00:04 Good morning and welcome to the J&J Snack Foods Second Quarter Earnings Conference Call. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. 00:25 And I will now turn it over to Norberto Aja, Investor Relations at J&J Snack Foods and you may begin, sir.

00:31 Thank you, operator and good morning, everyone. Thank you for joining the J&J Snack Foods fiscal 2022 second quarter conference call. We'll get started in just a minute with management's comments and your questions. But before doing so, let me take a minute to read the Safe Harbor language. This call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals and objectives, our anticipated financial performance, industry wide supply constraints and the expected impact of COVID-19 on our business. 01:18 These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results and performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors discussed in our Annual Report on Form 10-K for the year ended September 25, 2021 and other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call today. 01:54 Any such forward-looking statements represent management's estimate as of the date of this call May 3, 2022. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent event causes our views to change. In addition, we may also reference certain non-GAAP metrics, including adjusted EBITDA, which is reconciled to the nearest GAAP metric in the company's earnings release, which can be found in the Investor Relations section of our website at jjsnack.com. 02:28 With us on the call today are Dan Fachner, our Chief Executive Officer; and Mr. Ken Plunk, our Chief Financial Officer. Following managements prepared remarks, we will open the call for questions. 02:40 With that, I would now like to turn the call over to Dan Fachner, J&J Snack Foods, Chief Executive Officer. Please go ahead, Dan.

02:48 Thank you, Norberto and good morning, everyone. We appreciate you joining us this morning to discuss our second quarter results. J&J Snack Foods had a number of accomplishments throughout the quarter, including new customer wins, successful product launches, an expanding product distribution. We delivered an all-time high second quarter net sales of nearly $282 million despite the unexpected challenges related to the early February implementation of a new ERP system. 03:16 We intentionally planned the ERP system launched during fiscal Q2, which as many of you know our seasonally slowest volume quarter. The implementation created unforeseen temporary, operational, manufacturing and supply chain challenges that affected the performance of our food service and retail segments during the quarter. 03:43 Our Frozen Beverage segment, which already runs on JD Edwards platform was unaffected by the implementation. You've heard us talk about picking up some big boulders in order to best position J&J for the future and the ERP system was the largest and most necessary change required to strengthen our supply chain. Having a robust ERP platform, provides a more seamless, integrated process from raw materials through production, warehousing, inventory management, and electronic order fulfillment. 04:18 It is also vital to supporting many of the key initiatives we have discussed over the past several quarters, focused on increasing operational efficiencies, expanding capacity, accelerating our growth and improving margins. We are confident that this system will strengthen our operating infrastructure and deliver meaningful benefits to our customers and shareholders today and for many years to come. We estimate that these issues had a one-time impact on fiscal second-quarter sales of approximately $20 million and approximately $4.5 million in operating income. 04:56 Taking the one-time impact of the ERP implementation, sales across food service and retail would have grown by approximately 11% with…

13:03 Thank you, Dan and good morning, everyone. Taking a look at the results for the second quarter of fiscal 2022, we are pleased with the continued strength and resiliency of the business, surpassing pre-COVID sales for the third consecutive quarter. Net sales increased by 9.9% year-over-year to $281.5 million and by 1.9% when compared to fiscal Q2 2019. These top line results represent the highest fiscal second quarter revenue in the company's 50-year history. At the same time, our performance could have been even better this quarter, but it was negatively impacted by the ERP conversion challenges Dan mentioned earlier. 13:50 We estimate that the operations supply chain challenges resulting from the ERP implementation impact sales by $20 million in the quarter. Our improving sales performance was led by a 4.1% increase in food service to $176.3 million, a 50% jump in the Frozen Beverages segment to $64.4 million, partially offset by a 7.2% decline in our Retail segment to $40.8 million. Our Retail business was lapping a 17% increase in last year's second quarter. 14:27 Food service continues to be our largest segment representing 63% of total sales, while the Frozen Beverages segment accounted for 23% of total sales and our Retail segment representing the balance or 14% of our overall sales for the quarter. Food service growth of 4.1% was led by 17.6% growth in pretzels, an 18.5% growth in churros as we prioritize customer opportunities in these core products. Also sales in handhelds increased 2.6% on top of 168% increase last year. This growth was offset by flat sales in bakery and declined across frozen novelties. 15:15 The decrease in retail sales was led by a 52.3% decline in handheld sales, 12.4% decline in biscuits, and 2.4% decline in frozen novelties, soft pretzel sales were flat…

19:17 Thank you. We will now begin the question-and-answer session. [Operator Instructions] And on the line we have Ryan Bell. Please go ahead.

19:42 Hi. You highlighted some pricing increases that you took in the early April. Would you be able to elaborate a bit on the magnitude of those price increases? And then maybe how you think about that impacting margins over the next few quarters?

19:56 Yeah. Good morning, Ryan. How are you today? We did highlight that. We did take a second price increase that went into effect some in the first quarter, but will be fully impacted in our second quarter. On the ICEE side, we had the full impact in the second quarter, but excuse me, on the J&J side full impact on the third quarter, not in the second quarter -- full impact in the third quarter and a partial impact on the second. As far as the percentage, we're in that 9% to 10% price range of an impact for us. And we expect that to have a significant meaning as we go forward through the second half of the year. In addition to that, I also highlighted that we're taking a look at implementing a third price increase that would come into play probably later in our fourth quarter.

20:56 Thanks for those details. And then, in terms of the price increases that are in the market, how much of the increase in the costs would that cover, as you're contemplating, I guess another price increase on the horizon?

21:11 Yeah, Ryan. The challenge of that question is the pace upon which cost increases are coming. If you just look from Q1 to say December to Q2, our key commodities and packaging collectively probably increased 10%. So you're looking at $8 million, $9 million of cost of goods increase just since the end of Q1. So I think as we respond and look at what we're doing on pricing, it's one of the big challenges is locking that in right as the cost continue to go up. Just to give you a few examples. Flour went up 8% since the end of Q1, eggs went up 37%, dairy went up 12%, meat went up 18%, packaging went up 14%. Some of that's to tied commodities like wheat that have gone up over 30%, since October of last year and fuel has gone up almost 50%. 22:22 So I think as we enter those questions, I think we have to keep in mind is, the pace upon which these costs continue to increase. The pricing action that we've taken both last year and then what's hitting really most of it in April forward collectively, is expected to cover $28 million to $30 million of cost increase since last year Q4. As we look at the third price increase, that is anticipation of covering what we saw happen in Q2, and then expectations in Q3 and Q4 continued increases in some of these commodities. So, it's all about trying to keep up with the pace of those increases.

23:13 Thanks. And then for your ERP system that you implemented, you highlighted some challenges that were there with the initial implementation. Would you be able to talk about whether or not you've gotten most of the kinks worked out or the degree to which, that's something that's behind us at this point?

23:33 Ryan, we really feel like it is, like any of these that get implemented and sometimes go south a little bit. There is always a continual progression to make it better and better each day and that is the process that we're in today. We do see, as I talked about earlier, we see April bounced back to normal and above range, we see our first week of May continuing that, so we have all signs pointing towards that we are out of the worst of it. And now we're just fine tuning a few pieces of it.

24:11 Thanks. And that April bouncing back that's talking more about the issues that you had with the ERP system versus underlying demand trends.

24:21 No, it is our demand has been strong all along. It is with the ERP system and some of the picking and scheduling issues that we had with that.

24:34 Great. Thank you. That's it from me.

24:37 Thank you.

24:40 We have Rob Dickerson on line. Please go ahead.

24:44 Great. Thanks so much. So I just had a question on the margin side, obviously, margin squeeze Q2 given the cost price lag. What I'm kind of hearing is your demand so strong, but given the increase incremental -- increase on the cost side. And then kind of a third round hopefully coming sometime Q4 that we should still be expecting some margin pressure right in Q3, and then the hope would be as incremental pricing would come through Q4, you're hoping you're taking enough pricing to hopefully, let's say, get back to more kind of pre-COVID margins but that's more of a ‘23 event. I don't know if that makes sense. Just help me with that.

25:36 Yeah. I think that’s, I’ll let Ken talk to it in a minute. Good morning too, Rob. How are you doing? But I think you said that pretty well. We will continue to have some pressures into the third and fourth quarter. However, we have a good increase taken effect, fully taken effect beginning April that will lighten that some right. And we'll continue to monitor what happens as we get into our third one and as that helps out in the fourth quarter. I think we had talked about getting back to pre-COVID margin levels by the end of this year. And I think the last time you and I talked, we talked a little bit about that being delayed, maybe three to six months, and that's probably the range that we're in, but you'll continue to see the margins improve throughout that period.

26:26 Okay. Fair enough. And then just one last one for me. On the inventory side, you made the comment in the prepared remarks just around kind of how you normally would build some inventories in Q2 right, as we get through the heavier seasonal part of the year. I guess just with the kind of ERP challenges you had through Q2 and usually, right, the step-up on the revenue side in Q3, Q4, like how are you doing with those inventories? Is there any risk to that inventory as we go into Q3 or ERP situation was fixed inventory is in a great spot, demand et cetera? Thanks.

27:09 Yeah. Again I'll talk to and Ken, if you have anything to add to it. Demand is high right. So we feel very comfortable with the demand out there. Our inventory is in a good spot to build, to supply that and our ERP system looks to be fixed in a way that we are able to get it out the door and into our customers hands. So we're feeling comfortable with all three of those.

27:31 All right. Super. Thank you, guys.

27:35 Thank you, Rob.

27:35 Thanks, Rob.

27:37 [Operator Instructions] And up next, we have Todd Brooks. Please go ahead.

27:46 Hey. Good morning.

27:47 Good morning, Todd.

27:47 Good morning, Todd.

27:49 A few questions for you. One, can we talk to, I know you talked about $20 million in revenue loss due to the impact of ERP during this quarter. Is that $20 million fully lost or is there any of that that's deferred into Q3 either due to customer inventories being drawn down and you need to replenish those as you're working your way through the ERP issues? I want to size if this revenue if we see any of this come back in Q3?

28:20 I think it's a great question, Todd, it's hard to put your finger on completely. I do think that as inventories were drawn down in our customers that we have an opportunity to refill that pipeline. And I believe that is happening, we also have strong demand. So do I believe that we can pick up some of that $20 million absolutely. How much of it, it's pretty hard to put a number to.

28:46 Yeah. I would answer the same exactly, Todd. Certainly some of that we think will come in Q3, but I certainly couldn’t say and tell you how much, but I mean there is some loss sales in that number. But the other side that points to a little bit of that moving is that sales in April have started out really well again, as we've gotten beyond some of the challenges with the system that impacted Q2. We're now starting to see sales, double-digit growth over 2019. So my hunch is some of that is a bit of that Q2 flipping into Q3.

29:32 That's great. Thanks, Ken. And then just to follow up on that. When you look at the disruptions from the implementation, how impacted did your customers get? Were stock-outs a problem and is that any issue as you're now negotiating this next round of pricing increases that will go kind of into effect in Q4? Was there any kind of service issue at the retail or the foodservice customer level that undercuts maybe your ability to fully get the price increases that you're targeting?

30:05 Well, it's certainly a concern. We value our customers deeply. And so we tried to handhold people throughout this period of time, our sales staff did a tremendous job stepping up in communicating with the customers and alongside the operational team letting them know where we stood, we are getting the products back out there today, feel like that we have the opportunity to pass on that third price increase because of what's happening in the commodity side of things and they are aware of that, but yeah, we do have to live up to great service and that's what we believe the full conversion did, JD Edwards will do for us. So it's a good question though.

30:52 Two more quick ones. One, Ken, you were talking about the commodity cost pressures in the quarter and I think originally our outlook was that maybe we'd see some moderation in the second half of the calendar year on commodities. I'm just wondering with the reality of the increases that we saw, have contracting or hedging practices changed just now kind of saying, okay, we think this is going to persist through calendar '22? And are you more fully contracted or hedged than where you were entering this quarter and if so, any key categories you can share with us that you're hedged on?

31:29 Yeah. Well, first of all, procurement team, I think Todd, particularly in this environment, we all talk about this being kind of probably the most difficult inflationary environment in U.S. we've faced in our career, going back 45 to 50 years I think until these kinds of increases are hitting you. But they just took into a review a couple of weeks ago and do a really good job of hedging, whether you're talking about flour, eggs, oils, flour for example, I think we're hedged about 14 days depending on the type of flour, not days, 14 weeks depending on the type of flour many other categories over 20, but even the decision on when to hedge obviously is a challenge. The situation in Ukraine is not getting any better and the outlook on 2023 as it relates to wheat continues to be a concern for all the companies that use that as an ingredient in their products. But I would speak for that group and I think Dan would agree with me that we are hedging to the best ability that we have and I think doing it in the right way. But it's a day to day challenge.

32:45 The team has done an outstanding job, Todd, especially in the environment that we're in today.

32:50 Okay. Great. And the final one from me if I can. I know, given what kind of we've gone through since the onset of the war, and obviously with just battling through ERP that you guys had in the quarter. We really call out Omicron impacts in January. Is there any way you can size maybe, any sort of revenue fall off that you saw either from ability to staff and produce on your end or maybe end customer demand in January? I'm just trying to normalize what this revenue number for this quarter could have looked like without really three discrete headwinds on your part.

33:27 Well, if there was an impact it would have been in early January, right. And so we probably had a slight impact maybe even in the theatre group as that started to continue to rise. But I don't know that we've put a number to that. Ken, have you thought about that at all?

33:49 No, I haven't. I think again we tried to highlight it in the script, when we look at adding the $20 million back and you look at the growth versus '19 and '20, I'd feel pretty good about that, given the conditions, given you're seeing elasticity kick in some areas. We'd beat 2019 and last year even with the challenges of that. So January, we were tracking along pretty well and pretty pleased with where our business was and we're adding customers adding new SKUs. So there's probably and if there is an impact, it was probably in theaters in the month of January. But I wouldn't call it significant, Todd.

34:40 Okay. Great. Thanks, you both. I'll pass it along.

34:44 Thanks, Todd.

34:47 Thank you. We have no further questions at this time, I will now turn it back to CEO, Dan Fachner for closing remarks.

34:55 Thank you, operator. I want to take this opportunity to express my deep gratitude and appreciation to all of our employees who have consistently demonstrated their ability to offset challenges, putting J&J Snack Foods on a path for continued success. Our greatest asset is our people, whose commitment helps us to achieve our goals. We are also very grateful to our customers for their patience and loyalty as we work to resolve the ERP transition issues in the second quarter. Thank you everyone for joining us on the call today, we appreciate your interest and continued support and look forward to updating you on our progress during our third quarter. Thank you very much.

35:37 Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect