Q2 2022 UTZ Brands Inc Earnings Call
investing in our brands, our people, and our supply chain.
In addition, we continue to invest in critical supply chain and selling infrastructure to support geographic expansion nationally and to support our ongoing key customer wins.
These include investments in the Southeast of the United States to support our recently announced significant expansion with Publix, along with other large retailers.
As noted previously, we recently completed resets that introduced our portfolio across nearly 1,300 public stores.
and we are incredibly excited to expand this partnership with this important customer, and we remain dedicated to making continued future investments to support our shared category growth.
From a productivity standpoint, our programs remain on track and we continue to expect to deliver approximately 3% productivity in fiscal 2022.
As we have noted previously, we have built a significant amount of muscle in this area from a talent and process perspective, and we have done a fair amount of work towards our plant optimization efforts as well.
In addition, we are very excited about our preliminary pipeline of initiatives that is being developed for 2023 as we look to even further enhance our productivity.
These include capital investments to automate seasonal small bag production, as well as barrel and box filling equipment, and these will provide us with year-round capabilities for more efficient packing for multi-pack, variety pack, and small format packages.
In addition, we will be ramping up production at our Kings Mountain facility where our plans continue to remain on track.
We expect to begin pork production there this fall, which should help to alleviate our bottlenecks at our Birmingham manufacturing plant around pork rinds, and we begin to plan for kettle chip production at this facility as well early next year.
This will also help us to meet growing national demand for our continued fast-growing ZAPs Kettle Chip Rand, especially in the mid-Atlantic and northeast where we have been somewhat supply constrained. learn more at zap.org
So wrapping up our key messages.
I'll touch on our updated outlook for fiscal 2022.
Based on our performance year-to-date, as well as our expectations for continued strong consumer demand for our brands, we are looking to see how we can improve our overall performance in the future. We are looking to see how we can improve our performance in the future.
along with what we are seeing currently in regard to limited price elasticities.
We are raising our net sales guidance for the year.
We now expect total net sales to grow 13 to 15 percent and for organic net sales to grow 10 to 12 percent.
In addition, based on our year-to-day performance and momentum building actions to help mitigate inflation.
we now expect adjusted EBITDA to grow 2 to 5 percent versus our previous guidance of modest growth.
Importantly, we are maintaining our prudent approach to our full-year outlook given the environment.
and we remain dedicated to investing in critical brand building programs across the company.
Briefly touching on our second quarter financial results.
Total net sales grew approximately 18%, which reflects our strong organic growth of nearly 14%, as well as the contribution benefit from our acquisitions.
Adjusted gross profit grew about 20% and adjusted EBITDA increased over 18% as margins are beginning to stabilize. Ideally, the fall drive will go from where it moved.
and we expect this to continue for the remainder of the year, building a stronger foundation from which to build on in fiscal 2023.
Turning to our retail sales results in more detail, for the 13-week period ended July 3rd, our power brand sales increased 17.3% versus the category of 14.8%.
This is our third consecutive quarter of share gains for our power brand.
with double digit growth in the yachts on the border, Boulder Canyon and Tortillas brand.
Turning to our growth drivers in the quarter, we delivered double digit growth in retail sales across four of our five major sub-categories.
representing approximately 80% of our retail sales.
In addition, we once again drove share gains in potato chips and pretzels.
which represent approximately 50% of our retail sales.
It's important to note that while our tortilla chips grew a healthy 13% versus last year,
Our power brand of On the Border grew 15.4% and our power brand of Tortillas grew 17.2%.
I will note that our on the board of tortilla chip sales in the quarter were impacted by the timing of promotional features.
versus last year in the mass and club channels.
We expect some of these timing dynamics to continue into the third quarter, but these promotional features are being scheduled for later in the year and will provide a tailwind to sales in the fourth quarter.
On that note, we remain extremely excited about the entire On the Border brand portfolio.
When you include the on-the-border sauces and dip retail sales,
On the border as a whole grew over 22% versus last year in the 13 weeks of IRI sales.
In total, On the Border has eclipsed over 350 million in retail sales over the past 52 weeks.
And we continue to invest in manufacturing and distribution assets to better support the growth opportunities for this incredible brand.
I will also note that our pork rinds are not
which only represent about 5% of our retail sales.
were primarily impacted by supply chain challenges in the quarter.
Our team is actively working to address these opportunities to unlock their full potential.
And to that end, as I mentioned earlier, as we ramp pork rind production capabilities in our Kings Mountain facility,
which again is expected to come online the second half of 2022. This should help to address these challenges.
In the quarter, we also continue to make great progress driving geographic expansion, while also continuing to improve our execution.
in our core markets.
We deliver double-digit retail sales growth across all geographies.
And this was our second consecutive quarter of share gains.
in the core.
core.
which represents over 60% of our retail sales,
We registered approximately 17.5% growth.
versus a category of 15%, with our flagship UTS brand up nearly 23%, and on the border tortilla chips up over 30%.
Beyond the core, we continued our momentum with double-digit sales increases in emerging and expansion.
Consistent with the earlier context for our on-the-boarder tortilla chip sales performance, our relatively minor gap versus the category was impacted due to this same dynamic given that 75% of our on-the-boarder sales occur in these outlying geographies today.
Importantly, our OETS brand was up over 30% in both our emerging and expansion geographies.
And as a reminder, Florida is a key emerging state for our company, and our public slots will help to drive higher market share gains in this important geography over the coming years.
Consistent with our strategy as we enter the year, we are significantly shifting our legacy marketing spend from multiyear sponsorships to a much more dynamic, nimble and active marketing plan.
And this shift will result in an increase of approximately 40% in consumer pull marketing spend versus 2021.
with most of that spent growth actually occurring in the second half of the year.
And, per IRI, we've added 4.6 million buyers of its products since February 2020, and we are focused on buyer retention and maintaining our strong repeat purchasing rates.
We are also investing in exciting brand ideas, including our Family Crafted Flavor campaign from UTS that reinforces our quality and our People Like UTS campaign that reinforces our brand equity. We are also investing in exciting brand ideas, including our Family Crafted Flavor campaign
Family Cross's flavor provides compelling creative that messages deliciousness and taste and speaks to our family heritage and our legacy.
While people like us celebrate the loyal legion of Utspans,
sharing primarily user-generated content.
across our various social media platforms.
In addition, we are extending our voice to the consumer through both advanced targeting of media and earned reach, and we are finding success in connecting and engaging with our fans on high attention platforms.
Our social media following of both the UTS brand and the Zaps brand has more than doubled since the start of this year, and we are connecting in a deeper way with consumers through driven marketing.
to provide the right message to the right consumer at the right moment, at the right place, and then measuring the impact.
From an innovation perspective,
We have an exciting slate of new products coming in the second half of the year across key power brands and subcategories.
To touch on a few, first we are introducing zap flavored pretzel twists.
This iconic potato chip brand, known for bold and distinctive flavors, will now extend into flavored pretzels. This is the original potato chip brand, known for bold and distinctive flavors, will now
where the flavored segment is 40% of the pretzel subcategory sales and grew over 25% in the last 52 weeks.
This segment is all about flavor, and that's exactly what Zest delivers, along with its fun and exciting brand personality that consumers find irresistible.
To that note, we are planning a multi-channel launch supported by a comprehensive consumer marketing program this fall.
And we have seen a tremendous amount of retailer acceptance around this introduction.
And we are excited to present these snacks to our loyal ZAPPS consumers.
In addition, this Halloween season we are introducing even more innovation for fun and festive holiday snacking.
Our Utz brand, Witch's Brew, and our On the Border brand, Halloween Tortilla Chips, are classic snacks with a unique Halloween twist that are perfect for sharing at Halloween events.
and trick-or-treat.
This innovation and expansion of our product lineup is helping to drive future sales, and overall we expect our holiday seasonal sales to drive growth in the third quarter driven by expanded offerings.
and our ability to better satisfy demand versus last year, which is supported by an improved supply chain.
Finally, we are expanding our multi-pack offerings for incremental occasions.
Our UTS brand multi-pack retail sales have grown nearly 37% over the past 52 weeks.
while our share is just 1.5% of this high growth category.
We have a huge opportunity to gain our fair share of this segment of the category, and we will look to continue to find ways to expand our offerings.
Before I turn the call over to Ajay, I just want to reiterate my confidence in how well positioned UTS is to navigate the current environment.
First, we are a pure play snacking company competing in traditionally recession resistant categories.
Our growth is and has been supported over the decades by a very resilient Salty Snacks category with consistently healthy fundamentals.
Second, and as I mentioned earlier, the selfie snacks category has very little private label exposure with only 4.6 percent market share.
Brands that consumers love matter in salty snacks and that has been the case through multiple economic cycles.
And we believe that this continues to be the case today.
Third, we have strong brand equities across our entire portfolio.
and we participate in a sector with historically low price elasticity relative to the broader food category.
That said, while elasticity of price has been limited to date this year, we are expecting more in the second half of the year as consumers make spending choices in the face of high inflation.
Fourth, as we continue to have significant white space opportunities that will drive top line benefits today, we will continue to have significant white space opportunities
Our household penetration is still less than 50% across the entire U.S.
In our market share outside of our core geography
is still only about 3% of the salty snacks category.
Big customer wins like Publix and the purchase of DSD third party distributors
will help to drive share gains even further.
And finally, while net leverage is currently above our targeted long-term range, our liquidity remains strong and we have the ability to maintain investments in our growth and to keep M&A optionality open for highly accretive opportunities.
You'll continue to see us being opportunistic in this market as we remain one of the leading logical consolidators in the salty snack category.
And with that, I'd now like to turn things over to Ajay Kotharia, our CFO . Ajay?
Thank you, Dylan, and good morning, everyone.
I want to build on Dylan's comments and say how proud I am of our team's ability to continue to navigate a dynamic operating environment.
to deliver another quarter of record net sales performance.
while our margins begin to stabilize and we return to year over year profit growth.
our strong management and support teams
and our incredible frontline sales, manufacturing and supply chain teams.
are working well together to execute our playbook.
Thank you to all of our associates.
Now, I will review a very high-level summary of our second quarter financial performance.
And then we will discuss our net sales and margin drivers.
Our second quarter 2022 next year increased 17.5%.
to $350.1 billion.
We delivered organic net sales growth of 13.6 percent.
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 move to sales discounts, thereby benefiting selling, distribution, and administrative expenses.
and reducing next sales and gross profit.
Adjusted gross margins expanded 63 basis points to 36 percent. And this includes an approximate 120 basis points of negative impact from our IO conversions.
In addition, adjusted SDN expenses improved by 30 basis points.
to 24% of sales.
I will note that in the second quarter last year
There were certain miscellaneous non-operating income and expenses that are now factored into COGS and STNA this year.
This is consistent with our reporting change.
that began in the first quarter of fiscal 2022.
A more apples to apples comparison would show adjusted gross margin to be 47 basis points better
in the second quarter of this year versus last year.
and adjusted SDNA expenses as a percent of net sales to be 40 basis points higher in the second quarter this year compared to prior year.
Furthermore,
Our gross margins would have expanded about 167 basis points.
when you also account for the impact of our I O conversions.
Our adjusted EBITDA increased by 18.2% to $42.2 million for 12.7% of sales.
which was slightly better than the second quarter of last year and a sequential improvement
of 140 basis points relative to our first quarter 2022 results.
adjusted net income slightly decreased to $18.4 million.
The decline in adjusted net income reflects strong operating profit performance.
offset by higher net interest expense due to higher interest rates and incremental debt.
and also higher code depreciation expense.
as we have added new manufacturing assets through several acquisitions in the last 12 months.
Lastly, adjusted EPS was 13 cents based on fully diluted shares on an as-converted basis of approximately 141 million.
Now turning on to cash flow and the balance sheet.
For the 26 weeks through July 3rd,
cash used in operations.
was $26.3 million.
As we discussed on our first quarter earnings call, our cash performance was primarily impacted by working capital as we use our cash, which is in line with our normal seasonality.
and the $23 million of buyouts of multiple third-party DSD distribution rights in the first quarter that were treated as contract terminations and booked as an expense in adherence to GAAF.
Our working capital performance modestly improved in the second quarter and consistent with normal seasonality.
we expect this to improve further and become a source of cash in both third and fourth quarters.
Year-to-date capital expenditures were $60.3 million.
As a reminder, on April 28th, we announced
and closed the transaction for our Kings Mountain facility.
And it coordinates with GAP.
the $38.4 million purchase cost of this facility has been booked on our statement of cash flows as a capital expenditure and not as an acquisition.
excluding the purchase of King's Mountain facility.
capital expenditures would be 21.9 million.
The transaction 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 Benestar Brands in 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 in the southeast, northeast, and mid-south regions. We are very excited to add this facility to our manufacturing footprint as it will play
Moving to the balance sheet.
At the end of the second quarter, our cash and cash equivalents were approximately $20 million.
and we had $83 million available on our revolving credit facility.
providing close to $103 million in liquidity.
Liquidity was primarily impacted by the drivers that impacted cash flow from operations.
Moving down the balance sheet.
net debt at quarter end was $891.3 million, or 5.1 times normalized adjusted EBITDA of $174.9 million.
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 remains to begin approaching the upper end of our targeted range by the end of fiscal 2023.
We remain focused.
on operating the business, integrating acquisitions, and delivering synergy targets, all of which
We'll continue to improve adjusted EBITDA performance.
Also, just as a reminder, we have a well-priced crutch structure with covenant-like deck instruments.
which provides significant EBITDA headroom while we work on reducing leverage.
In addition, more than 60% of our long-term debt has a nominal interest rate swap through September 2026 at a rate of 1.39%.
Moving back to the P&L for some additional details starting with Net Sales.
Our net sales growth in the quarter was 17.5% driven by organic growth of 13.6%, acquisitions related growth of 5.1%.
and a negative impact from the conversion of RSP routes to IOs.
which reduced the net sales growth by 1.2%.
Our organic net sales growth of 13.6% was driven by price mix of 13% and volume growth of 0.6%.
was in line and volume performance was slightly better than our expectations.
as we continue to execute our planned pricing actions to offset inflation.
As we had anticipated, volume was proactively impacted by approximately 300 to 400 basis clients.
due to our strategic SKU rationalization activities focused on private labor and certain partner brands.
that are meant to simplify our portfolio, optimize mix, and increase focus on our power racks.
We are also lapping some promotional features and distribution gains from last year that are temporarily impacting volume growth as we expected.
Lastly, twice elasticity continues to be better than our expectations.
In the second quarter, adjusted EBITDA increased 18.2% and margins modestly expanded to 12.1% since.
which was ahead of our expectations.
Decomposing the change in the adjusted EBITDA margin for the quarter, positive drivers include
price mix of 13% as we continue to take pricing actions to offset inflation.
and productivity improvement of 190 basis points.
partially offsetting these positive drivers.
where unfavorable margin impact of 13.7% driven by higher inflation.
including transportation costs,
and selling an administrative expense of 100 basis points.
Our inflation impact versus last year was comprised of elevated labor and transportation costs.
as well as higher commodity input costs.
selling an administrative expense which excludes distribution expense
increased primarily as a result of investments in our team.
and infrastructure to support growth in our key geographies and customers.
Looking ahead to the rest of the year, we continue to expect gross input cost inflation.
including of raw materials, labor, fuel and freight.
to be a mid to high teens percent increase versus the prior year.
In response to these rising costs, we have been implementing inflation justified pricing actions, and you have been seeing these build in our sales results.
as we implemented new actions in February and May this year.
We continue to expect to deliver about 10% price this year to help cover our inflation expectations.
As we lock in our commodity contracts for the rest of the year, we are closely monitoring inflationary trends in fuel, freight, and certain packaging costs that are tied to the market and we are implementing strategic and selective pricing actions.
in the second half of the year that are meant to close gaps in parts of our portfolio and to address new inflation pressures.
ignorant.
We continue to expect to deliver productivity of approximately 3% in fiscal 2022.
which will also have to offset gross inflation.
Our primary areas of focus this year are manufacturing efficiencies, logistics, and packaging and product design.
In addition, we are transforming how we approach our demand and supply planning, which is critical to support our growth and become more efficient.
We are making great progress in our productivity programs and I am confident that these actions
along with strategic price-back architecture initiatives, will result in structural improvements that will drive meaningful long-term margin benefit to the company.
Power turning to our full year outlook for fiscal 2022.
Given our stronger than expected year to date performance
continued strong consumer demand and better than expected price elasticity, we are raising our total excess growth outlook to 13 to 15%.
and our organic net sales growth outlooks to 10 to 12 percent.
Within our net sales growth outlook, we continue to assume that sales volumes will soften in the second half of the year, but given our first half volume performance, we now expect for full year 2022 volumes to modestly grow versus the prior year.
Our volume outlook assumes continued incremental and strategic skew nationalization as we optimize our portfolio with an enhanced focus on our power branch.
including
prioritizing production of branded products to unlock additional capacity for growing brands such as On The Border.
In addition, we are also anticipating more price elasticity in the second half of the year as we continue to expect spending patterns of our consumers to be impacted by the inflationary environment.
Given our stronger net sales outlook, unchanged assumptions for gross input cost inflation, and the building benefits from pricing and productivity, what are the benefits of our
We are raising our adjusted EBITDA growth outlook from modest growth
to a growth of 2% to 5%.
Thank you.
Importantly.
This outlook
also assumes increased working media spend behind our power grants.
and investments to support key customer growth and geographic expansion.
Wrapping up our outlook, we continue to expect capital expenditures of approximately $50 million.
Of note, our CAPEX guidance excludes the purchase price of the Kings Mountain facility, which in accordance with GAAP, has been treated as a purchase of property and equipment and not as an acquisition.
In addition, 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 our 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 sequentially improve throughout the year.
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 sequentially improve throughout the year. in mainstream markets accent move towards onlyFlorumiere.
below the third quarter in line with our typical seasonality.
Given the strong second quarter performance,
The weighting of adjusted EBITDA in the first half of the year versus the second half of the year is now expected to be more balanced at approximately 49% and 51%.
From a sales perspective, we continue to expect that our first quarter sales growth will be the highest quarterly year-over-year growth rate of the year followed by the second quarter.
In addition, we continue to expect net sales dollars to be slightly more first half weighted.
given our strong first and second quarter sales performance.
and the expected impact from strategic skew rationalization and price elasticity in the second half of the year.
Before I open the call up for questions.
I would like to revisit our long-term margin opportunity.
and our confidence in returning to margin expansion and mid-teen margins over time.
These drivers have remained consistent.
We believe
that our inflation-justified pricing actions will help to cover higher input costs and enable continued investments.
in our brands, people, and supply chain.
Our supply chain is improving as we enhanced our manufacturing, logistics, and planning capabilities to increase throughput and unlock efficiencies.
Our recent acquisition integrations are on track and are allowing us to scale our manufacturing capabilities to efficiently support strong demand for our power branch portfolio.
Our recent investments in technology are helping to unlock insights that enable several margin-enhancing workstreams.
Finally,
We continue to enhance an already strong management team.
with new talent.
and more importantly
Tuts team members across the company are executing nicely.
With that, operator, you may open the call up for questions.
At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. Again, that's star, then the number one to ask a question.
Your first question comes from...
The line of Andrew Lazar with Barclays.
Good morning, this is Josh Bader on Franger.
Good morning Josh
So even with the upwardly revised full year guidance range, organic sales are expected to decelerate from about 17 percent in the first half to around five percent or so in the back half, which is actually even a little bit lower than the street is currently looking for. So we were just hoping you could discuss the drivers of this deceleration.
and if the company's expectations for the second half have changed at all, or if this was more just a flow through of the 2Q beat. And as part of that, that's mentioned on the call.
That price is expected to be about 10% for the year. It's actually a little bit lower than what it delivered in the first half. But it also discussed implementing some strategic pricing actions in the second half. So I was just trying to get an understanding of the slowdown if that's just lapping some of the prior actions or what's happening there. Thank you.
Hey Josh, thanks for the question. So yes, we are very pleased with our second quarter performance and I'll touch on pricing a little bit first before talking about volume. So pricing is expected to build from where we are now into the second half, but we are also going to start to lap for the second half of last year pricing.
So we are modeling that in when we say we're going to deliver about 10% price for the year. And then as far as volume is concerned, we have already seen the impact of skew rationalization and some Friday relapse in our second quarter results.
price elasticity in the second quarter was negligible. So really the change in second half versus second quarter is around price elasticity assumptions. So what we are modeling is the fact that consumer pull back in the second half due to the economic environment is going to be slightly greater than what we saw in the second quarter.
And that's what you see in our outlook. Now, I will say that we are being prudent and we have not seen an environment like this before, this level of inflation. That said, this could prove to be conservative and the category that we are in is pretty resilient to recession and we are growing our distribution with national customers. So we are optimistic, but we have to be cautious and we have to be prudent.
Your next question comes from the line of Jason English with Goldman Sachs.
Hey, good morning folks. Congrats on them.
Morning congrats on solid results here. Two quick questions. First you mentioned skew rationalization as a headwind to volume. Approximately how much of a headwind was it in the second quarter and how much are you expecting in the back half of the year?
So second quarter, just for the quarter, it was about 300 to 400 basis points of sales growth, and we are expecting similar levels in the second half. It should translate to our 200 to 300 basis points for here with the three quarters, we add 300 to 400.
Got it. That's helpful. And your results in your core market are really stellar. So this is a bit of a high quality problem. But I was somewhat surprised to see that emerging and expansion markets are actually lagging core, especially given that Florida is a big state, Publix is a big account, and it's entirely incremental year-by-year. So why is it lagging and what does the growth look like if we were to strip Florida out?
Yeah, hey Jason, thanks for the question. As you know, we agree, the core is very strong. The category itself is the strongest in the core as well, which is beneficial to us since most of our sales are actually in the core. If you think about the core plus the emerging markets together, that actually represents about 85% of our sales. And both of those are the relative.
Fantastic category results to show 15% to 14.5% category growth. And we outstripped both of those with the USP brands and with the USP brands. If you think about Florida and Publix, which is in the emerging, as I'm sure you can see from the index in the appendix where we have the state map, if you strip that out, we really didn't enter into the Publix until mid-May to late May. So we have a little bit of benefit list.
the second quarter from that, but as we look into the future, those 850 to 1300 new stores that we're expanding into for space will really start to resonate in our numbers as we see that continue to grow into the future. So we're pretty bullish that the areas of the states that are most important to us, again, cord emerging 85% of our sales, that's really where our focus is today on growing sales.
Got it. Good stuff. Thanks a lot guys. I'll pass it on.
Got it. Good stuff. Thanks a lot guys. I'll pass it on.
Your next question comes from the line of Michael Lavery with Piper Sandler.
Good morning. Thank you.
Good morning. Good morning, Michael.
I just wanted to touch on the border, you know, it's a case where the revenue synergies are pretty real with complementary geographies and channels.
Obviously we're seeing some of that momentum come through, but can you just give a sense maybe of the
of the union there, sort of what the – maybe what inning we're in in that trajectory. I know it takes a little while for that to play out, but how should we think about some of the trajectory of the momentum for those revenue synergies there?
Yeah sure hey Michael this is Dylan again. You know as we said in our script we're very bullish on the On The Border brand. If you think about both the tortillas as well as the dips and solaces we went into a little bit more detail on dips and solaces which were up 51% in the quarter on a 22 million dollar retail sales for the quarter base. We're very bullish on it. It's now a 350 million dollar retail brand.
That's up sequentially from when we acquired the brand a little less than two years ago in late 2020. The core markets are growing off the charts in terms of, I think, 30 plus percent gains for the brand. In our core market, we're expanding the brand into food and grocery and convenience and drug and all of these different avenues. We're expanding the ACV for the brand significantly across the U.S. So we're very bullish on it.
In terms of the inning, I'm not a real big baseball fan, but maybe we're in the second or fourth inning. I think we can easily grow this brand over the next couple years to $430, $450 million in a couple years. That's just a relatively moderate compounded growth for this brand. And because of all that white space that we have, I think this is going to be a very strong brand as part of our portfolio as we look forward into the future. Okay, great. That's helpful. Thanks for your time.
Just on the cost side, can you give a sense of maybe how covered you are for the rest of the year? Cooking oils, for example, have come in from peak levels.
Those continue to moderate, how much benefit or favorability might there be in the back half?
Hey Michael, this is Kerry. Great question. We're pretty much covered on cooking oils for the year. So we're about 95% covered. So it might benefit a little bit if the boards continue to come down, but supplier bases are still relatively robust. So not much benefit will be felt this year, but we would expect to see obviously a benefit next year if costs continue to come down.
Coverage just broadly across all commodities, would it be similar to that nearly completely covered level?
It's about 90% when you blend everything together.
Okay, great. Thanks a lot.
Our next question comes from the line of Bill Chappelle with Truist Securities.
Thanks. Good morning.
Good morning, Bill.
If I go back to kind of last year, I think
on the comparison you know that it was it was the costs were picking up but it was really supply chain it was getting freight it was you know
kind of renewing contract is force majeure all type of issues
How much of that, where are we versus a year ago in terms of are we 80% back to normal? Are we 90% back to normal in terms of those types of costs that really were kind of unforeseen but also ones you couldn't really hedge or do anything about? I think the way I'll repeat the question back to you the way I understood it. I think you're talking about supply chain disruptions. I think you're talking about supply chain disruptions.
and the environment we were in last year. I think things are getting better there. We are not out of the woods, but things have stabilized and we have built a lot of muscle around how to tackle that in our supply chain, manufacturing, logistics, distribution. We make people investments and we are also optimizing.
enhancing our manufacturing footprint. So all of those things, all the actions that we have taken have really helped us from a cost and financial standpoint. The second quarter results really show that we delivered pricing and productivity to offset inflation and those two things are working now in tandem and from here on out we should.
expect sequential growth in our margins in the next couple of quarters.
Okay, and then I guess in line with that, it means it seems for some companies certainly diesel spiked interquarter freight.
spiked and then started to come down into quarter. So is that another way of saying those things hopefully have passed us and that's part of your guidance in the back half?
Yeah, we have modeled all that in. We have good visibility into our cost structure, so we are able to model in. In fact, we did that back in Q1 earnings and we called mid to high teens inflation back in Q1 and I think we are still there with pluses and minuses, freight and fuel being a benefit and then there are other offsets there. In that case the
Got it. And then one kind of maybe random, not random, but a question on elasticity. I mean, I understand that snacks in general are fairly inelastic and you're even though you're taking a kind of conservative stance going to the back half. But as you look within potato chips, potato chips, pretzels, others, you find that there are some areas that are more elastic or less elastic just because there are other brands or private label offerings or are they all fairly similar?
Yeah, hey Bill, I mean I think we haven't really dug into subcategory by subcategory and you know, is it more elastic in pretzels versus tortillas or something like that. I mean it's so sort of inelastic to some extent from what we've seen in the private label as we detailed in the script in our presentation, it's such a small percentage of it. And the route to market that most of the snack manufacturers take to get to
the stores to service the customers and put product on the shelf is kind of unique in our industry as well. So I don't think it's going to be where we're overweight to certain subcategories. It's going to affect us any differently than just the overall trends.
Got it. Thanks so much.
Thank you.
Your next question comes from the line of Peter Galbo with Bank of America.
Hey, guys. Good morning. Thanks for taking the question.
Good morning.
Jay, I just want to ask a clarification. You mentioned in terms of quarterly cadence in the back half, I think 3Q even down margins up sequentially and then 4Q down kind of seasonally. Is that the same case on the gross margin line as well? You saw a nice expansion in 2Q. I would think from here you would continue to kind of see that sequential improvement. I just wanted to ask on the quarterly gross margin cadence.
Yeah, I believe that gross margin should follow a similar trajectory.
Still are trajectory to the EBITDA margin.
Cut.
Sequential improvement into Q3 and then a step down, slight slip down in Q4.
Got it. Thank you. And then, Dylan, maybe just stepping back, kind of a broader strategy question.
It's nice to see the slides included on innovation and on marketing spend ramping up and just
You know, it seems like this would be very different from when you were operating as a private company and knowing you haven't been in the public markets that long. Can you just frame for us how much...
you know different is how you're attacking marketing and innovation today versus even a few years ago when you were still operating as a private company. Thanks very much.
Yeah, sure. Hey, Peter. Great question.
I honestly would say that I don't think that we're operating much differently today as a public company than we would have been two plus years ago as a private company. What I will say is that we have a higher drive to create productivity. That productivity and sort of the virtuous cycle of how we operate the company will drive earnings of which we can reinvest and then our target is to reinvest.
terms of marketing and media to drive our brands and we want to look for ways that we can increase that over time. So not much difference between public and private but we're definitely looking forward to being able to spend more on innovation, on poll marketing, branding and all of the things that will drive top line results long term.
No, thanks very much guys. We're looking forward to trying the ZAST principles.
Thanks very much guys, we're looking forward to trying the ZAST principles. Great, thank you.
Your next question comes from the line of Ben Benvenu with Stevens.
Your line is open.
Your next question comes from the line of Robert, Moscow with Credit Suisse.
Hey, I was just curious.
In the years that you've been operating the business, have you had moments where you've had to lower list prices because of-
commodity deflation or competitive intensity in the category. It's a question I get a lot not just your category, but but a lot of categories and I was wondering just you know, just a history lesson if that's something that that occurs. Yeah, hey, Robert, a great question. The You know, I've been at us for 25 years so I've been through many a different economic cycle and I've basically been involved in sales and marketing my entire life and that you know one point that was my job to do all of them.
longer time frame you then see sort of the reintroduction of different PPGs or price pack groups where you know something may sort of go down in size over a couple years and then the commodity scene changes and companies are competitive and then five or six years out you know there's a new size introduction of a value pack or something else and that's been going on you know much longer than I've been at us at least in the salty snack category it's very competitive we all want to be
I appreciate it. But maybe a follow-up here. You're pushing for more distribution with these big national customers. Is part of the sell that you are providing lower-priced alternatives for consumers in certain subcategories, and how is that resonating?
With with retailers, it's true Yeah Not at all. We've never Positioned ourselves as a lower price alternative to any of the you know more national brands You know we are in a very What we considered to be a fantastic Fantastic category selfie snacks
Grows 3, 4%. I mean the fact that we're looking at markets and I think one of the earlier you know gentlemen asked me, Jason asked me about you know salty snack sales. I mean we're looking at markets that are up 15% in salty snacks and it's a fantastic category. We are offering to a retailer an alternative in terms of a unique brand and a unique quality. So if you look at O.G. is
Top-notch quality. It's been around for 25 years. It's grown significantly It's an alternative to the national brands that were offering ZAPs is a fantastic brand we bought in 2011 and have only grown every single year since we acquired it and brought it to a much more national size The US brand itself 100 years into it
producing double digit, 20, 30% growth, were an alternative because of the uniqueness of the quality and uniqueness of the brand. And I think just like there's 10 different major car manufacturers and brands, there's room in our category for brands like ours that have a unique route to market, a unique legacy and unique history to really continue to take that white space that we talked about in our summary page about geographic.
channel growth, subcategory growth, et cetera. Got it. All right. Thank you very much.
subcategory growth, et cetera. Got it. All right, thank you very much. Thank you.
Your next question comes from the line of Rupesh Parikh with Oppenheimer.
Thanks for taking my question. So I just want to touch on performance by channel. So just given some of the changes out there in the consumer dynamics, I was just curious if you guys are seeing any shifts of note by channel.
No, not really. I mean, our food channel is doing fantastic. You know, it would be interesting to see what happens in the second half of the year, you know, where the consumer goes to. You know, will they move more towards mass and club for value or size pack, you know, larger size packs. Right now, our convenience is really doing well. We continue to see great results and convenience. So, across the different channels, we are seeing a good result in the category.
And I think.
The simple thing to note here is costs have stepped down in the last couple of months from all-time highs, but they are still pretty elevated. So we do expect that inflation is going to continue into 2023. It's going to take some time for costs to come back down to pre-COVID levels, which is when this cycle started. So let's see what 2023 looks like, but there will be inflation there.
Okay, great. And maybe just one housekeeping question. On the interest expense line, would you expect to step up for the next two quarters to sign your variable rate debt?
We don't because two-thirds of our debt is locked at 1.39% LIBOR. So I think we are at a good level that we saw in second quarter for interest.
Okay, great. Thank you. Thank you. Your next question comes from the line of Mitch Pinero with Sturt Event and Company.
Good morning. Most of my questions have been asked.
Just a quickie.
From the back half here, so it looks like we're looking for, say, 7% type of sales growth in the back half. are the positions at the characteristics level that represent them.
you have about, you know, if you have double-digit pricing, you know, obviously that implies a, you know, a 3 or 4% volume decline. Is that math?
Is my math correct there?
Yes, I think that's good math. Okay, and does the volume decline have any impact on your fixed cost?
efficiencies in your plants? I mean are we going to is it a margin pressure or is it
offset by your, you know.
skew rationalization that some of the inefficiencies of some of these skews being rationalized out will offset that fixed cost leverage issue.
So we have modeled all that in, but the way I would describe that is we are working both sides of that equation.
as volume comes out, private label, etc., that we stop producing.
leverage, but then we start producing power brands so there is you know the mix is optimized and margin is optimized There is you know those those two things offset each other so we have sort of you know Model that out we are insourcing on the border that is a higher margin product than private label etc Okay and then one last question just sort of on the back to school season anything anything different this year versus last year?
Yeah, not really. I mean, we obviously have 2022 is different than 2021. We were still dealing a little bit in late 2021 with some of the sort of ancillary effects of COVID.
you know, different dynamics. We referred to it in our script, in our notes as well, about really seeing a holiday resurgence of especially Halloween and some of the more holiday-oriented products that we're putting out there. A lot of that is because our, A, our supply chain is better this year than it was last year, and some of just those ancillary dynamics around things like Halloween and COVID and late 2021.
the buyers from our customers have really rebounded and put in advanced orders for higher quantities. So we look for back to school, holidays, Halloween to all be more robust than last year.
Thank you very much.
Thank you.
Your next question comes from the line of Ben Venue with Stevens.
Hey guys, Jim Salera on for Ben. Are you able to hear me?
Are you able to hear me? Yeah.
Perfect. Sorry, I had a little technical difficulty before. I wanted to ask a two-part question on sales. First of all, if you look at, you know, you guys talked about volume decline in the back half, but we would look at salty snacks as already being kind of a trade-down indulgent category. Where does the consumer have to go below these guys, given that, you know, salty snacks are already an indulgent, and you've already mentioned there's very low private label penetration, you know, what does that look like from the consumer feedback?
private-label penetration.
It is probably one of the least expensive high reward products that you can buy in terms of a salty snack, a bag of chips or a bag of tortillas or something. I think as people make their decisions around what they're going to buy, that is probably, salty snacks is probably one of the least affected. I think I read recently something where household cleaning...
Household goods are one of the areas of which people don't buy as much of when they're making their decision. And salty snacks and food in general and beverage are areas that they go to. So I think we are in a pretty good spot as an industry as we've seen over at least the decades I've been here.
Okay, great. And then second part on that, obviously you guys have a big win with Publix. In terms of just your available capacity, if you were to get, I know there's not many Publix out there, but if you were able to get a bigger regional chain like an H-E-B in Texas or something like that, how long would it take for you guys to be able to ramp up on that? Or what's your available capacity to support getting another big ocean gain? Yeah, we have the capacity...
the different plants we have today to make many different things in many different places. And we can use Co-Man partners to the extent we need to to supplement demand in specific product subcategories. So it all depends on what product subcat you're talking about, but we don't see any issues in being able to bring on new distribution and support it.
Perfect. Thanks, guys. And at this time, there are no further questions. We'll now turn the call over to Dylan Lissette, CEO , for any closing remarks.
Thank you again for joining us today on our second quarter earnings call. I'm extremely proud of all of our associates for the collective actions that have helped to deliver such continued positive momentum for the company.
We appreciate your continued support as we approach the second anniversary of going public later this month, and I thank you again for your time.
This concludes today's conference. You may disconnect at this time.
And and and and and and and I, and and.