Q1 2022 UTZ Brands Inc Earnings Call
It's great to see our 100 year plus portfolio of brands continue to thrive as our snack foods provided simple pleasure at a modest cost.
Looking at IRI retail sales in the quarter, we gained share in the salty snacks category for the 13 week period ended April <unk> of 2022, which again was done through a balance of both price and volume gains as our loyal consumers combined with our very strong brand equities are driving our topline momentum.
And as we anticipated and is somewhat unique to salty snacks. The private label threat within our sub category has remained minimal as private label dollar share in the salty snacks category has per IRI declined for the last 16 12 week periods.
Importantly for US we continue to have large white space growth opportunities across our portfolio as we are under distributed across the United States relative to our largest salty snack peers and we are continuing to make the right long term investment decisions to drive continued above market growth and our expansion and emerging geographies.
Yes.
For perspective on our distribution, even though we are now per IRI. The third largest salty snack brand platform, the United States with retail sales over the last 52 weeks of 145 billion or a household penetration is still only just below 50% and we have tremendous runway for our brands.
Travel and grow across the country.
Turning to margins consistent with what you've heard around the entire food industry, our cost continue to rise across many of our commodities.
Since we last reported the ongoing Russia, and Ukraine conflict is impacting certain input costs meaningfully and as a result, we now expect mid to high teens percentage growth input cost inflation in fiscal 2022.
However, it's very important to note that as inflation continues to rise we continue to take pricing actions and drive our productivity initiatives to fully offset these increased costs.
All while making the necessary investments to support the strong growth of our brands.
Enhancing our margins is a key value driver for both the near term and the long term and we are well positioned to capitalize on our recent investments in both infrastructure and technology that we believe will support more profitable growth in the future.
On that note as you can see in our reported results our pricing is building significant benefit with ongoing momentum not only from the pricing and price pack architecture initiatives from 2021, but also from our 2022 pricing actions.
Our pricing actions in 2022 include our most recently implemented round of pricing taken in mid February as well as an additional round of pricing that we have already announced that is happening in late may of 2022.
With this continued momentum we believe that our Q2 pricing will be greater than the nine 4% pricing we achieved in Q1.
In addition to this we have incremental pricing actions under evaluation for the second half of the year to help offset any new inflation impact beyond our current expectations.
It is important to note that both our pricing technology and our revenue management capabilities have dramatically improved over the last 12 months as a result of new talent and improved analytics.
Also as a reminder, it was only February of last year, when we installed a new ERP system and we have built significant capabilities. Since then which will continue to add incremental value into 2022 and beyond.
So while we closely monitor our input cost trends and take inflation justified pricing actions, we will continue to drive our strategic price pack architecture programs leverage our new trade management software and better optimize our product mix, which will enhance our margins over time.
From a productivity standpoint, our programs remain on track and we continue to expect to deliver approximately 3% productivity in fiscal 2022.
In addition, as you may have read in our press release on April 28, our recent Kings Mountain transaction is an important step forward to enhancing our productivity.
The facility will enable us to in source manufacturing across several product types that we currently outsource to some degree increase our operational flexibility and will contribute to higher long term margins overtime based on identifiable multifaceted cost synergies.
We plan to begin production at Kings Mountain in the second half of this year and the facility will play a key role in supporting the strong growth of our brands across our rapidly growing markets in the southeast the northeast and the mid south.
So wrapping up our key messages I will touch on our updated outlook for fiscal 2022.
Our power brand sales growth continues to be robust led by both our flagship and on the border brands and given our strong first quarter top line results and trends through the month of April we are raising our net sales outlook for the year.
We now expect total net sales to increase 10.
10% to 13% and organic net sales to increase 8% to 10%.
In addition, as the benefits of our pricing actions and productivity programs continue to build we continue to expect to offset the previously noted higher inflation in fiscal 2022.
As a result, our adjusted EBITDA outlook is unchanged and we continue to expect fiscal 2022, adjusted EBITDA to grow modestly versus fiscal 2021.
Briefly touching on our first quarter financial results total net sales grew approximately 27%, which reflects our strong organic growth of nearly 21% as well as the contribution benefit from our acquisitions.
Adjusted gross profit grew 11% and adjusted EBITDA declined 4% as margins were impacted by the supply chain cost increases that I described earlier, partially offset by our building pricing of nine 4% in the quarter and our productivity momentum.
Diving deeper into our retail top line sales trends I am pleased to report that our sales growth continues to accelerate.
After lapping the tremendous growth we saw during the COVID-19 pandemic our year over year sales momentum in early 2022 continues to build as net price realization improves and volumes continued to increase.
To that end, our total etch brand sales growth accelerated to just over 19% for the latest 12 week period ended April 17.
Yeah.
Furthermore, when stepping back to an even broader look at our historical IRI retail sales levels on a pro forma basis for all of the acquisitions. We've made over the past few years you can see that we started January 2019, with a 12 week period retail sales of approximately $260 million.
As we enter the second quarter of 2022 or 12 week trailing retail sales through April 17 have grown to nearly $350 million as we've now added an astonishing 5 million more buyers since 2019 with 70% of those making repeat purchases.
It's very clear that as expected we are successfully lapping the impact of the pandemic on our retail sales results and due to the strength of the <unk> platform and our 100 year history of consistent growth and industry Knowhow that we are winning share and we are building for much higher sales baseline for continued future growth.
And importantly, our salty snack category trends remained strong and resilient as.
As we are accelerating our power brand sales.
Spanning distribution and Underpenetrated channels growing the core and driving geographic growth and our expansion in emerging geographies.
Our future is incredibly bright as we are now the number three salty snack platform, the United States and we see a clear path to continued momentum for years to come.
Turning to our retail sales results in more detail for the 13 week period ended April 3rd our power brand sales increased 21% versus the category of 13, 4%.
I'm also pleased to point out that our two largest brands us and on the border, which combined represent about 70% of our retail sales grew an amazing, 22% and 35% respectively.
Turning to our growth drivers in the quarter, we drove share gains in our top III sales subcategories of potato chips, tortilla chips, and pretzels, representing approximately 73% of sales.
I will note that both our pork rinds and <unk> performance was primarily impacted by supply chain challenges and our team is actively working to address these opportunities to unlock their full potential.
Potato chip and Pretzel growth were both led by our <unk> brand with potato chip growth of nearly two times the category growth and.
And tortilla chip growth was led by our on the border brand with sales growing nearly three times the category growth.
And since on the border was the largest acquisition in our company's history. I also want to point out how we are leveraging the <unk> platform to drive on the border to new Heights.
We are not only driving incredible growth from our now emerged salesforce, but we are also increasing the supply of product to meet the ever increasing demand for on the border via both new production capabilities that have been installed in our legacy plants.
As well as the benefits from our plant to acquisitions in 2021 that have unlocked even more supply.
This is truly allowing us to grow this brand to new heights, which will continue to add value to our platform.
In the quarter, we continued to make great progress driving geographic expansion, while also improving our execution in our core markets to that end, we gained share across all three of our geographies in the first quarter.
In our core total sales registered nearly 18% growth versus the category of 14%.
Our recent strong performance is largely due to several key factors a.
A stronger focus on our power brands led by performance across <unk> and on the border.
Brands on both base and incremental.
On the border continues to outperform as a result of the conversion to the DSD Route network and expanded distribution and retailer support, especially in the grocery channel.
And as noted in previous quarters, the conversion to independent operator routes can create some minor short term disruption, but now that the mid Atlantic is substantially transitioned that disruption is behind us and we are intent on continuing to drive improved results.
Beyond the core which has been the case for some time now we continued our momentum and expansion and emerging geographies. We grew 17, 4% and expansion and we grew 20% and our emerging geography outpacing the category growth of 12, 2% and 13, 5% respect.
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There is no doubt that our brands travel well beyond our core and it is exciting to see our continued success as we outpaced the market consistently and these white space geographies.
Looking ahead to the remainder of the year, our key themes for fiscal 2020 to remain the same.
We are well positioned for strong organic net sales growth and market share gains in the attractive salty snack category and we are off to a tremendous start with retail sales growth of over 19% through April 17.
We are delivering significant customer wins beyond our core geographies to include one of the 10 largest volume supermarket chains in the U S based in the southeast.
As inflation continues to increase we continue to take the appropriate pricing to protect our ability to reinvest in our future.
In addition, we are focused on leveraging our improved technology and enhanced team to accelerate our price pack architecture initiatives.
While we are very pleased with the results. So far we do believe that this is an area that is still in the early stages of delivering to its full potential.
In addition to higher net pricing, we expect to deliver approximately 3% productivity in 2022, and this was driven by carryover benefits from 2021 continuous improvement initiatives strong ROI capex projects product sourcing and in sourcing improvements and network and logistics optimization.
Further although not included in the 3%, but an integral part of our value creation program, our efforts around cost avoidance and capacity enhancement.
Matter of which has helped us support our strong volume growth to date.
And lastly, we remain intently focused on acquisition integration and delivering upon our cost synergy targets.
With that I'd now like to turn things over to a J Qatari here.
Our CFO .
Hi, Jay.
Thank you Dylan and good morning, everyone.
I would like to start by congratulating the team for delivering record sales this quarter by working together as one team to supply and service our customers, while ramping up pricing optimizing our brand portfolio and delivering volume growth through high quantity customer wins that will help deliver the company's long term topline.
And bottom line growth strategies.
Thank you Mark.
I will review a very high level summary of our first quarter financial performance and then we will dive deeper into our net sales and margin drivers.
Before I begin I would like to call out a few housekeeping items.
As we continue to work as a public company, we are evaluating our reporting practices to simplify analysis and aligned with our peers.
To that end, our fiscal 2022 financial reporting reflects the following changes.
First we are eliminating all pro forma non-GAAP metrics.
This includes removal of further adjusted EBITDA.
Note that we will continue to use normalized adjusted EBITDA for Mac leverage calculation.
This was previously named normalized further adjusted EBITDA, but the calculation has remained the same and you can continue to find the non-GAAP reconciliation and our supplemental tables.
Next you will find more prominent reporting of organic net sales growth.
The definition has changed slightly since our previous reporting in addition to excluding the impact of acquisitions. We now exclude the impact of Io conversions to create a more apples to apples organic net sales growth comparison to our peers.
Lastly.
Selling general and administrative expense has been renamed selling distribution and administrative expense.
Given our distribution costs are booked as an expense and not in cost of goods sold we talk it would be helpful to bring more transparency to the description of this line item on our income statement.
For context distribution expense is about 25% of our total SG&A expense.
I Hope you will appreciate these changes as we continue to mature as a public company.
And adopt best practices.
With that let's discuss our first quarter results.
Our first quarter 2022, net sales increased 26, 6% to $348 million.
We delivered organic net sales growth of 27%, which excludes the impact of acquisitions.
And the impact of converting company owned DSD routes to independent operators.
As a reminder.
When we convert routes to iOS.
Certain selling expenses, both of sales discounts, thereby benefiting selling distribution and administrative expenses.
And reducing net sales and gross profit.
Adjusted gross margin contracted to 33, 9% largely due to higher input costs.
And then a profit.
Third 30 basis point impact from our Io convictions.
In addition, adjusted SG&A improved by 180 basis points to 23, 2% of sales primarily due to expense leverage from strong sales growth synergy benefits from our recent acquisitions and Iowa out commissions.
Our adjusted EBITDA decreased by three 7% to $36 5 million.
Or 10, 7% of sales and adjusted net income declined to $15 4 million.
Adjusted EPS was <unk> 11 based on fully diluted shares on an as converted basis of $139 9 million.
Now turning to cash flow and the balance sheet.
Cash flow used in operations was $36 million.
Our cash flow from operations performance was primarily impacted by two factors.
First as expected and in line with our typical seasonality working capital was a use of cash in the first quarter.
We expect working capital performance to improve as we move throughout the year.
In addition, as we noted in our earnings press release this morning.
The $23 million of buyouts of multiple third party DSD rights in the first quarter were treated as contract terminations and booked as an expense and adherence to gap.
As such these acquisitions.
We are not treated as investing activities and therefore impacted cash flow from operations.
Had they been treated as investing activities cash flow used in operations would have been $13 million.
At the end of the quarter, our cash and cash equivalence that approximately $15 million and we had $81 million available on our revolving credit facility.
Providing close to $96 million in liquidity.
Liquidity was primarily impacted by the aforementioned drivers that impacted cash flow from operations in the quarter.
Moving down the balance sheet net debt at quarter end was $870 8 million or five one times normalized adjusted EBITDA of $172 1 million.
As a reminder, through the course of fiscal 2021 and fiscal 2022 year to date, we have funded from our balance sheet over $160 million of acquisitions, which include weakness this data RW Garcia.
And buyout of various third party distribution rights, including claims snacks and <unk>.
All of these acquisitions have been critical to building a stronger foundation to support the incredible demand of our brands.
And to drive sustainable higher margin growth.
While leverage is above our long term target of three to four times, we are committed to generating stronger EBITDA, improving free cash flow conversion and paying down debt.
Our goal is to approach the upper end of our targeted range by the end of fiscal 2023.
We are focused on operating the business integrating acquisitions and delivering synergy targets all of which will improve adjusted EBITDA performance.
Also <unk>.
Just a reminder, we have a well priced credit structure with covenant light debt instruments, which provides significant EBITDA headroom, while we work on reducing leverage.
In addition, more than 60% of our long term debt.
As a nominal interest rate swap through September 2026 at a rate of 139%.
Wrapping up the balance sheet as Dylan mentioned earlier on April 28.
We announced and closed the transaction of a kings mountain facility.
The total purchase price of the transaction was approximately $38 4 million.
Plus assumed liabilities of $1 3 million.
And was funded with approximately $10 4 million in cash and $28 million of proceeds from the issuance and sale of $2 1 million shares of class a common stock to the affiliates of <unk> brands and a private placement.
We are very excited to add this facility to our manufacturing footprint as it will play a critical role in supporting growing demand for our brands and the southeast northeast and mid South regions.
Moving back to the P&L for some additional details starting with net sales.
Sure.
Our net sales growth in the quarter was 26, 6% driven by organic growth of 27% acquisitions of seven 2% and.
And negatively impacted by the conversion of RSP routes to iOS, which reduced the net sales growth by one 3%.
Our organic net sales growth of 27% was driven by price mix of nine 4% and volume growth of 11, 3%.
Our pricing actions continue to gain strong momentum and price elasticities.
Has been better than expected.
As expected in the first quarter adjusted EBITDA margins contracted to 10, 7% of sales.
Decomposing the decrease in the adjusted EBITDA margin for the quarter.
Positive drivers include price mix of 940 basis points as we continue to take pricing actions to offset inflation.
Productivity improvement of 130 basis points.
And selling and administrative expense, which excludes distribution expense.
20 basis points.
Offsetting these positive drivers was higher inflation.
Including transportation cost or.
A 14, 2%.
Yes.
Our inflation impact versus last year was comprised of elevated labor and transportation costs as well as higher commodity input costs.
As a reminder, in the first quarter of fiscal 2021 inflation was muted and had a minimal impact on our EBITDA results.
Inflation began to build significantly in the second quarter of last year and.
And continue to climb higher throughout the year.
As a result, the first quarter is our most difficult comparison from a margin perspective.
Looking ahead to the rest of the year.
As you will recall, our expectation for total input cost inflation for fiscal 2022 was low double digit percentages versus comparable costs in the prior year.
We are raising our expectation for gross input cost inflation inclusive of raw materials labor fuel and freight.
From the low double digits to the mid to high teens as key input costs have increased significantly larger.
Largely due to geopolitical events.
In response to these rising costs.
We continue to implement pricing actions and you have been seeing these bird and our sales results as price mix contribution to net sales was 6% in Q4 2021 and.
<unk> increased to nine 4% in Q1 2022.
As we implemented new actions in mid February .
Q1 pricing results were especially encouraging as we saw them build from approximately 7% in January to 10% in February to 11, 5% in March.
Which gives us confidence that Q2 results will show better pricing than Q1.
And as Bill noted earlier, we have another set of pricing actions being executed this month and we were able to pull forward a few of our second half actions into this months implementation to go deeper and wider across our product portfolio.
This was in response to new inflation trends and we now expect to deliver about 10% price in fiscal 2022 to cover our updated inflation expectations.
That being said, we continue to closely monitor inflationary trends and we have incremental second half pricing actions being evaluated based on how inflation trends over the coming months.
In addition.
We continue to expect to deliver productivity of approximately 3% in fiscal 2022.
Which will also help to offset gross inflation.
While our primary areas of focus this year are on manufacturing efficiencies logistics and packaging and product design.
We are truly transforming how we approach our demand and supply planning.
Which is critical to support our growth and become more efficient.
To enable this transformation.
We've added best in class talent from across the industry, and we are deploying new tools and processes.
As an example.
One of the recent process changes we have made is to increase the lead times and required full pallet auditing on internal orders from our frontline DSD distribution centers.
Which provides our manufacturing plants more visibility to demand so they can plan better and make longer more efficient production runs.
Better demand signal and lead times have also driven higher order fill rates, which in turn includes availability on the shelf to support volume growth and improved customer satisfaction.
This is a cascading effect in our supply chain driving efficiencies in logistics by allowing the transportation team to secure lower cost carriers and optimize loads and warehouse labor to reduce overall cost per case.
In summary.
We are making great progress in our productivity programs and I am confident in achieving our 3% target this year.
More importantly, similar to pricing these productivity actions on making structural improvements that will drive meaningful long term margin benefit to the company.
Now turning to our full year outlook for fiscal 2022.
Okay.
Given the continued strong consumer demand and higher pricing related to increased input costs. We are raising our total net sales growth to approximately 10% to 13%.
And our organic net sales growth to approximately 8% to 10%.
However, with inflation expected to continue.
As we support and invest in a significant new customer growth. We continue to expect to modestly grow adjusted EBITDA versus last year.
Consistent with our approach in setting our initial guidance for fiscal 2022.
We continue to believe that it is important to be prudent in our earnings outlook.
Our outlook continues to assume that we would invest in critical infrastructure to support significant topline growth anticipated this year.
It also assumes continued incremental and strategic SKU rationalization.
As we optimize our portfolio with an enhanced focus on our power brands Inc.
Including prioritizing production of branded products.
Versus private label.
To unlock additional capacity for growing brands such as on the border.
In addition.
We are also anticipating that price elasticities may moderate to more historical levels.
While we are not seeing this today and our assumptions may prove conservative these are unprecedented times and we remain pragmatic in our approach.
Wrapping up our outlook, we now expect capital expenditures of approximately $50 million.
This is at the low end of our previous range, primarily due to the timing of spend related to large capital projects.
Off note.
Our capex guidance excludes the purchase price of the Kings Mountain facility.
In accordance with GAAP the transaction may be treated as a purchase of property and equipment and not as an acquisition.
That determination will be reflected in our cash flow results in the second quarter of fiscal 2022.
In addition.
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We continue to expect an effective tax rate of approximately 20% and net leverage at year end to be consistent with year end 2021.
Finally on a quarterly cadence assumed in our guidance as the benefits of our pricing actions and productivity continue to ramp up we continue to expect adjusted EBITDA margins to improve throughout the year.
But with fourth quarter margins below the third quarter in line with our typical seasonality.
We continue to expect adjusted EBITDA dollar growth with better margins in the second half of this year.
From a sales perspective.
Continue to expect that our first quarter sales growth.
Will be.
The highest quarterly year over year growth of fiscal 2022.
In addition, we expect net sales dollars to be slightly more first half weighted given our strong Q1 sales performance.
And the expected impacts from strategic SKU rationalization and price elasticity in the second half of the year.
Before I turn the call over to Dylan I would like to revisit our long term margin opportunity and our confidence in returning to margin expansion and mid teens margins over time.
These drivers have remained consistent.
Our actions around pricing and productivity have stickiness and significant momentum.
And will drive margin enhancements when inflation stabilizes.
Our supply chain is improving as we accelerated productivity programs and optimize manufacturing and logistics processes.
To increase throughput and unlock efficiencies.
Our recent acquisitions are allowing us to scale, our manufacturing capabilities to efficiently support strong demand.
For our power brand portfolio.
Our recent investments in technology are helping unlock insights that enables several margin enhancing work streams.
Finally, we continue to enhance an already strong management team with new talent.
With that I'll now turn the call back over to Dylan.
Thank you Jay before we open up the call to questions I just wanted to say how incredibly proud I am of the dedicated efforts of the entire <unk> team, who continues to navigate our company through an ever changing and dynamic operating environment.
Going forward our team will continue to be focused on executing against our value creation strategies to grow top line sales, but equally as important to continue to build on the earlier momentum from our margin enhancement programs that we believe will drive more profitable growth.
We are dedicated to our growth process and building a company that delivers stockholder value, while we delight more and more consumers across the us with our portfolio of brands.
We're excited about the challenges the opportunities and the rewards that are on the road ahead of US and we will continue to seek every opportunity to build a stronger us. Thank.
Thank you 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.
At this time I would like to remind everyone that in order to ask a question press the star and the number one on your telephone keypad.
Well pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Michael Lavery. Your line is open.
Thank you and good morning.
Good morning, Good morning, Michael.
I just wanted to unpack the guidance a little bit more.
Youre raising organic revenue growth from the four to six to eight to 10, which.
It feels like a pretty big jump this early in the year, but.
You also called out the 10 ish percent full year pricing that you're expecting and you're just to hear away from that already in the first quarter.
So that would put you at the high end alone even with 11% volume lift you have already had in the first quarter.
I guess, just trying to understand for between elasticities, and some conservatism how youre thinking about the rest of the year because I think the math alone. Mike suggests that's about a 445% volume decline, you're assuming which is 15 16.
<unk> from the first quarter I know the comps get a little bit tougher, but how are you thinking about some of that is it just trying to be extra careful on how the elasticities might go or what are some of the building blocks there.
Yes.
I'll take that this is a J Michael Thank you for the question and.
I think you you sort of answered it.
And the math is right.
We are taking our guidance up Q1 was really strong from a top line perspective.
We were very encouraged to see us ramp up pricing as we have been talking about and on top of that our team was able to deliver very strong volume.
High quality distribution gains key national customers.
And we really.
Hit the ground running in the first quarter now for the rest of the year. We believe that pricing is ramping up we have found ourself ourselves facing new inflation. So we will cover all of that inflation that we are now seeing with the new pricing and we are expecting about 10 points of pricing in the year.
Which means.
As you did the math we are anticipating.
Lower volumes for the rest of the year I would say most of that will be second half you should see us.
Q1 will be our highest sales growth quarter, followed by Q2 and so on.
Then we will we will see some.
Volume take backs in the second half.
Due to a couple of things one bucket to think about is we are doing some SKU rationalization, which is strategic in nature that we want to replace lower margin Skus private label Skus with power brand free up capacity for our power brands.
We are also lapping some distribution gains that we had in second half last year.
And then.
The market, we believe is going to presented some price elasticities at some point, we don't know what the nature of that is.
Colgate Lockdown and supply chain challenges related to that.
We're still at island. So there is a lot of uncertainty right now so you want to just be prudent and.
And see where this goes for another quarter before we.
We put a pin on the volumes.
Okay, great. Thanks, that's really helpful and maybe just a quick follow up on for geographical balance.
You're growing very strong your growth is very strong in.
Core expansion in emerging.
I guess just can you touch on some of the dynamics there.
And if that might start.
Start to tip more with the launch in the southeast retailer.
Yes.
Certainly got the momentum firm on the border.
Okay.
One of the factors, that's a little bit outsized versus the rest how do we think about the mix as it evolves and what some of the drivers are in each of the regions.
Well I mean, thanks, Mike This is Dylan.
Yes, I mean, we were very pleased by the results of the first quarter, where we saw the core.
Really progressing to positive year over year sales momentum versus the category.
A lot of that has to do with a lot of the work that we indicated we were going to put into the core to grow that.
The RF.
RSP to Io transition that occurred in the mid Atlantic is substantially done sometimes theres noise in that trans.
A transformation of that route to market to independent operator.
We've had strong pricing results in the core.
150 basis points better than emerging and expansion.
So somewhere in the 10% range, where we saw maybe on average eight 5% between those two other geographies. So a little stronger on the pricing and the core obviously that makes sense, that's where we have a higher <unk> in market share presence, but.
But as we look forward I mean, we a lot of this is our ability to supply on top of great brand strength.
And we've done a lot of work over the last 18 to 24 months to increase supply.
You mentioned OTB and on the border and our ability to grow that was supply constrained in the past and we put a lot of.
Effort into building out the infrastructure for that with the <unk> the RW Garcia.
Acquisitions last year that have really opened up capacity and ability to supply that demand. So as we just sort of think about core.
Versus emerging and expansion, yes, we have some great growth on the horizon for the southeast as we've mentioned with the largest.
Grocery food retailer in the southeast expanding our presence that has really kicking off as we speak literally as we speak in may So it's not really in our Q1 results.
But it's something we can look forward to as we grow. So we will continue to see that area grow but more importantly, I think our core is really geared up to grow just as fast and so I think the balancing of core versus.
Emerging and expansion as we look forward into the future will be relatively balanced.
From a sales results perspective.
Okay, great. Thank you so much.
Okay.
Your next question comes from the line of <unk> Hari.
Your line is open.
Good morning, Thanks for taking my question. So just wanted to go back just to the performance on your on the border brand, 35% growth during the quarter is there any way to frame.
It's being driven by distribution philosophy pricing et cetera, and then do you expect that strong double digit growth to continue throughout the year.
Yes, Hey, refresh this is Dylan.
Yes, I mean, we've we've really been highlighting the growth on the border I mean, it's our largest transaction from late 2020 that we closed and.
We were literally zero percent of the tortilla subcategory.
We acquired that brand we've added.
Bested a lot into it as we just mentioned from a supply chain perspective.
The growth is is really incredible it's a combination of ACB growth I think we had about 5% ACB growth.
The split between.
Pricing in velocity on OTB was about 50, 50, a little bit more weighted towards volume and very strong price appreciation in the quarter was about 14, 5% with.
With sales gains of about 35%.
As Youll note on the slide in the deck.
He has been continuing.
It's a balancing act between our core and our emerging in our expansion.
But you can really see where in the core right. If you remember back to last year, we took over the DSD in August of 2021 from a third party distributor our team has embraced it has become.
Our second largest power brands, we've continued to expand that into all of the different channels that we have access to and from our supply chain and from a sales leadership and from an innovation and marketing perspective, we've done a lot to support that so.
It really to answer the last part of your question, we anticipate that that double digit growth will continue and it's really backed by the ability for us to supply that.
The strength of our route to market our DSD team. Our sales teams that are now merged and working together. So we're really bullish on the growth of that brand as we look forward into the rest of 2022 and beyond.
Great and then maybe one quick question just for Jay I know you gave some brief commentary on just how to think about EBITDA margins for.
For the year. So if maybe you could just give any more granularity on the cadence for EBITDA margins, where we just saw in Q1.
Yes, that's a good question <unk>.
In March when we came out with we talk.
It is going to look 50, 50 on sales and about 45, 55, and EBITDA first half second half.
I think based on Q1 performance.
It's probably going to more like $51 49 on sales.
The $47 53 owned EBITDA first half second half and that's that's that's a little more balanced on EBITDA from a from a from a cadence standpoint, we are still expecting EBITDA to ramp throughout the year as we move sequentially through the quarters.
From a margin standpoint, and Q4 will be a tick down versus Q3, that's just the seasonality of our.
P&L.
So.
That's what we're expecting in.
I mentioned about volume.
I will point out we are expecting price elasticities and SKU rationalization.
Market dynamics to suppress volumes in the second half and we said this in our prepared remarks.
I hope I'm wrong.
We don't we don't know how to think about it.
The economics.
PRT will tell us that at some point consumer is going to react to the multiple rounds of pricing and inflation.
But we really hope that we're wrong about that and we're just being prudent and frankly conservative on that.
Great. Thank you for all the color.
Youre welcome.
Your next question comes from the line of Peter Galbo. Your line is open.
Hey, guys. Good morning, Thank you for taking the question.
One I just wanted to start with your comments around private label and understanding that it's a relatively small exposure in a lot of your categories, but one of the things that we've been hearing is private label, obviously suffered from a lack of availability of capacity constraint and so.
If that private label capacity guidance.
Unlock a bit better availability on shell, while you guys are raising price.
How are you thinking about that how is that being contemplated into your.
Into your outlook.
And then separately are there are there certain categories, whether it's potato chips or pretzels that are more exposed to private label or less so that would be helpful from our standpoint.
Sure Hey, absolutely Peter Yes.
Yes, I mean, one of the most interesting aspects of our category is private label is relatively small to start rate compared to many other CPG categories. I believe the exact number is it's four 6% sure I've noted in my remarks that it has also been losing share.
Sure.
Over 16 of the.
Last 12 week periods.
Much of that I think is the strength of branded products like ours, the strength of the brand the strength of the OTB the zaps brands our power brands.
Relative to the strength of private label in a market that is.
Really historically not oriented towards private label and there are significant route to market advantages that branded players like ourselves have in the salty snack category.
Meaning our DSD sales force, we have a DSD sales force that is all.
Almost 2100 DSD routes today across the country that everyday go in and service and sell customers products.
Typical private label and our industry does not do that so this gives us a great opportunity to have that competitive advantage in this category in terms of subcategories.
<unk> have a higher percentage of private label than the entire salted category.
A little bit more heavily weighted there but.
But I don't foresee that as something that is a risk to us as we.
Look forward into our ability to price.
Our ability to overcome inflation.
As Jay mentioned in his remarks, and I mentioned in my remarks.
The pricing engine that we have put into place that is significantly better and more talented than a year ago not just in people, but in technology, where we stand today versus where we stood 12 months ago with the installation of the new ERP and our abilities.
It does give us a lot of room, where we think that we're in the early innings of our ability to take price and.
And trade and all of the aspects of their price pack architecture that can really benefit us as we look forward to the rest of 'twenty, two but also into 'twenty three and beyond.
Okay. Thanks, Bill very helpful.
Jay just one for you I was hoping you could actually help us with some of the cadence or just help us a little bit more detail around <unk>.
Free cash flow for the year, obviously, there is some lumpiness in the first quarter.
But anything you can do to kind of help us just the leverage obviously is picking up and you are talking about a similar level. So how youre thinking about generating cash over the remainder of the year.
Yes, so I think.
The way we are thinking about it is the.
The transactions.
That happened in Q1.
We are thinking about them as acquisitions, they were buyouts of distribution rights.
Some of our master distributors and.
And if you back those out.
The cash flow the free cash flow outlook for the year Hasnt really changed we are still expecting to generate $30 million to $40 million.
We are also.
Noticed in our guidance, we are now expecting to spend about $50 million on capex, which is lower than our previous guidance about 50 to 60, so that will help with the free cash flow generation as well.
Q1 results were really encouraging.
The EBITDA guidance is still modest and all of that I think translates to the same place that we were a couple of months ago that we are going to get to $30 million to $40 million free cash flow.
And sorry, just to clarify that 30% to $40 million excludes the buyouts of the $23 million of the buyouts as well as Kings Mountain.
That's correct.
Okay. Thank you.
Your next question comes from the line that's been <unk>.
Line is open.
Hi, guys, Jim solar on for Ben.
I wanted to shift gears and ask a little bit on the input cost inflation side of things.
If you guys can give you a little detail on the commodity hedge position you have for the remainder of the year and then maybe some detail on just which inputs youre seeing the most meaningful step up in inflation, specifically what drove you guys to take the overall step up in your inflation expectations from that low double digits to the mid to high.
Teens.
Yes, hey, thanks for the question.
So the step up I'll answer the second part first the step up that we are seeing is.
Significant on on cooking oils.
All of the different oils that we use in our products.
Then that step up on.
Wheat flour as well as packaging some of our packaging costs are really tied to what happens with with crude oil prices.
So we are seeing those areas stepping up.
Course fuel, which we use with our freight that has stepped up as well.
Transportation rates freight rates.
Stepped up so both of those and we are expecting that in the second half the rates will start to come down and transportation, but feel there will still be up.
And if you put it altogether inbound freight for our commodities across the board that went up as well. So that's the basket that we're looking at.
Now from a covenant standpoint.
We are covered at <unk>.
Current rates in different buckets, and I would say on average we had about 80% covered for the remainder of 2022.
And.
We are really covered everything that the markets will allow us these already volatile markets.
Sometimes thats actually does not make sense to cover our position at 48 highs.
So so we are we have been.
Careful in watching the market and there are nuances and contracts.
Where we have the supply covered.
The price is locked within the range.
But we don't have a final price yet so so there is.
There is a lot of volatility.
But we feel that we have captured the inflation that we do see.
In the mid to high teens that we are calling.
Okay.
Then as it relates to sales and I know you guys touched on this a little bit before.
The organic growth saw pretty reasonable balance between the price mix in the volume.
What do you think the price umbrella.
For you guys to take pricing actions before you start to see any elasticity. When do you think there is like a two or 3% increase there it doesn't have any impact on volumes.
Any any insight into that would be great.
So yes, so the new guidance that we have we are.
We are expecting about 10% price, which covers all of the inflation that we're expecting mid to high teens.
So.
The price increase.
Expectation from where we were a couple of months back to where we are now has gone up about 300 basis points and to your question about.
Dylan mentioned this.
In prepared remarks.
Well is just just now that capabilities around technology or tools.
Our ability to see the data and execute pricing has gone up significantly so and proof is in the pudding Q1 really demonstrated that when we started to see new inflation.
We started to ramp up pricing, we lent wider and deeper in the actions that we took in February and the actions that we're taking this month. So so we've been able to ramp up and cover all of the inflation.
New price.
And I will say that we are evaluating scenarios that if we were to find.
More inflation.
In Q4, and the 20% ish of.
Commodities that we have not covered yet.
We'll be able to execute more pricing to two to go after that inflation as well and productivity productivity is another lever. We are we have really ramped up there and the team is.
Working well together and we have some best in class talent.
As we talked about that is really humming on our productivity programs.
Just a layer on top of that I mean I think.
<unk> indicated in his prepared remarks as well.
The number that we delivered in the first quarter of nine 4% was really built on you can see he laid out the January February and March momentum building.
We're seeing that already when we noted that in our remarks, we're seeing already in.
In April in the second quarter that momentum continue.
We think that we are.
I've said it before we think that we are very much in the early innings of our ability there and I think because of the brand strength and our route to market strength. We're in a very unique position that we will be able to.
<unk> to expand that.
Without really having.
Detrimental effect.
The elasticities beyond what we're sort of assuming from a prudent standpoint as we go forward.
Okay. Thanks, guys I'll pass it on.
Your next question comes from the line of Bill Chappell.
Your line is now open.
Alright, thanks, good morning.
Good morning, good morning.
Hey, just wanted to go back to the SKU rationalization commentary, maybe a little more color there.
I assume thats, SKU rationalization, where you're taking out weaker brands and putting in your power brands in the same spaces.
Normal business practice I'm trying to understand why it's being called out as kind of a contra revenue item and also.
Putting in power brands in that space.
Willing to have that big of an impact on sales or just help me understand that and then with that is to say longer term plan or you know or is this just kind of some some tweaking of certain areas.
Oh, Hey, Thanks, Bill This is bill and I will take that.
I think we've probably been talking about SKU rationalization for years before we ever went public and we've been talking about it since we went public it's an ongoing initiative probably for any CPG company. That's doing the right thing is to always evaluate.
We're calling it out one I think is just to be somewhat prudent to is a matter of timing and three it's a matter of the fact that.
And we've indicated this before is that in the process of acquiring some of the companies that we've acquired our <unk>.
Standard operating procedures are to evaluate sort of the tail of each.
Company's SKU list and to rationalize that down so if we.
Purchase a company last year. The number one thing we're going to do is go in and say if you have 100 skus, maybe they should only have 50 or 60 of it makes it much more efficient we take the impact of negative impact of that.
At the forefront of it right from a timing perspective, sometimes you you terminate a customer who may be X million dollars of sales and then we replace that in the case of.
An example would be the acquisition of <unk> or in our W. Garcia, which is really more about creating supply for our OTB. There is a timing issue there, sometimes where you are eliminating the customer you're opening up. The capacity. Then you are onboarding. The capacity then you are getting the benefits of that capacity, but I think youll see that through.
Like our.
OTB results in the first quarter, we unlocked that capacity in the first quarter, we would've loved to have unlocked more that capacity last year, but we had to churn through the efforts of SKU rationalization. So think hey, we're trying to be prudent be this is not something where we're going to come in and say, we're eliminating tens of millions of dollars of net sales and we have this big hub.
All of this big gap, that's not that's not how we do it we really do it in a much more.
Prudent way to ensure that we are maximizing the reduction as soon as possible turning it into.
Net sales gains for our power brands specifically.
Okay. So.
I didn't catch the quantifiable amount that's impacting the second half sales or is it just one of the many factors.
So I think it is quantifiable.
We believe SKU rationalization with the things that <unk> talked about taking some skus off the table. So we can make room for.
OTV Skus for example, and other power brands maintain supply simplified.
Probably 200 to 300 basis points of sales impact to the year.
Okay and.
As <unk> said.
We intend to replace that sales with higher margin power brand sales, but its a timing and we expect that.
Going to pressure second half of everybody right, but to be clear.
To be clear, we're being prudent on our approach there just to sort of be.
Be conservative of how we attack that in the.
We believe strongly in our ability to replace those sales. So we're just being prudent.
No that makes sense I just want a little help there and then looking at gross margin I understand youre, not giving quarterly guidance per se, but.
If I recall last year in for lack of better terms, the wheels were kind of coming off in terms of costs and freight and everything and not being able to price kind of in a timely fashion and so it really.
Acute impact on <unk> and to some extent <unk>.
Should I expect the biggest amount of recovery on gross margin to come in <unk> and <unk>.
Is it not that straightforward.
So I think first of all you are correct last year.
We came off of a new ERP implementation, we were building the team et cetera. So we.
We needed that.
We are four months to build all that out to start catching up to inflation. So we are there now.
Seeing that in our Q1 results.
The team technology everything we've talked about we really.
Figured this out.
So from here on out you will see us.
<unk> margins.
Youre going to see us sort of build.
In lock step with inflation.
Price and productivity offsetting.
The biggest recovery for the OTO or margins.
It will really come.
Towards the end of Q2.
The may price increases that we are taking they start to develop and we start to lap some of the inflation from last year some of the.
Pricing or lack of pricing from last year and.
And deliver on that.
Okay, great. Thank you.
Youre welcome.
Your next question comes from the line of Robert Moskow. Your line is open.
Thanks.
Just a quick one on SG&A.
18% in the quarter I'm, just wondering what are the levers for that going higher you have some acquisitions.
But is there also a reduction in cost from the conversion of Io routes.
With that number had been higher excluding that conversion impact.
For sure we did benefit from higher conversions the way.
We think about it is.
It's a point for point match, you see us call Io conversions.
130 basis points hurt the net says so it was a corresponding 130 basis points help to SG&A.
So SG&A as a percent of net sales was 180 basis points favorable.
130 of that is higher conversions the rest of that is.
As volume leverage and.
And.
Spec.
Okay. So what's driving that number higher is it just the cost of delivery and can I correlate that with volume growth maybe.
Yes, so the dollar amount did go higher because of our distribution costs being up.
The prior year.
So acquisition SG&A.
We are calling it now is also in there so those two things.
And the investments, we are making to support new customer wins.
Those are the things driving the dollar amount higher.
The center net sales.
It's.
A good place.
Okay alright. Thanks.
Your next question comes from Mitch Pinheiro.
Your line is open.
Hey, good morning.
A couple of quick ones.
Just in terms of channel growth.
Which were the.
Can you talk about which channels performed really well or which ones were.
Below average.
Yes.
This is Dylan Hey, Mitch how are you.
Our food grocery channel performed.
Fantastic.
That's where most of or.
Really over performance against the category came from.
<unk>.
Customers inside of there.
Really just looking down through them.
500 basis points better than the category in many cases.
Our convenience was slightly under the category.
But we have very strong east coast growth with our premier.
Convenience channel retailers.
Is higher than the category and performing quite well. We also are starting to enroll our power brands into.
A large <unk>.
<unk> channel customer.
Literally just started about four weeks ago that will build throughout the rest of this year. So we're very positive on that.
Our mass is very strong against the category.
Club would be one where we have an opportunity it is very cyclical.
Where that goes up and down depending on.
Items, because clubs very item specific.
But that is someplace that we have opportunity as well so it's really broad brushed across the entire different subset of channels.
Okay and then.
I was curious about the composition of your price increases.
I think what.
That would be an estimated price pack architecture changes.
Is there is some of your price increases promotional reduction of promotional.
Cadence chain.
Changes.
And I was curious like where that's been and of the 10% you've called out how that looks.
Factors affect that to 10%.
Anticipated correction grid.
Yes, Hey, this is <unk>.
So yes.
We haven't broken it out that way, but.
I will say that price pack architecture.
Maintaining a healthy gap with within the subcategories that.
That we play in.
Those are some some big changes that we are making.
And we are really deploying all levers and it's not a single answer.
Across the portfolio it really depends on how you're talking about pretzels tiers or in which customer you're talking about so we are really deploying list price increases.
Price pack architecture work in a big way and then we are taking tweaking promotions as well as much as we need to to stay competitive.
Within the subcategories and channels that we plan, yes, again, just jumping in I mean, it's really a testament to where we are today versus where we were a year ago.
In February March of 2021.
We were literally standing up our technology.
Sorry, I'm getting feedback, but we're literally standing up our technology.
Around our trade management, our pricing systems at the exact same time that we're installing an ERP.
Where we stand today.
Our ability to take that the weight outs in terms of price pack architecture, that's probably a rough number maybe only about 20% of the total.
Most of it is in either pricing or a combination of pricing plus sort of velocity and timing in depth and quantity of promotion.
But it's primarily in pricing and trade as opposed to wait outs are.
Significant changes to the.
The architecture of the units themselves.
Luckily sort of jumping done because were still in full fledged inflation mode, but as inflation comes down and maybe even some of the input costs.
Hi.
Come down to more normal levels.
It remains elevated but just more normal than what happens are we talking are we going to see.
A period of increased promotional activity to lower price I mean.
You don't go we're not going to start seeing wheat.
How's that.
Do you feel about that like what's going on.
Is that going to be a difficult time demanded.
As pricing comes down or excuse me inflation comes down maybe even goes I don't say negative but.
How do you think about that kind of time period, what do you do.
Yes, Hey, Mitch.
Somewhat the benefit of being at this for somewhere between 2006, and 2007 years, having gone through these cycles in the past.
Everything takes a big 10 year loop essentially but.
The point is we're in a very rational category.
This is not one in which.
There is a chase to the bottom in terms of pricing we offer a great.
Product at a moderate price that gives people immediate pleasure for not a lot of.
Lay up a lot of money to have that pleasure of a bag of snacks.
Our brands are very strong, we're surrounded by great brands and competitors.
Everybody is working very hard to produce fantastic products, but what we have not seen historically as we're just because inflation abates a little bit that there is a chase to the bottom. So I think as inflation moderates as it potentially comes down a little bit whatever that is and whatever the duration.
A time that is over the next 612 18 months.
We will have the benefit of new price pack architecture, better trade and promotional systems and people and talent, you'll have a lot more stickiness to the to the pricing and youll have an abatement of inflation, which will ultimately lead towards increased margins is the way that we're looking at it so.
We're very excited for when that opportunity comes to us because obviously going into 2022 I'm not sure anybody was really ready for the increased inflation that came because of sort of geopolitical events, but that too will pass and we will work very hard on.
Rewarding our customers as we always have.
Okay, well that's all for me thank you very much.
Thank you thank you Mitch.
There are no further questions at this time, gentlemen, listen I'll turn the call back over to you.
Okay, great. Thank you all for joining US today, we are extremely excited about the momentum we have in so many facets of our business in regards to growing the top line and the bottom line and on behalf of our entire team. We thank you all for your continued support.
This concludes today's conference call you may now disconnect.
Okay.