J & J Snack Foods Corp (JJSF) 2022 Q1 法說會逐字稿

Welcome to the J&J Snack Foods first quarter earnings call. My name is Annette, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Norberto Aja. Mr. Aja, you may begin.

Thank you, operator, and good morning, everyone. Thank you for joining the J&J Snack Foods Fiscal 2022 First 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, anticipated financial performance, industry-wide supply constraints and the expected impact of COVID-19 on our business.

These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual 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 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. Any such forward-looking statements represent management's estimates as of the date of this call, February 1, 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 events cause reviews 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.

With us on the call today are Dan Fachner, Chief Executive Officer; Ken Plunk, Chief Financial Officer; Steve Every, Chief Operations Officer; and Lynwood Mallard, Chief Marketing Officer. Joining remotely are Marjorie Roshkoff, our General Counsel; and James Hamill, Corporate Controller. Following management's prepared remarks, we will open the call for a question-and-answer session.

With that, I would now like to turn the call over to Dan Fachner, J&J Snack Foods Chief Executive Officer. Please go ahead, Dan.

Thank you, Norberto, and good morning, everyone. We appreciate you joining us to discuss our first quarter results, which reflect the continued strength across our businesses, driven by a healthy growth in all 3 of our segments. Before doing so, I'd like to take this opportunity to thank the entire J&J Snack Foods team. As always, none of our achievements would be possible without the hard work of our world-class team of employees. The dedication of this group ensures that we deliver for all of our stakeholders, and I am truly grateful for their efforts and commitments.

Taking a look at the results for the first quarter of fiscal 2022. We are pleased with the strong start to the year and the continuation of many of the positive trends we saw in the prior quarter. Net sales increased by 32% year-over-year to $318.5 million and by 17% when compared to our fiscal Q1 2019. These top line results represent the highest fiscal first quarter revenue in the company's 50-year history.

Our improving sales performance was led by a 54% jump in the Frozen Beverage segment, followed by a 32% increase in Food Service and 9% growth in our Retail segment. This led to earnings of $11.1 million or $0.58 per share compared to $1.8 million or $0.09 per share in the first quarter of fiscal 2021.

Walking through each of these 3 segments, let me begin with our largest group, Food Service. This segment represents over 60% of our total sales. We have strong customer relationships with snack and food businesses, leading retailers, warehouse clubs and convenience stores. Our portfolio also includes malls and shopping centers as well as many of the most popular QSR and casual dining chain restaurants and many of the largest stadiums and sports arenas. This segment also sells into leisure and theme parks across the country. And of course, just about every movie theater there is.

The Food Service segment is a great example of what we mean when we say J&J Snack Foods is everywhere. Our Food Service sales grew 32% compared to the same quarter last year and 18% above Q1 2019 and continues to reflect the healthy demand for our soft pretzels, frozen novelties, churros and handheld products across the consumer touch points. Soft pretzel sales increased 54%, and frozen novelties increased 34%. Churros sales and bakery products increased 69% and 21%, respectively. In addition, we are seeing growth of 5% in the handheld as this category continues to be a greater contributor.

Moving to our Retail segment. Revenue grew by 9% year-over-year and by 36% versus fiscal Q1 2019. Growth was driven by a 17% rise in soft pretzel sales, helped by our increasingly popular filled pretzel bites. Frozen novelties are also continuing to perform well, posting a 16% year-over-year increase. We continue to gain placements and new selling opportunities at major grocery retailers through products like Luigi's flavored ice, Whole Fruit bars, Dogsters and ICEE branded novelties. The Retail segment continues to reflect sustained consumer at-home consumption. Given the increase in remote work and evolving consumer preferences, we believe these trends will continue to benefit our retail business going forward.

Let's move on to the Frozen Beverage segment. Our business is now starting to produce results consistent with pre-COVID sales as the theater industry continues to improve and consumers enjoy travel and outdoor activities. Our sales for the quarter exceeded the same period last year by 54% and were 6% above a very strong Q1 2019. These results were led by strong performances in amusement, convenience and restaurants as traffic returns to these outlets and as we gain new QSR and convenience customers.

In the amusement channel, we continue to see strong growth in the indoor-focused venues as that business segment continues to expand. I'm also really excited to see theater sales improve steadily throughout the quarter, including a December where sales were just slightly above or below pre-COVID 2019 levels. The segment growth was once again led by our ICEE beverage lineup, which grew 113% versus the prior year and 8% above fiscal Q1 2019.

Service revenue increased 16%, the strongest first quarter in our service history, led by an acceleration in our preventative maintenance calls. Equipment sales increased 21% driven mainly from a large QSR and convenience customers. With all of our major business lines posting strong sales growth, we remain optimistic that these positive consumer trends will continue as we move further away from the impact of the pandemic and the recent challenges the variants have brought to all of us.

As was the case last quarter, our industry continues to experience unprecedented inflationary pressures and higher-than-expected cost increases across many facets of the business, from raw materials and ingredients, to transportation, packaging and labor. These costs escalated in the back half of the quarter with the onset of the Omicron variant resulting in first quarter fiscal 2022 gross margins of 25%, favorably compared to 21% in the prior year but below the 28% gross margin generated in the comparable 2019 period.

Like many of our competitors and customers, we are seeing double-digit levels of inflation across a number of areas. Ingredient costs increased over 10% on average compared with the same period last year. In distribution, expenses were 10.5% of sales in the quarter compared to 9.5% in the same period last year. Our organization continues to focus on specific actions to offset these short-term challenges, and we have identified a number of opportunities to reduce expenses across the business, including procurement, R&D, production and distribution. In addition, we have 4 new production lines scheduled to be activated in fiscal 2022 that will leverage automation to improve efficiencies.

Finally, we are also implementing additional price increases for our products across nearly all of the categories. Collectively, we expect these initiatives to improve our gross profit margins progressively over the second quarter of fiscal 2022 and really into the back half of the fiscal year.

And while we're being proactive and taking necessary steps to best navigate the current inflationary environment, the work we are doing to build and evolve our brands also continues. We have over 10 iconic brands that are leaders in their respective segments. And in some cases, these brands even define the segment. So there are a number of significant opportunities to leverage these brands and grow organically.

Within Food Service, we are very bullish on churros and expect to launch a new branded churros product to target major food service customers in fiscal 2022. We are also expanding our powerful SUPERPRETZEL and Bavarian Pretzel brands with individually wrapped salted pretzels and filled pretzels. In Retail segment, we are leaning on the super brands, including SUPERPRETZEL, Luigi's and Dogsters to both create and grow market share through new products, flavor extensions and improved packaging.

Finally, in our Frozen Beverage segment, we remain focused on expanding our ICEE brand and have recently introduced ICEE products into QSRs and fast casual dining. As previously reported, we have seen great success on this front in places like Krystal Restaurants and Golden Corral. We have a good pipeline with customers testing the ICEE products, and I am pleased to report that our customers are already seeing marked upticks in beverage consumption.

As it relates to inorganic growth, we continue to be very vigilant on the front and remain disciplined in our criteria and approach. We will not do acquisitions that are not accretive to our business, overpay for assets or buy something outside of our area of expertise. We have a long and successful track record on the acquisition front, and we intend for that to continue to be the case.

In closing, an important aspect of our business that has shone through more than ever before during the past 18 to 24 months has been the resilience and power of our products and brands. The changes brought on by the pandemic have created tailwinds for many of our brands as people have sought to create moments of enjoyment, comfort and even companionship during these unprecedented times. Challenges create opportunities for strong brands to get even stronger, and that is what I firmly believe is happening here. On the back of various initiatives I mentioned earlier and the strong demand environment we continue to experience, we are in a much stronger competitive position today. We are well positioned to continue to drive long-term growth and shareholder value for the company.

I would now like to turn the call over to Ken Plunk, CFO, to review our financial performance. Ken?

Thank you, Dan, and good morning, everyone. Our fiscal 2022 first quarter results reflect the continued success of our operating strategies and the power of our unique brands [as with improving] trends in the macroeconomic environment and across the majority of the 2 customer segments we serve. Like Dan mentioned, they also reflect some of the challenges and headwinds we continue to experience as it relates to our supply chain and cost of goods.

Revenues for the first quarter of fiscal 2022 increased by a healthy 32% to $318.5 million versus the prior year period and compares favorably versus the first quarter of fiscal 2019 with an increase of 17% in sales. Breaking revenue down, Food Service revenue grew 32% to $211.7 million or 67% of our total sales. It was led by a 69% growth in churros. Bakery and soft pretzels enjoyed 21% and 54% growth, respectively, versus Q1 of fiscal 2021. And frozen novelties grew 34% for the quarter, and handhelds grew in mid-single digits.

Retail increased over 9% to $42.7 million or 13% of total sales as soft pretzels, frozen novelties and biscuit sales increased 17%, 16% and 8%, respectively. Handhelds in our Retail segment declined 54%, driven by proactive discontinuations of margin-dilutive products. I would like to point out that retail was lapping a 33% sales growth in last year's first quarter as consumers stay at home.

Regarding our third segment, Frozen Beverages, revenues increased 54% to $64.1 million or 20% of total sales versus Q1 of fiscal 2021, reflecting healthy sales growth across all subsegments including a 113% increase in beverage sales and 16% and 21% increase in maintenance and machine sales, respectively. This led to a gross profit of $79.4 million or an increase of over 58% compared to the previous year period and a gross margin rate of 24.9%, an improvement of over 400 basis points above Q1 of fiscal 2021. As Dan pointed out, our industry continues to face historic inflationary challenges and that certainly impacted our cost and margin expectations for the quarter. As Dan discussed, we are confident in our plans to manage these headwinds as we move forward.

Moving down the income statement. Total operating expenses increased from $49.5 million to $64.5 million and were 20.3% of sales for the quarter. This compares favorably to the same quarter of fiscal 2021, even while distribution costs continue to escalate. Distribution expenses were 10.5% of sales compared to 9.5% of sales in fiscal 2021. Marketing expenses and administrative expenses were well managed for the quarter and below prior year.

Overall, operating income improved from $0.6 million to $14.8 million for the quarter compared to the prior year. With income taxes of $4 million compared to $0.2 million in Q1 of fiscal 2021, net earnings increased by over 524% to $11.1 million, resulting in diluted earnings per share of $0.58 per share compared to $0.09 in the prior period. And on an adjusted EBITDA basis, we saw an improvement of 77% to $27.5 million in Q1 of fiscal 2022 versus Q1 of fiscal 2021.

Taking a look at our balance sheet and liquidity position, we are pleased that even on the back of these challenging last few quarters that we continue to have a healthy balance sheet, and overall liquidity was $283 million in cash and marketable securities and zero debt. Our company is well positioned for continued investment and growth.

In closing, our first quarter results reflect the diversification and strength of our brands and products. Financially, we are confident in our short-term plans and manage through the current environment, and excited about our long-term strategy is to grow sales and profits. We have an incredible portfolio of brands and products and a proven team committed to continue the growth legacy of the company.

I would now like to open the call to questions. Operator?

(Operator Instructions) Let's see, and we have some people in the queue already. Okay. This call is from Rob Dickerson, and please excuse if I'm mispronouncing your name.

I guess first question I have is just on the Food Service side. The results are impressive. I think it's the best first quarter you've actually posted on the revenue side. I'm just curious if you could provide any more color, kind of like what do you think in your opinion is driving that? I mean, is that like just kind of black and white new distribution, picked up a new customer? Or do you think it's just kind of more consumer behavior driven just with respect to traffic in these certain channels, be it convenience, what have you?

You know what I think, there's a little bit of all of that, that you mentioned, Rob. We are excited about what Food Service is doing and the growth that it's having. I do think there's a little bit of pent-up demand that's going on out there. But I also think that our products are a product that people are now starting to search out. And you know what's exciting to me probably more than anything is I'm seeing some great growth on our core products. It's not just new things that we're introducing, but it's really some of our core products like the pretzels and the churros that are really having some strong improvement over the quarter. And that's encouraging as we get deeper into the year. So I really am encouraged by what we're seeing and anticipate for us to be able to continue to have growth in that category or segment.

Right. Got it. And then I guess just quickly, historically, your second quarter on the revenue line at least seems to be fairly similar relative to Q1 just given seasonality. Q1 is pretty strong. Realized you don't guide for the year, but it doesn't seem as if there would be anything kind of one-off in Q1 that wouldn't necessarily hopefully repeat in Q2, right, which kind of stages you for kind of a solid year, given back half you would assume would be stronger, given [in part traffic], et cetera?

Well, we absolutely think that. We think that Q2 has a chance of mirroring what you saw in Q1, right, and then getting some really strong help as we end Q2 and into Q3 and 4 with some of the initiatives that we're doing regarding the costing side of things and supply chain. So we're encouraged. We're really encouraged by the year.

Yes. Rob, I would just add one [thing]. Even with strong Q1 revenues, which we're quite proud of, I think it's good for us all to remember that Omicron and the impact of that on travel and on getting out, particularly in December, probably impacted our sales from being even bigger in the quarter. And as we hopefully get beyond that, we're very optimistic that the trends from Q1 and then maybe even as you get past Omicron that, that environment improves even further for us.

Got it. Okay. Super. And then just on the cost side. Obviously, costs are up like they are for everyone. It sounds like things hopefully improve through Q2, given some of your initiatives in pricing. Kind of a quick 2-part question. I'm curious, so like as you think forward for the year, right, if we assume there's perfect visibility on the cost side, right? There's not a lot of volatility, you probably know what some of the pricing is, some of the initiatives. I mean my assumption is you're probably, as we exit the year, maybe it's still a little challenging to kind of get back to those pre-COVID gross margin levels. So any color on that would be great.

And then the other kind of follow-up question is just maybe this is for you, Ken, and it might be a bit difficult to answer. I'm just curious, you're talking about reducing margin-dilutive products. You have 4 new lines coming on, which should be more efficient, should get some operating leverage with better top line. So if we kind of were to normalize the cost environment, right, you think the larger strategy if we get through COVID, the assumption here is that gross margin should, in theory, be kind of nicely above pre-COVID. And I know you can't quantify, but just kind of, one, how are we feeling about the end of the year, exit rates? And then two, just kind of broadly speaking how we're thinking about kind of gross margin in a normalized environment?

All right. Let me start, and then I'll let Ken add to that as well. But you're right, we have some hefty goals out there for us as a company and have been working really, really hard on the business and some initiatives that we think will take hold as we get into the later half of the second quarter and then stronger in the third and even stronger in the fourth. And then some long-term ones, as we've talked about with some of the distribution and the frozen plants that we're looking at across the country. We do believe that we can get back to those pre-COVID gross margin levels. We are convinced that we can get there. There are challenges in front of us and some headwinds that we're facing like we just faced in this quarter and some that we may not see yet. But if it was normalized, I absolutely believe that we can get ourselves back to the margins that you had seen before. And then, of course, my goal would be to be better than that. Ken, do you want to touch on that some?

Yes, Rob. I would say similar to what we said coming out of Q4 and heading into Q1, we've got to get through this period where we executed the price increases. We have done that on the ICEE side. I think I could probably say, if not the largest, one of the largest price increases that we've passed through and the industry has done. That work has been done and was done in January. And we have very specific plans over the next 3 months to execute that on the Food Service side. We had a number of customers that had 60-, 90-day notice causes and that sort of thing. But the plans are there.

So I think what I mentioned going into Q1 is we really feel like back end of Q2 and particularly into Q3 and Q4, the pricing actions, the cost actions will start to bear fruit. And I expect those in the back half of the year, to get back to those margins that you're used to seeing in those Q3 and Q4 periods.

And the other thing I would add, I mean, the team has been working exceptionally hard. And I probably said here, and I think Dan would say the same thing, more confident in kind of the rigor behind our plans, whether that's cost reduction initiatives, that's the new lines we're implementing, that's the pricing action, there are very specific plans and timing around those, many of which are happening now, many of which will happen over the next few months. So I think, again, continue to look at very late Q2 back half back to kind of what we would expect, assuming nothing else crazy around distribution expense, inflation and raw materials continues.

Our next question is from Todd Brooks.

A couple of quick gross margin questions to follow up on Rob's line of questioning. If we go back and look at Q1, can you maybe talk about how much pressure you were seeing in gross margin pre-Omicron? And then that last month of the quarter, how much inflationary cost pressures accelerated to hit the gross margin?

Well, again, we'll tag team this some, but certainly saw pressures throughout the quarter. But it definitely peaked as you got into the later half of the quarter. Omicron, one of the things it did is affect labor. And with the sales that we're experiencing and not wanting to not be able to ship everything that we can, there are some labor increases that happened towards the end of the quarter with people calling out sick and having to bring in temp labor and overtime hours and things like that and working really hard to make sure that we're continuing to produce the products that we want to produce and get them out to our customers.

So it certainly peaked throughout the quarter. Distribution was a big piece of that, and distribution was a rising cost all across the quarter. I don't know that it peaked throughout it. I think it was just a rising cost all across the quarter and continue to get worse. So Ken, you want to talk about that some?

Yes. I'll just kind of start where Dan ended. On distribution, again, some of the quick and fastest escalation costs that I've seen in my career. Just to give you one idea, one of our biggest line items is outbound freight. And from Q4 to Q1, that continued to increase just under 20%. So if you look at that level of cost increase just within 3 or 4 months, plus as we got in December, it was a huge revenue month for us. And our first commitment as it relates to the business both in the quarter and long term is to continue to invest in getting our sales growth back and get market share.

So there are things that we did to ensure, from a product availability standpoint, we did to drive those sales. And that was part of the reason why we had such a great quarter. There are specific plans in place around distribution. We mentioned before, we brought in a third-party expert around logistics management, and they are just now starting to get engaged. They've already taken responsibility for one of our biggest warehouse and pickup locations. That will continue very quickly in Q2, but distribution and the escalation of those costs certainly had an impact. And then the same thing on raw materials.

And yes, December, as it relates to cost of goods and margin and results, was our toughest month. And I think it was because of the combination of the things I mentioned and as that escalated over the quarter as well as the labor situation that Dan mentioned.

That's helpful. Can I follow up with obviously rolling out of a strong month in December into the beginning of the year. Just what's kind of the current experience as far as Omicron, staffing levels? Do volumes drop enough that you're not having to chase the same magnitude of labor, so maybe not the same pressure as we're working our way through this variant?

It's getting better, Todd. And as you said, January isn't December. However, we're still seeing nice increases year-over-year and believe that we'll continue to do that. But the labor issues that we experienced towards the end of December or in the mid-December through the end of the year aren't as challenging as they are today. However, I think it could be challenging all year long to some extent.

Okay. Great. Can we kind of talk about pricing and maybe break it into -- I know it's across segments, so it's hard to just give a blanket statement on pricing. But maybe talk about where we stood on blended pricing in Q4, what you tried to put in effect over Q1 and then magnitude of what you're trying to put in over this next 60- to 90-day period in the Food Service business.

Well, we've always tried to be sensitive when it comes to pricing to our customers and consumers, right? And so probably our first go around with an increase that would have taken effect, we might have been a little bit more conservative than we should have been. And so we have gone back and looked at that really, really hard. We've taken pricing with the ICEE side that became effective January and probably some of our largest pricing that we've ever taken. And we've gone back and done that on the Food Service side.

You've heard me talk about our new Senior Vice President of Sales on the Food Service -- or in the J&J side of our business, Bjoern Leyser, and he's on the call today. But you've heard me talk about him, and he's really led the team on pricing right out of the chute. And so we feel really good about where we're at with that. That will take effect end of this quarter. Some happens in this quarter, but really into this quarter and then really mainly in the third quarter. And again, pricing probably had a larger rate than we have taken in the past.

So Ken, if we use kind of Rob's constructive cost table from here, how much gross margin should you recapture from the pricing increases if they fully implement?

Well, it will scale its way through time. But I'm going to kind of leave it at this. I mean, the level of increase is double what we took last year. So you're looking at probably, on average, 6% plus depending on product, customer, composition of product. Flour, for example, is one of -- it's a big commodity for us and it's one of the ones that continues to inflate double digits. So yes, it does vary by product, customer, et cetera. We'll enjoy some of that benefit in Q2, but I would call it marginal but somewhat improved over Q1. But the bulk of that will play out entirely in Q3 and Q4. And that, in combination with the cost reduction initiatives that we just mentioned, is going to enable us to get back to more of that 30% gross margin range assuming the double-digit inflationary environment doesn't continue, which at least right now, we're not expecting that.

Okay. Great. And then if I can ask one more and then I'll jump back in queue. Obviously, a great revenue performance and relatively flat sequentially, which we don't typically see December quarter versus September quarter. Maybe if we can parse the strength between -- and Dan, you pointed to maybe brand discovery versus new introductions? And then secondly, if we can talk just about the recovery in the theater business across the course of the quarter and what kind of the forward outlook for that business is given the release schedule.

Well, really proud of all 3 segments. All 3 of them had a good increase in sales across the board. And I think I mentioned this to you already. Most of that increase is coming from our core products, and that's really encouraging to see. We're seeing our pretzels increase. We're seeing churros increase. We're seeing our frozen novelties in the Retail side increase and we're seeing increased distribution in all of those channels. The Frozen Beverage side, it was great to see the theater business come back, and it really came charging back in December. A lot of times, that's really based on the movies that are being released and the timing of those movies. And we had a great one released in December, and we saw that immediate jump across the whole channel.

So really encouraging to say, in the midst of Omicron continuing to grow in December, when the theaters released a good movie, the people were out there to see it. And so encouraged by that. And that's what I would tell you about the theater business going forward for the rest of this year. As we have the right movies released, we'll see a nice return to that business again.

And pretty similar to what I've said to you in the past, I think by the end of the year, we could be in that 85% range of what it was in 2019. Our business particularly might be greater than that because of their reduction in their SKUs in the places we sell more per location than we used to sell in 2019. So we may be at a higher level than that. But encouraged -- I would just say this, I'm encouraged by the theater business that when there's a good movie released, people are willing to go see it in the midst of the pandemic even.

That's a big deal, in my view. Again, we mentioned December was just a hair under FY '19. So to me, that's even more encouraging than probably 3 or 4 months ago. Because when you see the product there, you see the right kind of movies in the theaters, the consumers are coming back. And that's really encouraging as we look to more of those kinds of movies coming out, Top Gun, The Batman. I think there's a lot of product built up in inventory. So that's encouraging.

And our next question comes from Ryan Bell.

I sort of had a question sort of about the impacts with elevated COVID cases at the end of calendar '21 and through the beginning of this year. Just trying to understand if you had any sort of quantification about what that impact might have been on the businesses and then seeing potentially a relief from that as we're getting -- cresting over the Omicron.

Ken, I don't know if you can identify a percentage or a number there. But what I would tell you, Ryan, is the biggest impact we had of the COVID cases was on the labor side of our business. We continue to have strong sales all the way through the quarter and all the way through December. So it wasn't as affected at the customer or consumer level. But where we really saw the impact is in the labor shortages and what we needed to do to cover for those labor shortages, both on the snack food side of the business, the J&J side and on the ICEE side with our many service technicians out in the field and some of them suffering from the variant and having to cover that with overtime or additional labor.

Okay. That's helpful. And then I think when you're talking about some of the pricing that's been taken so far this year, I may have misheard this, but it was that it's about or at least 6% so far this year? And does that not include some of the Food Service pricing?

No. Let me try to clear that up a little bit. One point that Dan made was the price increases we took last year, in hindsight, we probably should have been more aggressive. Those are probably, on average, 3% to 4%, call it. The price increases that we've taken at ICEE already and the ones that we are in the process of taking on the Food Service, Retail J&J side of things will be, call it, double that. Again, the specifics are different based on customer and product and that sort of thing, but kind of just thinking averages. But that's the magnitude of not just us, like everybody in the industry is having to look at as costs have gone up double digits.

And so that's why we keep emphasizing. As we get through that in this quarter, along with the other things that we're doing, we feel really good about, one, we have to sell where we want it. We're growing it. We've got great programs, new innovation. And as we get the margins back up, we feel really confident about the back half of the year.

That's helpful. And then structurally, the retail supermarket business is in a lot better place than it was in calendar 2019. How much of the base that increase do you think will hold going forward? And where do you see maybe opportunities to hold that base or expand a little bit more?

We're encouraged by retail. We feel like we've got some really good things going on in that group. We've got some great products, some good introduction to even some newer products. We feel like we can hold on to where we're at today and potentially grow that. We have some good new distribution happening with one of the largest mass merchandisers out there with our frozen novelty group and the Dogsters specifically. But we're really excited about what's happening in retail and don't expect that to dip its nose anytime soon.

And then just the last one for me. In terms of capital allocation, obviously, your balance sheet is incredibly strong. Is there anything you're thinking about in terms of strategies for deploying some of that capital? And then I don't know if you've talked about this before, but is there potentially a leverage range that you'd be thinking about if potential acquisitions [come through]?

Well, we are fortunate to have a really strong balance sheet, and we've worked really hard to have that type of thing. And we want to continue to be vigilant in the way that we look at it. We've looked at all aspects of what to do with that cash. But probably our biggest interest is some type of acquisition out there. And we've been really active on that front, Ken and I, over the last 3 months or so. And I feel like we're storing up some pretty good opportunities and hope that, that would be the area that we would be able to use that cash. Ken, do you want to touch on that at all?

The other thing, Ryan, you're seeing, you'll see it even on the financials this quarter is we're investing even more in our plants. And that's -- we mentioned 4 new lines coming in. Those lines are all focused on core product areas, whether it's frozen novelties, churros, pretzels. And those will improve efficiencies and innovation.

There's 3 other lines coming in, in Q1, Q2 of next year. And then -- so that pipeline of things that we need to do to get better and get more automated, we're investing in. So we're using money for that. Dan mentioned, we're very aggressive in looking at the acquisition opportunities. And I think that's just a matter of time. So we're maintaining cash for that. In terms of leverage, I don't want to throw a specific number out, but we have clear support from the Board that, depending on the opportunity, if we need to go leverage the balance sheet a bit, we can go do that.

And this call is from Robert Costello.

I have a question. A number of years ago, Jerry outlined where he thought the best growth opportunities percentage was in Food Service. And with your expansion of your product lines that you mentioned on CapEx, is that continuing? Could you be a little more specific on what you think where you're reinvesting the money for the future growth is coming from what areas of the company?

Yes. Robert, when we're talking about Food Service, as I mentioned earlier, we're seeing great growth in our core products. Core products, meaning the pretzels, the churros and the frozen novelties. And as we're looking at lines of expansion right now, we're looking at the opportunity of being able to expand our production on that core. I still believe to this day, if that was Jerry's answer in the past with pretzels and churros and frozen novelties and that's how he answered it before, I would tell you, I still believe today that that's our biggest opportunity for growth right now.

Right. With the CapEx budget, is there any change that you're anticipating with the inflation versus the beginning of the year versus now in your cost and what it's going to cost you to expand the product line? Or is it pretty much the same as you anticipated?

Well, there's some slight inflation in that. Most of the ones that we've approved, we locked in on the pricing for that -- for those lines. But I'm sure there'll be some if things don't change, I'm sure there will be some inflation that will go along with the lines as we start to put them in.

Yes. The other thing, Rob -- sorry, the other thing, Robert, to keep in mind is yes, and we've mentioned this before, we have a capital committee. And so each of these investments go through rigorous review, strategic fit, operational and then financial modeling. And in each of those, we don't make these decisions unless we believe very strongly that they're going to drive accretive returns. So that level of rigor is behind a lot of these decisions as well as investing -- putting the lines in the right places, which are really focused primarily on our core products.

All right. Two quick questions. On the churro, you mentioned the new product lines. Could you be more specific, is it a new product category? Or how are you anticipating doing this?

We're seeing great growth today in the churro business, and that's one of the areas that we're going to continue to look at potential new lines to be able to keep up with that. And maybe even some regional production, I'll call it, so that we're not shipping things across the country, that we're making them in the spots where we're selling them. But we're seeing some great growth when it comes to churros and good demand out there with customers.

Last question, your cash. With interest rates slightly rising over the year, what are you -- where is the cash invested specifically?

Well, most of it is in very liquid cash money markets. There's still some bonds that are older that most of those are maturing. Like most every other company, given where rates were over the last year to 18 months, we've been waiting to see what the market does. And so now, as the rates come back up, we're evaluating that option of investment along with using that money for capital, using that money for dividends, using that money for acquisitions.

Right. But you don't have it in bond funds right now. Is that the case? Or you have it just in cash and individual bonds?

The majority of it is in cash and very short-term liquid. There's only probably, I don't know, $20 million to $30 million that's in corporate bonds that we've had for a number of years that most of those, I think, are maturing probably in the next 12 months.

Okay. We have Todd Brooks again. Did you have another question?

I sure did. Just wanted to follow up and see if we're to the point where some of these efficiency opportunities are clear enough that, Ken, can you start to manifest a total savings from efficiency efforts that the company is targeting? Or are there any bigger projects in here where you can maybe size the targeted savings so that we can look at these cost offsets against what could be some persistent inflationary pressures?

Yes. Todd, just to reiterate what I said a little bit ago, the one thing that gives me more confidence than I've ever had in these calls is these plans are very specific. I mean, they're -- our operations supply chain leaders have done a great job of really putting very concrete things together. And they're laid out by months, they're laid out by quarter.

So there's a lot of [elements] to that. We've mentioned before in the areas of distribution, on an annualized basis side, Todd, once we move our logistics management, this third party, and leverage their capability, technology, there's a conservative $4 million benefit there. And that's an annualized number. As you look at like procurement, we've got a number of initiatives in place there that once those start to bear fruit, we think there's low single-digit million opportunities over the next few quarters. There's some work we have to go do to tie it together, but those just give you some high-level numbers. But the plans are specific in terms of ownership, in terms of estimates, in terms of timing. And we're just really getting that going in terms of launching those and initiating those.

Todd, I'll just add to that, we're focused on distribution. We're focused on procurement, R&D, production, even regional production, as I talked about earlier and pricing and really encouraged by what we think that is out there in those efficiency side. So as the year progresses, we feel really comfortable with that.

That's great. And then just a final one for me since we have Lynwood available on the call. I'd love to get your thoughts on the brands being a more recent arrival to J&J and thoughts on looking at this portfolio and the ability to really extend these brands to start to drive a little bit more of a new product or a product extension engine to help enhance the revenue growth rate over time?

Todd, that's a great question. Lynwood is sitting right here next to me and anxious to be a part of this. So Lynwood, I'll turn it over to you.

Yes. Todd, thank you for getting me involved. I appreciate it. We have a lot of confidence in these brands and our core brands and the ability to stretch these brands into some new spaces starting with IT and its ability to extend further into Food Service, to stretch and innovate in novelties or novelties continue to be a promising overall category. We have a lot of confidence in SUPERPRETZEL and just the inherent strength of that brand across channels, both Food Service as well as retail. And we see the innovation opportunity in Retail to continue to be a positive space for us and our pretzel bites followed up by pretzel nuts later in the year.

Then when you get into -- further into our novelty brands, we have brands like Whole Fruit, which has just tons of upside. Fantastic brand, big distribution upside. Dan mentioned Dogsters, and with Dogsters, we're seeing green shoots as we speak with brand-new distribution with some of our largest customers. Honestly, I think the upside on Dogsters in the booming pet industry space is just enormous.

The last one I'll call out is Luigi's where we have leadership in the Italian ice category, there's a lot left to do with Luigi's. And it's not just about expansion, it's about growing into new spaces, like a natural place for Luigi's is gelato. So we have a lot of confidence. That's just a few top line thoughts. I'll leave it there. Dan, anything to add?

You could just touch on gelato a little bit more if you want to. We haven't mentioned that yet. Now is a good time to introduce that.

Yes. It's a fantastic product. I can tell you that it's just a natural fit. It's a real genuine Italian gelato, it's consistent with that brand's positioning. And we're launching -- we've been launching 3 flavors as early as next month in March. So we're very excited about that.

Okay. And at this time, there are no more questions in the queue.

Great. Well, 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 second quarter call. Thank you very much, and look forward to speaking with you soon. Have a great afternoon.

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