoughts or comments on the M&A outlook and whether you're seeing some opportunities to pick things up in a challenging environment.

We are looking and we take a very careful approach on the acquisition front. But we've made them in the past and I expect we will make some in the future.

Great. Thank you. Thank you, everybody. Appreciate it. And good luck going forward.

Thank you.

Thank you. Our next question comes from Todd Brooks. Your line is now open.

Hey. Good morning, everybody.

Good morning, Todd. This is Gerry.

Gerry, I hope you and the team are all well and kind of hanging in there as we muddle our way through this.

We are. We're healthy and strong. We're not used to this. So, we're going to come out looking to – we're going to come out swinging.

Well, I'm looking forward to that. And it kind of leads into my first question. If I look at the June quarter, it's really, in my mind, kind of a tale of two quarters. There was the initial digestion of kind of shifts in food service demand, spikes in retail grocery demand, which I can picture bringing some distribution inefficiencies with it. But when we look at that five-week period at the end of the quarter that was talked about in the release being down in the mid-20s or the start to this quarter, as we've moved further into whatever the new normal is, as we've digested some of shifting lines maybe between end markets and we've gotten volumes back to this down mid-20s level, is the company set up for profitability in the mid-20s now or does it still require more recovery in sales before we can get back to a profitable result?

Well, let me see if I understand the question. Yeah, the company is and has been adjusting our profitability glean as sales have dropped. And we're confident that we will get back to our profitability levels in the early part of this next fiscal year.

But as far as just the down mid-20s sales results get us back to a better than breakeven level from a profit…

Yeah. This is Dennis. I would say, in that range, we hopefully would be there.

Okay, great. And the second question I had and it's – I know that we've used – you guys have used the balance sheet in the past offensively. You talked about it in the March quarter kind of not cutting into the bone, keeping especially human capital resources in place, while lot of others were furloughing or laying off employees. When I look at marketing expense in the quarter, I would have expected that expense to be one that could have been more variable. And I was wondering if you could talk about that expense line as far as, is the company still playing offense on the marketing side because the balance sheet allows it to do so?

Well, I'm trying to understand the question. Keep in mind that the sports arenas and leisure and theme and whatnot, those kind of programs were preset as far back as the beginning of our fiscal year. And it's awfully hard to cut them and to rewrite them once the seasons have started, but we're spending – I think we're spending less on marketing than planned. And as the business comes back, we'll put our foot on the gauge a little bit there.

Yeah, Todd. This is Dennis. And also, the other part of that is that the marketing name is kind of a misnomer, in that we also – that includes selling expenses as well. So, a good part of that is selling and not what we'd consider marketing/advertising expenses.

Okay. So, if we look at the $22 million spent in the quarter, what percentage of that would you say was fixed versus variable?

Yeah. I'm thinking now. I would say probably half or so. Little less than half of that is fixed cost.

Okay, great. And then, two more quick ones. I know in this quarter, there were a decent amount of initial COVID-related expenditures for employee safety, incremental employee wages to kind of thank them for their service during the real tough times of the pandemic. If you think about the $5 million in COVID spend in the quarter, what's the continuing go forward versus kind of a one-time startup nature to the COVID expenses?

We would say probably a third of that at this point that would be ongoing.

We're still doing screening. We're providing masks. We have checkpoint systems. And so, there is some costs added to that.

Okay, great. And then finally, Gerry, you touched on kind of new products and new business that you were able to secure. Anything you could share with us on the new product pipeline coming up by now, some of the efforts switched to packaging solutions post-COVID, but just any commentary on that new product pipeline would be great. And then I'll hop after that.

We have an array of new products, some that are single customer base, others that are for food service and we're very optimistic that these things will come out either in the fourth quarter or next year's first quarter and they will add to our sales and growth.

Okay, great. Thank you all very much.

Thank you. Our next question comes from Brian [ph]. Brian, your line is now open.

Hi, Brian.

Brian, your line is open.

Hello.

Yes, Brian. We can hear you.

Great. Is there anything we should be thinking about with respect to the percentage of your business that's exposed to venues that facilitate larger gatherings? We know a meaningful portion of sales goes through malls and shopping centers, stadiums, arenas, theme parks, movie theaters and schools. So, as things get back a bit more to normal, like, what are we thinking – what type of percentages of sales would be allocated towards venues that are larger gatherings and people may be a little bit slower to come back to?

Well, I touched on them all in the beginning. The sports venues, the leisure and theme, the Disneys of the world, the movie theaters, so all of those venues are going to have an impact on us. But as they come back, albeit slowly, we are hopeful that we will be able to increase our locations and thus our sales.

And so, do you see a lot of that being predominantly driven by government policies or by consumer behavior?

Hi, Brian. This is Dan. I think there is a little mixture of both of those. But we're hopeful to see a good percentage of that start to come back over the next quarter and maybe even two quarters. But as Gerry has mentioned, the ball parks and the theaters and some of the food service areas that we have suffered from over the last quarter are now starting to open up or predicting to open up over the next month or so.

Great. Thank you. That's pretty helpful. And then, next year, as you're thinking about all of these parts of your businesses that were negatively impacted, how do you see the lapping of that and the pent-up demand and increased potential interest in things like sports and movie theaters and theme parks?

Well, hopefully, if we get this quarter off, we'll be able to project with a little bit more clarity as we move on here. But right now, it's a mixed bag. I was all set to watch the Yankee-Phillies game on TV the other night. And even though there were no fans, but they canceled it because of COVID-19 spreading in the locker room.

Right. And you shut down one plant. Is there any risk that another plant may need to be shut down over the next quarter or so if demand doesn't come back or is that essentially all that you would need to?

I don't think so. The plant we shut down was acquired a few years back. And as it was, it was excess to our needs and we finally made the decision to close it up and take care of the severance and whatnot in there and go forward. We still have 17 plants that were operating throughout major geographical locations throughout the country. So, we're in good position for production and even better position for distribution. We need our sales back.

Thanks. That's pretty helpful. And if for whatever reason, a good number of schools end up opening up virtually rather than in person, what type of impact would that have on your business?

Virtually does not help us. All right? We'd like schools were open when they have students in there from K through 12 and they get lunch and they get breaks and whatnot in there because we are feeding them during lunch and breaks.

And is there any way to understand what the impact might be overall in your business were that to happen?

Well, Brian, schools sales are roughly 5% to 6% of our overall sales.

Okay.

And so, I guess – but to some extent, it's not all lost, Brian, because a lot of the school district systems throughout the country continue to feed the children, even though they may not actually be having class.

And also, as you know, Brian, if you're watching it, there is – all across the country, there is schools that are still open and some not open. And so, it's hard to put a finger on it, but as Dennis said, in total, it's 5% to 6% of our business.

Perfect. That's very helpful. I think that's it for me. Thank you very much.

Our next question comes from Ashish. Your line is now open.

Hi. Good morning. This is. Ashish for Rob. I just had a couple of quick questions.

Okay, Ashish.

Yeah. So, in terms of the uptick improvement that you saw toward the...

Ashish, who are you with?

Rob Dickerson.

Okay.

From Jefferies.

Very good.

Okay, sure. So, one of the questions I had was, in terms of the improvement, was wondering if you could give a little more color on specific channels like C-stores, QSRs, where you're seeing the improvement. Also, how have the trends shaped up in the first month – in the month of July compared to the last five weeks of the third quarter?

Well, our C-store business, it's something that we began focusing on a few years back, has been growing nicely. And we expect that – and we have multiple products in C-stores now, ICEE and pretzels, and occasionally, one of our other products. But the second part of your question, I'm really not sure how C-stores were June to July, but we're happy with our C-store growth. With the exception of having to wrap everything for them, which slows down our process and adds some costs, we're happy with our C-store growth.

Got it. And in terms of the sales trends for the overall company, because you mentioned, like, the trends for the last five weeks of June were trending 24% down year-over-year, was wondering how are those trends shaping up in the month of July.

Too early to tell yet. We're still looking at that.

Got it. Thank you. And then, last one for me, like, in terms of changes or initiatives that you are looking into from cost control perspective, was wondering if you could give a little more color on that.

I'm sorry. I don't understand the question.

In terms of cost controls that you're looking into, so what were some of the initiatives that – from the cost control perspective?

We've had an ongoing focus on labor since labor appears to be an issue almost all over the country. So, we've been working on projects that will control labor and/or reduce labor. That's going to be a continued focus.

Ashish, in addition to that, we've had some plant improvements as well. And then, we mentioned the closure of one of the plants, and that's part of the cost improvements that we've been working on.

Got it. Thank you. That's it from me.

Thank you. [Operator Instructions]. And speakers, at this time, I show no further questions in queue.

Well, thank you. I want to thank everybody for being on this conference call and we look forward to talking to all of you again at the end of our fourth quarter.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.