Q3 2022 Whole Earth Brands Inc Earnings Call
[music].
Good day and welcome to Cool brands, Inc. First quarter 2022 earnings conference call all participants will be in listen only mode.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on it that sounds good to me.
A question. Please press Star then two.
Please note today's event is being recorded I.
I would like to turn the conference over to Jeff Aside ICR. Please go ahead.
Thank you and good morning, today's presentation will be hosted by Albert <unk>, Chief Executive Officer, and Duane Portwood, Chief Financial Officer Executive Chairman Irwin Simon is also participating on the call and will be available for Q&A. The comments during today's call and the accompanying presentation contain forward looking statements within the <unk>.
Meaning of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1095 Allstate.
All statements other than statements of historical facts are considered forward looking statements. These.
These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events.
Such forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward looking statements. Some of these risks and uncertainties are identified and discussed in the Companys filings with the SEC.
We will refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on the Investor Relations website investors that whole Earth brands Dot com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures.
Additionally, we provided a supplemental earnings presentation on the IR website that may be useful in your analysis of the company's performance.
With that I'd like to turn the call over to Albert <unk> CEO .
Thank you, Jeff and thanks to everyone for joining the call today are.
Our business generated another quarter of consistent growth.
In the third quarter, we drove consolidated constant currency revenue growth of eight 1% and generated adjusted EBITDA of 21 5 million.
At the segment level, our branded CPG business grew five 9% on a constant currency basis driven by price.
Our branded CPG portfolio is well positioned in the current environment, we have a diverse assortment of strong brands.
The diversification in terms of its channel presence.
Thats sort mint and geographical reach users shrinks that continues to drive results.
In North America, 80% of revenues generated we see unmeasured channels, such as club E Commerce foodservice private label and ingredients.
We continued to see nice growth in this channels during the third quarter and we believe they would remain a significant force for future growth.
We've seen our measured channels, which represent 20% of North America revenue, we planned for and expected a slowdown in velocity on our branded business.
Due to the price increases and a reduction in trade promotions.
This the strategy speaks to our focus on profitable growth gross profit dollar growth.
And ultimately cash flow.
Looking at the progression, we saw trends improved sequentially in third quarter versus the first half.
And then looking ahead to the fourth quarter, we expect to see for Green Cross cement as well, which should put us in a good position to generate growth in the measured data in 2020 free.
Our international branded CPG businesses grew revenue, 8% in the third quarter on a constant currency basis with both volume and price contributing as we continue to grow share in our international markets.
Globally, our product assortment is well positioned with a host of brands that address unique consumer preferences and offer.
Entry level price points for consumers that are feeling the effects of the ongoing macroeconomic headwinds.
Our private label and ingredients business complemented the branded portfolio nicely.
Grew stronger and broader customer relationships and purchasing scale.
As the word experiences unprecedented pressure from market disruptions and macroeconomic headwinds our mission and core strategy remained more relevant than ever to consumers.
We've approximately three in four consumers aiming to limit or avoid refined sugar as well as powerful movement towards wellness and personal health our mission to help consumers achieve healthier lifestyle positions us for success.
Globally, our portfolio of brands is worth suite did to address a battery of consumer needs are premium and baking oriented brands, including wholesome swerve in order in the U S. Our optimal solutions for at home indulgence and healthier lifestyles.
Our mainstream brands, such as Kim derail, an equal present, a strong value proposition delivering affordability without sacrificing quality.
We continue to see net gains in our distribution across our global footprint in <unk>.
North America through our ongoing focus on improving production rates and service levels, we're seeing distribution wins, adding doors across our core brands driven by increasing momentum with national and regional customers.
Our emerging international markets comprised of Asia Pacific and give me duties in Africa, and Latin America, which represents 15% of our branded CPG segment.
Once again collectively posted a strong double digit growth during the third quarter.
Confirming the strong secular demand trends for our products.
Innovation is a core capability of our business and today represents 17, 5% of our North American branded CPG sales and 12% of our global branded CPG sales.
Over the trailing three year period.
Our new innovations are tapping into high growth segments of sugar substitutes with monk fruit, which you're seeing consumption growth of 42% in animals, which is growing at nearly 40%, 14% versus a year ago $4 13 week period ended October .
First.
For instance, we're bringing this growing ingredients into our square portfolio and leveraging swerved powerful consumer loyalty to drive cross purchases.
Nearly half of all <unk>, where consumers are repeat purchasers that will help to drive brand growth on the heels of the innovations, we're bringing to market.
You would see us in the market with blends such as monk fruit and cane sugar to bringing new users to the sugar substitute category and to help consumers transition toward a sugar free lifestyle.
And over innovation, we're especially excited about this were of no sugar added chocolate chips in the large baking adjusting fee.
Chocolate baking chips are a strong natural link to existing square baking behaviors.
This segment of interest for sugar, reducing consumers.
And we're also bringing exciting adjacencies in North America, and chocolate cookies and flower to name a few coming on shelf soon stay tuned.
Our innovation efforts have also driven our share growth across our international markets for.
For example, take our work in Australia, where we now have 23% share of the natural segment.
Which increased nearly 12 points over the past two years following the introduction of our older Bakers secret range and monk fruit range, including our latest launch the rule borrowings.
As we look to the future of web we focus on building our brands both in their core categories and through potential adjacency expansion.
By putting <unk> innovation levers across ingredients locations value propositions and new categories. Our brands can solve a variety of consumer needs and ultimately grow the category household penetration.
Moving to supply chain and as communicated previously we took control of the deca toward Alabama facility and manufacturers sushi and bags in the second half of 2021.
This was a deliberate move as our co manufacturer went into financial distress.
It was <unk> <unk> in the U S.
And significant supply chain disruptions exacerbated by Covid and low unemployment rates.
Since then we have stabilized operations said dedicate toward Alabama facility.
Improved service rates supply to demand.
And reinvigorated growth of our North American branded CPG business. Despite.
Despite facing a series of macroeconomic challenges along the way.
Following the stabilization of our North American supply and the improvement in customer service that followed we will streamline our north American supply chain network and puts UNFI light model with increased use of strategic partners that possess proven operating capabilities and cost advent.
<unk> across manufacturing warehousing and distribution.
We expect that this will allow us to improve costs and drive positive free cash flow in 2023.
While continuing to deliver sustainable supply for our customers and allow our teams to focus on our core competencies and driving growth through innovation.
Building and distribution.
Beyond the supply chain. We're also combating inflationary forces through a combination of tools, including price productivity and prudent expense management.
We are on track in 2022 to deliver about $40 million of pricing and cost savings to offset inflationary and currency pressures.
With respect to our pricing actions, we instituted in mid single digit price increase earlier in the year and took another round of price in the third quarter of low single digits to fend off the persistent cost inflation.
We will continue to take actions as needed to protect margin dollars.
Mixed productivity the SKU rationalization, we executed at the beginning of the year, which was a year over year headwind of one 6% in the third quarter.
Was largely focused.
On less profitable Skus and reallocating those resources towards innovation.
This is an excellent complement to our pricing strategy and something that we can control in response to external forces.
Finally expense management.
We continue to be vigilant about expenses and reduced head count and expenses throughout the year to ensure our organization is right sized and appropriate for the current operations and environment.
Shifting to our flavors and ingredients segment.
We continue to generate above trend revenue growth in the third quarter at 17% on a constant currency basis.
This growth was driven primarily through volume and to a lesser extent pricing actions.
This marks the fourth consecutive quarter of strong growth for the segment following the implementation of new dealership.
<unk> developed a set of commercial initiatives aimed at driving adoption of our natural non GMO flavoring <unk> related ingredients.
Our end markets across food and beverage cosmetics health care and industrial.
Together with a significantly improved cost structure following our footprint optimization projects. We also have an ability to drive more competitive pricing.
Taken together the team has the tools necessary to drive growth and we're very excited about the results of our generating for the business.
Flavoring ingredients is a strong free cash flow generator with high barriers to entry and our global leadership position that would support our broader growth initiatives as we further diversify and grow older friends.
This diversification in both revenue and cash flow is valued in a fluid environment, such as this allowing us to deliver greater consistency in our operating results.
In summary, our proactive efforts across all our brands are creating a stronger foundation that we would build upon.
We're pleased with our progress to meet our goals for 2022.
<unk> is the global leader in the better for you sweetener and reduced sugar categories.
Our team who I want to thank today on this call for all the work done to date.
<unk> to pursue four priorities.
Disrupt the massive 100 billion total addressable refined sugar markets, which is being displaced by fast growing alternative sweeteners.
Drive category leadership through best in class innovation and brand building.
Expand our global distribution and leverage our supply chain capabilities.
Continue to build out our ESG credentials and if all of our brands and products portfolio towards becoming a large organic natural and plant based food company and.
Work on enhancing our cash flow management, and reducing balance sheet leverage.
With that I'll pass the call for the financial review.
Thank you Albert and good morning to everyone.
As a reminder, please refer to our non-GAAP reconciliations at the end of the press release for additional detail and I encourage you to view the supplemental earnings presentation in our Investor Relations website.
For the third quarter ended September 32022, consolidated product revenues grew four 9% to $135 3 million versus the prior year quarter.
On a constant currency basis product revenues increased eight 1% versus the prior year third quarter the.
The increase was driven primarily by strong pricing growth along with increased volume.
Reported gross profit was 35.0 million compared to $43.0 million.
In the prior year third quarter.
The decrease was largely driven by cost inflation costs associated with our supply chain reinvention project and $2 8 million of favorable noncash purchase accounting adjustments related to inventory revaluations in the prior year period that did not reoccur.
Partially offset by pricing actions.
Adjusted gross profit was $41 7 million compared to $43 4 million in the prior year period.
Reported gross profit margin was 25, 9% in the third quarter of 2022 compared to 33, 4% in the prior year period.
Adjusted gross profit margin was 38% compared to 33, 6% in the prior year.
The majority of this decline was primarily a function of higher cost of goods sold due to cost inflation, mostly offset by increased prices.
This resulted in higher sales to predict year over year gross profit dollars, but on a percentage basis results in a lower gross profit margin.
Consolidated operating income was $6 8 million compared to operating income.
$13 5 million in the prior year third quarter.
Consolidated net loss was $2 5 million compared to net income of $8 8 million and the <unk>.
Prior year period.
Consolidated adjusted EBITDA was $21 5 million compared to $22 1 million in the prior year third quarter deal.
The decrease was primarily due to an unfavorable foreign currency impact of approximately $1 3 million.
Now shifting to the segment results for Q3.
Branded CPG segment product revenues increased $2 $7 million or two 6% to $105 4 million for the third quarter of 2022 compared to $102 7 million for the same period in the prior year.
On a constant currency basis segment product revenues increased five 9% compared to the prior year, driven primarily by pricing actions.
Overall volume was down 2.0% due to the discontinuance of certain private label Skus at the beginning of the year.
Excluding the impact of the SKU rationalization branded CPG volume was essentially flat versus the prior year quarter.
Operating income for the branded CPG segment was $5 $5 million in the third quarter of 2022 compared to operating income of $10 1 million for the same period in the prior year.
The decrease was driven by costs associated with our supply chain reinvention project the impact of cost inflation.
And an unfavorable impact from a stronger U S dollar, partially offset by pricing actions.
Flavors and ingredients segment product revenues increased 13, 9% to $29 9 million for the third quarter of 2022 compared to $26 2 million for the same period in the prior year.
On a constant currency basis segment product revenues increased 16, 9%, primarily due to strong volume growth of 12, 3%.
Driven by growth in liquorice extracts and pure derivatives, resulting from the company's commercial expansion and innovation efforts.
Pricing was also a contributor but to a lesser extent, increasing four 6% versus prior year.
Operating income for the flavors and ingredients segment was $7 $3 million in the third quarter of 2022 compared to operating income of $9 5 million in the prior year period.
The decrease was primarily driven by $2 $8 million of favorable purchase accounting adjustments in the prior year period related to inventory revaluation.
That did not reoccur in the current quarter.
Along with higher severance and related expenses.
Operating expenses for corporate for the third quarter of 2022 were $6 $1 million compared to $6 1 million in the prior year period.
During the quarter increased insurance expense and salaries were offset by lower M&A transaction and public company readiness costs.
Now I'll briefly cover our September year to date results.
As a reminder, we acquired wholesome on February five 2021.
I will speak to reported results, which.
Which include wholesome for the first full quarter of 2022.
Additionally, we will provide some select pro forma results as if we had owned wholesome for the entirety of 2021 year to date period to assist in your analysis of the organic growth of the combined portfolio.
For the nine months period ended September 32022, consolidated product revenues grew 10, 6% on a reported basis.
$399 $4 million versus the prior year nine months period.
On a pro forma basis organic constant currency product revenue increased seven 2% compared to the prior year.
Consolidated operating income was $21 6 million compared to $16 4 million in the prior year period.
Consolidated adjusted EBITDA decreased four 2% to 59.0 million.
Which included $3 zero million of unfavorable foreign currency.
Now moving to the cash flow and the balance sheet.
Cash used in operating activities for September year to date was $17 $3 million driven by increased inventory levels.
Due to both.
Timing of purchases and strategic build in certain inventories to improve service levels as well as the pull through inflation in our inventory.
Approximates roughly 50% of the year over year inventory build.
Capital expenditures for the nine months ended September 32022 were $6 $9 million.
Free cash flow for the first nine months of 2022 was a negative $24 2 million.
With respect to our near term expectations, we anticipate an improvement in working capital during the fourth quarter.
Which combined with limited capital spending will contribute to positive reported free cash flow for the quarter.
Yeah.
As of September 32022, we had cash and cash equivalents of $28 million and $435 $7 million of long term debt net of unamortized debt issuance costs.
Our long term debt increased from year end 2021 by approximately $52 million, primarily due to $54 million of draws on revolving credit facility.
These proceeds were used to fund a portion of the wholesome earn out payment in the first quarter.
And to find increased net working capital levels, primarily related to higher levels of inventory, resulting from increased costs and to improve customer service as well as timing related to seasonality.
At September 32022, there was $79 million drawn on our $125 million revolving credit facility.
Reducing balance sheet leverage continues to be a corporate priority.
While we seek to reduce leverage this fiscal year, our latest expectation is for our net debt leverage ratio at the end of 2022 to be approximately 5.0 times.
As we look to 2023, we believe we can reduce that ratio to the low to mid fours with improved costs and improved net working capital.
Now shifting to our outlook.
We are updating our 2022 guidance to account for year to date sales momentum and currency headwinds.
More precisely we are narrowing our range of expectations for net product revenues towards the higher end of our previously stated range and lowering our expectations for adjusted EBITDA due to unfavorable foreign currency impacts, which are now reflected in our guidance.
As a reminder, our outlook is presented on a reported basis, which includes the impact of foreign currency translation and our expectations for growth are presented on a pro forma organic basis.
We define pro forma organic growth to be as if the company owned wholesome for the full year 2021.
For 2022, we now expect consolidated product revenues to be in the range of $535 million to $545 million.
Which reflects a $5 million increase from the bottom end of our previous range and accounts for our year to date performance.
And the impact of planned pricing actions.
The remainder of the year.
We are lowering our adjusted EBITDA to a new range of $79 million to $81 million, which reflects the expected impact of approximately $5 million of currency headwinds that we anticipate for the full year. In addition to some persistent cost pressures due to inflation that have not yet been fully covered by our pricing actions.
Last we continue to expect total capital expenditures will be approximately $10 million.
That concludes our prepared remarks, operator now back to you. Please open up the call for Q&A.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Okay.
The first question is from Todd Laskin.
All five Cabot Hill. Please go ahead.
Hey, guys. Thanks, Thanks for taking my questions.
I guess I wanted to talk a little bit about framing 2023, I know you talked about the goals of getting the debt down how else scale, just I know youre not going to give guidance, but how should we be thinking about 2023.
Good morning, guys. Scot this is Albert and I will ask Duane to answer that first question of yours.
Yes, Scott I appreciate the question and good morning, good morning.
Tom.
Well, obviously, we'll give guidance.
The 2023 next time around.
Earnings after year end.
We think about how do we think about 2023.
From a from an operating perspective, we're still seeing we are seeing a lag in pricing offsetting inflation, which we do expect to catch up in 2023.
Have expectations that next year is more in sync with our long term algorithm.
Mid single digits top line growth with some with some leverage on EBITDA.
And then I think importantly from a from a cash flow perspective.
Expect significant tailwind from working capital investments that we've made in 2022.
Don't see the severity of those carrying forward actually much less severity.
That's already kind of costs, the cost and flowing through to the to the working capital side.
As well as just.
More improved cost overall.
Albert alluded to the streamlining.
The operating model going forward in North America.
And a very very positive excuse me positive.
I'll look from our perspective.
As we exit 'twenty, two and entered 2003 with <unk>.
It.
Cost more in line with our pricing more in line with costs.
And investments kind of already under the bridge so to speak.
From a net working capital perspective.
And then Bob I just.
Scott Jamie add to that.
Hey, Scott how are you nice to hear it again I think the baked in year.
As we put all these companies together we had happened.
Is that in between Covid.
That happened with higher costs, what's happened with two acquisitions and international.
<unk> business.
And with a lot of new team members.
I think as we look at this business today.
What hit us on currency.
$4 million to $5 million and cheered EBITDA, where we didn't get the pricing through.
Some of the things that happen in our Deepak facility.
The Capex and I think going into 'twenty three.
I will tell you the team is focused on free cash getting our debt levels down into the low fours.
And getting the growth in the business that's necessary.
I think that's the floor of five things.
Focus on but the more important thing is.
It's the history that they had an operating businesses.
It came together over the last couple of years.
All of the different challenges with COVID-19 with pricing and that effect. So.
I think there is much more visibility and <unk>.
Much more knowledge there.
In front of us that will help us with 23 to get to the numbers that we expected.
Thanks, Jay if not Oh go ahead sorry.
Sorry, Scott just building on that I need to build on what everyone said, but yes.
Yes.
The currency headwinds that we've experienced.
This year.
Her are to a certain extent unprecedented and of course, an intensified as the year has gone on so.
So who knows where currency goes but I would say two years of this would be unlikely.
And the Big thing is Scott just on the other hand.
The majority of our businesses in North America. So the good news.
And the good news standpoint, where we are but we.
We do have.
Good.
A good size business in Europe nowhere near.
You talked about 20% so I think there's.
We know where we're starting from now.
I was going to say around you've always hated that so having confidence that you guys are getting it down as high interest because they know us well.
Track record there.
I still ate and Scott I still hate it I hate to even more with these interest rates. So.
I will tell you. This team is laser focused.
And you know me from my days.
<unk> for numbers I would like the levels.
This is a tremendous cash flow business, so youre absolutely right.
And then just my follow up and then I'll yield.
I can appreciate Europe is a much smaller part of the business at this stage.
But how should we think of the risks into 2023 do you guys feel like you kind of get your arms around it I mean, obviously this award to actually cure.
Maybe manage it all but how do we think about Europe .
Specifically.
Albert do you want to take that.
Alright as you wish.
Yeah.
So I would tell you that in Europe , we have a very strong position and I don't foresee concerns for next year. We are already I would say from a recession area as you know in Europe , there or energy prices probably in.
In the situation that we're going to encounter next year and talking to the strengths of our portfolio.
We have very strong brands innovations and different price points and if you just take <unk> as an example.
In Q3 alone we gained four one share of markets and we're now a 76.5 off the market. So we continue to gain share we continue to be competitively advantage.
Versus competition, we have been able to take <unk>.
<unk> and position essentially are different brands from a value midpoint in the high points.
I would say extra need that.
From past experience in those type of situations.
This is this is an opportunity for us to get even stronger in this downturn.
<unk> has as one of the key players in Europe , we are from a.
Currency standpoint, producing in Europe and so.
It's contained.
And.
I will tell you that from a performance standpoint to the Europe is strong notwithstanding of course the exchange rates.
Thanks, guys.
Like with everything that's been thrown at you this year its easy for us to.
Shoot at you guys, but it's been an amazing.
You've done actually a good job.
So thank you.
Thanks Scott.
The next question is from Bobby Burleson with Canaccord. Please go ahead.
Thanks for taking my questions.
So I guess the first one is just.
Yes.
Look at cost inflation, maybe help us understand your across your portfolio, where you see the most acute.
Acute issues.
Kind of for the balance of this year.
Sure.
I can start and then Duane. Please please buildup, but I would say cost inflation is obviously across.
A number of items from input cost to freight and logistics and labor as you know so I think you have the whole.
But in a CEO for Cogs increases Dwayne said, we have taken price.
And we will continue to take prices needed to prices being a lagging indicator and we expect this dwayne say to this to get trapped nicely in 2023 and in addition to price we have taken cost out of the business and that's been extremely disciplined.
So we're looking for the full year of 2022 to deliver 40 million of cost savings in between the pricing and cost initiatives.
In terms of the organization, our gross to net and every over SG&A items. So that's that's what we see from an inflation as I told you and this is what we're doing about it we.
We don't expect again from an inflationary standpoint to distribution to be the same next year.
And we will at that point to benefit from the lagging factor of pricing.
Duane and Albert Yes, I think Albert you should just add to that I think as you saw in our press release between cost savings and price.
On the annualized basis, the team was able to get about $40 million, which again will deposit for the full year next year, so that should be very helpful.
I think.
You asked where we got inflation I think it's fragrance ingredients is labor.
It's currency.
And as you're well aware you don't get pricing right away so to speak.
So I think that's what's important.
As the team has as Albert said been able to.
Do you have pricing and cut costs at the same time.
Okay.
Yes, I don't know that all have much to pile on but.
One one thing that.
Maybe we haven't talked too much about because there hasnt been much in the way of.
Costs, there before but.
On our wholesale business, which is doing quite well.
As I think everyone knows as we've seen throughout this year.
What's the dynamic that's been happening in the back half of 2022, where the where the demand for the product has been high enough to where we're having to take sugar out of bond, which means we're having to pay a little bit more tier one penalties and then <unk>.
Normally would so that's also contributing to cost inflation in 2022 don't know that thats going to recur, but its impact in the current year again.
As for the greater good but.
It's money that.
As indicated.
Okay. Thanks, and then just in the opening comments and in the press release.
I believe in the press release as well you guys talked about.
Door growth.
With some of your own.
Our distribution partners.
And I'm wondering.
Just regionally.
We're expecting the most to our growth going.
Going forward just looking at the U S.
Yes.
So thats a great question.
And.
People have visibility into Nielsen and so let me start there by saying that Nielsen for us in North America represents less than 20%, it's actually 19%.
Our sales and so if I look at.
That specific channel what you ever had going into this year is obviously.
We I talked in my remarks about.
What we have done from a supply chain standpoint, but we had some supply chain disruptions as you know in Q4 Q1 and part of Q2.
That affected that's the second we did take price and we are just talking about it extensively and we've done it ahead of overs and.
To protect our margins.
The sort of thing is we've got the discipline on our.
Promoted the level and gross to net so all those things that went into we're very deliberate.
Knowing that our profitable growth was more important than growth at all cost.
When you look at that channel. What you see is that we do have distribution wins, which are innovations, which have also talked extensively in my opening remarks.
We expect the momentum to continue to start building Q3, Q4 and into 2020 free now.
80% of our sales more than 80% are done outside of Nielsen and then of course, we have been growing nicely contributing to.
The five 9% growth that we have had in branded CPG.
And does here what to what do we see growth across all the channels I would tell you that with Nielsen that we play in the club foodservice.
And in the E Commerce and <unk>. So we're very pleased with the broker private table of course, which is benefiting in this current environment.
And ingredients, so we're seeing growth across our 81%.
We are fixing or.
<unk>.
19% that I, just talked about but for us the priority. This year has been after restoring supply chain has been profitable growth and.
And we would continue that way.
Great. Thank you.
Thanks, Bobby.
The next question is from Ryan Meyers with Lake Street. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
A follow up to the last question to ask but you did call out kind of in the prepared remarks, some growth in retail doors I'm. Just wondering if you guys could maybe quantify that.
For us maybe kind of how many doors you guys have added sort of year to date and maybe how many you added during the quarter and then kind of looking at it from a full year standpoint.
So I want to I wouldn't give you the full year because of just need that.
A number of we're working it all the time as you know, but in terms of the doors had the penetration into the including penetration how many skus we have added.
<unk> two into the U S were about 1700.
And that's for a total of about of 49.
Point of sales. So we are right into the selling season as you know and we have grown into a number of accounts and we're continuing to have those meetings top to top with all the retailers too.
To continue to drive.
The penetration for those innovation importantly versus what I have said before we are also seeing significant wins in terms of doors in what we call sugar replacement Adjacencies and so I talked about chocolate chip cookies I talked about.
Items coming.
That we're discussing right now with retailers those are obviously not captured into Nielsen because theyre not in the definition of sugar replacement, which is just sugar and sugar alternatives, but obviously that doesn't deter us from promoting those initiatives because obviously those are very big categories.
Like the chocolate chips are baked in for <unk> and would contribute very nicely to the acceleration of our growth as we grow as a company.
Got it that makes sense and then second one for me just looking at the flavors and ingredients business.
The past few quarters, we've seen some pretty healthy growth here do you feel like there's enough tailwind in this business and you guys are in a good spot from a supply chain reinvention project that we can see some of these elevated growth rates going forward here.
Sure I'm happy to take this on and then if you want to add in.
Dwayne, but I would tell you. This this business is is is a rocket and we're very excited about it and.
We made some leadership changes back to when we went public which we discussed about that we invested in sales and R&D and <unk>.
But I think you are seeing is that our across our end consumers be food and beverage cosmetics health care and industrial there is a growing demand for natural non GMO ingredients, that's what exactly what we're offering so being the leader.
<unk> into a product that has multiple benefits, but importantly, natural non GMO is what I would tell you.
Is really the secular tailwind that we're going to continue to benefit dawn and considering our leadership position worldwide in that's ingredients.
I would say that the macro trend powered by very strong sales in there Andy.
And in market performance globally positions.
Positions us well for the future.
And just to follow up on that I think what we've realized and the good news every product has ingredients and every product every company today is looking to simplify their ingredients with natural ingredients or plant based ingredients and <unk> happens to be that ingredient.
And we're very fortunate to have great share of that category have great supply and our business portfolio has changed dramatically.
Indeed, confectionary into personal care products and the other snack products and the team has done some great jobs on innovation.
These ingredients can be used in.
Like you said.
And our rocket for us where that has not always been the case in this business.
No that's super helpful and that's it for me Thanks for taking my question guys.
Thank you.
The next question is from Alex <unk>.
<unk> capital. Please go ahead.
Hi, guys. Thanks for taking my question.
It's just sort of a high level.
Question on margins.
And trying to unpack how they may look over the next couple of quarters. So could you.
Sort of just speak to the <unk>.
Break out and break down the margins a little bit, but also sort of the timing of taking price last quarter and how that may normalize as it flows through for a full quarter this quarter and if youre seeing any cost abatement.
On any front that may offset some of the cost increases <unk> been seeing because it feels like I think a couple of hundred basis points of sequential margin pressure each quarter for the past couple of quarters and I'm just trying to figure out how that flows forward.
Good morning, Alex I will let dwayne those kick it off.
Good morning, Alex.
So so from a.
From a margin perspective, yes.
The story is fairly consistent with.
Q2, I guess first of all to your to your pricing question on the price that we took in Q.
In Q3 was pretty much effective throughout Q3, so don't see a on a quarter on quarter sequential improvement there.
Or more price I should say.
Really what's what's happening is all the price we are taking us.
And a little bit more as being eaten up by by increased costs. So in this quarter alone just just thinking about $8 5 million.
<unk> benefits.
That we saw.
That we had we had costs.
At least equal to that.
So just just to.
As I call it the math.
When revenues go up.
$5 million on our on our base and cost go up about the same amount that that alone accounts for almost 30 basis points on the.
The movement so as we go.
Thank the messages as we go forward from a from a gross margin perspective, I would expect that to remain.
Fairly similar now as it.
As we've talked about.
Couple of questions prior to this.
And we do see we do see ways to improve costs and in 2023, so that should have margin expansion.
<unk> that as it relates to kind of 2022, its infrastructural relative to the cost inflation that we've seen in the price actions we've taken.
Alright, Thanks, guys have a good one.
Thank you.
Okay.
My last question is from JP will them with Roth Capital Partners. Please go ahead.
Hi, guys. Thanks for taking my question I wanted to just focus on pricing first so I believe you commented that you have.
I'd taken low single digits in <unk> and I just wanted to clarify that was consolidated pricing that was just for branded CPG. If you could just break out kind of what you're cooking brands, you can see versus flavors and ingredients.
That would be great and then.
Also kind of.
Plans for taking more I think maybe.
Maybe there was a comment that you will take as needed and then also maybe.
Comment about that was planned price actions. So if you could just let me know kind of what youre thinking in terms of going forward and if theres anything already planned.
Duane do you want to start.
Sure.
The pricing that we took in Q3 was primarily related to the branded CPG segment.
And.
As for the full year.
Have kind of mids mid single digit millions impact.
We did take.
We have taken price and flavors and ingredients segment, but those are kind of put in total put into effect primarily in Q2.
It did have a little bit of impact in <unk>.
And in Q3, but the primary impact is branded CPG. So.
And again that was on top of the increases that we and the increases that we took at the beginning of the year. So.
Sure.
Overall.
Sure.
Holidayed basis price impact for 2022.
In the low Thirty's 3100 $32 million.
And then we will look at there will be a carryover there will be carryover impact.
And 2023.
From the first price increase as it didn't it wasn't effective for the full quarter.
Of 2000.
I wasn't effective for the first quarter of 2022, and then obviously the price increases that we took again primarily related to branded CPG.
In Q3, we'll have a lower impact than in 2023 as well.
Great. Thanks.
Go ahead Bryan.
No I was saying to the to answer the second piece of your question we have.
On a global basis, we do take price first of all the different geographies deeper in markets.
At the right time, so that is something that we always do especially in our international markets.
On flavors and ingredients as.
We discuss we have a strong.
Momentum and we.
We would do what we need to do in the North America steel.
Places, where we can get more targeted.
There are opportunities as we need them. The objective as I said he's is profitable growth and that's what we're focused on for 2023.
Great. Thank you and then just quickly as a follow up to one of the earlier questions about cash flow.
Just hoping.
We've seen kind of two consecutive quarters of negative operating cash flow.
I think you talked a little bit about plans for working capital, but can you maybe just give us a sense of timing on when we should see kind of positive operating cash flow and when you really start.
Getting some working capital benefits.
Sure.
I think that starts.
In the quarter, we're in we're in currently.
Important to note Q2, and Q3, particularly in Q2.
But we're now reinvesting significantly and working capital obviously within the health of the business both from an inventory.
Tori perspective.
Ed.
One of the impacts of course is just cost inflation pulling through to ultimately inventory levels and from an inventory perspective cost inflation.
I'll now turn that about half of the increase in inventory and the other half is.
Related to.
Making sure that we're servicing our customers well some of it is related to timing and then the other part of working capital of course is making sure that we have.
Positive vendor relationships everybody is suffering through the same kind of dynamics and so.
It's all it's all one big organism.
Trying to win together, so the big Big investment in Q2.
Continued investment in Q3, although at a at a much slower pace and as we enter Q4, I see that I see that subsiding and actually expect.
Working capital to be a source of cash for the second quarter itself. So Q4, I expect positive free cash flow and of course, I think that will with.
Kind of a cost inflation already embedded in the.
In the.
And the working capital investment that we've taken.
Service levels back to where we want it to be.
And the team is going to work hard on making sure we're optimizing that.
Net working capital investments in 2023, and I don't expect the pressure to be nearly as high as we had seen in 2022.
So.
At this point I'm not going to say working capital is going to be a source of cash in total for 2023, but.
The dramatic improvement in that in that metric.
Perfect. Thank you very much.
This concludes our Q&A session I'd like to turn the conference back over to management for any closing remarks.
Hello.
Can you hear me.
Yep.
Alright, just wanted you to take the opportunity to thank everybody for joining us today and as we said we.
We are very satisfied with delivering.
Consistent growth for December quarter and.
That's something that we're excited about and I think we have had great opportunity to talk about how we see 2020 free from.
And then B diavik cash flow and margin standpoint, and so looking for where to our follow up calls they wanted to take this opportunity also to thank the team as Irwin said earlier.
He is working very hard.
Into this volatile environment and did you bring dose results Erwin anything else you want to add.
Hi, mimic what you say, but.
Again, we've been through like every other consumer package good company challenges out there, but and as this company has come together over the last couple of years in these acquisitions.
And they are great businesses, and great categories with lots of potential which is now pulling it all together.
Scott Munchkin mentioned, we're focused on that.
Focused on free cash flow, we're focused on are we.
Ben.
Our capex.
Factory and our cost.
Smaller companies public company costs.
Creep up on us and how we manage that.
They are things that are laser focused to make sure that we are.
Cash flow positive and we get the debt numbers down and get that growth. Thank you very much and I want to thank the team for all their hard work.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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