Q2 2021 UTZ Brands Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome today use brands incorporated second quarter 2021 earnings conference call. At this time, all attendees or you mean listen only mode.
After the speaker's presentation, there will be a question and answer session.
And to ask a question during the session you will need to press star one telephone if you require any further assistance. Please press.
Thank you now I would like to hand, it over to Mr. Kevin Powers Senior Vice President of Investor Relations. Sir. Please go ahead.
Good morning, and thank you for joining us today.
On the call today are delegates at Chief Executive Officer, and carried a or Chief financial Officer.
During this call management may make forward looking statements within the meaning of the federal Securities laws.
These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in these forward looking statements.
Please refer to the risk factors and <unk> brands. Most recent quarterly report filed with the Securities and Exchange Commission.
As well as the risks highlighted in the Companys press release issued this morning for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
Please note management's remarks today, we will highlight certain non-GAAP financial measures. Our earnings release also presents the comparable GAAP numbers to the non-GAAP numbers provided and reconciliations of our non-GAAP results to the GAAP financial measures.
Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on <unk> Investor Relations website.
You may want to refer to these slides during today's call.
This call is being webcast and an archive of it will be also available on our website.
And now I'd like to turn the call over to Dylan.
Alan.
Thanks, Kevin Good morning, everyone and welcome to our second quarter earnings call, let's begin with a few key messages on the quarter.
In the second quarter, our net sales on a two year basis continued to gain momentum as we lap the impact from Covid 19 in the prior year.
Our net sales increased six 1% on a two year CAGR basis, which was an increase from four 3% in the first quarter.
From an IRI retail sales perspective growth accelerated to six 5% versus five 9% in Q1, and we are also beginning to see our sales strengthened in channels that were most negatively impacted by Covid 19, and 2020 for example, our foodservice sales increased nearly <unk>.
60% versus last year with other areas like discount and specialty seeing strong double digit growth.
While we expect our sales momentum to continue into the second half of the year. The strong recovery of the U S economy is having a broad based impact on supply chains.
Consistent with what you've heard around the food industry the cost to serve our customers are increasing and our key input costs are higher than we originally expected.
This is largely due to higher commodity transportation and labor inflation.
As a result, we are prudently, reducing our full year adjusted EBITDA outlook for fiscal 2021.
On that note. Please be aware that we are aggressively taking the steps necessary to mitigate these cost pressures and our pricing actions and productivity initiatives are well underway.
To be clear, we have been increasing pricing across our network and we are leaning into our productivity initiatives to offset these inflation headwinds.
But the benefits of these actions will lag the cost and as noted previously we will see the benefit of these initiatives in the second half of 2021 with meaningful carryover benefit into 2022.
As we manage through this environment, we remain focused on the long term health of our brands and we continue to prioritize investments to capitalize on our significant continued and future growth opportunities.
Among these growth opportunities as our strategic M&A as our scalable platform has proven to generate both meaningful cost and revenue synergies.
We believe our pure play snacking focus makes us the logical consolidator in the salty snack category and there is inherent optionality in our platform as we can consider small tuck ins medium sized acquisitions or potentially larger transformative opportunities.
We continue to focus our M&A efforts on businesses that will either facilitate geographic expansion and increase our presence in key subcategories or channels and of course, those that deliver strong synergies.
Our acquisition pipeline remains very robust and we will continue to prioritize the opportunities that are accretive and strategic to our long term goals.
Lastly on July 26th we announced promotions to our executive leadership team that will accelerate our ability to grow and strengthen our organization.
These changes will provide us with the optimal organizational structure to best position us to drive continued top and bottom line growth.
Among these changes carried <unk> is being promoted to chief operating officer, and Ajay Qatari off our current EVP of finance and accounting is being promoted to chief financial Officer.
Both changes are effective this october 4th.
In addition, we welcome Teresa Sherry as our General Counsel right after July 4th.
Promoted chain chambers to Chief growth Officer, and promoted Jim spent <unk> to Chief people officer.
Turning to the numbers in the second quarter net sales grew over 23% in the quarter, which reflects the positive contribution from our acquisitions and from price mix.
This growth was partially offset by lapping the impact of the peak prior year Covid 19 sales increases which were most pronounced in the second quarter of 2020.
In addition, adjusted gross profit grew 17% and adjusted EBITDA grew 10% as margins were impacted by the key input cost increases I described earlier.
In addition, I'll note that our adjusted EBITDA performance reflects a higher marketing spend in the quarter as we invest more in our power brands for long term growth as well as public company costs in 2021 that didnt exist in the prior year period, given that <unk> was a private company.
Now, let's turn to our recent IRI retail sales trends and results.
Consistent with the first quarter, given the significant outperformance of <unk> brands versus the salty snack category in the early months of Covid 19 pandemic last year, we believe that evaluating our results on a two year basis is the best indicator of overall performance.
As we lap the peak Covid 19, pantry stocking period of 2020, we are driving strong two year growth rates that continue to accelerate as we move through.
Throughout the year.
Our power brands momentum is growing with sales on a two year CAGR basis accelerating to eight 8% for the 12 week period, ending July 11 versus seven 7% for the 12 week period ended April 18th of 2021, both of which outpaced the broader salty snack category.
By over 100 basis points.
Importantly, during the same time periods, our foundation brand declines have slowed to minus one 8% versus -3%, even as we continued to reduce our emphasis on these brands.
As mentioned in previous calls the move towards power brands and away from foundation brands as many times driven by working through the transition that occurs when we acquired foundation brands as part of an acquisition, including those acquired in the Conagra DSD snacks and <unk> acquisitions for example, and actively work to.
To rationalize and right size the portfolio by inserting key power brands into the market.
This strategy is to amplify our focus on the power brands, which we believe can scale nationally, which helps us to capitalize on the significant white space opportunities that exist.
To that end our investments in marketing and innovation are focused on these faster growing brands and we are increasing spend in digital and E Commerce, and app launched or will be launching key innovation introductions.
Turning to our growth drivers in the quarter, we continue to grow sales on a two year CAGR and all five of our key Salford subcategories.
And in source NK cell. We also gained overall share during the period across potato chips, tortilla chips, and <unk>, which comprised about 70% of our retail sales.
In addition, as we evaluate our emphasis on our power brands, we delivered two year market share gains in our power brands across four of our five major subcategories as well as greater than category growth and our salsa in case of brands.
During the quarter, we also made significant progress driving geographic expansion.
We continue to focus on large population areas and our expansion in emerging geographies and we continue to drive our power brands growth across the U S VR platform.
For the 13 week period ended July 4th and the expansion in emerging geographies, we drove double digit growth on a two year CAGR basis for both the total <unk> portfolio and for our power brands, which outpaced the category by approximately 400 to 500 basis points in each area.
As noted previously we believe the revenue opportunities and our expansion in emerging markets as significant with every one percentage point of share gains in these geographies, representing approximately $200 million of incremental retail sales opportunities.
Looking at our core performance over the last two years, our total portfolio growth trends are behind the category and as noted in Q1. This was primarily due to declines in our good health brands and the impact of our foundation brands, both of which are more heavily weighted to our core.
These two factors combined accounted for about two thirds of our performance GAAP to the category in our core.
That being said, we continue to be focused on the core and have a targeted set of actions that we are executing to drive improvement as we move throughout the year and we remain focused on this area of opportunity and improvement.
And our analysis of near term IRI data, we do see our results beginning to improve in the GAAP to the category is starting to close signaling that our actions are beginning to take root.
In addition, we are seeing significant growth of beyond the border brands in the core with very solid growth rates on a two year CAGR basis over six of the last seven four week quads you can see the on the border results I'm speaking of on Slide 13 later in the deck.
Wrapping up our retail sales insights with a look at our Tampa growth. We continue to drive two year positive sales growth across every major channel with tower brand share gains in grocery and C store as well as double digit sales growth in club.
In the grocery channel, which is approximately 50% of our retail sales our power brands grew eight 3% outpacing the category growth of six 7%.
And our most underpenetrated channels, namely mass and convenience both remained a continued opportunity for future growth and we are excited about the progress we are making in these important channels.
And mass.
We underperformed the overall category and a two year basis, our growth accelerated to six 8% versus three 7% in Q1, and our GAAP to the category was nearly reduced in half.
We are very excited about our growth opportunities in this dynamic channel and look forward to sharing more with you on this later.
And as travel continues to resume around the country are convenience store trends are improving and sales grew year over year, nearly 15% and nearly 7% on a two year CAGR basis.
We are expanding distribution and strengthening distributor relationships in the western United States remains a key white space opportunity for us.
Looking ahead to the second half of the year. Our sales momentum is truly building and we are excited about the progress that we're making across several areas.
Here are just a few highlights.
We are lapping the extra ordinary surge in demand during the peak Covid 19, pantry loading period in the second quarter of 2020.
And we are beginning to enter a more normalized comparison period to the prior year.
We are positive space and facing gains coming in Q4 with a critical mass retailer as we leverage the strength of our now broader ups and on the boarder portfolio.
Our C store and foodservice channels are rebounding quickly and C store remains a large channel opportunity for us with only a current three 4% share.
We are accelerating power brand sales through key innovation like what's twisters in Zap pins and introducing new on trend flavors for the on the board a dip like southwestern Bean and Jalapeno ranch as well as on the border queso tortilla chips amongst other innovation ideas.
And finally, we expect to deliver a strong holiday season with holiday item sales expected to grow versus last year as the traditionally strong holiday season for US was muted by Covid 19 in 2020.
Finishing our review of our retail sales data you can see by the recent four week IRI <unk> see trends that sales momentum is building with our power brands and the foundation brand performance is improving as well.
And finally before I turn the call over to Carrie I'll make just a few final remarks on our <unk> acquisition progress.
As a reminder, trucco also known on the border was our largest acquisition in the history of US and we closed on this on December 14th of 2020.
From an integration standpoint, many of our milestones on the on the border acquisition are being hit and the teams continue to work well together.
We are six plus months into bringing these two organizations together and we see opportunities abound for the on the border brand within our sales platform and this is amplified with the recent transition from a third party DSD distributor to the DSD distribution system for a number of states effective.
About a week and a half ago on August one.
We believe that this will drive even more future gains for the brand.
We both vertically manufacture and distribute this strong brand and we believe this will help to unlock even more revenue opportunities.
It is important to note that on the board of Tortilla chips have only a 50% ACB across the U S. And we are leveraging the US sales force and route to market system to drive increasing growth and unlock revenue synergies.
And we are seeing new distribution for on the border across multiple channels, such as grocery drug <unk>.
Convenience and dollar in our core geographies remain a big revenue opportunity.
For this brand.
As you will note on the accompanying chart. The two year CAGR for weak numbers show continued progress and growth with recent trends climbing into the 15 to 20 plus percent range on a two year basis, and our core as well as very strong results in both emerging and expanding.
Finally, we are driving manufacturing efficiencies within our vertical integration initiatives.
We recently in sourced some on the board of production into our Hanover plant with future plans to bring even more production into both Birmingham in the second half of 2021 and hand over in Q1 of 2022 to support the elevated demand and complement our current co man network.
Finally, we are also excited about the test introduction of on the border soft tortillas, which will be the testing in a subset of a national retailer stores as we believe beyond the border brand equity can expand into the growing $1.9 billion dollar software Tia market and we look forward to seeing the results.
In short we are very excited about the opportunities beyond the border brand will continue to bring to our portfolio across all of our geographies.
And now I'd like to turn the call over to Kerry <unk>, our Chief Financial Officer.
Karen.
Thank you Dylan and good morning, everyone in the second quarter net sales increased 23% to $297.9 million adjusted gross margin contracted to 35, 4% adjusted SG&A was consistent at 24, 3% of sales and adjusted EBITDA increased nine five.
<unk> to $35.7 million or 12% of sales.
As John mentioned earlier, our adjusted EBITDA performance reflects significantly higher inflation than we originally expected.
Well as higher marketing spend as we invest more in our power brands and higher public company costs in 2021 that didnt exist in the prior year given up towards a private company.
Finally, adjusted net income increased 39, 7% to $19 million and adjusted EPS was <unk> 13 per share.
Based on fully diluted shares on an as converted basis of $142 million.
As a reminder.
Our non-GAAP share count reflects the combination of total outstanding shares and assumes the net settlement of private placement warrants, resulting from our business combination with <unk> Creek Holdings.
Turning to our balance sheet and other key points.
At the end of the quarter, our liquidity remained good with cash and cash equivalents of $26.7 million and an undrawn revolving credit facility, providing liquidity of more than $130 million combined.
Note.
In the first half of 2021, we realized approximately $13 million in cash proceeds from asset sales primarily related to independent operator routes. In addition, we executed a sale leaseback transaction to recoup $13 million in cash from prior capital expenditures locking in favorable fixed rate capital.
<unk> financing.
Moving down the balance sheet net debt quarter end was $787.2 million or four four times normalized further adjusted EBITDA of $179.5 million and.
In addition, we completed a term loan tack on a $75 million and used the proceeds primarily to pay down our revolving credit facility.
In terms are consistent with the term loan financing we executed in January 2021, which was pricing of LIBOR plus 300 with no floor.
And just as a reminder, we previously used cash and the ABL to close the <unk> and <unk> acquisitions.
Finally capital expenditures were $10.8 million in the first half of the year.
And we expect this to accelerate in the second half of 2021 to support our productivity initiatives.
Moving back to the P&L for some additional detail our net sales growth in the quarter was driven by price mix of two 3% and acquisitions of 24, 2%, partially offset by volume declines of 3% and the impact of our Io route conversions, which reduced the net sales growth rate by 40 basis points.
The volume decline was primarily due to lapping significant growth in the early weeks of the Covid 19 pandemic.
Our pro forma net sales growth rate on a two year CAGR basis was six 1%, which was an acceleration from the first quarter rate of four 3%.
Moving down the P&L in the second quarter, adjusted EBITDA margins contracted by 150 basis points to 12% <unk>.
Decomposing the decrease in adjusted EBITDA margin for the quarter positive drivers include acquisitions of 180 basis points largely driven by trucco.
Price mix of 160 basis points.
Productivity improvement of 50 basis points in.
And SG&A, excluding transportation costs of 10 basis points.
Offsetting these positive drivers were headwinds related to volume of 130 basis points as we lap Covid 19, pantry loading from prior year.
And inflation of 420 basis points, which includes commodities transportation and labor.
Commodities inflation was most pronounced in cooking oils and packaging.
The higher transportation cost increases were largely due to higher spot market rates and contract freight costs. As a reminder, transportation costs, which are largely freight out are included in SG&A expense on our income statement and not in cost of goods sold.
While our margin pressure in the second quarter was worse than we expected largely due to a rapid rise in costs that cannot be hedged our pricing and productivity actions are taking hold in the second half of the year and we are confident our margin performance will improve.
To that end, we expect for margins to improve in the second half of the year relative to the first half.
Through the combination of higher sales volumes improved net price realization benefits from our productivity initiatives and additional cost actions, we expect margins to increase from 13% in the first half to between $14 five and 16% in the second half.
Looking at the quarters, we continue to expect third quarter sales to be the highest of the year and for fourth quarter sales to be lower than the third quarter, which is in line with typical seasonality.
From a profitability perspective, we expect third quarter margins to be at the low end of the second half margin range in fourth quarter margins to be at the high end of the range. This reflects the building benefits of our pricing productivity cost actions.
We believe will carry forward to fiscal 2022.
And I'll note that fiscal 'twenty, two will also benefit from $7 million in unrealized cost synergies from our recent acquisitions.
Furthermore, our acquisition pipeline remains active and robust as I can remember during my tenure at ups.
We will continue to prioritize opportunities that are accretive and multiple enhancing.
From a financial policy perspective are consistent with our long term target net leverage ratio.
Now turning to our full year outlook and expectations for the second half of the year.
While demand remained strong and we are on track to deliver our sales targets. We are adjusting our full year adjusted EBITDA outlook to reflect higher than planned inflation.
The very challenging environment, our teams across our manufacturing plants and logistics network are doing an incredible job delivering for our customers, but unfortunately, it's coming at a higher cost than we anticipated. This.
This was primarily due to higher inflation and unhedged cost, which include certain commodities as well as transportation and labor.
Our original expectation for commodity inflation was 4% to start the year.
But given rising prices for the 20% of our unhedged commodity positions and higher inbound transportation costs, we now expect 6% commodity inflation for the year in.
In addition, we now expect higher outbound transportation costs and labor costs, given the challenging industry wide supply chain dynamics.
That being said, we are aggressively taking steps to manage our higher input costs as Dylan mentioned, while our pricing and productivity initiatives are well underway and on track. The benefits are lagging the near term cost pressures and as a result, we are lowering our full year EBITDA look to reflect this incremental inflation.
To put this into further context in the second half of fiscal 2021, we expect higher year over year inflation of between 30% to $35 million.
When we compare our second half 2020 further adjusted EBITDA of $92 million that is pro forma for recent acquisitions to our second half 2021 implied guidance range of $86 million to $96 million, we are nearly or entirely offsetting this bucket of higher inflation we.
We are doing this through a combination of higher sales volumes improved price and mix.
Productivity initiatives and lower SG&A.
We expect this pricing and productivity will have a meaningful carryover benefit to 2022.
And we'll provide a strong baseline upon which to layer incremental pricing and productivity to drive margin performance in fiscal 2022.
Bringing it altogether, excluding mosquito we continue to expect full year 2021, net sales to be consistent with 2020 pro forma net sales.
As a reminder, our 2020 pro forma net sales is on a 52 week comparison basis assumes we owned <unk> Anderson and <unk> on the first day of fiscal 2020, and assumes 20 million of net sales for fitness to aligned with expectations for fiscal 2021.
We continue to expect modest organic sales growth year over year, even as we lap fiscal 2020 organic growth of over 8%.
And pro forma sales to grow about 6% on a two year CAGR basis, which is above our long term growth outlook of 3% to 4%.
Moving to adjusted EBITDA, We now expect a range of $160 million to $170 million versus our prior expectation of $180 million to $190 million and.
And adjusted EPS of <unk> 55 to 60.
Versus 70% to 75 previously.
Turning to our additional assumptions on slide 22 of our earnings presentation, you'll find a detailed list that supports our 2021 outlook. Notable assumptions that have changed include raising our commodity inflation to approximately 6%.
Increasing capital expenditures to $40 million to $50 million to accelerate high return on capital projects to drive our productivity efforts.
Lowering our effective cash tax rate to 17% to 19% due to tax amortization of bonus depreciation from the vendors with the <unk> acquisitions that were asset deals for tax purposes.
And the tax benefit from equity awards in 2021.
Finally, we are raising our net leverage ratio range to approximately four to four five times by the end of 2021 to account for acquiring proceeded with debt and reduced adjusted EBITDA look I'd now like to turn the call back over to Dylan for some final comments.
Thank you Kerry as we wrap up our presentation I would like to conclude my remarks with a few high level summary perspectives to share <unk>.
First off as always thank you to the 3000 plus associates for the incredible efforts put forth to deliver for our customers and our consumers in such a challenging environment.
Second we are encouraged by the fact that our power brands continued to drive strong two year CAGR sales growth and that they are becoming a larger percent of our total retail sales each period and momentum is building.
Third while we continue to manage through a challenging input cost environment, we are pulling as many levers as possible to offset these costs importantly, we are doing so with a long term mindset and we remain laser focused on enhancing our customer relationships driving distribution and building our brand equity.
Fourth we know that an important leg of our value creation strategy is M&A and our pipeline remains robust with many actionable and accretive opportunities.
And finally, our long term organic outlook remains intact for both topline and bottomline growth and we remain well positioned to deliver value for our shareholders.
And now I'd like to ask the operator to open the call for questions.
Thank you and then as a reminder, if you wish to ask a question. Thank you Brad Thorn then the number one and your telephone keypad. Once again is that a star one on your telephone keypad.
First question is from the lineup.
<unk> <unk> from Oppenheimer. Your line is now open.
Good morning, Thanks for taking my questions. So starting out with cost pressures I wanted to get a sense of whether you think you've maybe captured more of a worst case scenario on the cost front for the balance of the year and if you look at your key commodity and transportation cost pressures any signs of them starting to level off at this point.
It's Kerry thanks for the question.
I think we've been prudent in our outlook for the year.
In terms of capturing what we are seeing the commodity and transportation and labor.
I think from that perspective.
As a prudent outlook.
And then the second part of your question. If you don't mind repeating it yes have you started to see any relief on the commodity or a transportation cost front at this point, we'd have they peaked and started to come in or is it what type of environment are you seeing right now.
Still very fluid I mean, I think from a transportation perspective.
There certainly is a demand and supply issue in terms of drivers and trucks relative to how strong. The overall economy is so I think that that remains a fluid situation and then from a commodity perspective.
The levels right now are our.
Still elevated relative to historical standards.
We're doing the best we can to to make sure we have enough.
Enough commodities to supply our demand and our demand remains strong. So the team is working hard and making sure that we're protected as well as we can be from a margin perspective.
Okay, Great and then maybe just a second question just in terms of EBITDA margins. So I know earlier. This year you guys saw 60% EBITDA margins would be the baseline for the business now.
Now it seems like this year, you'll probably end closer to I think around 14% for the full year.
Is the expectation that now you will grow off of this lower 14% base or is there a potential for maybe a sharper rebound next year as we start to see more benefits from pricing flow through.
Yes look I think it's too early to call 2022, right now what I will say is from a long term perspective, the margin upside story is still very much intact here.
We expect.
To grow next year, we expect significant benefit from the pricing and productivity that we're putting in place this year, which were only capturing a partial year on there'll be a meaningful carryover benefit.
And that will be higher next year, and then we will layer on incremental pricing and productivity next year. So 2022 from that perspective will be much higher than 2021.
And from a synergy capture perspective.
There is at least $7 million of acquisition synergy.
Will drop in 2022 relative to this year, so from a demand and pricing and productivity and synergy perspective, we're in a very good position I.
I think the situation.
The variable is commodities and though we just need more data points on where those come in at as we get closer to the end of the year, but long term that the.
Martin storage still.
Still very strong.
Okay, great. Thank you I'll pass it along.
Your next question from the line of Michael <unk> from Piper Sandler Your line is now open.
Thank you good morning.
Good morning, Mike.
First question just wanted to understand how you think about the portfolio a little bit.
Yes.
Got two parts first just when you think about it.
Seeing emerging in expansion outpace your core geographies that you've called out the foundation brands aren't that good.
On the just foundation reverses power brands piece I guess the first question is would it be right to assume that that's precisely what you're aiming for and comfortable with in terms of how it evolves you want these power brands to get more national.
Some of the foundation declines in the core part of that that that's a little bit all by design. So I guess, one is that right and then two to the extent that good health is another.
Another piece of it can.
Can you just give us a sense of the trajectory you expect there.
How much income stabilizer for pads.
And they might look like.
Sure Hey, Thanks for the question. This is bill and I will take that.
Well I think youre exactly right.
From a from a very broad perspective, our strategic.
Direction is to grow our power brands right those are the national book.
Mike.
Like on the border like SaaS.
The national brands that we can take on a national basis.
We noted the growth and expansion in emerging versus the category four to 500 basis points and that's a lot of the white space opportunity that we see that we are gaining as we go across the country into different geographic areas and these aren't just new areas that we went into the <unk>.
Two or three months or the last six or nine months. These are areas. We've been in for a couple of years, but it takes a while to kind of get the engine going and some of those especially as we're introducing new brands and part of that process and part of our strategic process.
We are acquiring in many cases brands for their infrastructure for their routes for their operations a lot of the strategic process. There is to convert that over time from foundation to power, but it doesn't happen overnight. So we're very long term oriented in our thinking.
Good health.
That you cited.
As an area of opportunity for US we've noted it before we bought it in 2014, we did a lot of renovation that brand group.
Extra ordinarily for.
At least four years to five years last year during Covid and kind of got a pause as people were prioritizing other brands will took a hit we're rebuilding it but if we look at like a 52 week when we compare it to.
A 12 week or 13 week, and then when compared to the four weeks, we're seeing progress.
Doing a lot of work to renovate that brands.
So really get into the insights behind.
What makes it what it is today as a brand and how we can build on that and how we can innovate around that so theres a lot of work happening there, which is positive and will play out very long term and as we look at our core and we know that foundation is a drag on the core there are a lot of brands that we've acquired and we're just taking the long view on China.
Those were doing a lot of infrastructure.
Change in our core markets, we're investing in distribution centers and people.
<unk>.
The bones basically the foundation of those operations very much for the long term.
Part of that is converting from raw salespeople data put an operator, that's well underway. So theres a lot of things that are happening that are improving that core.
Of course as you noted the emerging expansion is growing as well so we're starting to see trends improve we're looking forward to it.
You'll note there is the <unk> brand, which is a power brand is exploding in our core and so that will also contribute to sort of the overall long term benefit of our brands in the core too.
Okay, that's great really helpful color and just one more on inflation.
Sorry, if it's just some of the math I haven't gotten that play with enough, but you call out on slide 18, the 420 basis points headwind in <unk>.
But then on slide 19 call out the 100 basis point headwind.
Headwind.
Two H and it looks like that's growth of price and so I guess I'm just curious.
Headwinds have moderated and am I reading that the right way or is there some other way to reconcile those.
Yes, we are comparing.
Impairing two different things Mike So on page 18, we're comparing Q2 of 2022 Q2 of 2021.
And then on page 19, we're comparing the first half of 'twenty one to the second half of 'twenty, one right. So it's apples and oranges in terms of the.
The periods, we're comparing.
Yes, sorry, I missed that okay. Thanks, so much.
Yes.
Your next question is from the line of Andrew Lazar from Barclays. Your line is now open.
And this is Max on for Andrew on a two year CAGR basis, while your power brands continue to outpace the southeast snack category and it did lag the category again, the core markets. So.
So similar to last quarter, you called out that begin health brand was the contributor to this GAAP and.
And you've addressed your progress on that front, but could you walk us through any other key drivers of the GAAP, maybe provide a bit more color on the targeted set of actions.
To improve core market performance on the call earlier.
Yes sure.
For the recovery.
Yes sure Matt This is bill and again, it's very similar to the answer.
The explanation behind.
Michael's question around.
Core.
Two thirds of the GAAP between <unk>.
Category growth and.
Our growth in the quarter is attributable to a foundation and good that's a that's a story that existed in the first quarter is still exist in the second quarter and I think what we had indicated before is that it doesn't happen overnight right and so we're really taking what we want to do is we want to create the long term view of what builds the best infrastructure for sales growth for the long term.
So part of that as we described is renovating good health I think we have seen where the.
The four and 12 week numbers in good health are much better than the 52 week numbers works when we start seeing that improve as we go through the year and that will improve as we invest behind it.
Marketing and our branding and an innovation perspective, but those things don't happen overnight, but we are definitely working on them. The foundation as we migrate from foundation to power rate as we make that transformation from taking something which may have been an acquired brands and we need to discontinue it and then we need to replace it on the <unk>.
Well for the power brands and then we need to make the power brand can hold a lot of that is heavily weighted to the core.
With those foundation brands, a little bit heavier than on a national basis. So thats.
It's an effort that is in place and if we think about the independent operators and we were moving from RSP to independent operator in our core markets. The infrastructure that we have to invest in our core markets to have very similar.
Positive systems in place to get products from manufacturing to the.
Stores, a lot of that's happening in the court one of the metrics that I mean, I do know that we speak a lot about the core but I think I think a 100 basis points in the core for the quarter.
Relatively about one $5 million to $2 million of retail sales for the quarter. So it's not immaterial and it's not something that we are not concentrating on but it is not necessarily a very large percentage of our overall revenue that occurs in any given quarter.
Great. Thanks, very much for the color that's it for me.
Your next question is from the line of dealing shutdown from TD Securities. Your line is now open.
Good morning.
Good morning.
Just wanted to talk a little bit more about I know youre, not giving guidance on 'twenty, two but you made.
Strong statements about the recovery on margin in 'twenty, two and just maybe you can help us understand is that just because you're going to have favorable comps in the pricing will fully caught up do you expect commodities to ease or input costs ease where you could actually have a cushion on 2019 levels or just trying to understand.
<unk>.
How we should be looking at especially that first half is it just.
More of a recovery if things are finally, catching up or where you really have some tailwind.
Thanks for the question Bill. So so I think it's too early to call 'twenty two right now what I was speaking to was though the things that are within our control and that we're putting in place to really drive long term margin growth. So.
Obviously as we grow this business, we grow margins because we're leveraging fixed overhead. So we expect to grow next year right the volume trends.
And the customer.
Wins in the top line momentum is strong. So we have we have a good view to 2022 revenue growth.
And then on top of that the pricing and productivity were putting in this year, we're not capturing 100% of that this year. So there is a big carry over benefit next year, and then we always layer on incremental pricing and productivity. So next year from a pricing and productivity perspective.
We will be we will be much higher than this year and then we expect good pull through on synergies. So the variable that I noted earlier on another question was really commodities right. So we'd have to see where.
I'm on and even delivery and labor inflation comes in and it's too early to call, but the topline and the things we can control from a productivity.
And pricing perspective will be I think strong next year and I think long term. The margin story is still very very strong because at some point commodities and inflation will correct right and at that point in time all of the levers we're pulling right now in terms of driving the top line driving pricing driving productivity.
Are sticky and so.
Margins will benefit from that.
Especially as the commodity environment improves.
Hey, Bill this is Dylan.
Just coming a little bit over the top on that thanks for the question.
Based on 25 years of being in the snack food industry and seeing commodities.
Over the decades, we've been here before we've seen.
<unk>.
Huge increases in underlying commodity.
Our prices, we then kick into gear with price increases with price pack architecture weighed out.
Rationalization of.
Of the marketing of the spends the trade we come in with a whole bunch of our weapons to basically offset that but there is a lag behind that so I think if anybody sat here and thought that something like.
Corn oil would be up.
50, 60, 70, 80% it was very hard to see that coming for many of us, but we had the weapons in place once we put those weapons in place once we take the weight outs and we take the pricing.
It does have a long term sticky benefit that transcends.
No not even just one year, but insurance for a long time as hopefully the inflation debates itself over time as it normally has in the past.
Got it so just to be clear you youll see it completely a lag not a price ceiling you have versus the peers.
Yes, that's the lag.
Second and maybe you can help me a little bit.
I'll give this question a lot on the geographic expansion.
The court.
Fundamental story is.
You are not a national brand theres, so much opportunity.
Obviously on the border helps.
I'm a national footprint. So maybe can you help us understand where youre seeing.
Geographically some of the biggest gains right now.
<unk> West is it.
Southeast stuff like that and then why that's happening and what gives you such confidence.
Hey, after we get to a certain share of 10% share in the market then it takes off or after we've been in three or four years it really expands.
You've seen this so I'm just trying to understand.
It's a big big opportunity, just how you kind of map it out.
Yes, and you nailed it thank you.
The areas of the southeast I think we've talked a little bit about earlier in the year, where we are.
<unk>, a third party master distributor back in Central Florida, We took that over that area has been.
<unk> tremendous growth for us long term I need to just think about the migration of people from the mid Atlantic and East Coast northeast have moved into the southeast Carolinas through.
Atlanta.
All of the southeast areas are really high growth areas for us where the brand transcends. The brand is known and like you said it doesn't happen overnight.
Once the flywheel started it begins to occur in.
And build upon itself, we're seeing tremendous growth in Texas, we're seeing tremendous growth.
The Midwest our expansion there into Chicago with the acquisition of the <unk>.
As just a starting point for us entering one of the largest salty snack markets in the country and we spoke about going after large.
Our policy in areas with a lot of individuals' a lot of consumers for us to go after that is an area that we've seen tremendous growth and so if we were to pull up the the IRI and the retail share data in Chicago and the <unk>.
Midwest and we see significant growth, there and really into the west like ourselves.
GAAP with the marketing spend right.
Being the second largest platform and salted snacks in the United States from an IRI retail share perspective, we're trying to invest behind that with a very long term lens on on growth and opportunity because we really do think that theres just the abundance of GE.
Graphic areas that we can grow into.
No that's great color. Thanks, so much sorry for the long questions.
Thank you.
Your next question is from the line of Wendy Nicholson from Citigroup. Your line is now open.
So Abigail Lake on for Randy.
First question is just on integration. So can you comment on how the integration of their recent acquisition is going so far and then how does this kind of impact when we will have the operational bandwidth to take on another acquisition.
Yes, let me start with the first half and then I'll, let karri jump in on the second half because he is intimately involved in M&A and will be even more so in his new role new role post October but.
From an integration standpoint, if you really think about it we have.
We acquired <unk> Anderson in November of 2020, we acquired on the border in December 2020, we acquired <unk> in February of 2021, and we acquired first data in June of 2021. So we've done a lot of acquiring and were very good as a team at integrating these acquisitions.
<unk> into our company.
I'll start really quickly on <unk>.
While you always have sort of a little bit of a dip in the beginning as you rationalize the portfolio you rationalize the Skus now we're really starting to see that momentum pick up and if you look the recent four and 12 week data on that brand is growing.
Growing tremendously as we sort of cleaned up some of the legacy things that needed to be done there for long term growth.
On the border we put a whole page on page 13, I think you can see the highlights there we're doing everything right in our minds there it's growing tremendously it's growing in our core is growing and expansion.
We're vertically integrating some of the production to take cost out as I mentioned, we bought first data, which will allow us to unlock even more future demand because that's a big that's a big issue right. We have more demand for that brand that actually we could produce and we're fixing that through vertical integration as we mentioned with two lines coming on to handover and.
The next six months one already in place.
Where the new opportunities in Birmingham to make that brand and as well as the <unk> data and what we're unlocking there in terms of new capacity, so that's going along quite well.
There's we're seeing great results, we acquired that in February we've integrated the back end of the.
<unk> side of that business a few months later.
We're continuing to see expansion of sales and share there.
And we're continuing to look at ways that we can invest into that market even more.
To expand our sales operations, there just because I think thats a tremendous.
Market for Us, we're seeing really good results for our brands. There. So I think overall our team is really good at it.
And we continue to look at it and I'll, let Terry speak maybe just a little bit about the future M&A in the the bandwidth that exists there from the team too.
Yeah. Thanks, Marilyn Yeah look I think I think the organization.
Physician integration plans already laid out the $30.6100 day plans already laid out and all of that funnel through our <unk>.
And then we meet on a regular basis.
Every month to make sure that we're on track and we're doing what we said we would do so so we've got the <unk> teams experienced the PMO office the process.
And I think we take great care to make sure there is consistency in execution right.
The true protein that is running the business the random business before acquisition is still running the business today right. So we make sure that we don't do anything to mis execution from a from a sales and cost perspective, and then as you know from.
From a go forward perspective.
I'm pleased with our M&A pipeline today as I have ever been I think theres a tremendous opportunity set.
Acquisitions for us down the line.
And as I move into a CLO role in October and we'll have even more bandwidth to help shape and drive that M&A opportunity and and when things do happen.
Sure we are integrating those in the best possible way.
Yes.
Right.
And you kind of segue then my one follow up question just wondering what kind of prompted the changes in the management structure are there any other organization.
Changes that you think you need to make sure that does.
Maximize the new changes.
Yet our Abigail this is bill and I'll take that thank you.
First of all I'd say, we're really excited about the changes that we've announced.
Kind of go back in the history of time slowly as we built out our executive leadership team, we took on Kevin powers in our Investor Relations.
Doing a fantastic job there, we recently hired Teresa Shay as our general counsel Onboarding and in boarding those functions. So that they are very closely connected to the team.
We promoted Jim Managua LINTA achievement.
People officer role and more importantly, and more near term coming up in October with Cary and I have worked together since 2016.
Literally every every single day on so many aspects of our business right. We acquired Golden Flake in 2016, we acquired invention in 2017, we acquired the Conagra DSD snacks in 2019, we acquired <unk> I mean, we've done a lot of things together to build value for.
For the company and he is a fantastic.
Individual with immense.
The immense amount of knowledge, especially in value creation.
Project management, and M&A and Treasury activities. So we're very excited to just walk us.
Our focus on those areas of our business as we go forward, which are going to be very important in all of these are so <unk>.
Also very excited that J, who has been here for four years. Since 2017 again is a fantastic background public company background accounting background finance background, Giovanni Pepsico and.
It has been learning and has been an integral part really of all of those acquisitions since he joined integrating them standing up our ERP overseeing and running our it department as well So Jay has a fantastic lead in for that that's really all sort of part of the.
An orderly natural progression and so as I sort of look forward into October until the latter half of 2021 and preparing for 2022. It just it feels like we've got a really good team in place.
Putting people in the right places with the best outcomes and we really look forward to what that means for the business going forward.
That sounds great. Thank you.
Your next question is from the line of Robert Moskow from Credit Suisse. Your line is normal thing.
Thanks for the question.
My perception is that high.
Snack companies have not had to cut their guidance as meaningfully as you have.
Kellogg model East Frito lay and alike, and Youre not alone in terms of having commodity cost inflation.
So I guess my question is like do you think that.
Sure.
The size of the business in relation to the big ones as part of the reason for that difference is it is a little more expensive for you to get access to.
Freight routes and are there are there lacks of of scale in purchasing.
Because this is visit a big cut and.
Maybe the other ones. The other companies are on their way to doing the same thing, but I'm just wondering if scale makes a difference here.
Yes, Rob good question and it is hard for it's hard for us to comment on.
What other companies do or don't do I mean, certainly scale and we've always said scales tremendously important in snacking. So.
It's possible, there's a scale benefit there, but I think I think we're executing well.
I think what we've seen in terms of I mean, the Q2 supply chain.
Honestly is a different animal than the Q1 supply chain.
As as Covid cases dropped in the economy opened up there was a huge spike in demand across all inputs right. So.
Transportation and delivery.
Spike you've got labor Spike so we're having to pay more people more money to support the demand, we're having to pay more for for freight and an freight outright and trade in as part of the pressure in commodities.
We have to pay more for delivery and fuel.
In order to get the ingredients to make make sure. We can support demand. So the pressures. We're seeing I think are unprecedented I think we're doing a good job executing but tough for me to compare ourselves to other people.
Okay.
And I know, it's too early to look at 2022, but I guess two questions. There are you, saying that the pricing actions that you've taken now fully cover the inflation that you've seen so far and therefore, you have a chance to get back to your prior margins in the first half of next year.
Because I think you also.
There is more pricing that needs to be taken.
So does that mean Youre also are you still trying to catch up in the first half of 2022.
Well it depends on it obviously depends on the inflationary environment, we see next year the pricing that the simple carryover benefit the run rate exiting this year, obviously is going to be higher than what will actually hit our P&L. This year right. So so the carryover benefit is material and then we will put incremental steps of.
Our pricing on top of that so in productivity as part of it too as you know our productivity is going from 1% to 2% and that will increase meaningfully next year as well. So so the total dollars dropping to the P&L next year in pricing and productivity will be meaningfully higher in 2022 than they are in 'twenty one.
Obviously the only.
Variable then is what inflation is doing.
Okay, and do you have any kind of.
Way of helping us know whether youre still on track with your your original like core business profitability EBITDA outlook.
Rented priest back.
I would say obviously the you.
You can see our margins.
Or in the 14% area based on the most recent guide.
But long term the margin story is unchanged in my opinion right because because of all the things I mentioned before.
Our revenue growth pricing productivity and then.
We're just unprecedented inflationary environment in commodities and inflation will correct right we saw correct.
Back in <unk>.
<unk> hundred nine and when that happens.
The topline usually continues to grow and you have any.
A really nice benefit on a margin basis in terms of the jump. So so long term, we're still as bullish as we ever were on the future margin opportunity is just we're experiencing.
Unprecedented inflation and we do see it as transitory long term.
But it's hard to gauge the timing.
Okay. Thank you.
Last question is from the line of Ben Bienvenu from Stephens. Your line is now open.
For me the.
First on pricing and kind of piggybacking on Rob <unk> question, you are taking pricing in the back half of this year.
It sounds like there'll be some more.
Pricing actions early next year.
Does anything about that impede your ability to grow your brands long term I suspect not because it's a relative dynamic and others are raising price as well, but how do you think about demand elasticities that you expect to encounter.
We entered this.
Higher pricing environment.
Yes, Thank you Ben.
The snacking category is a fantastic category to be in rate. It continues to grow as you know year in year out and it just has for for such a long time.
The ability to take pricing we are in a very rational category. There is a leader in the category for the large percentage share of the category. It is not a.
Yeah.
The pop to the lowest price.
It is a rational category with rational pricing and as we take the pricing and we have to be very cognizant of what their pricing is we have to think long term. We don't want to do things that are only short term in nature that gives us a one quarter benefit right. So we're very.
Cognizant of what the changes are amongst our competition.
We are able to quickly follow in most cases.
Make the changes to our portfolio as well this year I think we've touched to 70% to 80% of the skus in our portfolio with pricing and price pack architecture, and what we've seen is that being in a rational category.
That's a long term benefit it does not go backwards.
A year or two from now and what we have seen and I mentioned it earlier in 2008.2009 as as the commodity pressures.
Updates and normalize over the long term trends, we have a lot of stickiness in our pricing that helps us and carries us through so.
I don't think anybody could have predicted the amount of inflation that exists from corn oils to fuel.
Apply issues around <unk>.
<unk> based products like film.
That existed out there, but we've got a 100 year history of working through this we have a great team who is very.
Adept at making the best of even challenging situations and we're going to continue to try to drive long term value for the brand via pricing via price type of architecture and continuing to invest in the brands to long term I think it'll be beneficial to us long term and sticky in nature.
For our overall brand equity.
Okay makes sense My second question is.
Appreciating the fact that it's too early to make a call on fiscal 'twenty two around.
The cost outlook, if we think about that.
Back half guidance that you provided an update for this morning, how much certainty versus uncertainty is embedded in that new outlook, meaning if we get <unk>.
Cereal moves higher in corn oil in the back half of the year, how exposed to that would you be.
And maybe to the extent you can talk about the buckets of cost where you are more or less exposed to that would be helpful.
Yeah, I think the guidance, we've given is prudent and we are mostly covered on commodities for the year. So.
I think from that perspective.
We're protected.
Okay, great. Thanks.
That's all the question that we had in need that this concludes today's conference call. Thank you for attending you may now disconnect.
Okay.
Okay.
[music].
Yes.