Q3 2021 UTZ Brands Inc Earnings Call
Yes.
Thank you for standing by my name is Brent and I will be your conference operator today at this time I would like to welcome everyone to the O expand incorporated third quarter 2021 earnings Conference call.
Lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
I would like to withdraw your question press the pound key it is now my pleasure to turn today's call over to Mr. Kevin Powers head of Investor Relations. Please go ahead.
Okay.
Good morning, and thank you for joining us today on the call today are Douglas <unk>, Chief Executive Officer, a J Qatari, our chief financial Officer, and carried of our Chief operating officer.
Yeah, Linda Jay will make prepared comments this morning, and all three will be available to answer questions. During a live Q&A session.
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.
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 risk highlighted in the company's press release issued yesterday 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'll highlight certain non-GAAP financial measures.
Our earnings release also presents the comparable GAAP numbers to the non-GAAP numbers provided and reconciliations of the 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 us as Investor Relations website.
You may want to refer to these slides during today's call. This call is being webcast and an archive of the call will also be available on the website and now I'd like to turn the call over to Doug.
Dylan.
Thanks, Kevin and good morning, everyone and welcome to our third quarter earnings call first off I'd like to give a special welcome to our recently promoted CFO Jay Qatari I'll, let Jay joined US in 2017 with a strong public company financial background and a great amount of experience with several CPG companies they've worked.
Direct Lee for our Chief operating Officer Carey Devor over the last few years and I am excited to have them fully into the CFO role now.
Thank you to both the J and Gary for such a well planned out transition.
So let's get started this morning with a few key messages.
Demand for our brands remain strong and our two year sales growth is accelerating as we continue to lap the elevated consumption impact from COVID-19, pantry loading in 2020 with improved strength in our core and significant growth in our emerging and expansion geographies.
Our IRI retail sales outpaced the salty snack category on a two year basis with our power brands significantly outpacing the category with strong performance across all retail channels.
On a longer term basis I'm also happy to report that our national expansion continues.
ACB growth of around 600 basis points over the last two years in total points of distribution gains of approximately 22% over that same time period.
We expect that these trends will continue into the future as our team consistently builds out our national presence.
Like most of the industry gross margins in the quarter were impacted by rising inflation, but our pricing actions and productivity initiatives are underway and on track and continue to build as we exited the year with a carryforward benefit expected into fiscal 2022.
As I'm sure you can imagine after 26 years of being at ups and as CEO for almost a decade.
<unk> proud of our incredible associates as we celebrate both our 100 year anniversary as well as our first year as a public company. We remained very focused on continuing to think long term and we continue to deploy the value creation strategies that have enabled us to succeed for so many decades.
To that end I'd like to take a minute to reflect on our progress this quarter against these strategies.
We took this incredible company public with the goal of building a fast growing profitable national snack food platform, and we know that delivering on our long term value creation strategies is the path to achieving that vision.
If we are successful in this we will deliver long term results for all of our stakeholders our associates, our customers our loyal consumers and our shareholders. It will lead to better opportunities for our team as we continue to grow better terms on the shelf and traffic for our retail customers as well as continuing to.
To deliver the absolute best tasting snacks to our consumers.
If we can do all of this will create significant long term value for our shareholders. So on that note, let's check in on how we are performing against our core objectives.
As a reminder, our foundational core value creation strategies are.
To reduce costs and expand margins.
To reinvest some of these savings to accelerate revenue growth and to continue to leverage our platform and core abilities to make strategic acquisitions that add value to our company.
Let's start first with reducing costs and expanding margins.
We made good strides in the quarter to help build the foundation for a more advantaged margin profile in the future.
We are pushing hard on our productivity programs, which are focused this year on continuous improvement and automation across key manufacturing processes and we remain on track to deliver about 2% productivity this year.
Productivity will continue to increase as we ramp up investments in higher ROI projects.
In addition to deploying capital for these initiatives, we have several continuous improvement and process related projects that will drive productivity that don't require significant capital and we are hiring even more talent in engineering and productivity as we enhance and invest in our capabilities across our entire supply chain optimization efforts.
In addition, moving from company owned routes to independent operators as a continuous strategic initiative for us as well.
That entrepreneurial mindset to be pervasive across our entire DSD network and we continue to make progress every single quarter.
To that end, we converted approximately 42 routes in the quarter and we remain on track to convert approximately 200 routes. This year, where their continued long term goal is to be 100% converted to independent operators around the middle of 2022.
I'm also happy to report that for the first time, we have grown our DSD route base to over 1800 routes, which includes approximately 60 new routes. This year, which we continue to believe is a very important part of our competitive advantage in the industry.
The path to higher margins is also underpinned by our price pack architecture initiatives, which includes better trade management and higher net price realization.
Trade management will benefit from improvements we've made in people process and technology, including standing up a new trade management system as part of our new ERP.
On net price realization, we have been taking pricing actions throughout the year in response to the higher inflation.
Our entire supply base.
And while there is a natural lag the pricing benefits are starting to really build as we expected and price mix improved to a four 2% contribution to year over year net sales growth in the quarter.
That will continue to move even higher in the fourth quarter, but it's still lagging the continued cost increases that we're seeing.
Next year as the carryforward benefits of pricing actions build.
We will be better positioned to offset inflation increases.
More pricing already lined up for Q1 of 2022 and if costs continue to rise we will take even more price.
Luckily, we believe in the strength and the quality of our brands, which allows us to continue to price accordingly into the future.
Finally, as our sales mix shifts more to power brands. This will further help in improving our margins.
Power brands today improved to 87% of our retail sales up approximately 200 basis points from this time two years ago.
As part of our plans this will continue to build to an even higher percentage as we go forward.
Our next strategy is reinvesting to accelerate revenue growth. The key objectives remain in place and are accelerating our power brands, expanding our distribution and underpenetrated channels, continuing our geographic expansion and in increasing our presence in key salty snacks subcategories.
We have made tremendous progress across each of these objectives in the quarter as our sales growth continues to accelerate and we delivered two year gains across both the mass and C store channels as well as our expansion in emerging geographies and we increased our presence and share in certain sub categories, most notably tortilla chips.
I'll expand on these areas a bit later in my remarks.
Finally, we continue to execute on our goal of making it effectively integrating strategic acquisitions two weeks ago, We announced our latest acquisition of RW Garcia a family owned and operated artisan maker of high quality organic tortilla chips crackers in corn chips RW Garcia has significant production capacity to support the growth of our <unk>.
<unk>, which will position us better to serve more demand and being more efficient in doing so further RW Garcia products are non GMO verified certified gluten free low sodium and free of artificial additives or preservatives, which we believe long term will bolster our better for you portfolio and will upon.
<unk> bring our platform wide sales in the better for you category to around $100 million on an annual retail sales basis.
From a financial standpoint. This is a highly accretive transaction, where we will pay five seven times adjusted EBITDA, assuming run rate cost synergies that we have a clear line of sight into.
We look forward to closing in December of 2021, and welcoming the <unk> team and their capabilities into the <unk> family.
Beyond the RW Garcia signing of definitive documents announcement, we completed four acquisitions since going public in late August of last year.
Our team is incredible at this and I'm happy to report that all of the integrations are going smoothly and we are on track to deliver against our topline and bottomline targets.
Our team has a proven M&A playbook, that's been actively deployed over the last decade, and I'm happy with our progress year to date and in the third quarter.
Turning to the financial results in the third quarter net sales grew over 26%, which reflects the positive contribution from our acquisitions as well as organic growth of 1% or 2% when you adjust for the impact of our Io Rod conversions.
I'll note that this quarter, we returned to year over year organic growth as we expected and this was on top of our 10% organic growth in the third quarter of 2020.
Importantly, our net sales momentum is building and our pro forma two year CAGR of six 4% is an improvement from six 1% in Q2 and four 3% in Q1 and we based on what we're seeing in October we expect this trend to continue in the fourth quarter.
In addition, adjusted gross profit grew 13% and adjusted EBITDA grew 17% as margins were impacted by the key input cost increases that I described earlier.
Shifting to our IRI <unk> retail sales results for the period ending October 3rd we are happy to report the two year CAGR share gains have happened for both our power brands and the entire <unk> platform.
Our two year CAGR share growth rates continue to accelerate driven by our power brands. This is part of our long term strategy. As described previously as we move our portfolio into a tighter more responsive brand portfolio over time.
Our power brands gains are outpacing the category on almost all metrics and our foundation brand performance is getting better but it still reflects our emphasis to focus on our power brands as well as some of the negative impact on foundation brands, when we execute our M&A strategy.
Additionally, our ongoing SKU rationalization focus is mainly on our foundation brands, which is consistent with our long term strategy, but as obviously heightened in this environment as we look to simplify our portfolio.
We believe that these great retail sales results are proving that the <unk> brands can and will continue to grow off of the higher level of sales from the COVID-19, driven consumption trends of 2020.
Turning to our growth drivers in the quarter, our total <unk> portfolio gained share across four of the five major subcategories that we track and we gained share in salsa and queso as well.
We continue to increase our presence in key salty.
Snack sub categories with share gains on a year over year basis, and tortilla chips, pretzels cheese and solve the queso and on a two year CAGR basis, we grew 8% in potato chips versus a subcategory of $5, one and 17% growth in tortilla chips versus the subcategories.
<unk> of seven 6%.
It is truly great to see our two largest subcategories and dollar sales are growing and are taking share.
As a reminder, at this time last year, our presence was nearly nonexistent and tortillas and today, we have a four 3% share and we are the number three brand in tortillas due to our acquisition of on the border in December of 2020, as well as the continued growth of our tortillas brands.
In the quarter, we continued to make great progress driving geographic expansion, while also executing to improve the performance in our core.
We grew 13, 3% an expansion and 14% in emerging geographies outpacing the category by about 400 bps and 500 bps respectively.
There is no doubt that our brands travel very well beyond our core and it's exciting to see our continued successes as we outpaced the market consistently and these white space geographies.
In addition, I'm happy to report that in our core our two year CAGR doubled from two 9% in Q2 to five 7% in the current quarter.
Our foundation brands as expected had less of a negative impact on our growth and our <unk> brand strength continues to improve.
Moreover, on the border growth remains robust with a two year CAGR of over 26% and our core with broad based strength across every channel.
To that end as we mentioned last quarter, we transitioned our primary DSD distributor for on the border in certain key geographies to us in August and we are seeing very positive results.
Congratulations are due to our team and to our distributor partners for really embracing this wonderful brands and driving such great growth display space and sales.
We are also leveraging the <unk> platform to not only drive increasing sales growth, but also to increase the supply of product to meet this ever increasing demand for on the border with a new production capabilities that have been installed as well as the benefits from our acquisition of this data in June of 2021 that has unlocked even more supply.
Seeing as we acquired on the board of less than a year ago in December of 2020, I couldnt be more pleased with the long term value we are creating for the platform with beyond the border brand.
And finally from a channel perspective in the quarter, we gained share in almost every channel.
Importantly, we had been lagging the mass category throughout the year and we committed to you that the gap would narrow and that performance would improve.
In the quarter, we returned to strong share gains and significantly outperformed the category due to space gains in phenomenal execution by our team in this channel.
On a two year CAGR basis, we grew 15% in the mass channel versus the category at 12% and equally and perhaps as important the entire C store channels rebounding positively as mobility across the U S. Proves we are currently underway in this channel and we gained share in the quarter on both a one year and two year.
AGR basis, and we look to see continued share growth in this channel into the future, especially in the west.
I would now like to turn things over to a J code Terrier, our CFO Jed.
Thank you Dylan and good morning, everyone.
I would like to begin by thanking Dylan Kelly and the entire <unk> team for helping me transition smoothly into this new role.
I am excited about the opportunity ahead of us at ups and humbled to participate in the next century of growth off our incredible brand portfolio.
I'll start with a very high level summary of our third quarter financial performance and then we will dig deeper into our net sales and margin drivers.
Third quarter net sales increased 26, 1% to $312 $7 million.
Primarily due to the impact of our acquisitions over the past year.
We delivered organic net sales growth of 1%.
Which would be 2%, excluding the impact of converting company owned DSD routes to independent operators.
As a reminder.
When we convert routes to iOS certain selling expenses move to sales discounts, thereby benefiting SG&A.
And reducing net sales and gross profit.
Adjusted gross margin contracted to 35, 8% largely due to the higher input costs and the aforementioned impact from out of Iowa convergence.
In addition, adjusted SG&A improved to 21, 1% of sales versus 24, 6% of SaaS.
The SG&A improvement in the quarter was primarily driven by lower corporate G&A.
Synergy benefits from our recent acquisitions.
I owe route convergence.
And optimized marketing spend given the continued strong demand in Wyoming.
Yeah.
Adjusted EBITDA increased 17, 3% to.
$244 $8 million, while at 14, 3% of SaaS.
It was a nice sequential improvement from our second quarter margins of 12%.
Finally, adjusted net income increased nearly 47% to $25 $6 million and adjusted EPS was <unk> 18 based on fully diluted shares on an as converted basis of $142 million.
I will note that we benefited from a lower than expected tax rate in the quarter.
Briefly turning to our balance sheet and other key points.
At the end of the quarter, our liquidity remains strong with cash and cash equivalents of $26 million.
$133 million available on our revolving credit facility.
Adding close to $160 million in liquidity.
Moving down the balance sheet net debt at quarter end was $796 4 million or four seven times normalized for the adjusted EBITDA of $172 million.
Additionally, as we indicated in the acquisition announcement, we intend to use balance sheet cash and our revolving credit facility to fund the $56 million purchase.
Price of IW Garcia.
Excluding the impact of <unk> acquisition and based on our expectation of full year 'twenty one normalized EBITDA. We now expect to end this year with a net leverage ratio of approximately four five times.
Our target net leverage ratio remains between three and four times and we expect to return to this level within one to two years.
Moving to cash flow capital expenditures were $17 8 million through the first three quarters.
And we continue to expect this to accelerate Florida in the fourth quarter to support our ongoing and increasing productivity initiatives.
Moving back to the P&L for some additional details starting with net sales.
Our net sales growth in the quarter was 26, 1%.
Driven by acquisitions of 25, 1% and organic growth of 1%.
Our organic net sales growth was driven by price mix of four 2%.
Partially offset by volume declines of 2%.
The impact of I O conversions, which reduced the net sales growth by 1%.
Like the rest of the industry, we faced several supply chain disruptions during the quarter.
Despite a challenging environment, our frontline procurement manufacturing logistics and selling teams have done an incredible job in meeting the continued elevated demand for our growing brands.
The team was able to deliver topline growth and execute pricing actions.
Wrapping up on sales.
Given the significant impact of several acquisitions over the past two years, we provide pro forma net sales growth as another indicator of outperformance.
Our pro forma net sales growth.
On a two year CAGR basis was six 4% and this was an acceleration from the second quarter rate of six 1%.
And first quarter rate of four 3%.
Moving down the P&L to adjusted EBITDA.
In the third quarter, adjusted EBITDA margins contracted by 110 basis points to 14, 3%.
I'll note that we are lapping very strong performance last year, when our adjusted EBITDA margins expanded by about 170 basis points.
Decomposing the decrease in adjusted EBITDA margin for the quarter positive drivers include.
Price mix of 360 basis points, as we take pricing actions to offset inflation.
SG&A, excluding transportation of 70 basis points.
Acquisitions of 100 basis points.
And productivity improvement of 100 basis points.
Partially offsetting these positive drivers we had headwinds related to volume of 80 basis points as we lap COVID-19 related growth from last year and supply disruptions noted earlier.
And inflation, including transportation costs of 650 basis points.
Consistent with industry trends.
The inflation impact was last year was comprised of elevated labor and transportation costs as well as higher commodity input costs.
These include continued pressure on all varieties of edible oil wheat flour, corn based items and pork related items.
As with the agricultural goods, our packaging components, such as pet resin and Colgate continue to see meaningful cost increases.
To that end as you will recall at the beginning of the year, our expectation for commodity inflation was 4% of cost of goods.
That expectation increased throughout the year as the industry conditions began to worsen.
And we now expect commodity inflation of about 7% of cost of goods for the fiscal year.
While we have most of our raw material supply under contract several disruptions at our suppliers have resulted in higher costs as we work to secure supply from alternative sources.
Similar supply chain pressures at co manufacturers are driving cost higher in areas, where we do not have colored positions.
When we layered on incremental labor and transportation costs due to higher than expected supply chain pressures.
We now have total input cost inflation of low double digits in the second half of the year versus comparable cost in the prior year.
As we learn more about rising input costs. We reacted quickly early in the year and began planning pricing actions to help offset these costs.
We have been implementing these pricing moves throughout 2021 and you are seeing these building in our sales results as price mix contribution to net sales.
One 9% benefit in Q1, two 3% in Q2 and four 2% in Q3.
Okay.
As we continue to implement new actions.
This contribution will increase in the fourth quarter and we'll build into fiscal 2022.
And to reiterate what Bill mentioned earlier if costs continue to rise next year, we will continue to take pricing actions accordingly.
Now turning to our outlook for the remainder of the year.
We continue to expect full year 2021, net sales to be consistent with 2020 pro forma exits.
As a reminder, our.
Our 2020 pro forma net sales is on a 52 week comparison basis as deals we owned <unk> Anderson and true call on the first day of fiscal 2020.
And assumes $20 million of net sales for witness to align that expectations for fiscal 'twenty one.
We continue to expect modest organic sales growth year over year, even as we lap fiscal 2020 organic growth of over 8%.
Turning to adjusted EBITDA.
Reflecting our updated assumption for incremental pricing flow through.
I'll stick by higher than expected supply chain inflation.
We now expect to be towards the lower end of our previous range of $160 million to $170 million.
For adjusted EPS.
We are reaffirming our.
Our previous range of 55 to 60.
This reflects lower than expected interest expense and a lower than expected tax rate.
Turning to our additional assumptions on slide 20 of our earnings presentation.
Dentation you will find a detailed list that supports our 2021 outlook.
Notable assumptions that have changed include.
Raising our commodity inflation to approximately 7% was the 6% previously.
Higher than expected transportation costs.
Cash interest expense of approximately $30 million versus 33 million previously.
And effective cash tax rate of 15% to 17%.
The prior expectation of 17% to 19%.
And finally, our net leverage is expected to be at the high end of our previous range and we now expect it to be approximately four five times.
This excludes the impact from the Ara WRC acquisition.
Yeah.
With that I'll now turn the call back over to Dylan.
Thank you Jay and in closing I want to reiterate that I truly believe that we are doing all the right things to grow our business for the long term that in return we will drive great results.
As a company we have seen inflationary periods in the past and we've weathered supply chain challenges many times over our 100 year history, and we are committed to building an even stronger more resilient infrastructure for continued growth as we begin to move towards the new year and I'm very thankful to our incredible associates that make all of this happen.
We are excited about our future and we look forward to continuing to create value for all of our stakeholders.
Thank you again very much for joining us today on our earnings call and I would now like to ask the operator to open up the call for questions.
Yes.
At this time I would like to remind everyone in order to ask a question.
Press Star followed by the number one on your telephone keypad.
Your first question comes from Andrew Lazar with Barclays. Your line is open great.
Great. Thanks, so much good morning, everybody.
Good morning.
I guess I would like to start out at you know I understand it's obviously early to go into too much detail on.
2022 at this stage, but.
I guess when I, just sort of <unk> I know gross margin was expected to expand significantly in 2022 due to productivity ramping up and optimizing revenue and trade in and improving the margin mix. I guess my question is with those levers still be expected to be in play, which along with pricing that you've talked about.
Be enough to keep gross margins stable in 'twenty, two or should we now anticipate some year over year compression and I ask I guess because consensus still has sort of gross margin expanding for next year. So.
Any even just directional thoughts on that would be really helpful.
Hey, Andrew this is a J. Thank you for the question I'll take that.
Listen before I answer that I do want to note that we are not providing guidance for 2022 today.
Now, having said that the environment remains incredibly dynamic and you know as.
As a company we are focused on a couple of things.
First demand is strong and we are doing everything possible to maintain supply to our customers and consumers. We have done that throughout last year and this year through COVID-19 and through the the dynamics here and secondly in our <unk>.
<unk> program is ramping up you know as I noted in my prepared remarks that that's that's working and toured Dylan outlined in his remarks that we are executing on our long term strategies.
And to answer your gross margin question specifically.
I look at these focus areas. They are all delivering put us pricing trade optimization productivity everything that we talked about when we went public you know, they're all they're all coming through for us.
So based on what we know today about inflation about being wide mint and in all of these things delivered and put US I do believe that we will call it inflation and gross margins in 'twenty two should not contract.
I'll remind you that transportation costs are fluid and they had an SG&A for us. So again, we are talking about gross margins and we are not providing guidance for next year at this point, but I do believe that they won't contract.
Very helpful. Really appreciate that and then I guess just a follow up would be I saw that you brought on a new supply chain head of supply chain.
And obviously in light of just all the challenges.
The entire industry is facing at this point.
I guess I'm trying to get a sense of what would be the roadblocks if any to moving even faster on productivity maybe than you had initially planned.
Thanks, so much.
Yes, Great question, Andrew This is Gary I'll take that.
Look I think we feel really good about productivity you referenced Chad White, who we recently hired two to run logistics for US. We're super excited about that he ran logistics for Pinnacle foods and some other companies <unk> consulting with US right now and has been since 2020 on value creation initiatives. So we're thrilled.
To bring him on he's got a great depth of experience and a network of relationships that will benefit us with that we're able to put Brian grass, our senior Vice president.
Currently in charge of logistics into an enterprise integration role to help with M&A integration and he has been here for 30 years.
Basically held every position in supply chain you could think of so we're really excited about the move from a roadblock perspective.
No look I don't see any roadblocks per se, we've given guidance that will be 3% to 4% of Cogs and productivity by 2023, that's still a good number we feel great about that.
Put more emphasis on continuous improvement.
And.
Get that program up and running.
More robustly. So we feel good I mean, I think we are on track to hit our targets and.
We've got the liquidity and the capital and I think the team to drive it.
Thanks, so much.
Yes.
Your next question comes from <unk> Parikh with Oppenheimer. Your line is open.
Good morning, guys. This is actually Erica eiler on for Apache Thanks for taking our questions.
So I might just start with sales so you know as.
You look at the sales acceleration here in Q3 and your expectations for Q4.
Has anything surprised you in terms of what you're seeing and then you know you know our team is also called out supply disruptions and.
And I apologize if I missed this but is there any way to quantify the impact on the top line during the quarter and if maybe you could just dive a little bit deeper kind of what you're seeing here on your expectation on these going forward. You know just curious on you know when you think these could potentially get resolved.
Yes, So hey, Erika this is Dylan and I will just maybe take the first part of the question on <unk>.
Demand and what we're seeing in sales and then.
Hi, Jason quantified, perhaps some of what we're seeing just from a supply challenge standpoint can try to quantify that if that's even quantifiable.
As you can see from our IRI consumption data across both our core and our emerging in expansion markets.
Are you really seeing a nice pickup in two year CAGR rates and one year CAGR rates.
In many of our subcategories in many of our channels. So I think from a sales demand perspective, we're very excited about what we're seeing we're seeing it continue into October which I noted in my remarks.
We see demand there.
The consumer is buying they're buying our brands you can see it across the channels across the geographies and across the subcategories. So I won't go into too much repetitive detail, but as you note there are supply challenges.
Our ability to meet that increased demand we're leaning in at the end of the day. The the last thing that we want to do is not supply or customer we believe in the long term benefit of.
Supplying our customers the demand that they are asking for and so we're spending a lot of time investing in that.
And really at the end of the day, putting dollars against that in terms of just making sure that we're securing the.
The inputs in the supply chain that we need to to meet that demand.
In terms of quantifying.
What we may have missed out on in terms of sales I don't think we really have a number for that we do know that every single week of its some part of our component that's not there right. It could be film it could be seasoning.
It could be other <unk>.
<unk> supply it could be the ability to move freight there is always going to be that especially in today's environment.
I will say Luckily I believe we have a fantastic team and we have a 100 year platform, that's been dealing with supply chain issues in the past and commodity issues in the past and we're very good at that so I don't really have a number to quantify it but the good thing is that I would say demand is outstripping our ability to supply and as we look forward and solve some of that in the industry itself solve some of.
As we go forward.
<unk>.
<unk> for good things for us as we look into the future.
Okay. That's helpful. And then just on the core I mean, you made nice progress this quarter, you know and closing the performance gap in the core versus like that category can you, maybe just remind us of the key efforts that have helped you achieve that you know what we should think be thinking about going forward and then just any new insight when the core.
Could potentially be back to being at least in line with the category.
Yes, we.
We made really.
Happy I mean, we've been saying this in last few earnings calls about the fact that we.
We have a little bit heavier foundation brand Wade.
Waiting in our core that we have to go against we've also noted in the past that as part of our M&A strategy in some cases, we're buying foundation brands that we skew rationalizing and we're <unk>.
Executing on making sure that they have the right pricing the right display and the right items and the right innovation, we're doing a lot of work around foundation brands and Youll see in the data that we supply to you that that has improved and our core <unk>.
Really put a lot of effort on focus right, we have a lot of transition from.
Ralph salespeople to independent operators that occurred in the core and once we get through that transition period, and we really start to ramp up in our productivity.
For that so there's a lot of effort a lot of work by our sales team that's gone into the core on execution and lastly included in there is the is on the border right. The <unk> acquisition opening up on the border to our core that was one of the core tenants of that purchase back in December of 2020, where we talked about only.
14% of their sales within our core and we thought that our DSD network can really support and grow that exponentially and I think youll see that data as well in the deck, where we can really see that start to expand the core. So if you think about a few of those things.
Happening the core is about 50% of our business.
<unk> speaking in terms of IRI retail sales.
So.
As we continue to move forward I think it will compress much more closely the difference between our overall <unk> platform sales, but also our power brands are right on the cusp of breaking into being share.
Share gainers as well in the quarter. So we're really looking forward to seeing that continuing to expect it to.
Okay, great. Thank you so much.
Yes.
Your next question comes from the line of Michael <unk> with Piper Sandler Your line is open.
Thank you good morning.
Good morning, good morning morning.
Just wanted to stay with on the border for a second.
You have a nice slide obviously is showing its momentum and some of the geographic splits.
But.
Maybe just talking.
Talking to the acceleration that broad base.
How much of that is moving into DSD.
I guess I'm, just trying to understand some of the drivers and how sustainable it is and what do you expect looking ahead a little bit.
Sure Great question I mean, yes, as you can see on the chart page 11 in our deck.
The exponential growth on a two year CAGR basis thats occurring for on the borders in our core.
That really has helped and driven by our DSD right Youll note that back in August of 2021, we converted our third party distributor to the.
Distribution system.
Four.
Number of states and most of those states were in our core.
You think about the fact that.
We not only made the conversion to our DSD, but we also are looking and making great strides in vertically integrating the production. So when you produce something.
And you're vertically move it directly into the DSD stream and it's available and it's in stock and it's on time and its.
That really helps your DSD to expand and we have a much larger sales team not just the DSD sales team, but a much larger sales team that's out selling the brand to the customers at the end of the day. So you couple the two of them together and we're really seeing that exponential growth in our core. However, if you look at expansion.
And emerging we're seeing double digit growth there too on a two year CAGR basis. So it's across the board we have some great retail partners that continue to do fantastic at it we're doing a lot of work.
On the supply side as noted in the acquisition of first data that we announced back in <unk>.
June of 2021 are closed in June of 2021, as well as the recently announced RW Garcia, we have opportunities here to really increase the supply of the products, which has been an issue where demand has outstripped supply and as we build that supply I think will continue to unlock the ability to grow on the border and somewhat on our side.
Note Youll see even the salsa and the queso on the border branded salsa and queso combined that's actually a $69 million of IRI retail on an annual basis and thats growing exponentially as wells, we are unlocking opportunities on the chip side or on the border, but really also unlocking it onto salts and.
Queso side, which is.
Sort of icing on the cake for that brand and our growth prospects for that Gregg brand continue.
That's great color. Thank you you also touched a little bit on the second question I just wanted to cover with R. W. Garcia.
I think it's clear you're getting.
Interested in that for the capacity and the capabilities there, but can you just help us understand a little bit how much it's <unk>.
We needed to keep up with demand or torch to support growing demand or if it also can support a margin lift from repatriating.
<unk> co manufactured today.
I'll take that.
Great question. So we're thrilled about the RW Garcia acquisition, so that is really.
First and foremost our supply chain enhancement acquisition.
They have the ability to start making some of our brands today.
Right away I mean, you've got the excess capacity. So we don't have to wait and order a new line or anything like that so.
The very immediate.
An increase to our capacity and that allows us to in source some things that.
We can make more margin on.
And then from a.
Currently they don't really do any co man for us so it's different than for <unk> for instance, on the borders largest co man.
Currently don't do any manufacturing for us, but they have the ability to do it.
In a short period of time, so we're thrilled about what it can do for our supply chain are strategically well placed plants on.
In the West and east of the United States, which helps helps us focus on minimizing landed cost.
It helps with logistics.
As well as manufacturing costs and then it's got a great I think a nice BMI brand right. It's all organic for the most part.
Corn based crackers, and so we look forward to adding that to our portfolio and certainly takes us over $100 million in retail sales on the <unk> side as well.
Great. Thanks, so much.
Your next question comes from the line of Jason English with Goldman Sachs. Your line is open.
Hey, folks thanks for Slotting me a couple of quick questions.
First on M&A I heard you mentioned your leverage now four and a half you want to get back down to that three to four <unk> range in the next year or two.
Are you kind of implicitly, suggesting that you may be out of the game with M&A for a while and so you get that leverage back in there.
Hey, Jason This is cary and good to hear from you.
I wouldn't say we're out of the game no I mean I think.
We're going to continue to do.
Smart acquisitions that makes sense for us.
Obviously, we're committed to that three to four range long term.
It hasn't prevented us from doing things like in RW Garcia.
I wouldn't say capital structure in and of itself as a as a limiter for us but look we are focused on making sure. We have the right Levered long term leverage profile and we're very disciplined about how we approach acquisitions, we want to make sure we pay the right price for things in that they drive they deliver the strategic value.
For the price we pay so I don't think it takes us out of the game I think our set of opportunities in front of US is very unique in terms of what we're able to do and how we're able to create value. So.
So I think I think we continue to do some smart things.
While at the same time, making sure that we stay disciplined.
Got it makes sense. Thank you.
The price growth you guys realized this quarter.
Certainly surprising to the upside and congrats on achieving it.
So it's better than I expected can you unpack a little bit of it how much of it was list price how much is coming from from mid perhaps lower trade et cetera, as we think about the forward.
How how should those components progress.
Hey, Jason Thanks for the question. This is a J I'll take that so I think the way to think about that as well.
We are effectively touching our entire portfolio of brands and product categories that we play in across all of our customers. So the pricing lowest that we have you know you talk about weighed out list price increases trade optimization, we are pulling all of them so it'll be it'll be.
Tough for me to pick one over the other.
It's all being deployed we have already taken.
Two or three rounds of pricing this year and a couple more coming in the next three months. So by the time, we get to February of next year.
We would have touched our entire portfolio and activated all of the levers we have.
Makes sense, thanks, a lot and thanks for the detail pass it on.
Thank you.
Okay.
Your next question comes from the line of Bill Chappell with <unk> Securities. Your line is open.
Thanks, Good morning.
Good morning, Good morning Bill.
One get them more housekeeping as you look forward on the Io conversion how much pressure is I guess left or do you expect on gross margins from that over the.
Next 12 to 18 months or are we largely done with that and I'm just trying to understand how much that comes into play.
Yes, thanks for the question.
So all I'll say, we are going to convert about 200 routes. This year and we have another 200 to go so the pressure to your question that we should expect is about the same as what we would get in 2021.
Is there any way to kind of quantify the basis points.
As we're looking into next year of obviously commodities and pricing.
We'll have a down draft, but im just trying to understand if that's much bigger or you know.
Similar.
Yes, absolutely. So so far this year, we have been looking at 80 to 100 basis points of pressure on gross margins and net sales and then there is an offset to that in SG&A and we should we should expect about the same next year.
Okay, great. Thank you and then on the freight side, let's.
Let's see it's widespread issue.
And not unique to your company, but how do you see this playing out over the next six months I mean do you have more drivers is gonna be available do you think prices will come down or go even higher just trying to I mean, you're obviously dealing with this day in day out and just trying to understand if you see any light at the end of the tunnel.
That's it.
Yeah.
Yeah I'll take that again this is a J.
No.
So I think if I had a crystal ball it would be nice, but odd assumption.
Going into this thing is.
First half of next year is going to look very much like like what it looks now so we are not expecting.
Thanks to to improve meaningfully now that said there could be changes to this environment in either direction positive or negative and.
Let's see what shakes out.
Got it but do you you weren't seeing things accelerate in the past month or two.
In terms of the Basel III Cogs.
[laughter] negative I guess, it's not getting meaningfully recently.
Well Neil freight cost have gone up and we have transportation is the big variable in our inflation costs.
That can be caught up.
And and.
Our conversation this morning.
And transportation is going up and we have seen it gone up.
Got it yeah I was just was hoping if you'd seen a ceiling, but I guess not not yet, but thanks for the color.
Thank you.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad. Your next question comes from Ben Bienvenu with Stephens. Your line is open.
Hey, Thanks, good morning, everybody.
Good morning.
I wanted to ask about the price mix versus volume balance as we see the pricing action contribution build as we go through the fourth quarter and presumably into the first half of next year.
Is sustaining volume on call. It a two year stack level reasonable do you think that gets harder to sustain where do you think we are with demand elasticity.
You see and how does.
Share gain factor into that and channel mix as well factor in to that equation.
Yes.
From a high level and then maybe Jason can layer and afterwards, Ben Thanks for the question.
Yes, I mean, what we are seeing.
Yeah.
The snacking industry for 26 years in my role almost for 10 years.
Alright, thank you.
Partially.
Something that has the benefit up which is great brands, but other people have great brands as well.
And the other part of it is that we're in a.
Fantastic industry of snacking, where the elasticities are relatively low it's a simple pleasure.
For the most part it's an impulse item.
In many cases.
And we've had.
At least from what we can see elasticities are pretty low.
Have room to incur.
Increase because of our great brands, we have price pack architecture that we are executing on I think Jason referred to it in the previous question about the price mix and the benefits that we're getting there.
And I think that as.
The industry is relatively rational from.
From a pricing perspective, then we will have opportunities to continue to look at ways to.
Take more price if it if it's warranted and I think.
Long term.
Obviously, we want to provide a good that consumers want to buy and that's what we're in the business of doing.
And we will take our knowledge in.
And history of being in this industry and apply it across our price pack architecture, but.
I think from a high level, the elasticities have shown to be pretty resilient too.
To the increases in they're not these are 20%, 30% increases I mean, we're talking about four or five 6% increases so.
So we feel really good about that.
Okay, Perfect and then Jay revisiting your comments on kind of expectations.
<unk> gross margins as we head into next year.
And combining that with what you said around freight.
Could you talk about when you look through the components of your cost of the various buckets. The level of visibility you feel like you have into next year at this point and then if you could rank order the buckets of cost pressure as you see it now that would be helpful.
Sure.
So let me.
When I look at 2022 again, we're not guiding to 2022 today, we have more work to do and we will come back to it in March.
What we know today about 2022.
Is that all of our pricing actions productivity et cetera. These things that are working we will have a meaningful carryover benefit going into 2022, and secondly, first half is going to look a lot like the second half of 2021 in terms of inflation and the environment we're in and.
The volatility in benign dynamic nature of transportation. So those are two two things that we know what we don't know is what what's going to happen in the second half so to your question.
The the visibility that we have is probably the the <unk>.
<unk> on the second half of 2022.
And it is a very light on transportation specifically.
And the impact that we have in our P&L in terms of inflation I would say, it's about half commodity have enabled in transportation.
<unk>.
Within that commodity we have good visibility into even though youre not youre not liking what we're seeing that's in prices at all time highs consumer price indexes.
Is the highest it has been in 30 years. So we don't like that but we at least see it transportation on the other hand very dynamic we find new information on a weekly basis that we are working through.
Thank you so much very very helpful and best of luck with the rest of the year.
Thank you. Thank you.
There are no further questions at this time I will now turn the call back over to the Chief Executive Officer, Mr. Dylan, Let's say.
Great. Thank you all very much for joining us today on our third quarter earnings call. We truly appreciate your support of <unk> brands and are as excited about our future and hope that you are as excited about our future as we are so thank you very much.
Ladies and gentlemen, this concludes today's conference.
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Yes.
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Uh huh.
Okay.
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