Q1 2022 B&G Foods Inc Earnings Call

May 5, 2022

[music].

Good day and welcome to <unk> Foods' first quarter 2022 earnings conference call today's call, which is being recorded is scheduled to last about one hour, including remarks might be engie, Foods' management and a question and answer session.

I'd now like to.

Turning the call over to your host Sara General them Senior director of corporate strategy and business development for <unk> Foods Sarah.

Good afternoon, and thank you for joining us.

With me today are Keith Taylor, our Chief Executive Officer, and Bruce Walker, Our Chief Financial Officer.

You can access detailed financial information on the quarter in the earnings release, we issued today, which is available at the Investor Relations section of <unk> Dot com.

Before we begin our formal remarks I need to remind everyone that part of the discussion today includes forward looking statements.

These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We refer you to P&G Foods annual report on Form 10-K, and SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial condition.

<unk> undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

We will also be making references on today's call to the non-GAAP financial measures adjusted EBITDA adjusted net income adjusted diluted earnings per share and base business net sales.

Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release.

Casey will begin the call with opening remarks, and discuss various factors that affected our results selected business highlights and his thoughts concerning the outlook of fiscal 2022 and beyond.

Bruce will then discuss our financial results for the first quarter 2022, and our guidance for fiscal 2022, I would now like to turn the call over to Casey.

Good afternoon. Thank you Sarah and thank you all for joining us today for our first quarter earnings call.

The first quarter of 2022 continued to be challenged by inflation and supply recovery.

Net sales increased by five 4% versus the first quarter of 2021 ahead of our expectations sale.

Sales were driven by continued elevated demand compared to pre COVID-19 levels and higher pricing with relatively low elasticities.

However, our first quarter adjusted EBITDA declined 16, 2% versus last year behind higher than expected inflationary cost pressures accelerated by the war on Ukraine, particularly in oil wheat, corn fuel and other commodities.

We expect that our latest pricing initiatives will recover these higher costs in the back half of 2022.

There is a lag between higher cost of goods sold and pricing during the first half of 2022.

New pricing actions will take effect in late Q2, and early Q3 with a two to three months notification and the implementation period required by our retail partners.

Bruce will talk more specifics on the quarter, including financial and portfolio highlights.

But let me address the key factors driving 2020 to first quarter results in more detail.

Inflation.

Total cost of goods sold inflation in 2022 is projected between.

19% to 20% following the impact of the war in Ukraine, and global supply issues.

We plan for inflation in the low to mid teens, but now have line of sight to significantly higher costs.

In particular soybean oil the primary input to Chris go is now over 80 per pound relative to our projections in January of less than 60.

Wheat, and corn have reached historical highs because of the Ukraine, Russia disruption and vegetable costs for green giant have risen as farmers shifted crop planning.

Freight and delivery costs have also increased sharply.

Find higher oil prices.

Second pricing.

<unk> has exited several rounds of pricing actions trade spend efficiencies as well as weight reduction initiatives to offset higher input costs.

Pricing in Q1 delivered $36 2 million in additional revenue from 2021 increases and additional pricing implemented in late February .

More pricing actions have been fielded in March and April that will be implemented between may and early July .

Pricing elasticities are generally lower than projected on price increases already reflected on shelf.

Third supply.

In Q1, we also experienced supply issues at <unk> facilities, and co manufacturers related to omicron infections, and labor and material shortages production output and service levels steadily recovered through February and March but customer fill rates during Q1 were below 90%.

And finally demand.

Most P&G categories and product lines experienced reasonably strong demand relative to prior year and pre COVID-19 levels, we continue to see consumers eating and preparing more meals at home, partially driven by hybrid work models with some days during the week spent working remotely in the home.

Looking forward, we expect that pricing will catch up to recent inflationary cost spikes in late Q2, and the back half of 2022.

Customer fill rates are expected to steadily improve barring any further disruptions to enable growth and improve margins.

The outlook for fiscal year 2022 is for net sales to increase more than previous guidance with pricing elasticity is increasing somewhat from current levels.

On the bottom line adjusted EBITDA is projected lower than previous guidance driven by the lag between new higher cost and pricing actions moving into the market.

Overall, we remain consistent on our major priorities.

Foremost managing <unk> foods effectively through the concurrent inflationary pricing and supply environment, which means pricing as quickly as possible to recover higher input costs and increasing production and critical supply to improve service levels above 95%.

Second improving organic growth performance beyond COVID-19 recovery to plus 1% to 2% capitalizing on the post pandemic trends of remote working from home and a renewed interest in cooking.

Third focusing on brands and categories, where we have the capability scale and right to win in terms of resources investment and structure.

Making disciplined acquisitions that are accretive to our portfolio and cash flows and fit with our core expertise in center store dry distribution.

And finally accelerating cost savings and productivity efforts to eliminate non value added costs offset inflation and strengthen margins longer term.

To deliver on these priorities and goals, we are working to reorganize the company operations into four business units.

We are seeing clear focus and expectations within the <unk> portfolio.

As discussed these units will define the categories and brands that we will resource and grow the platforms for future acquisitions, the brands that will run for efficiency and cash flow and the businesses, we may exit over time.

The business unit structure will also push accountability and multi functional responsibility down to more closely manage parts of the complex P&G portfolio.

Improving the speed and clarity of decision, making to deliver growth and financial performance.

The timeline to complete these organization changes as the next three to four months and I expect to provide specifics on composition structure and performance expectations in late summer or early fall.

Finally, before turning the call back to Bruce I'd like to mention two additional items.

First as we announced in a press release shortly after our earnings release today, we acquired the frozen vegetable manufacturing operations of growers Express.

<unk> Express has been our long term manufacturing partner for our Green giant Rice, Veggies and Green giant veggie spirals two of our important frozen vegetable innovation products that we launched shortly after acquiring the green giant brand.

This relatively small acquisition, which closed today allows us to take greater control of our supply chain, which we expect to improve access to product helped to protect our margins and also enhance our innovation efforts for the green giant brand.

Second.

Earlier this quarter, we closed on the previously announced sale of our Portland, Maine manufacturing facility.

Thank you and I will now turn the call over to Bruce.

Thank you Casey and good afternoon, everyone.

As Casey just discussed our first quarter was heavily impacted by severe input cost increases across large portions of our portfolio coupled with continued industry wide supply chain disruptions that while improving has still been a drag on the business.

The negative pressures have been offset in part by our pricing initiatives.

<unk> list price increases trade spend reductions.

Product weight outs and the impact of product mix.

These initiatives that we have taken to improve net pricing.

Been designed to be equally as large however.

However, due to the lag effect on implementation our margins have been compressed in the short term.

We expect similar levels of margin compression in the second quarter due to the input cost increases.

Our model assumes that our pricing initiatives will begin to catch up to the cost increases and lead to relief beginning late in the second quarter and in the second half of the year.

Our supply chain issues continue to improve and we expect strong net sales performance to continue throughout the year.

During the first quarter of 2022, we generated net sales of $532 $4 million adjusted EBITDA of $77 $9 million and adjusted diluted earnings per share of <unk> 34.

Net sales for the first quarter 2022 increased by $27 3 million or five 4% ahead of our annual targets. Despite the supply chain challenges.

Price, coupled with mix accounted for $36 $2 million of the net sales increase.

FX had a negligible impact in volumes accounted for a decrease of $9 million.

We believe that supply chain challenges and low fill rates contributed to the majority of the volume declines we continue to monitor our brands to measure the negative impact of elasticity, resulting from our pricing initiatives, but so far these impacts have been relatively modest and concentrated on a relatively small selection of our brands.

Net sales of Chriscoe increased by $21 million or 36, 2%.

Net pricing, which we implemented to help offset extreme levels of input cost increases, particularly for soybean oil and canola oil contributed to the majority of the sales increase for Chris' group. However, we also had significant increases in chriscoe volumes during the quarter.

Clabber girl had another strong quarter for net sales as we closed out the baking season.

Net sales of Clabber girl increased by $3 6 million or 25% during the quarter.

Like Chriscoe net sales of Clabber girl benefited from both price and to a lesser but still meaningful extent volume growth.

Cream of wheat benefited from price and volume driven in part by continued strong demand across the brands portfolio, particularly for our premium <unk> products, which are showing very strong momentum.

Net sales of cream of wheat increased by $2 8 million or 15, 5%.

Net sales of Ortega, which has benefited from increased production capacity from our new tacos offline and hurlock, Maryland increased by $3 6 million or nine 3%.

Maple Grove farms had another strong quarter with net sales, increasing by $1 2 million or 6%.

Green Giant also had modest growth with net sales increasing by $3 2 million or two 4% in the quarter.

Net sales of Green giant shelf stable products benefited from a full quarter of lapping against last year's allocation constrained levels and were up by $3 9 million or 11, 5%.

Net sales of Green giant frozen products on the other hand, we're slightly down <unk> 7 million or 0.7%.

Net sales of our spices and seasonings business were off for the first quarter, primarily driven by two factors.

Lapping last year's first quarter was challenging as it was one of the peak performance quarters for the Spice category.

Separately, our supply chain constraints.

Each were challenging late last year and early in the first quarter had a significant impact on our ability to produce and keep up with demand levels.

That while lower than last year still remain quite elevated.

Net sales of our spices and seasonings business decreased by $15 1 million or 14, 7% in the first quarter of 2022, when compared to the first quarter of last year.

However, when compared to the first quarter of 2020 net sales of our spices and seasonings increased by $14 9 million or 24%.

We have made significant investments in our ankeny, Iowa, spices, and seasonings facility and we are beginning to see meaningful improvements in our fill rates for this important category of our business.

We expect that our improvements will better enable us to maximize our opportunity in the spices and seasonings category. This year.

Gross profit was $101 3 million for the first quarter of 2022 or 19% of net sales.

Gross profit was $117 8 million.

In the first quarter of 2021 or 23, 3% of net sales.

During the first quarter of 2022 gross profit was negatively impacted by higher than expected input cost depletion, which was in many cases higher in.

In the first quarter of 2022 than it was in the fourth quarter of 2021.

Our expectation is that input cost inflation will continue to have significant industry wide impact.

During fiscal 2022.

As we have discussed on previous calls we have been able to mitigate a portion of the impact of inflation by locking in prices through short term supply contracts and advanced commodities purchase agreement.

And by implementing cost savings measures.

We are also executing various pricing initiatives, including list price increases trade optimization and product weight outs.

However, these pricing initiatives generally lag behind rising input costs.

As such we were unable to fully offset all of the incremental costs that we faced in the first quarter of 2022.

We expect a similar cost pressures in the second quarter of 2022.

Based on current levels of input costs, we expect to see margin recovery in the second half of 2022.

Okay.

Selling general.

<unk> and administrative expenses decreased by $3 6 million or 7% to $46 8 million in the first quarter of 2022 compared to $54 million.

In the first quarter of last year.

The decrease was composed of decreases in acquisition divestiture related and nonrecurring expenses.

$4 million in consumer marketing expenses of $1 5 million.

Partially offset by increases in selling expenses of $1 $7 million general and administrative expenses of 0.1 million and warehousing expenses of zero point $1 million.

Expressed as a percentage of net sales selling general and administrative expenses improved by one two percentage points to eight 8% for the first quarter of 2022 as compared to 10% for the first quarter of 2021.

During the first quarter of 2022, we completed the closure and sale of our Portland main manufacturing facility and recognized the gain on sale, which was partially offset by expenses related to the closure of the facility and the transfer of manufacturing operations.

As I mentioned earlier, we generated $77 $9 million and adjusted EBITDA in the first quarter of 2022 compared to $92 9 million in the first quarter of 2021.

The decrease in adjusted EBITDA was primarily attributable to industry wide input cost inflation and supply chain disruptions, partially offset by list price increases trade spend reductions and the net benefit during the first quarter relating to the Portland closure and sale.

Adjusted EBITDA as a percentage of net sales was 14, 6% in the first quarter of 2022 compared to 18, 4% in fiscal 2021.

Interest expense was $26 8 million for the first quarter of 2022 compared to $27 million in the first quarter of 2021.

Depreciation and amortization was $19 8 million in the first quarter of 2022 compared to $23 million in the first quarter of last year.

We had an effective tax rate of 24, 6% for the quarter compared to 25, 5% in the prior year.

We generated 34 and adjusted diluted earnings per share in the first quarter of 2022.

Third to 52 in the prior year.

Despite the margin cost pressures and the decrease in adjusted EBITDA when compared to last year net cash from operations was relatively flat compared to last year we.

We generated $25 $2 million in net cash from operations in the first quarter of 2022 compared to $26 million in the first quarter of 2021.

As I mentioned earlier on the call. We expect second quarter of 2022 to have many similarities to the first quarter.

Based on what we know today about cost and what we have implemented in terms of pricing, we expect our price increases to catch up to the cost increases.

The end of the second quarter and the beginning of the third quarter.

Directionally speaking, we are expecting a negative impact of more than $200 million for the full year from the combination of material cost increases factory labor and logistics.

Similarly, we.

We have implemented or are in the process of <unk>.

<unk> price initiatives that we expect to generate over $200 million in benefit during the year.

We have executed multiple rounds of list price increases already this year and we'll continue to do so as needed over the course of the year.

We expect our various pricing or revenue management initiatives to cover more than 95% of the brands in our portfolio.

With pricing as a large driver of net sales performance for the year and based on where we finished the first quarter. We are increasing our guidance for net sales to 2% to 4% growth up from our prior guidance of 1% to 3% and our traditional long term growth algorithm of zero to 2%. This.

Implies 2022 net sales of approximately $2 1 billion to $2 4 billion.

A key factor that will influence our ability to hit this target includes the impact of any further supply chain disruption on our customer fill rates.

Fill rates have begun to recover from the omni crone related disruption that negatively impacted performance at the end of 2021 and earlier this year.

While we are still far below our customer fill rate expectations. We are beginning to move in the correct direction.

We were also watching closely for any signs of negative elasticity.

So far we are experiencing only very modest unless it.

<unk> in certain brands, but as we mentioned previously supply chain challenges have been the leading driver of topline performance for the majority of our brands.

Based on our current net sales forecast and when factoring in both cost increases and revenue management initiatives, we expect to generate adjusted EBITDA of approximately $340 million to $358 million.

Adjusted EBITDA margins will obviously be down, but we do expect a recovery over time when the piece of input cost inflation moderates.

Additionally, we expect interest expense of $110 million to a $115 million, including cash interest of $105 million to $110 million.

Depreciation expense of 60 million to $65 million.

Amortization expenses of $20 to $22 million in.

An effective tax rate of 26, 5% to 27, 5%.

Adjusted diluted earnings per share of $1 65 to $1 75 and.

And capex of approximately $50 million.

Now I will turn the call back over to Casey for further remarks.

Thank you Bruce.

As discussed the first quarter showed progress in delivering sales and pricing growth, but could not offset the gross margin impact of escalating input and operating costs.

Additional pricing actions have been fielded and implemented to recover higher costs and will flow through in late Q2, and the back half of 2022.

We will continue to closely monitor inflation and respond quickly with any further pricing and continued productivity efforts.

This concludes our remarks and now we would like to begin the Q&A portion of our call operator.

Thank you.

To ask a question you will need to press star one on your telephone until we draw. Your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of William Reuter from Bank of America. Your line is now open.

Good afternoon.

Once all of the additional price increases have been pushed through.

And assuming that we don't have accelerating inflation from here would we expect that next year, you could be kind of back in that 18% to 20% EBITDA margin range that you've talked about in the past or we'll still take it takes some time to get there.

I think that would be the goal the big wildcard is what continues to happen with inflation and do we have any more shocks to the system like we had over the first quarter of this year, but certainly that is the goal to return to those margin profiles.

Okay.

And our pricing our pricing is largely going to recover gross margin dollars.

So you will have a little natural compression of margins because of that.

Price realization.

But our goal is to get back to that as Bruce said to that 18% to 20%, but I think in a while.

Cost stay high we will probably have a slight margin compression over our long term goals.

Yes, now that makes sense on the inflation and the margin rate coming down a bit but and then I guess my second question with regard to the change in the organizational structures that's getting.

Put in place over the next three to four months.

I mean, you mentioned that it's going to improve speed and agility.

Is there any either incremental cost of having more labor or is this actually going to result in some cost savings in terms of your head count.

I think it's largely a reorganization and which we expect to be relatively neutral.

In terms of the total SG&A or G&A costs associated with the business, it's largely reorganizing ourselves to kind of create multi functional units, which are driving aspects of our business and have people make.

Patients that are closer to the business and more real time.

But our goal is to maintain this at relative cost neutrality. So we will have some some puts and takes and some movements and other things that are maybe some slight restructuring costs, but so far we've designed this to be relatively cost neutral.

Perfect. That's all from me thank you.

Our next question comes from Michael Lavery from Piper Sandler Your line is now open.

Good afternoon. Thank you.

Hey, Michael.

I just want to follow up on that margin question.

Just trying to understand did this quickly I hope the math is right, but just based on what you have in the bag for the first quarter.

And what your guidance would point too it looks like you're guiding 17% to 18% EBITDA margins for the rest of the year.

I guess, if that's right what are the what really gets you there and what kind of trajectory does it look like I think you said, it's more second half skewed which of course would just push those numbers even higher if the <unk>.

Second quarter is more similar to the first.

Not talking to margins for specific quarter, but directionally. There is expansion. If you think about a lot of the pricing.

That we're expecting to get this year it will be in the second half of the year.

And most of that is already underway. It just hasnt fully ramped into the business yet so.

There is a process of communicating those price increases to our customers we need to do that we need to wait till after the costs have materialized and then there's a process to go through and so.

Very large cost increase.

This year that there'll be fees and very large pricing.

That's the biggest driver.

We will expect to see better margins in the back half.

The back two quarters.

Well I guess can you just contextualize that a little bit more on the prior question you were really referencing kind of an 18 or higher for next year.

Waving a little bit of caution around that but I think you.

Your guidance is pointing to that in the second half of this year is that achievable.

Again, the whole point is premised on input cost increases that we've already seen and price increases until we have another shock to the system. This year in the back half from an input cost we will have to have additional price increases to take it if not the pricing increases should catch up to the cost increases by.

The back half of the year.

Okay. That's helpful.

Yes, just to be clear, what we're saying is our.

Our long term goal to get to 18 to 20.

The issue will be that even next year, we will be challenged to get over 18 because of this natural margin compression.

Higher realizations and higher costs right.

Got you and can you just give some of the thinking on.

The gain on the sale would have been included in adjusted EBITDA that feels more like more like a one time item.

I don't know I mean look it's an accounting calculation.

Again on sale it was offset in part by some costs that we incurred in terms of factory shutdowns.

So some of those net against each other.

In part.

Okay. Thanks, a lot.

Yes.

Our next question comes from Carla Casella from Jpmorgan, you May now state your question.

Great. Thank you for taking my call.

On the M&A front, you did you say how much you paid for growers Express.

We did and it was a private transaction it's on the smaller side in terms were not disclosed.

And so they own the fee.

And I'm, sorry that green giant license.

Is that recently that you sold that to them.

For our time actually.

We've owned it for years and that's a small piece of the business fresh.

Yeah and then.

The other part is they are the manufacturing for two of our kind of long time initiatives.

Innovation products, the spiral veggies and the rice veggies.

Okay, Great and Thats really what the transaction was all about.

Other opportunities like that to buy bring someone in house that you've already been working with or are you talking when you mentioned about M&A are you talking about.

Like what we've seen in the past brand acquisition.

As your scale.

So the yes, I mean theres not a ton of opportunities like this we're always looking but in general we're looking for.

Opportunities similar to what we've done in the past, obviously will point to the ones that have been more successful than not and that's the role models to do more like what we own what we have today, that's going to do well in and build a more focused portfolio.

So.

Expectation is to be more disciplined.

In the past.

Most of our acquisitions will probably be buying entire businesses. This one just happened to be a great opportunity to integrate our supply chain.

There will be there may be some others like this but really I don't see any on the near term horizon.

Okay, Great and then.

Hi.

Are you is M&A I mean, you continue to look even though your leverage is relatively high.

Senior somewhat limited in financing.

Leverage is at this point or.

Is this a steady process of looking at M&A, regardless I.

I think it's a steady process of looking certainly from a capital structure standpoint.

<unk> fit within the context of where our leverage is in.

We've got we've got debt and equity with which to fund stuff and so.

Open for M&A, but but you are raising a valid point, we got to be smart about how we finance things.

Okay, Great and then just on the cost increases you mentioned oil wheat corn fuel.

Any of those that you can hedge and if so how far out.

You just can't be hedged.

Honestly, we can we can increase coverage on some of these commodities but.

To be honest increased coverage right now.

Historical highest doesn't feel like the right thing to do so we still know where theyre going to go and so we try and protect our near term supply.

But we don't go out and hedge long term when the market is at historical highs.

Okay, great. Thanks, I'll get back in queue.

Thank you.

Our next question comes from <unk> Martinson from Jefferies. Your line is now open.

Good afternoon.

In terms of the reorganization I thought I heard you say that there would be a portion of the business that would be <unk>.

<unk> for potential divestitures and I just wanted to get a sense of whats the magnitude of businesses that you think may no longer fit with you.

They do not come up to your full standards.

I think.

Within the business unit structure, we would have.

This unit that was managing a collection of assets that we would.

I think managed for cash flows and stability and over time, we might decide that some of those businesses don't belong.

Our portfolio I think.

In the near term those are relatively small business is not huge.

But we'll always be looking at our portfolio and deciding which businesses. We think fit where are we going to drive value and add value in the future and where we have platforms for future acquisition and rollout.

And when you guys talk about still being below fill rates at year end customers.

We've been getting kind of mixed signals from grocers and others. Some are saying that they are still seeing strong demand others are saying and we're starting to lap tougher comps consumers are pulling back a bit.

But certainly below fill rates would suggest that that demand is still out there I mean, what are you guys seeing or hearing from your customers.

I mean, we're hearing that demand still remains elevated compared to pre COVID-19 levels.

And some of the traditional categories.

Preparing meals and other things. So we're still hearing that the demand is high but it is off that COVID-19.

So.

We continued to see strength behind kind of at home meal consumption, particularly as people continue to work some parts of their weak remotely which is driving a few more meal occasions like breakfast and lunch.

Coming out pretty clearly in the research. So we still are seeing some elevated demand is going to vary by category in terms of People's behavior, I do expect that youll see people shift a little bit more eating at home on the margin, but again I think relative to kind of pre COVID-19 levels, we're still seeing at home consumption and higher demand.

Thank you very much guys I appreciate it.

Thanks, Greg.

Okay.

And our next question comes from Robert Moskow from Credit Suisse. Your line is now open.

Hi, Thanks for the question.

Hey, Casey.

Bruce I am just looking at the cash flow and first quarter looks a lot like first quarter a year ago.

And last year was characterized by working capital being a.

A big use of cash like a couple hundred million.

If you were chasing an upward inflation curve it looks like that's playing out again. This year. So if this is the scenario where you have another.

Use of cash.

That size.

And depressed free cash flow.

What will happen at the end of the year does that put too much pressure on your balance sheet would you have to do another equity deal or what do you think.

Yes, the goal would be to not have quite as much as last year I still think that there is going to be some.

The real pressure that we saw last year.

<unk> was two things it was the cost inflation.

Which which was a big product the second half of the year and the other part was the re piping for Green giant.

We had virtually ran out of product.

During the Covid enhanced period and last year was a big investment from our green giant and some others. So youre right there will be some pressure.

Don't expect it to be as much as it was last year.

Okay, and just the balance sheet.

<unk> enough to handle that or.

Yes, we would make sure to manage the balance sheet to handle it.

Okay Alright. Thank you. Thank you yep.

And we will now take our next question comes from Eric Larson from Seaport Research Partners. Your line is now open.

Alright, Thank you for the question.

Two of them from me so first maybe you've talked a little bit about this but in your prepared comments you said that you would.

Obviously sales are going to be more elevated than you would expected because of pricing.

But then you also threw in there that.

Youre looking for more elasticity are you.

Seeing elasticity yet or.

Is that just an overabundance of caution.

I think a little bit the ladder.

So so far what pricing has been implemented in the market that we can track and do some last season measurements, we've seen relatively low elasticity I would not say no elasticity, we are seeing some elasticity, but it's relatively low to what our models would have historically predicted.

And our future projections, we're predicting we're predicting that that goes up.

Modestly.

Got a little bit of caution to assume not assume that we're going to stay at this low level, but maybe go up a little bit more but still below where we would expect.

That said at a historical up right.

Because everybody the entire category is kind of is going up.

So I guess, just just to be cautious we've assumed a little bit higher lapses in our to go projections, that's easy to answer.

Okay. So the other question is.

You had mentioned also that you were I think you were expecting.

Some more vegetables inflation on the input side and.

And stated that.

You think the farmers are going to be shifting from from.

Kind of vegetable acreage into maybe some more of the more traditional row crops like corn soybeans wheat whatever.

We haven't started that go outlet you haven't really started that planting season much yet.

Our farmers, telling us that are are your supplier, saying that there isn't going to be as much acreage this year. So.

I guess I'm, just curious as to get yes, we.

Those conversations.

Have you been anticipating some some shortage of supply, but uhm mmm.

I understand what you're saying, it's just fine. So thank you. So far we're so far we're being told that our needs can be met.

Got it okay. Thanks.

And obviously a lot of that depends on you know what kind of a crop really comes out [laughter], but so far from a planning standpoint, and it looks like we can meet our needs.

Thank you and we now have a follow up question comes from.

J P Morgan.

Kansas.

Any add any color on labor in terms of do you have any issues of flavor. Our labor crossed also going up through the year are you laughing easier comparisons of labor front.

To labor.

Labour I think just two components. This one is that we have we have raised wages.

And many of our plans to maintain.

Our workforce.

And and some and some of our labor and some of our factory markets.

We have extremely low unemployment so it's been difficult to maintain full staffing. So this has been improving I think quite a bit over the last couple of months.

We have raised wages.

We put a new programs to recruit labor, so I feel like our labor situation is getting better and most of our factories. There may be still one or two that we're still trying to get back up to full staffing, but you know I think what you're hearing essay about inflation and cost pressures is that we do expect our direct labor costs in the factories will be up this year over.

Last year.

To maintain full staffing and maintain full production.

Great. Thank you.

Our next question comes from.

<unk> from bank.

Your line is now open.

Good evening.

And how are you.

Okay can I just ask one question about what do you see you in the last two cities and are you see and value brands.

That label.

How do you kind of factor that in not just this year, but into 2023.

I mean, I think we're still sitting relatively low elasticity and some of our most price sensitive products, we might see them to be a little bit higher, but still well below kind of historical model predictions.

I think we are one of the reasons why we are saying, we've kind of raised our expectations unless they see a little bit, but not you know not where it would have been historically is that we do expect us prices get higher and higher particularly on some of our some of our products that have really big cost increases that we will see a little bit of migration.

Private label, so far we have not really seen that very broadly but.

But we kind of expect as prices go higher that some of that could happen.

Have you seen any competitors not follow or have you not following some of your competitors.

I I'm, not sure, which one which comes first but I'm just trying to make sure that the.

The disparity between you and your competitors are still theme or has there been any change in that across any part of your portfolio and then I'll leave it there and I appreciate it.

Largely the same.

Sometimes you see private label are different competitors moving at different rates, but largely.

People have responded to the higher input costs.

Okay. I appreciate you. Thank you very much.

Daniel Friday question at this time.

<unk> you may continue.

Great. Thank you everybody.

Thank you.

And this concludes today's conference call. Thank you everyone for by dissipating you may now disconnect.

[music].

Good day, and welcome to <unk> Foods' first quarter 2022.

Earnings Conference call today's call, which is being recorded is scheduled to last about one hour, including remarks by BMG Foods' management and a question and answer session.

I would not like to turn the call over to your host Sara Hall General them Senior director of corporate strategy and business development for PNG Foods Sarah.

Good afternoon, and thank you for joining US with me today are Casey Keller, our Chief Executive Officer, and Bruce Walker, Our Chief Financial Officer.

You can access detailed financial information on the quarter in the earnings release, we issued today, which is available at the Investor Relations section of BG food Uh Huh.

Before we begin our formal remarks I need to remind everyone that part of the discussion today includes forward looking statements.

Statements are not guarantees of future performance and therefore undue reliance should not be placed upon them.

We refer you to PNG through its annual report on Form 10-K, and SEC filings for a more detailed discussion of the risks that could impact our company's future operating results and financial condition.

<unk> undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

We will also be making references on today's call to the non-GAAP financial measures adjusted EBITDA adjusted net income adjusted diluted earnings per share and base business net sales.

Reconciliations of these financial measures to the most directly comparable GAAP financial measures are provided in today's earnings release.

Casey will begin the call with opening remarks, and discuss various factors that affected our results.

The business highlights and his thoughts concerning the outlook of fiscal 2022 and beyond.

Bruce will then discuss our financial results for the first quarter 2022, and our guidance for fiscal 2022, I would now like to turn the call over to Casey.

Good afternoon. Thank you Sarah and thank you all for joining us today for our first quarter earnings call.

The first quarter of 2022 continued to be challenged by inflation and supply recovery.

Net sales increased by five 4% versus the first quarter of 2021 ahead of our expectations.

Sales were driven by continued elevated demand compared to pre COVID-19 levels and higher pricing with relatively low elasticities.

We expect that our latest pricing initiatives will recover these higher costs in the back half of 2022.

There is a lag between higher cost of goods sold and pricing during the first half of 2022.

New pricing actions will take effect in late Q2, and early Q3 with a two to three months notification and the implementation period required by our retail partners.

Bruce will talk more specifics on the quarter, including financial and portfolio highlights.

Let me address the key factors driving 2020 to first quarter results in more detail.

Inflation.

Total cost of goods sold inflation in 2022 is projected between.

19% to 20% following the impact of the war in Ukraine, and global supply issues.

We plan for inflation in the low to mid teens, but now have line of sight to significantly higher costs.

In particular soybean oil the primary input to Chris go is now over 80 per pound relative to our projections in January of less than 60.

Wheat, and corn have reached historical highs because of the Ukraine, Russia disruption and vegetable costs for green giant have risen as farmers shifted crop planning.

Freight and delivery costs have also increased sharply.

Higher oil prices.

Second pricing P&G.

<unk> has exited several rounds of pricing actions trade spend efficiencies as well as weight reduction initiatives to offset higher input costs.

Pricing in Q1 delivered $36 2 million in additional revenue from 2021 increases and additional pricing implemented in late February .

More pricing actions have been fielded in March and April that will be implemented between may and early July .

Pricing elasticities are generally lower than projected on price increases already reflected on shelf.

Third supply <unk>.

In Q1, we also experienced supply issues at P&G facilities, and co manufacturers related to omicron infections, and labor and material shortages production output and service levels steadily recovered through February and March but customer fill rates during Q1 were below 90%.

And finally demand.

Looking forward, we expect that pricing will catch up to recent inflationary cost spikes in late Q2, and the back half of 2022.

Customer fill rates are expected to steadily improve barring any further disruptions to enable growth and improve margins.

The outlook for fiscal year 2022 is for net sales to increase more than previous guidance with pricing elasticity is increasing somewhat from current levels.

On the bottom line adjusted EBITDA is projected lower than previous guidance driven by the lag between new higher cost and pricing actions moving into the market.

Overall, we remain consistent on our major priorities.

Foremost managing BMG foods effectively through the current inflationary pricing and supply environment, which means pricing as quickly as possible to recover higher input costs and increasing production and critical supply to improve service levels above 95%.

Second improving organic growth performance beyond COVID-19 recovery to plus 1% to 2% capitalizing on the post pandemic trends of remote working from home and a renewed interest in cooking.

Third focusing on brands and categories, where we have the capability scale and right to win in terms of resources investment and structure.

Making disciplined acquisitions that are accretive to our portfolio and cash flows and fit with our core expertise in center store dry distribution.

And finally accelerating cost savings and productivity efforts to eliminate non value added costs offset inflation and strengthen margins longer term.

To deliver on these priorities and goals, we are working to reorganize the company operations into four business units.

Clear focus and expectations within the <unk> portfolio.

As discussed these units will define the categories and brands that we will resource and grow the <unk>.

Platforms for future acquisitions, the brands that will run for efficiency and cash flow and the businesses, we may exit over time.

The business unit structure will also push accountability and multi functional responsibility down to more closely managed parts of the complex <unk> portfolio.

Improving the speed and clarity of decision, making to deliver growth and financial performance.

Finally, before turning the call back to Bruce I'd like to mention two additional items.

First as we announced in a press release shortly after our earnings release today, we acquired the frozen vegetable manufacturing operations of growers Express.

Growers Express has been our long term manufacturing partner for our Green giant Rice, Veggies and Green giant veggie spirals two of our important frozen vegetable innovation products that we launched shortly after acquiring the green giant brand.

Second.

Earlier this quarter, we closed on the previously announced sale of our Portland, Maine manufacturing facility.

Thank you and I will now turn the call over to Bruce.

Thank you Casey and good afternoon, everyone.

The negative pressures have been offset in part by our pricing initiatives that include list price increases trade spend reductions.

Product weight outs and the impact of product mix.

These initiatives that we have taken to improve net pricing.

Been designed to be equally as large.

However, due to the lag effect on implementation our margins have been compressed in the short term.

We expect similar levels of margin compression in the second quarter due to the input cost increases.

Our model assumes that our pricing initiatives will begin to catch up to the cost increases and lead to relief beginning late in the second quarter and in the second half of the year.

Our supply chain issues continue to improve and we expect strong net sales performance to continue throughout the year.

During the first quarter of 2022, we generated net sales of $532 $4 million adjusted EBITDA of $77 $9 million and adjusted diluted earnings per share of <unk> 34.

Net sales for the first quarter 2022 increased by $27 3 million or five 4% ahead of our annual targets. Despite the supply chain challenges.

Price, coupled with mix accounted for $36 $2 million of the net sales increase.

X had a negligible impact in volumes accounted for a decrease of $9 million.

Net sales of Chriscoe increased by $21 million or 36, 2%.

Net pricing, which we implemented to help offset extreme levels of input cost increases, particularly for soybean oil and canola oil contributed to the majority of the sales increase for Chriscoe. However, we also had significant increases in critical volumes during the quarter.

Clabber girl had another strong quarter for net sales as we closed out the baking season.

Net sales of Clabber girl increased by $3 $6 million or 25% during the quarter.

Like Chris go net sales of Clabber girl benefited from both price and to a lesser but still meaningful extent volume growth.

Net sales of premium <unk>.

Increased by $2 million or 15, 5%.

Yeah.

Net sales of Ortega, which has benefited from increased production capacity from our new tacos offline and hurlock, Maryland increased by $3 6 million or nine 3%.

Maple Grove farms had another strong quarter with net sales, increasing by $1 2 million or 6%.

Green Giant also had modest growth with net sales increasing by $3 2 million.

Our two 4% in the quarter.

Net sales of Green giant shelf stable products benefited from a full quarter of lapping against last year's allocation constrained levels and were up by $3 9 million or 11, 5%.

Net sales of Green giant frozen products on the other hand, we're slightly down while Europe was $7 million or 0.7%.

Net sales of our spices and seasonings business were off for the first quarter, primarily driven by two factors.

Lapping last year's first quarter was challenging as it was one of the peak performance quarters for the Spice category.

Separately, our supply chain constraints.

Which were challenging late last year and early in the first quarter had a significant impact on our ability to produce and keep up with demand levels that.

While lower than last year still remained quite elevated.

Net sales of our spices and seasonings business decreased by $15 1 million or 14, 7% in the first quarter of 2022, when compared to the first quarter of last year.

However, when compared to the first quarter of 2020 net sales of our spices and seasonings increased by $14 9 million or 24%.

We expect that our improvements will better enable us to maximize our opportunity in the spices and seasonings category. This year.

Gross profit was $101 3 million for the first quarter of 2022 or 19% of net sales.

Gross profit was $117 8 million.

In the first quarter of 2021 or 23, 3% of net sales.

During the first quarter of 2022 gross profit was negatively impacted by higher than expected input cost depletion, which was in many cases higher in the first quarter of 2022 than it was in the fourth quarter of 2021.

Our expectation is that input cost inflation will continue to have significant industry wide impact.

During fiscal 2022.

We are also executing various pricing initiatives, including list price increases trade optimization and product weight outs.

However, these pricing initiatives generally lag behind rising input costs.

As such we were unable to fully offset all of the incremental costs that we faced in the first quarter of 2022.

We expect a similar cost pressures in the second quarter of 2022.

Based on current levels of input costs, we expect to see margin recovery in the second half of 2022.

Okay.

Selling general and administrative expenses decreased by $3 6 million or 7% to $46 8 million in the first quarter of 2022 compared to $54 million in the first quarter of last year.

The decrease was composed of decreases in acquisition divestiture related and nonrecurring expenses of $4 million in consumer marketing expenses of $1 5 million, partially offset by increases in selling expenses of $1 7 million general and administrative expenses of <unk> $1 million and where.

Housing expenses of zero point $1 million.

During the first quarter of 2022, we completed the closure and sale of our Portland manufacturing facility and recognized the gain on sale, which was partially offset by expenses related to the closure of the facility and the transfer of manufacturing operations.

As I mentioned earlier, we generated $77 $9 million and adjusted EBITDA in the first quarter of 2022 compared to $92 9 million in the first quarter of 2021.

Adjusted EBITDA as a percentage of net sales was 14, 6% in the first quarter of 2022 compared to 18, 4% in fiscal 2021.

Interest expense was $26 8 million for the first quarter of 2022 compared to $27 million in the first quarter of 2021.

Depreciation.

The Asian, and amortization was $19 $8 million in the first quarter of 2022 compared to $23 million in the first quarter of last year.

We had an effective tax rate of 24, 6% for the quarter compared to 25, 5% in the prior year.

We generated 34 and adjusted diluted earnings per share in the first quarter of 2022 compared to <unk> 52 in the prior year.

Despite the margin cost pressures and the decrease in adjusted EBITDA when compared to last year net cash from operations was relatively flat compared to last year we.

We generated $25 $2 million of net cash from operations in the first quarter of 2022 compared to $26 million in the first quarter of 2021.

As I mentioned earlier on the call. We expect second quarter of 2022 to have many similarities to the first quarter base.

Based on what we know today about cost and what we have implemented in terms of pricing, we expect our price increases to catch up to the cost increases.

The end of the second quarter and the beginning of the third quarter.

Directionally speaking, we are expecting a negative impact of more than $200 million for the full year from the combination of material cost increases factory labor and logistics similar.

Similarly, we.

We have implemented or are in the process of implementing price initiatives that we expect to generate over $200 million in benefit during the year.

We have executed multiple rounds of list price increases already this year and we'll continue to do so as needed over the course of the year.

We expect our various pricing or revenue management initiatives to cover more than 95% of the brands in our portfolio.

This implies 2022 net sales of approximately $2 1 billion to $2 4 billion.

The key factor that will influence our ability to hit this target includes the impact of any further supply chain disruption on our customer fill rates.

Fill rates have begun to recover from the omicron related disruption that negatively impacted performance at the end of 2021 and earlier this year.

While we are still far below our customer fill rate expectations. We are beginning to move in the correct direction. We're also watching closely for any signs of negative elasticity.

So far we are experiencing only very modest.

Elasticity in certain brands, but as we mentioned previously supply chain challenges have been the leading driver of topline performance for the majority of our brands.

Adjusted EBITDA margins will obviously be down, but we do expect a recovery over time when the piece of input cost inflation moderate.

Additionally, we expect interest expense of $110 million to $115 million, including cash interest of $105 million to $110 million.

Depreciation expense of $60 million to $65 million.

Amortization expenses of $20 to $22 million.

An effective tax rate of 26, five to 27, 5%.

Adjusted diluted earnings per share of $1 65 to $1 75.

And capex of approximately $50 million.

Now I will turn the call back over to Casey for further remarks.

Thank you Bruce.

As discussed the first quarter showed progress in delivering sales and pricing growth, but could not offset the gross margin impact of escalating input and operating costs.

Additional pricing actions have been fielded and implemented to recover higher costs and will flow through in late Q2, and the back half of 2022.

We will continue to closely monitor inflation and respond quickly with any further pricing and continued productivity efforts.

This concludes our remarks and now we would like to begin the Q&A portion of our call operator.

Thank you.

To ask a question you will need to press star one on your telephone.

We draw your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of William Reuter from Bank of America. Your line is now open.

Good afternoon.

Once all of the additional price increases have been pushed through.

And assuming that we don't have accelerating in place and from here. We expect that next year, you could be kind of back in that 18% to 20% EBITDA margin range that you've talked about in the past or will it still takes some time to get there.

Okay.

Our pricing is largely going to recover gross margin dollars.

So you will have a little natural compression of margins because of that.

Our price realization.

But our goal is to get back to that as Bruce said to that 18% to 20%, but I think in a while.

Cost stay high we will probably have a slight margin compression over our long term goals.

Yes, now that makes sense on the inflation and the margin rate coming down a bit but.

And then I guess my second question with regard to the change in the organizational structure that we put in place over the next three to four months.

Yes.

<unk>, you mentioned that it's going to improve speed and agility.

Is there any either incremental cost of having more labor or is this actually going to result in some cost savings in terms of head.

Head count.

I think it's largely a reorganization, which we expect to be relatively neutral.

In terms of the total SG&A or G&A costs associated with a business, that's largely reorganizing ourselves too.

To create multi functional units, which are driving aspects of our business.

People make decisions that are closer to the business and more real time.

But our goal is to maintain this at relative cost neutrality. So we will have some some puts and takes and some movements and other things there maybe some slight restructuring costs, but so far we've designed it to be relatively cost neutral.

Perfect. That's all from me thank you.

Our next question comes from Michael Lavery from Piper Sandler Your line is now open.

Good afternoon. Thank you.

Hey, Michael.

I just wanted to follow up on that margin question.

Just trying to understand did this quickly I hope the math is right, but just based on what you have in the bag for the first quarter.

And what your guidance would point too it looks like you're guiding 17%, 18% EBITDA margins for the rest of the year.

Second quarter is more similar to the first.

Not talking to margins for specific quarter, but directionally. There is expansion. If you think about a lot of the pricing.

That we're expecting to get this year it will be in the second half of the year.

And most of that is already underway. It just hasnt fully ramped into the business yet right. So.

There is a process of communicating those price increases to our customers we need to do that we need to wait until after the costs have materialized and then there's a process to go through and so.

Very large cost increased.

This year that that we faced and very large pricing.

That's the biggest driver, yes, we will expect to see better margins in the back half.

The back two quarters.

Well I guess can you just contextualize that a little bit more on the prior question you were really referencing kind of an 18 or higher for next year and wavering a little bit of caution around that but I think that youre.

Your guidance is pointing to that in the second half of this year is that achievable.

The back half of the year.

Okay.

Yes, but just to be clear, what we're saying is our.

Our long term goal to get to 18 to 20 I think the issue will be that even next year will be challenged to get over 18 because of this natural margin compression.

Higher realizations and higher costs right.

Yeah.

Got you and can you just give some of the thinking on why.

The gain on the sale would have been included in adjusted EBITDA that feels more much more like a one time item.

I don't know I mean look it's an accounting calculation.

Gain on sale it was offset in part by some costs that we incurred in terms of factory shutdowns.

So some of those net against each other.

In part.

Okay. Thanks, a lot.

Yes.

Our next question comes from Carla Casella from Jpmorgan, you May now state your question.

Great. Thank you for taking my call.

On the M&A front.

You did you say how much you paid for growers Express.

We didn't it was a private transaction it's on the smaller side in terms were not disclosed.

And so they own the fee.

And I'm, sorry, the green giant license.

Was that recently that you sold that to them.

Before our time actually.

We've owned it for years and that's a small piece of the business is fresh.

Yeah and then.

The other part is they are the manufacturing for two of our kind of long time initiatives.

Innovation products, the spiral veggies and the right strategies.

Okay, Great and Thats really with the transaction was all about.

There are other opportunities like that to buy bring someone in house that you've already been working with are you talking when you mentioned about M&A are you talking about.

Like what we've seen in the past brand acquisition on a larger scale.

So, yes, I mean, theres not a ton of opportunities like this we're always looking but in general we're.

Looking for.

So expectation is to be more disciplined in the past.

Most of our acquisitions will probably be buying entire businesses. This one just happened to be a great opportunity to integrate our supply chain.

There will be there may be some others like this but really I don't see any on the near term horizon.

Okay, Great and then.

Hi.

Are you is M&A I mean, you continue to look even though your leverage is relatively high.

Senior talent limited and financing given how high the leverage point or.

Is this a steady process of looking at M&A, regardless I.

I think it's a steady process of looking certainly from a capital structure standpoint, it's got to fit within the context of where our leverage is and we.

We've got we've got debt and equity with which to fund stuff and so.

Open for M&A, but but you are raising a valid point, we got to be smart about how we finance things.

Okay, Great and then just on the cost increases you mentioned oil wheat corn fuel.

Any of those that you can hedge and if so how far out can you have you are there.

You just can't be heads.

Honestly, we can we can increase coverage on some of these commodities but.

To be honest increased coverage right now at historical highs doesn't feel like the right thing to do.

So we just don't know where theyre going to go and so we try and protect our near term supply.

But we don't go out and hedge long term when the market is at historical highs.

Okay, great. Thanks, I'll get back in queue.

Thank you.

Our next question comes from <unk> Martinson from Jefferies. Your line is now open.

Afternoon.

Terms of the reorganization I thought I heard you say that there would be a portion of the business that would be position for potential divestitures and I just wanted to get a sense of whats the magnitude of businesses that you think may no longer fit with you if.

If they do not come up to your full standards.

I think.

Within the business unit structure, we would have.

Business unit that was managing a collection of assets that we would.

I think managed for cash flows and stability and over time, we might decide that some of those businesses don't belong in <unk>.

Our portfolio I think.

In the near term those are relatively small business is not huge.

But we'll always be looking at our portfolio and deciding which business that we think fit where are we going to drive value and add value in the future and where do we have platforms for future acquisition and rollout.

And when you guys talk about still being below fill rates at your end customers.

Im getting work, we've been getting kind of mixed signals from grocers and others. Some are saying that they are still seeing strong demand others are saying and we're starting to lap tougher comps consumers are pulling back a bit.

But certainly below fill rates would suggest that that demand is still out there I mean, what are you guys seeing or hearing from your customers.

I mean, we are hearing that demand still remains elevated compared to pre COVID-19 levels, so and some of the traditional categories.

Preparing meals and other things. So we're still hearing that demand is high but it is off the COVID-19.

So.

We continue to see strength behind kind of at home meal consumption, particularly as people continue to work some parts of their weak remotely which is driving a few more meal occasions like breakfast and lunch.

Thank you very much guys I appreciate it.

Thanks, Greg.

Okay.

And our next question comes from Robert Moskow from Credit Suisse. Your line is now open.

Hi, Thanks for the question.

Hey.

Casey Bruce I'm, just looking at the cash flow and first quarter looks a lot like first quarter, a year ago and last year was characterized by working capital being.

A big use of cash of $100 million. If you were chasing an upward inflation curve.

Looks like that's playing out again this year. So if this is the scenario where you have another.

Use of cash of that size.

And depressed free cash flow.

What will happen at the end of the year does that put too much pressure on your balance sheet would you have to do another equity deal or what do you think yes.

Yes, the goal would be to not have quite as much as last year I still think that there is going to be some.

The real pressure that we saw last year.

<unk> was two things it was the cost inflation.

Which which was a big product the second half of the year and the other part was the replay pin for Green giant.

We had virtually ran out of product.

During the Covid enhanced period and last year was a big investment from our green giant and some others. So youre right there will be some pressure.

Don't expect it to be as much as it was last year.

Okay, and just the balance sheet strong enough to handle that or.

Yes, we would make sure to manage the balance sheet to handle it.

Okay Alright. Thank you. Thank you.

And we will now take our next question comes from Eric Larson from Seaport Research Partners. Your line is now open.

Alright, Thank you for the question.

Two of them from me so first Dennis maybe you've talked a little bit about this but in your prepared comments you said that you would.

Obviously sales are going to be more elevated than you had expected because of pricing.

But then you you also threw in there that.

Youre looking for more elasticity are you.

Seeing elasticity yet or.

Is that just an overabundance of caution.

I think a little bit the ladder.

So so far what pricing has been implemented in the market that we can track and do some Alaska and measurements, we have seen relatively low elasticity I would not say no. Alaska, we are seeing some elasticity, but it's relatively low to what our models would have historically predicted.

And our future projections were predict we're predicting that that goes up.

Modestly.

Got a little bit of caution to assume not assume that we're going to stay at this low level, but maybe go up a little bit more but still below where we would expect.

That said beef at a historical up right.

Because everybody the entire category is kind of is going up.

So I guess, just just to be cautious we've assumed a little bit higher lapses in our to go projections, that's easy to answer.

Okay. So the other question is.

You had mentioned also that you were I think youre expecting.

So more vegetables inflation on the input side and.

And stated that.

You think the farmers are going to be shifting from from.

Kind of vegetable acreage into maybe some more of the more traditional row crops like corn soybeans wheat whatever.

We haven't started that rollout that you haven't really started that planting season much yet.

Our farmers, telling us that our our <unk> supplier, saying that there isn't going to be as much acreage this year. So.

I guess I'm, just curious as to yes, yes, we do.

Those conversations we kind of lock in planting and contracts.

With our with our basketball suppliers.

We lock those in kind of in the last month based on what plannings, there contracting and what we're seeing is that it's more expensive to get the vegetable planning contracted I think because a lot of farmers are shifting towards that record high prices in soybeans and corn.

So are you getting the <unk>.

I understand.

Are we going to we're going to we're going to get we're going to get the acreage <unk>.

That's what we're hearing, but it's going to cost us a little bit more because now we're competing against other land use.

Okay, Yes.

That's actually that's actually one of the things that has changed in the last month for us in terms of our inflation assumptions that we've got clarity from our farmers around what we expect to VR.

Cost of the new crop coming out starting in <unk>.

July August .

Perfect.

I was assuming I was actually thinking that maybe you were.

Maybe even anticipating some some shortage of supply.

I understand what youre, saying its just line. So thank you. So far we are so far we're being told that our needs can be met.

Got it okay. Thanks.

And obviously a lot of that depends on what kind of a crop really comes out and so.

But so far from a planning standpoint, it looks like we can meet our needs.

Thank you and we now have a follow up question comes from Carla Casella of JP Morgan.

And just wondering if you gave any add any color on labor in terms of.

Do you have any issues with labor our labor costs also going up for the year are you lapping easier comparison on the labor front.

To labor.

Labor I think Theres two components. One is that we have we have raised wages.

And many of our plans to maintain.

Our workforce.

And in some in some of our labor in some of our factory markets.

We have extremely low unemployment so it's been difficult to maintain full staffing. So this has been improving I think quite a bit over the last couple of months.

We have raised wages, we put a new programs to recruit labor. So I feel like our labor situation is getting better and most of our factories are maybe still one or two that we're still trying to get back up to full staffing, but I think what you're hearing us say about inflation and cost pressures is that we do expect our direct labor.

And the factories will be up this year over last year.

To maintain full staffing and to maintain full production.

Great. Thank you.

Our next question comes from Ken Zaslow from Bank of Montreal. Your line is now open.

Hey, good evening guys.

And how are you.

Okay can I just ask one question about what are you seeing on elasticities and are you seeing any value brands.

That label.

How do you kind of factor that in.

Not just this year, but into 2023.

I mean, I think we're still seeing relatively low elasticity is in some of our most price sensitive products, we might see them to be a little bit higher, but still well below kind of historical model predictions.

I think we are one of the reasons why we are saying, we've kind of raised our expectations unless it's a little bit but not.

Not where it would have been historically is that we do expect as prices get higher and higher particularly on some of our some of our products that have really big cost increases that we will see a little bit of migration of private label. So far we have not really seen that very broadly.

But we kind of expect as prices go higher.

Some of that could happen.

Have you seen any of your competitors not follow or have you not followed some of your competitors.

I'm, not sure, which which comes first but I'm just trying to make sure that.

The disparity between you and your competitors are still the same or has there been any change in that across any parts of your portfolio and then I'll leave it there and I appreciate it.

It's largely the same.

Sometimes you see private label or different competitors moving at different rates, but largely.

People have responded to the higher input costs.

Great I appreciate it thank you very much thanks.

Thanks, Ken.

Okay.

There are no further questions at this time.

You may continue.

Great. Thank you everybody.

Thank you.

And this concludes today's conference call. Thank you everyone for participating you may now disconnect.

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