Q2 2022 B&G Foods Inc Earnings Call
Ladies and gentlemen, thank you for your patience our conference will begin shortly again, we thank you for your patience our conference will begin shortly.
[music].
Good day and welcome to the P&G Foods second quarter 2022 earnings call today's call, which is being recorded is scheduled to last about one hour, including remarks by P&G Foods' management and the question and answer session I would now like to turn the call over to Sarah.
Sure Allen senior director of corporate strategy and business development for being cheaper it's 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 <unk>.
We will report on Form 10-K, and subsequent 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 statement, whether as a result of new information future events or otherwise.
We will also be making references on today's call are non-GAAP financial measures adjusted EBITDA adjusted net income adjusted diluted earnings per share and base business net sales.
Reconciliations of these financial measures with the most directly comparable GAAP financial measures are provided in today's earnings release.
You see we will begin the call with opening remarks and discuss various factors that affected our results.
Electric business highlights and his thoughts concerning the outlook for the remainder of fiscal 2022 and beyond.
Bruce will then discuss our financial results for the second quarter 2022, and our guidance for full year fiscal 2022, I would now like to turn the call over to Kathy.
Good afternoon. Thank you Sarah and thank you all for joining us today for our second quarter earnings call.
The second quarter was difficult.
Over to Q1, we experienced continued pressure from inflation ahead of recovering price actions.
Total Q2 net sales increased three 1% versus last year with adjusted EBITDA at $54 1 million.
35, 4% decline to prior year.
Simply put our pricing actions have not yet caught up to the higher inflation flowing into our cost of goods sold.
Within the quarter, we saw improvement in June results. After a tough April may behind some early realization from pricing implemented in June .
And we expect to see further improvements starting in mid July with additional pricing actions across the portfolio.
Some key perspectives on the quarterly results pricing.
The price increases effective in the last couple of months, Chris go plus 25% Green giant plus 8% have been implemented and are yielding benefits, but are just taking effect in the market with the required customer lead times.
We realized $56 $7 million of pricing benefit in the first half of fiscal year 'twenty two slightly below initial inspection expectations.
In addition, the elasticities on some brands have increased modestly in recent weeks, although still well below historical levels Chriscoe elasticity. For example is now at <unk> five to <unk> six with the last increase has a few consumers trade down to private label.
Inflation.
Total cost of goods sold inflation impact in the P&L is now projected at $270 million to $280 million year over year or over a 20% increase.
The latest culprit is fuel and energy costs, which have driven up our freight transportation and utility costs rapidly.
The July pricing action cover diesel cost at roughly $5 10, with the upcoming price increase across the portfolio covering costs closer to projected levels.
Downsized conversions Q2 sales were also impacted by delays in the conversion of the Chriscoe 48 to 40 ounce bottle and the new reduced Ortega Taco shell packs.
Retail inventories took longer to work through before shipments started on the new bottles and <unk>.
The good news is that we are seeing most files impacts shipping and converting on shelves now.
Spices and seasonings.
P&G spices, and seasonings portfolio was down versus last year impacting volume and mix in Q2 results.
Key drivers were the overall contract category contraction against elevated pandemic demand in early 2021, as well as supply and customer service issues related to Q1 disruptions and labor shortages in our ankeny spices and seasonings facility.
Customer service levels have now significantly improved and recovered to over 92% in July .
Despite the recent trend both the category and our spices and seasonings are up double digits versus pre pandemic levels. We are also seeing improved trends in most recent month results.
Looking forward.
We expect to return to last year adjusted EBITDA performance in the back half behind pricing catching up the costs.
Specifically looking at the flow and timing of pricing against rising costs in 2022.
First half pricing realization covered about 50% of actual year over year inflation.
Q3, total pricing is projected to cover approximately 85% of year over year inflation.
Q4, total pricing is projected to fully cover year over year inflation.
As a result Q3 adjusted EBITDA is expected to be below last year with more pricing actions implemented against rising costs in Q4 higher than last year with full pricing benefit against stabilized costs and service recovery compared to the omicron and Delta challenges in Q4 two.
Thousand 21.
Now, let me shift gears to talk about the recent changes we announced to create a business unit structure effective August one.
We are making these changes to one establish clear focus and expectations within the complex and fragmented <unk> foods portfolio.
The business unit's 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.
To.
Push accountability and multi functional responsibility down to more closely managed parts of the broad <unk> foods portfolio.
Improving the speed and clarity of decision, making to deliver growth and financial performance for example.
The Bu structure will make us more effective in the current inflationary environment, improving visibility to brand and product specific cost drivers and accelerating decisions to drive productivity and implement pricing to recover higher input costs.
Three improve the external visibility and understanding of the relative performance and composition of the broad <unk> foods portfolio.
And moving to a be a structure, we expect over time to be able to provide analysts and investors with deeper insights into the financial performance and key priorities for each unit.
We announced the formation of the four business units last month they are.
<unk> and seasonings, representing approximately 18% of <unk> foods net sales and the number two player in the high margin spices, and seasonings category with a strong portfolio of consumer facing brands, including Dash Weber Spice Islands etcetera.
Our aspirations are to grow this business organically in the low single digits long term and add new positions to the <unk> foods portfolio through product expansion and acquisition. This.
This unit will be led by Jordan Greenberg, formerly <unk> Chief commercial officer.
Yeah.
Niels <unk>.
Representing approximately 22% of <unk> net sales capitalizing on elevated at home <unk> and casual lunch dinner occasions, driven by remote working.
This unit has a strong position in the growing Mexican category with Ortega, Las Palmas et cetera, as well as a solid breakfast foundation with cream of wheat, Mccann's and Maple Grove farms.
Our aspirations are to grow this business organically in the low to mid single digits and add targeted new positions to build scale in specific sub categories and occasions.
We expect to announce the appointment of the meals president shortly following an external search.
Frozen vegetables, representing approximately 27% of <unk> net sales with physicians in frozen and shelf stable vegetables behind the green giant and lesser brands.
Initially this unit's focus will be on improving the economic model through supply consolidation for example, the growers acquisition productivity savings and enhancements and better innovation design.
Longer term our aspirations are to grow this unit at a low to mid single digits consistent with the frozen category.
This unit will be led by Kristin Thompson, formerly the marketing director on Green Giant who has extensive experience in the frozen category on other brands.
Specialty.
Representing approximately 33% of <unk> net sales with a portfolio of shelf stable center store brands, including a strong baking category position behind Chriscoe Clabber girl Bakers Joy et cetera.
Our expectations for this unit are to maintain cash flow margin and reasonably stable stable cell sales trends with heavy focus on sales and operating costs.
This unit will be led by Ellen Schum, formerly our Chief customer Officer, who has had additional experience in operations and finance roles earlier in their career.
I am personally excited to strengthen <unk> foods performance and portfolio through the business unit structure, we are underway working in the new organization and going through transition and startup in the next couple of months.
But already in the first days and weeks I can see sharper focus faster decisions and bigger and better actions much more to come.
Thank you and I will now turn the call over to Bruce for more detail on the quarterly performance and outlook for the remainder of the year.
Thank you Casey good afternoon, everyone.
As Casey just discussed our second quarter was challenging.
And much like the first quarter. It was heavily impacted by extreme input cost increases across large portions of our portfolio.
Our supply chain has showed continued signs of improvement, but it still has not fully recovered to pre pandemic levels of efficiency.
And thus limited some of the upside demand opportunities that we are still seeing in certain category.
We've executed large price increases that are yielding benefit, particularly late in the second quarter.
But due to the timing of those price increases relative to the cost increases we face our margins have continued to be compressed.
We are seeing some elasticity drag, but so far these elasticity effects have been modest.
And are largely in line with our forecast.
Based on our June monthly performance, the execution of our pricing initiatives and some moderation in the level of commodity costs. We believe that we have seen the trough in terms of the margin compression in overall financial performance.
We are cautiously optimistic with regards to the rest of the year.
During the second quarter of 2022, we generated net sales of $479 million and adjusted EBITDA of $54 1 million.
Net sales for the second quarter of 2022 increased $14 6 million or three 1%.
Price increases coupled with product mix accounted for $25 million of the net sales increase.
Volume declines negatively impacted net sales by $5 million.
And FX had a negligible impact.
Volume declines were primarily driven by supply chain challenges lower than normal fill rates and modest elasticity.
We will continue to monitor our brands to measure the negative impact of elasticity, resulting from our pricing initiatives, but so far.
We remain encouraged that elasticities remain modest relative to our historical models.
And current expectations.
In fact, our two largest brands green giant and Chriscoe benefited from increased volumes during the quarter, despite sizable cost driven price increases.
Net sales of Chriscoe increased by $13 4 million or 22, 9%.
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 net sales increase for Chris go.
However.
As mentioned, we also had significant increases in chriscoe volumes during the quarter.
Cream of wheat also benefited from price and volume driven in part by continued strong demand across the brands portfolio.
Net sales of cream of wheat increased by $3 1 million or 21, 5%.
Clabber girl had another strong quarter for net sales net sales of Clabber girl increased by $1 5 million or eight 7% during the quarter driven by price increases green.
Green Giant also had modest growth with net sales increasing by $6 2 million or five 9% in the quarter net.
Net sales of Green giant frozen products were up $7 6 million or 10, 4%.
Green giant shelf stable products on the other hand, we're down $1 4 million or four 6%.
Net sales of Ortega decrease versus the year ago quarter and were down $5 1 million or 12, 3%.
The decline in net sales of Ortega was largely driven by our exit of low margin and unprofitable private label Taco shell business that we exited last fall how's.
However, Ortega continues to have elevated sales relative to pre pandemic levels and is up $1 8 million or five 2% compared to Q2 2019 net sales.
Yes.
Maple Grove farms had another strong quarter with net sales, increasing $1 2 million or six 1%.
Net sales of our spices and seasonings were off in the second quarter and similar to the first quarter performance was primarily driven by two factors.
First lapping last year's second quarter performance was challenging as it was one of the peak performance quarters for the spaces category.
Separately supply chain constraints, which have progressively improved throughout the year 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 spy.
Spices, and seasonings were down by $4 2 million.
Our four 2% compared to 2021 levels.
But we're up $13 9 million or 17, 1% compared to pre pandemic 2019 levels.
Gross profit was $76 5 million for the second quarter of 2022 or 16% of net sales.
Gross profit was $111 6 million in the second quarter of 2021 or 24% of net sales.
During the second quarter of 2022 adjusted.
Gross profit was negatively impacted by extreme input cost inflation.
Which was in many cases higher than the second quarter of 2022 than it was in the first quarter two.
2022.
Our expectation is that input cost inflation will continue to have significant industry wide impact during the remainder of fiscal 2022.
Although we are beginning to see some signs of moderation in several of the categories that had seen the highest levels of inflation.
As discussed on.
On previous calls we have also been able to mitigate a portion of the impact of inflation by locking in prices through short term supply contracts and advanced commodities purchase agreements and by implementing cost savings measures.
We are also executing various pricing initiatives, including list price increases when justified trade optimization, where possible and product layouts for certain skus.
However, these pricing initiatives generally lag behind the rising input costs as such we were unable to fully offset all of the incremental costs that we faced in the second quarter of 2022.
We did begin to see improvement in the month of June and expect to see margin recovery in the third and fourth quarters of this year.
Selling general and administrative expenses decreased by $2 9 million or six 1% to $44 2 million in the second quarter of 2022 compared to $47 1 million in the second quarter of last year.
The decrease was composed of decreases in warehousing expenses of $2 2 million.
Consumer marketing expenses of <unk>, 8 million and general and administrative expenses of $1 4 million and acquisition divestiture related and nonrecurring expenses of $4 million par.
Partially offset by increases in selling expenses of <unk> $9 million.
Expressed as a percentage of net sales selling general and administrative expenses.
Improved by <unk> nine percentage.
Manage points to nine 2% for the second quarter of 2022 as compared to 10, 1% for the second quarter of 2021.
We generated $54 1 million and adjusted EBITDA in the second quarter of 2022 compared to $83 8 million in the second quarter of 2021.
The decrease in adjusted EBITDA was primarily attributable to industry wide input cost inflation increases in freight and fuel costs and supply chain disruptions. These.
These cost challenges were partially offset by list price increases.
Adjusted EBITDA as a percentage of net sales was 11, 3% for the second quarter of 2022 compared to 18% in fiscal 2021.
As we discussed on the last call performance was going to be challenging in the second quarter and was slightly worse than expected.
The primary drivers were freight fuel and other energy cost at spike industry wide during the quarter and impacted our transportation and factory costs.
Chris go also had a challenging quarter with increased input costs, coupled with the delay in the implementation of our planned downsizing initiatives.
That had to be completed prior to the June price increases taking effect.
And although we achieved tremendous list price increase benefits during the quarter across our portfolio. We also had some promotional programs that we needed to protect with higher trade spending, which led to delayed gratification and some of our pricing efforts.
Interest expense was $29 9 million for the second quarter of 2022 compared to $26 7 million in the second quarter of 2021.
The primary driver for the increase in interest expense was a $1 $6 million one time payment for the amendment to our credit facility.
Interest expense was also modestly affected by increased borrowing during the quarter relative to last year, coupled with a slight increase in borrowing costs on our revolver and term loan.
Depreciation.
<unk> and amortization was $25 million in the second quarter of 2022 compared to $22 million in the second quarter of last year.
We generated.
<unk> and adjusted diluted earnings per share in the second quarter of 2022 compared to <unk> 41 in the prior year.
Net cash from operations was $21 $1 million for the six months ended July <unk> 2022, compared to $66 million for the six months ended July three.
2021.
One of the primary drivers for the decrease in net cash from operations was $56 $6 million increase in inventory compared to $38 7 million in the prior year.
The increase in inventory was driven by the combination of the beginning of our annual pack plan, coupled with increased input cost inflation, including increased costs that are carried in our inventory until it is sold during the normal business cycle.
Inventory as of the end of the second quarter 2022 was $667 7 million.
Compared to $609 8 million at the end of the fourth quarter of 2021, and $533 6 million at the end of the second quarter 2021.
While we are encouraged by what currently appears to be peaking in the level of inflationary pressures in recent weeks and what could very well the beginnings of a reversion to the need with regards to some of these costs. We were disappointed to see that many of these costs ratcheted up the levels that we did not anticipate earlier this year and well.
Thus have a greater than expected impact on our performance this year some.
Some examples include soybean oil, which had a peak level of ADC 88 per pound in April 2022, compared to <unk> 56 per pound at the start of the year.
<unk> reached.
We reached a peak level of $13 70 per bushel in March compared to $7 71.
At the beginning of the year.
Corn hit a peak of $8 43 in April compared to $5 95.
At the start of the year and diesel fuel hit a peak level of $5 81 per gallon in June compared to $3 62 per gallon at the start of the year.
Through six months, we have generated net debt benefit from pricing of approximately $56 $7 million and remain on track to generate more than $200 million and net benefit that we discussed at our last earnings call.
Unfortunately, as we highlighted earlier today the cost side has gotten worse, particularly with regards to certain commodity inputs freight and factory costs.
As a result, we are revising our guidance for the year to reflect what we know today, which will include a reaffirmation of our net sales guidance.
Two 1% to $2 4 billion.
And a reduction to our adjusted EBITDA guidance to a range of $300 million to $320 million.
The primary drivers for the reduction in guidance include an incremental $25 million and anticipated free fuel.
Cost energy factory costs, and an incremental 10% to $15 million and anticipated material cost inflation versus our prior estimates.
When looking at the back half of the year as compared to the back half of last year, we expect adjusted EBITDA to be down in the third quarter, and then flat to up in the fourth quarter.
We expect the fourth quarter to be an inflection point as pricing finally catches up to costs and absent any changes we expect that to be the case through 2023.
In fiscal 2023, we expect improved adjusted EBITDA performance in the first half of the year and full year adjusted EBITDA that better reflects.
Key factors.
That could lead to either upside or downside to our guidance include the level of elasticity that we face given the price increases that we have already executed as well as the additional price increases that we are in the process of executing.
So far we have seen relatively modest levels of elasticity drag.
Additionally, we are hoping for at least a pause in the levels of inflationary pressures that we're seeing in certain input costs.
Obviously any input cost relief would be favorable to plan and an additional wave of inflation would have a negative effect, although many of our costs for the year are largely locked in at this point.
Our supply chain situation in customer fill rates are also improving and are expected to be a tailwind for the remainder of the year.
We still operate in a volatile world.
That has seen stresses and may continue to see stresses on the global supply chain.
Additionally.
We expect interest expense of $117 five to $122 5 million, including cash interest expense of $112 five to $117 5 million.
Depreciation expense of $57 5 million to $62 5 million.
Amortization expense of 25 to $22 5 million.
An effective tax rate of 26% to 27% and capex of $40 million.
Now I will turn the call back over to Casey for further remarks.
Thank you Bruce in summary, the second quarter showed some pricing recovery, but not sufficient to offset the gross margin impact of rising inflationary input and operating costs.
We have fielded <unk> implemented pricing actions that are sufficient to recover projected cost positions, which are now flowing through in the back half of 2022.
Finally, we are up and running with the business unit structure and organization and making rapid progress towards driving stronger focus greater speed and improved performance on the business.
This concludes our remarks and now we would like to begin the Q&A portion of our call operator.
Thank you we will now be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Since using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from the line of Andrew Lazar with Barclays. Please proceed with your question.
Great. Thanks, so much.
I guess to start off maybe Bruce are you able to break out in the second quarter.
The benefit from price versus mix was.
If we just look at overall price mix I think it was up like four 5%.
Honestly that decelerated quite a bit from where our price mix was in the first quarter, which is surprising or confusing just given obviously you've been putting more pricing into place I was wondering whether thats because of mix or maybe some of the trade promotion do you talked about that you had to protect but trying to get a better handle on that just to see that pricing is actually accelerating.
Yeah, we don't have a perfect split between the price and the mix part, but if that is some of it as well as.
Some of the promotional.
Promotional trade to protect price points.
And the price increases.
So then.
Pricing is the pricing mix number so one of the things that happens is when spices seasonings goes down and we have a mix effect going on so okay.
Okay. So if we look in the back half of the year, if we look at that price mix line.
So I'm, assuming that accelerates fairly dramatically.
And I think I think maybe as of last quarter, you were expecting it maybe to get even to the even into the double digits is that still the right way to think about the back half in terms of the price mix equation.
From a price standpoint, yes, there's going to be a lot more pricing benefit in the back half of the year and even as we talked about on the last call a lot of our price increases. This year that were sizable where June July and back half of the year implementation.
Okay.
Andrew we disclosed that we're expecting kind of close to $200 million in total pricing for the year and so year to date.
We've gotten 50 $657 million so.
We expect acceleration in the back behind all of the actions have been taken.
Got it and then last one would be.
I think you said it but I want to make shareholder right did you suggest that 2003 EBITDA.
Could be similar.
To 'twenty, one or was it was at the back half of 'twenty three I want to make sure I heard I want to make sure I heard yes that is correct we expect.
Based on what we're seeing today continued normalization in EBIT.
And that would imply.
A stronger.
First half of 2023.
In 2023, EBITDA levels that would be closer.
To what we saw in 2021.
Got it okay. Thanks very much.
Thank you.
Ladies and gentlemen, we do ask that in the interest of time, you limit yourself to one question and one follow up. Our next question comes from the line of crew Martinsen with Jefferies. Please proceed with your question.
Good afternoon, when you look at the price gap between your product and private label, where does that stand now and post the price increases.
Where do you think that will go in that kind of dovetails into questions on the sustainability of the positive trends <unk> seen so far on elasticity.
Yes. This is Casey I'll answer that I mean, this is going to vary dramatically between brands and product lines, but let's just take the big one Chris go.
Which obviously has had the most pricing going on so we measure elasticity pretty carefully and we look at our gap to private label.
So we know that.
Prior to probably the last increase which was in June .
We were seeing Alaska, six probably in the two to three range.
And now I think since this last increase we're seeing it more in the five.
<unk> five.
Six range.
And in that period with our last price increase the gap to private label increased a little bit, but now I have noticed in the last couple of weeks private labels began to come up again so.
Our our assumption is is that prices go higher that there will be a little bit more lastly, the effect, we've modeled that in the back half.
And that we.
We do expect that some consumers may make the decision to trade down to private label, but we just haven't seen it in in large impact yet I mean, we think that the.
$25 six is where Chris go will stay.
Relative to relative to elasticity in the back half of the year.
Okay and then then when you look at the <unk>.
Recovery of EBIT.
You guys are looking for in 2023, I was trying to kind of square that with the credit amendment that will maintain the eight times leverage ratio through September of 'twenty three is that just.
Being overly cautious on that front.
Or what's the thinking there.
Yes, being overly cautious and we want to give ourselves time.
To Delever just through the combination of the natural EBITDA growth part of the equation.
The cash flows that you generate for that.
And as well as potentially select asset divestitures.
Thank you very much guys I appreciate it.
Thank you. Our next question comes from the line of William Reuter with Bank of America. Please proceed with your question.
Hi, My.
The first question on the dividend I guess.
<unk> is given your leverage is elevated is this something that you would consider reducing for a period of time in order to bring down leverage or are you pretty committed to staying at this level.
At the current time, there is no change in dividend policy.
Okay and then.
Given that you have seen some declines in some of these input costs from there from.
From their peaks when you think about your cost outlook for next year do you anticipate that those are going to be lower on a year over year basis. If they were to remain at current levels or will they be higher year over year next year.
Yeah.
If we look at that this is Casey. So if we look at total inflation expectations next year right. Now. We're currently modeling some something in the 3% to 5% range versus we talked about over 20% this year.
And our expectation is that the.
The big commodity inputs that have been so volatile and rapidly rising in the first six months of this year kind of stabilize that.
What we're seeing in the markets, maybe even go down a little bit.
Which would allow us maybe to have in some periods of next year some lower costs.
Year over year, and those big inputs, but overall, we are seeing that we will have inflation in certain components thinking about glass paperboard Tomatoes et cetera. So three years to 5%, which we would we would intend to price and drive cost savings against that.
To make that neutral.
Got it that makes sense. Thank you.
Thank you. Our next question comes from the line of Carla Casella.
<unk> with Jpmorgan. Please proceed with your question.
Hi, one of them is that the supply chain can you just talk about kind of where youre seeing the biggest supply chain issues.
And when you expect them to resolve.
Yes, I think.
The Big picture is that we've improved dramatically in the last three to six months on our on our service levels and our supply positions.
And I feel pretty confident that we'll continue to make progress.
We said I think we were.
At the end of the first quarter, we were below 90% service levels, we're now approaching 93% service levels.
On the business and we think that by the end of there will be even closer to 95% service level. So.
We had a lot at the beginning of the year, we had some significant disruptions we had a few material problems.
Add some labor shortages in some of our key facilities like.
Despite since even utility in ankeny some of those driven by the the omicron variant and other things, but so far we have been operating pretty smoothly, we've been able to now recover in terms of our labor shortages and we're running all the factories. The way we want to we will probably have material shortages here and there, but so far it's become more.
And manageable and as I said, we're kind of getting back to full production staffing.
Right.
Where we were I would say six to 12 months ago.
Okay, Great and then.
So where are you I mean.
<unk> raised the covenant level on your debt.
Okay.
Do you expect leverage to peak it sounds like you feel like you are near trough.
EBITDA should we then be near the.
Leverage take or what quarter.
You, probably see leverage peak in the third quarter as is our normal seasonal pattern.
And that's due to the pack coming in for Green giant.
No different this year.
Okay, Great and then.
I don't know if you can give us an update on if you look at your costs.
Excuse me give us any ballpark figures how much of it is the raw material labor versus packaging and transport.
Not a number we disclose but obviously when you are talking about soybean and soybean oil.
Part of Chris go in.
Corn and wheat as part of a lot of our products I would say, it's commodity commodity input is the biggest driver of our inflation, but clearly packaging material.
And.
Paperboard no things are up but I would say the lion's share of it is being input costs commodity input costs.
With also a significant challenge on the freight and fuel side right exactly again.
Yeah.
Okay, and then just one more.
Retailers are starting to talk about.
And the consumer and the elasticities are you getting any more pressure can promote or are you seeing any pick up in any particular category.
We're seeing a more promotional environment.
I think what we see right now is less around kind of the inflation impact on promotion or maybe potentially deflation. What we see is a resumption of more normal promotional patterns from the in.
In the post pandemic period, so think about 'twenty one in 'twenty.
Promotions were kind of scaled back by a lot of retailers are focusing on some of the core skus not doing as much.
Feature and display activity, we're seeing a resumption of that normal pattern. So promotion activity has increased this year, but frankly, that's because I think we're just coming back to normal.
Okay, great. Thanks, so much.
Thank you.
Thank you. Our next question comes from the line of Eric Larson with Seaport Research Partners. Please proceed with your question.
Eric Your line is.
Okay.
Our next question is from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thank you.
I think you said that.
Some of your pricing initiatives.
Didn't occur like like you thought it would in Q did I catch that right and if so.
Is it a delay or.
What caused that and also.
Yes, the cost that you are talking about like since the increase versus your prior estimate.
It's a lot more than what other food companies are reporting and <unk>.
Most.
Most companies reporting so far seem to.
Talked about stabilizing costs.
<unk> came out pretty well.
What do you think happened here that was <unk>.
<unk> different.
Regarding your cost profile, which is I guess a lot more than you thought it would be.
So on the on the pricing and implementation the real driver there that we're referring to is for Frisco, we have downsized and it just took longer for some of that inventory to flow through.
The system, which was kind of a delay there and we also had a price increase to attached to that flowing through.
But largely we got.
Got within.
We got pretty close to the pricing that we expected for the first half.
Right.
And then on the.
The cost side we.
We've also seen a stabilization I mean, thats, where we think.
We're near the trough certainly.
Comparing us to other companies I guess it depends on what company in what that portfolio is certainly for us some of the real challenges that we saw in the quarter was just the.
The disconnect or the rapid increase in the cost side from Christo.
Relative to when we were able to implement the price we knew a lot of that was coming but that was the challenge in the quarter are at that inflection point, yes, I mean, the way I would answer it is we have a portfolio with.
With the addition of Chris go and let's be honest Chriscoe is driving probably 40% of this.
We have a portfolio now that is very sensitive to the dramatic increases in certain commodities over the last six months soybean oil.
Corn wheat. So unfortunately these were some of the largest.
The largest increases then we just we have a portfolio now thats extremely sensitive to those so where.
Chris go to me is something we've got to think about longer term in terms of the commodity sensitivity of that product, but we are at historic levels. So with a little bit of luck, we will start to see that come off in.
And then in the future months and with a decent crop this year and the positive on that is really Chris goes.
Was an issue for Us April May and June was actually Wouldnt say normal, but much closer to normal but April may were challenging and so we are encouraged to see the June performance.
Bruce you mentioned 80 soybean oil but.
Soybean oil is much lower now so does that mean that you get an immediate benefit from that in the third quarter and fourth or do you kind of live with 80 for a little while.
Well.
We're not quite at any sense through the whole period, but we're covered through the whole year now and we can't.
Just the way oil works is once we agreed to buy it we probably have between 10 to 15 weeks before we can actually sell it as a bottle.
So because you got to refine the oil you've got a deal horizon, you've got to process. It.
So we're largely covered for the rest of the year, so any benefit that happens in the soil.
Soybean oil market will get in in DFM kind of in the first quarter of next year, but right now we had to cover the costs because of the lead times in the product and also we were able to go in when the dip down in kind of the low to mid <unk> and cover a little bit of our fourth quarter needs, but largely we're we're set for the rest of the year.
More and more in the 70 to 80 range.
Okay I got you know thanks for the clarity.
Thank you. Our next question comes from the line of David Palmer with Evercore. Please proceed with your question.
Okay. Thanks.
Just a question for those of US tracking you with scanner data it looks like now and in IRI for example, you've gotten up to it.
Double digit pricing increases per unit portfolio wide is that the type of price realization you expect.
That's the kind of run rate of pricing that you would actually see in your organic results going forward.
Yes, I mean, it varies by obviously by brand and product category, but yes.
And you would see that any of that show up.
Yes go ahead, you'd see that showing up probably with some of the latest increases that really hit kind of in June and July .
Right right yes.
One of the things that I've been wrestling with is just the fact that it seemed to take <unk>.
In the data.
Finally did accelerate as you said, but it took a while to get through.
I wonder to what degree it's a mistake for us too.
Co mingle the pace of your price realization with pricing power and the.
In other words some of your competitors out there, where we're getting pricing in faster and.
Is there a reason for that is there something of a category dynamic that plays.
Plays out in some of your major categories and any thoughts on that.
No I think what.
What we face is as we're in kind of categories with promotion, we have kind of contracts with retailers. So we have to protect promoted price points are sometimes that mute a little bit of how fast the total pricing that comes in.
I would say.
I would say, we do have to get better on pricing. This case youre talking having been here, we have to get better and faster on projecting future cost increases as well as pricing against them that is something that we're going to get better at and the business unit structure and we're designing that capability to do that I would say overall on chriscoe, which.
<unk> is driving a lot of this what we're talking about.
We have to probably treat that more like a commodity and try and negotiate with our retailers to move pricing more quickly.
Because of the normal lead times in a commodity that as Bruce said went from 56 to 88, we just we can't operate with these kind of lead times. It is not a normal win that so much of the cost of product is in that commodity.
We're going to have to think about it more like coffee.
And then one last question I have is just on spaces.
Noted that you have a tough comparison, there that seems to be an inventory of all perhaps like the ultimate Covid type category, where people were perhaps growing at home more and they stocked up on this stuff do you feel like you have decent visibility into that getting better the year.
Getting back to its historic growth rates some time in this year.
What we're seeing is contraction.
Contraction in the first half of the year in the category.
Frankly, some of our Spice and seasonings problems was our own issues, where we had supply problems.
Production problems in the first quarter, which kind of caused some temporary distribution losses, which were now getting back.
But we think that the.
Trends will.
Kind of improve in the back half, we're already seeing that trend improving in July .
So where we are.
We don't expect to see big growth in spices, and seasonings, either our business or the category. This year, but we expect to see it kind of like steadily kind of recover and stabilize and then we know that from a lot of consumer research that people are now planning given.
Possibility of recession are now planning to maybe continue to make more meals at home use more spices and thats kind of the research. We're seeing so I'm encouraged that we'll still be able to deliver some growth on the spices and seasoning portfolio.
As we go forward and in the long term and what I said was the low single digits I think there's good growth there and it's obviously good margin and I think we have good capabilities in that category and Dave. The other thing you've got to keep in mind I think on spices and seasonings as a category is it was almost a different pattern from the COVID-19 response than something like a <unk>.
<unk> can mean for US we look back at the financials and you actually see the spike in sales in some of those products even before we thought we had.
Covid issue back in 2020, and then spices was more of a delayed reaction and so we're lapping in the first and second quarter of this year. Some of the some of the strongest performance in the Spice category that contributes a little bit to it.
Thank you very much.
Yes.
Thank you. Our next question is from the line of Connor <unk> with consumer edge. Please proceed with your question.
Good afternoon, thanks for the question.
So I know, it's a bit premature given the current environment, but just I guess as far as the pricing strategy goes going forward.
If we begin to see a commodity pullback like we've seen some of the commodity.
Especially in soybean oil I'll, let as seen on the last couple of weeks.
Later in the year, when you're closer to full coverage would that really impact your strategy around pricing or maybe make those conversations with retailers tougher.
Well I mean, we don't we've largely kind of feel that all the pricing against the big commodity increases so thats already.
Kind of been fielded and sold through.
So I think the discussions with retailers will be around.
If the commodity.
It comes down much below.
Where it is now we will start to have the conversations about when would we.
When would we take possibly on chriscoe prices down, but honestly even.
That the spot market prices today, they are not far off where our real costs are so you got to add basis and other things to it but.
I think if the commodity comes down we're going to get benefit in the probably the first quarter of next year.
And we will have those discussions with retailers on predominantly on Chris go on oil about what does that mean in terms of when we can reflect pricing, but those will be conversations that we'll have over the next several months, depending on where the market. The soybean market actually goes it's not.
It's not down to the point, where it's really that that way far off from where we are from a cost basis.
Alright. Thank you so much that was very helpful background.
There are no further questions at this time I would like to turn the floor over to Casey Keller for closing comments.
Yes.
Thank you all for joining us as I said this was a difficult quarter, but we.
We feel pretty confident that we have the pricing actions in place to recover against the kind of unusual inflation environment that we're dealing with.
I appreciate all the questions and we'll talk to you next quarter. Thank you.
This.
Todays teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
Okay.