Q3 2022 UTZ Brands Inc Earnings Call

Based on our current view of our business and actual future results may differ materially.

Please see our recent SEC filings, which identify their principal risks and uncertainties that could affect future performance.

Before I turn the call over to Dale and I just have a few housekeeping items to review.

Today, we will discuss certain adjusted or non-GAAP financial measures, which are described in more detail in this morning's earnings materials.

Reconciliations of non-GAAP financial measures and other associated disclosures are contained in our earnings materials and posted on our website.

Finally, the company has also prepared presentation slides and additional supplemental financial information, which are posted on our Investor Relations website.

And now I'd like to turn the call over to Dylan.

Thank you, Kevin and good morning, everyone.

I'm pleased to report that our momentum continued in the quarter and we again delivered results that were ahead of our expectations.

Consumer demand remains robust for our brands and our products driving record third quarter net sales.

We have found that during both times of recession and when times are good consumers reach for fun and indulgence snacks that they feel come at a modest price point and our products are well positioned for continued success and a perpetually growing category.

Furthermore, in line with our seasonality, both adjusted gross margins and adjusted EBITDA margins improved sequentially.

In addition, we are successfully managing inflation as the combination of our revenue management actions and our productivity initiatives are now fully offsetting high inflation.

These actions are providing the fuel to ramp up continued investments in our people. Our brands are selling infrastructure and are planning capabilities. For example, we are increasing our working media spend compared to last year as well as elevated merchandising and point of purchase support and spend.

Given the close to 250, plus DSD routes that we've added year to date, we are investing in growing our selling organization, which includes people and new distribution centers for example to support our growth long term.

And finally, we have been increasing spend behind our planning capabilities to include investments in our people and processes to support our integrated business management initiatives and revenue management programs to ultimately provide a strong foundation for continued future growth efficiency and capabilities.

We believe these collective efforts will drive value for our retail partners and best position us to capitalize on our white space opportunities and drive consistent organic growth.

Bringing this all together and based on our performance year to date, our current business momentum and what we're seeing currently regarding limited price elasticities. We are once again, raising our net sales and adjusted EBITDA outlook for the full year.

Our cost visibility and forecasting capabilities continue to improve and I'm incredibly proud of our team's execution against the expectations. We put in place at the beginning of the year.

Briefly touching on our third quarter financial results total net sales grew approximately 16%, which reflects our strong organic growth of 12, 6% as well as the contribution benefit from our acquisitions of four 7%.

Im impressed with these results as we continued to drive strong net sales growth, even as we continued to simplify our portfolio.

Turning to our retail consumption trends in the quarter for the 13 week period, our positive sales results continued with our third consecutive quarter of double digit retail consumption growth and we increased retail sales 17, 2%.

And as we expected our retail sales growth in the 13 week period slightly lagged the overall salty snack category.

As noted in our second quarter earnings call certain subcategories were impacted by the lapping of strong promotional features in the mass channel in the prior year and as expected. Some of these timing dynamics continued into the third quarter.

That being said, even as we lapped very strong growth in the prior year, our power brands continued their strong momentum in the quarter with growth of 17, 4%.

Six of our nine power brands delivered double digit growth and to just highlight a few our flagship <unk> brand, which is about 52% of sales grew more than 22% <unk> grew 29% and on the border grew about 12%.

In addition, our foundation brands at a very strong 16 plus percent growth rate in the quarter.

In short a very strong showing across our brands.

Turning to our growth drivers in the quarter by sub category, we delivered double digit growth in retail sales across our three major subcategories of potato chips, tortilla chips, and pretzels, which represent about 75% of our retail sales.

In addition, we once again drove share gains in our largest and most important subcategory potato chips with robust growth of nearly 30% led by strength across the grocery mass and C store channels.

Important to note and tortillas are on the border brand delivered over 50% growth in the last quarter in the grocery channel. This is a channel that the OTB brand has historically been underweight in and we are excited to see the strong results in this important channel as the brand benefits from our route to market into this channel through <unk>.

<unk>.

So also NK cell sub category for us that is currently approaching $100 million in annualized retail sales also continued to significantly outperform once again with growth of 22% and 65% respectively.

And as I mentioned earlier, our overall sales were impacted by the lapping a very strong promotional features in the mass channel in the prior year.

This was most pronounced in our tortilla chips and cheese subcategories, whose sales are more heavily weighted towards the mass channel.

I'll also note that pork ranch, which only represent about 5% of our retail sales is something that our team is actively working to address the supply chain opportunities to unlock their full potential and as we ramp production capabilities in our Kings Mountain facility, you will see that this new and modern facility should significantly.

Gently help to address the supply chain opportunities.

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 delivered double digit retail sales growth across all of those geographies.

In our core which represents over 60% of our retail sales retail sales increased over 18% with our flagship <unk> brand up 20% on the border tortilla chips up nearly 30%.

Zapped up 22%.

Beyond the core we continued our momentum with double digit sales increases in both emerging and expansion.

In our emerging geography, which is our second largest geographic area sales increased a robust 26%, while our <unk> brand growing over 34%, even as we lapped significant above market growth of 23% in the prior year.

And consistent with the earlier contacts we share related to our tortilla chip sales performance against the overall category and given the weighting of on the border brand and our expansion geographies and lapping strong promotional features in the mass channel in the prior year this impacted sales growth in the quarter and expansion.

Importantly, our flagship <unk> brand continues to show that its brand strength travels across the United States and was again up nearly 30% and the expansion geography and similar to the emerging geography was building on the prior year's growth of 21%.

Also in the developing better for you segment and salted snacks, we thought it was important to share that our retail sales in the natural channel increased by over 19% in the third quarter significantly outpacing category growth of approximately 10%.

Our main <unk> better for you brands in the natural channel, our Boulder Canyon and good health and we now have the number three ranking in the salty snack category in terms of retail sales in the natural channel as measured by spins.

The Boulder Canyon brand also continues to deliver record sales and the traditional below sea IRI reporting as well.

Finally, I wanted to take a few minutes to reflect on the momentum we've been building over the past few years as we mature as a public company.

We have been on an impressive growth journey marked by rapid expansion in our scale geographic reach and our portfolio of brands and products.

Since going public in August of 2020, our team has worked incredibly hard in the midst of challenging times COVID-19.

COVID-19, lockdown supply chain disruptions historically high inflation with a laser focus on doing what's right for our customers and doing what's right for our business for both the short term and also most importantly, the long term.

Over two years ago, we entered the public markets. So that we can create an even stronger national platform of snacking brands that we'll be able to delight customers across the United States.

I believe we have been executing very well across these strategies since going public with strong progress across several areas.

Just to name a few since 2019, we have increased annual retail sales from about $970 million to over $1 $5 5 billion.

Our market share has gone from three eight to four 6%.

And we've improved our salty snack category ranking from the fourth largest brand platform in the U S to now the third largest.

In addition, we have improved our share in major channels that we had set out to focus on moving from number four to number three in mass and from number three to number two in club.

We've also expanded into key subcategories like tortilla chips.

Where we essentially had no share in 2019 and now we're up to almost 4% a share driven by the acquisition of the on the board of brand, which is approaching $300 million in annual retail sales over the last 52 weeks.

Finally, we have grown our <unk> buyers or households from 48 million to $63 million and we have continued to expand our DSD network from about 1650 routes to over 2100 routes today.

All the while converting from RSP to Io moving from about 77% independent operator, or Io in 2019 to about 91% independent operator today.

All of these results are a true testament to our brand strength and to the incredible talent of our collective team of over 3000 associates that are dedicated to delivering on so many fronts to our continued success.

Bringing it altogether I'm incredibly confident that the foundation, we built over the past few years has us uniquely positioned to continue to succeed for generations to come.

So looking ahead I have never been more excited about our growth opportunities as our business turns the corner after a challenging period.

<unk> has never been stronger our growth opportunities continue to be multifaceted and our management team is succeeding across so many fronts.

To that end, we have strong growth momentum in the resilient and growing salty snack category.

We are continuing to make investments to support our significant white space growth opportunities.

Our margins are recovering as rep revenue management and productivity are now fully offsetting inflation and our recent acquisitions are enabling increased scale of manufacturing capabilities to efficiently support our strong demand.

And finally before I turn the call over to a J I just wanted to make a few additional comments about our CEO transition that is currently underway.

As we announced in early October I am incredibly excited to pass the baton to Howard Friedman as our new CEO in mid December .

Having led some of our country's most iconic brands and with his established track record of profitable growth I believe Howard is the ideal leader to leverage our momentum and take us to the next level.

For me personally I am looking forward to my transition to executive Chairman and then eventually chairman of the Board has also remained very actively involved in the company helping to guide the company in various areas of importance from corporate governance to business strategy.

Over the coming months I will continue to work closely with Howard our management team and our board to help ensure a smooth transition and to maintain the continuity of what's his heritage and forward growth momentum.

With that I'd now like to turn over the call to a J cataria our CFO Ajay.

Thank you Dylan and good morning, everyone.

I would like to begin by congratulating Dillon for successfully leading the company over the last decade as CEO to our current position of strength and beginning the transition to chairman of the board.

I am looking forward to welcoming Howard to auction in December and along with the rest of the management team and associates I am excited to build upon this year's strong growth momentum.

I would also like to congratulate all of our associates across the company for delivering another record quarter of net sales performance, along with continued sequential improvement to margins and year over year profit growth.

Your team.

Now I will review our high level summary of our third quarter financial performance and then we will discuss our net sales and margin drivers.

Our third quarter of 2022 net sales that are ahead of our expectations and increased 16% to $362 8 million.

Adjusted gross margins expanded 79 basis points to 36, 5%.

This includes an approximate 130 basis points of negative impact from our Io conversions.

Our adjusted EBITDA increased by six 5% to $47 7 million.

While at 13, 1% of Fas.

It was a sequential improvement of 100 basis points relative to our second quarter 2022 results.

Adjusted net income was $22 5 million compared to $26 1 million last year.

Our adjusted net income reflects good operating performance.

Offset by higher net interest expense due to higher interest rates and incremental debt and also higher core depreciation expense as we have added new manufacturing assets through several acquisitions in the last 12 months.

Moving to the P&L for some additional detail.

Starting with net sales.

Our net sales growth in the quarter was 16% driven by organic growth of 12, 6%.

Acquisition related growth of four 7%.

And an impact from conversion of RSP routes to iOS, which reduced the net sales growth by one 3%.

Our organic net sales growth of 12, 6% was driven by price mix of 14, 7%.

And lower volumes by two 1%.

Both pricing and volume performance better than our expectations as we continued to execute our planned pricing actions to offset inflation and experienced lower than anticipated price elasticities.

As we had anticipated volume was proactively impacted by approximately 300 to 400 basis points due to our strategic SKU rationalization activities.

Are meant to simplify our portfolio optimized mix and increased focus on our power brands.

In addition, as we expected and referenced in our second quarter earnings discussion. We are also lapping strong promotional features in the mass channel and the prior year that temporarily impacted volume growth.

In the third quarter adjusted EBITDA increased six 5% and margins were 13, 1% of sales.

Decomposing the change in the adjusted EBITDA margin for the quarter.

Positive drivers include price mix benefit of 14, 7% as we continue to take pricing actions to offset inflation.

And productivity improvement of 200 basis points.

Offsetting these drivers were.

Were unfavorable margin impact of 14, 3% driven by higher inflation, including transportation costs, and selling and administrative expense of 350 basis points.

Our inflation impact versus last year was comprised primarily of elevated labor and transportation costs as well as higher commodity input costs.

Selling and administrative expense, which excludes distribution expense increased.

The increase primarily due to higher accruals for incentive compensation commensurate with fiscal 2022 performance lapping softer performance last year.

In addition.

As Bill described earlier, we continue to increase our investments in our people brands selling infrastructure and planning capabilities to support our growth.

Importantly, our third quarter margin performance was consistent with our value creation strategies and reflects the execution of our playbook.

Just to highlight a few.

We are proactively optimizing our revenue mix and rationalizing less productive and lower margin Skus and we have eliminated more than 350, skus with a primary focus on private label and certain partner brands.

These actions free up capacity in our plants and distribution network, which will help us to service higher margin power brand business over time.

We are further developing our price pack architecture programs and optimizing our trade spend leveraging improved technology talent and analytical capabilities.

We are delivering our expected M&A cost synergies from our recent acquisitions since going public and importantly, all of these acquisitions are now fully integrated to our new ERP systems.

This is an important building block for our ability to operate our business using a common platform, which gives us better visibility to drive future portfolio synergies and scale.

We are ramping up production at our new Kings Mountain facility with a first put production occurring in the third quarter of 2022 and.

And Kettle chip production planned for the second half of next year.

Importantly, Kings mountain will increase capacity for certain key subcategories that have been more recently affected by certain supply constraints.

Finally, we are executing our productivity programs focused on manufacturing efficiencies, including logistics and network optimization packaging design work and product formulations.

We are on track to deliver productivity of approximately 3% of this year as a percent of Cogs.

This is helping to offset gross inflation.

More importantly, our talent and capabilities have improved significantly in this area.

I am incredibly proud of our team's execution this year during a challenging environment and we expect these programs will continue.

To build momentum into fiscal 2023 and beyond.

Now turning to cash flow and balance sheet.

Beginning with cash flow, we generated strong cash flow from operations in the third quarter of $34 4 million.

Which brings our year to date cash flow up to $8 1 million.

Note as we have previously discussed.

Our cash flow. This year has been impacted by the $23 million of buyouts of multiple third party DSD distribution rights in the first quarter of the year.

Were treated as contract terminations and booked as an expense and adherence to gap.

In addition, our working capital performance improved in the third quarter consistent with normal seasonality and we expect this to continue and to be a source of cash in the fourth quarter.

Year to date capital expenditures were $68 7 million.

As a reminder, in April we announced and closed the transaction of a kings mountain facility and it.

Accordance with GAAP, the $38 $4 million purchase cost of this facility was recorded on our statement of cash flows as a capital expenditure and not as an acquisition.

Excluding the purchases of Kings Mountain facility capital expenditures would be $33 million.

Moving to the balance sheet net debt at quarter end was $870 2 million or five times normalized adjusted EBITDA of $175 6 million.

In addition, after the end of the third quarter and as we previously announced we are.

Entered into a new real estate senior secured term loan of $88 million maturing in 2032.

Importantly, this loan has an effective fixed rate of 6% with an interest rate swap.

And with the rising interest rate environment. This real estate term loan puts in place a low fixed rate instrument that increases our financial flexibility as we continue to expand distribution and generate strong organic growth.

Proceeds from this strategic financing that he used to pay down in full the outstanding amount under our revolving credit facility with excess cash going to the balance sheet.

Pro forma for this transaction as of October 12, our liquidity significantly increased to approximately $215 million as compared to $138 million as our fiscal third quarter ending October 2nd.

And now about 70% of our long term debt is fixed.

At approximately four 6%.

Also just as a reminder, we have no significant maturities on our debt until 2028.

And our credit structure is comprised of covenant light debt instruments.

We have no maintenance covenants on our term loan B, which provides significant EBITDA headroom, while we work on reducing leverage.

Now 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 again, raising our net sales and adjusted EBITDA outlook.

We now expect total net sales growth of 17% to 19% and organic net sales growth of 13% to 15%.

As we have better visibility into price elasticity impact given our third quarter results. Our net sales growth outlook now assumes fourth quarter volume performance to be similar to our third quarter results.

And fourth quarter price to deliver more than 12% and price mix benefit.

Okay.

Our volume outlook assumes continued incremental and strategic SKU rationalization in the fourth quarter as we optimize our portfolio with an enhanced focus on prioritizing production and distribution of branded products to unlock additional capacity for our growing power brands.

Given our stronger net sales outlook unchanged assumption for gross input cost inflation.

And the building benefits from pricing and productivity, we are again, raising our adjusted EBITDA growth outlook from a growth of 2% to 5%.

To a range of $166 million.

$270 million.

This raised outlook translates to an year over year growth of approximately 6% to 9%.

As a reminder.

In line with typical seasonality, we expect fourth quarter margins to be lower than third quarter margins.

We continue to expect gross input cost inflation inclusive 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 of this year.

And more selective actions with executed in October .

Given better than expected revenue management actions to date, we now expect to deliver low double digit price mix. This year to help cover our inflation expectations.

In addition, we now estimate capital expenditures of approximately $40 million versus our previous expectation of $50 million.

The lower spend this year is largely due to the timing of certain projects, which we now expect to occur in fiscal 2023.

As a reminder, our capex guidance excludes the purchase price of the Kings Mountain facility.

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.

Before I turn the call back over to Dylan I would like to thank our entire ox team once again for setting us up for a successful exit to fiscal 2022.

And a strong position stepping into 2023 and.

In addition, I want to personally thank Dillon for being an incredible partner coach and operated and I look forward to his continued counsel from the board chair.

Over to you.

Thanks, a J.

Before we open up the call for questions I'd, just like to reiterate how well positioned I believe we are in the current environment.

Our enhanced planning capabilities are helping to improve throughput and unlock bottlenecks.

The salty snack category remains strong with minimal price elasticity and minimal private label penetration.

We now have proven in developing capabilities to offset continued inflation for both price and productivity.

And we have mitigated our interest expense.

In a potential rising rate environment.

And as a further note we don't have any material foreign exchange exposure, nor do we have any pension liability exposure.

In closing I believe that we have turned the corner our visibility has greatly improved and I am confident in our ability to continue to drive organic net sales and adjusted EBITDA growth next year in <unk>.

Fortunately, we will continue to invest in key areas to support our growth, while we manage high inflation.

With that operator, you may open up the call to questions.

Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.

First question comes from Andrew Lazar from Barclays. Please go ahead. Your line is open.

Great. Thanks, good morning, everybody.

Good morning.

Maybe just start off obviously I realize you're not providing sort of detailed 23 guidance at this stage, but.

I just wanted to get a sense of if there was anything that you can sort of see today that you do have visibility to that that might sort of take us off course from kind of an algorithm year, which is essentially it's I guess, it's 3% to 4% net sales growth in 6% to 8% adjusted EBITDA growth.

Hey, Andrew this is a J I'll take that thanks for the question.

You are right we are not we're not guiding to 2023 today it's.

Too early to talk about specific numbers.

However, I can tell you that the visibility into our business has greatly improved.

And there is a lot of momentum in the business going into 2023, so based on what we see today. There is really nothing that should take US off course next year and we are confident that we can deliver the ads.

One of them that you just did.

Yes.

I also want to remind you of some areas of momentum.

That we outlined in our prepared remarks just to repeat.

Our capabilities around planning supply chain revenue management productivity.

Et cetera.

Bin.

They have been in a good place and we are still in early innings and a lot of those and that momentum is building. The category remains strong price elasticity is negligible.

We do have we are making investments in the business and we will continue to do that but we and we expect.

Based on what we see today about high single digit inflation.

In terms of percent of Cogs.

Next year as well.

Even given with all of that our capabilities.

Capabilities will allow us to continue to offset those and and we should we should deliver on algorithm next year.

Thank you for that and then John I was hoping maybe we could explore a little bit more in sort of what ways you see the new CEO being additive to us in terms of unique skill sets and such I guess, what are the areas, where Howard Chen perhaps enhance capabilities and essentially what does he bring to the table. Thanks. So much.

Yes, Thanks, Andrew.

Thanks for the question.

We're really excited about.

<unk> joining the team Howard.

We announced back in early October we've had about five weeks or so of interaction and he's been able to meet with a lot of employees and associates visit some of our plants.

Really are listening and learning tour to kind of understand our business better but also just to.

<unk> start to formulate.

Opportunities challenges areas of expertise areas that we could possibly be leaning more into.

As well.

So we have another couple of weeks until we start to make the transition to mid December .

But how he has been doing great and so his expertise in innovation and marketing operations all of those things. He has a great background in building brands and I think thats an area that over the last 100 years, we have done a great job at but I think at the end of the day innovation in.

Expanding our product line.

As an area of marketing and branding are areas that we've underinvested in the past that part of our formula is to invest more in the future.

And.

Ultimately I I have a very strong sense that.

It is truly a one plus one equals three.

<unk> by the interaction so far.

The team's interaction with Howard his abilities and it's just going to be what I think is something that's great for investors great for shareholders great for the company great for the brand.

Thanks, so much.

Our next question comes from Jason English from Goldman Sachs. Please go ahead. Your line is open.

Yeah, Hey, good morning folks thanks for slipping me in.

Congrats on the continued momentum.

A couple a couple of quick questions.

First could you update your free cash flow outlook and then.

Sticking on the topic of cash.

Talk about your priorities regarding.

Working our leverage down versus M&A in the current interest rate environment.

Hey, Jason.

Thank you, yes, we are very pleased with the Q3 results.

So.

We had good performance in terms of cash flow in Q3, and that's our seasonality and you'll see that we will continue to perform well going into Q4 as we exit 2022 on the cash front.

And we will get to our goal by the end of fiscal 2022 of approaching where we finished 2021. So we are on track for that.

What.

Hi.

In terms of how we are thinking about leverage our thinking really hasn't changed we said that we want to approach the top end of our range of $3 <unk>.

Bye Bye bye in fiscal 2023, and we still are working on that goal and you have seen us.

Do positive things to improve margins improve earnings drive our growth and free up cash and to the extent that we can work both the numerator and the denominator to get to our leverage goals. We are we.

We are doing so.

Great.

Based on kind of the P&L math, it looks like to get there you're going to have to put M&A on the back burner for a while at least through next year is that is that fair.

And also in terms of the routes that we fly the distributions that you bought back.

Is that just the restructuring should we expect you to resell those it raised more cash going forward. Thank you.

Yes.

So.

You had a couple of comments in there so the M&A we are we.

We continue to be opportunistic.

We are we are looking at.

<unk> continued to show up on a master distributor.

Buyouts with the DSD route infrastructure.

Effectively added this was in my prepared remarks about 250 routes.

Since year end 2021 into our portfolio and that's supporting our growth. So some of that work is continuing is going to continue.

We are going to continue to be opportunistic on M&A.

And then that said.

As we think about.

M&A and growing the business, we are kind of being prudent in how we invest that cash.

Keeping leverage in mind.

That playbook.

<unk> is going to keep going.

And Jason this is Dylan.

Say hi to your dogs for US if you don't mind.

In terms of.

Spend on M&A.

I think what we did in 2022 and 2021 was invest a lot into our capacity. So we saw M&A that we did for <unk> in 2021 R. W. Garcia in late 2021, we didn't have a lot of that in 2022. We don't think we'll have a lot of that in 2023 as we look forward, but if you add up.

The cash that left the system for those acquisitions. They were really building blocks for the foundation of supporting the growth of the OTB brand the growth of our overall <unk>.

<unk> and demand cycle. So as we look into 2023, while to Jay's point, we are not taking M&A off the table I mean, we have our balance sheet, we have other ways of our equity and ways to look at how to.

Think about M&A, especially if it's very strategic very accretive.

Expansion.

<unk> to our platform that adds value to our scale and relevance in the industry. So it's not off the table, but we obviously are understanding that we're trying to drive down our leverage we're going to generate more cash we're not going to have as much capacity building.

Cash going out.

The door in 2023 like we did in 2021 in early 2022. So I think we're in a really good spot as we look at 2023.

Sure makes sense and I agree with your acquisitions or something like that.

And my thoughts were very pleased by them as well as directly.

Okay. Thanks for that.

Okay. Thank you.

Our next question comes from Robert Moskow from Credit Suisse. Please go ahead. Your line is open.

Hi, I was just hoping.

You can give us a little more color on whether or not there are more incremental pricing actions that you still need to take to.

To cover the high single digit inflation youre talking about for 'twenty, three or if or is this inflation really just kind of a wrap around of inflation. That's accumulated during the course of 'twenty two.

And.

It will be mostly in the first few quarters of the year.

Yes.

Yes so.

But there is there is rollover wraparound impact.

For inflation as well as price and productivity. So so there's definitely a benefit there from price and productivity just by doing nothing.

That said.

We have talked a lot about improved capabilities, so to the extent that the.

The market dynamics acquired it.

Prepared to execute on both fronts on price and productivity front too to offset anything that we find.

I will point out that there is a lot of work that we're doing around price pack architecture improving.

Portfolio mix.

We've talked about SKU rationalization and the other side of the point of that SKU rationalization activity as we replace that dollar of sale.

<unk> brand dollar of sale.

Whether it's our plants, our distribution network and that comes at a higher margin mix.

So that benefit is also starting to pump through you see you saw part of that benefit in our price mix delivery in Q3. So all the work that we're doing.

Means that going into 2023.

Have some organic benefit to offset high single digit inflation available to us before we have to go go.

Go to Jason's darden's our asset.

Yes.

Yes.

I'm sorry.

I don't know.

Following me.

Yeah.

So I think a J, saying that right I mean, our our technology.

And our talent and our Rev man areas and if you think about sort of the relative complexity of our business. We have DSD. We have <unk>, we have third party master distributors.

It's somewhat complex we have multiple brands, we have multiple ppg's.

Our technology and our talent as increase Rob dramatically. If you think about the beginning of 2021, when we kind of installed it we're now.

<unk> 18 plus months into that.

<unk> added more bodies, not just talent, but also bodies and I think thats really going to help us as we sort of derive where is that next 10 2030 40 bps of sales that we can derive out of that so I think our capabilities are increasing that may or may not mean.

Price increase it may just be more about sort of churning through our data working through our customers our channels.

Our routes to market and really finding the opportunities, which is essentially with Rev. Mandan and price pack architecture at the end of day do on a day in day out basis.

So maybe if I could summarize it doesn't sound like there was any list price increases in fourth quarter.

It doesn't sound like there's going to need to be any.

And also it also sounds as your inflation guidance for this year about the same as it was three months ago or is there any change to it for this year.

So the inflation guidance is the same.

We actually had good visibility so we have not had to change it in the last two.

Three to four months.

The question around new pricing in October .

We are being very surgical and absolutely we have taken a couple of lines to bounce.

Back in February and May.

So those have been delivering for us.

What we are doing in Q4 is more off.

Cleanup activity parts of the portfolio that we missed and going and addressing those customers and channels that we had not addressed we are addressing those as well. So we're doing a lot of backlog that isn't that is not broad based.

In our list price increase that was executed in October .

Got it alright, John congratulations thanks, a lot.

Great. Thank you.

Our next question comes from Michael Lavery from Piper Sandler. Please go ahead. Your line is open.

Okay.

Thank you and good morning.

Good morning, Ed.

Second quarter, you had characterized the sales split is more first half skewed for the year and obviously, it's now looking like it's at least balanced or maybe a little bit skewed.

Second half.

Touched on the accelerated.

The higher outlook for the price mix lift for the year. Just was curious if you could dissect that a little bit and how much is it promos adjustments or mix or did you take more or less pricing than you had initially anticipated.

Okay.

Thank you Matt So yes, the the the sales is a little more balanced first half second half now.

The increased outlook.

As for two reasons, one big reason is that we had.

We had a volume decline that we had assumed because of consumer pullback and elasticities in the second half, which did not come through in Q3, and we are we.

We are guiding to Q4 to be more like Q3. So therefore, we are we have an improved volume assumption in there.

That's the big driver.

And then we are also we experienced a bigger benefit.

<unk> price in Q3, and we are flowing back into Q4 as well to guide to a higher sales in the second half.

That's the other Tyler so we will I believe when we came to you three months ago, we set.

Looking at more than 10% price for the year and now we're looking at low single low double digit price for the year.

And from <unk> runway run rate should <unk> hold that or is there any reason for deceleration holding it would certainly put it.

Like I would think of 12, five or even 13 on the year is that the right way to think about it.

I assume you are talking about price right.

Okay, sorry, yes.

The FX piece, yes, so Q4 should hold.

Q3 numbers.

With with one edit that we have to consider that last year's lap. So the fact that last year stepped up in Q4. So we are backing that out of your calculation off.

Around 12%.

For Q4 in terms of price mix is spot on.

Okay, Great and could you just touch on the price gaps competitively.

With all of the pricing in the market have you seen those.

Range in any categories or for certain brands that have been meaningful or is the.

Pricing has been pretty broad across them.

All segments and categories.

Yes.

So.

I think the the.

The short answer is the category has been pretty rational.

So for the most part.

It's.

It's been moving in lock step so I don't I don't think that gaps versus competition or anywhere in the category in the subcategories.

Anything has.

Hi.

Dylan any what I'd say Michael.

We all everybody in the industry have real inflation.

Inflation right there as well.

Real pressure on cooking oil trader cottonseed oil and soybean this real world pressure on that there's real pressure on freight is real pressure on labor It was real pressure on.

A lot of the different commodities that go into it so.

I think in general as we sort of are all attempting to sort of price to overcome inflation allow us to do the reinvestments that we're doing in people and technology and selling infrastructure and planning capabilities.

As we sort of look out into the future I think that everyone in the industry is going to have similar.

Issues in <unk>.

Similar innovation to overcome and so I don't think its going to be any massive dramatic changes in sort of the.

And pricing and how that looks across the industry.

No that's helpful.

Partly thinking of sort of sub categories or looking a little bit of like slide seven you called out some promotional swings there that really changed how to think about.

The share momentum fluctuated.

At the simplest.

Trying to understand if we should expect that to the share momentum to snapback or recover or is there anything in terms of price gap.

Competitively that might be sticky, we should have in mind.

Yes.

It's not pricing.

That pricing isn't really making a big difference there I mean, what we are.

<unk>.

It's a wonderful thing when you report 17% 18%.

Growth in your retail sales.

On a year over year basis, we had fantastic.

Fantastic really really strong growth in mass and otp in certain subcategories in the prior year.

And we're just we're going against an incredible third and fourth quarter of last year right.

But when we when we dialed down into the channels, we dialed down into the brands I mean, youre seeing just we sort of laid it out in the on the various slides you're seeing tremendous double digit growth across so many of our brands.

Not driven by pricing, it's really year over year lapping.

We see very strong results, we have the benefit of sort of some insight into the last couple of weeks have gone DST is very strong as about half of our business.

We see results day in day out we're very pleased by what we're seeing so it's not a pricing thing.

Really just a year over year lapping thing, which is kind of just a snapshot in time.

Yes.

Okay, Great. That's helpful. Thank you.

Our next question comes from Bill Chappell.

<unk> from <unk> Securities. Please go ahead your line is open.

Okay.

Thanks, Good morning.

Good morning.

And you might have covered this I just wanted clarification as I look at the numbers.

Youre 17, 18% growth certainly strong, but it was slightly below the salty snack category and I just want to make sure. You may have covered this but does that pricing was that just comps was that just.

Product mix.

Else I should be thinking in house would you be expected to trend as we move into the fourth quarter.

Yes, sorry.

I feel like it's very similar to my answer to the last question.

The the category itself was I mean, what what a great.

Category, if youre talking about a category that's growing.

17, 18, 19% right.

Years years into this sort of uptick in the category sales as the category that traditionally does 3% to 4%.

We were slightly under mostly attributable to we can really dial it down to the mass channel OTB, a fantastic fantastic above algorithm.

Year last year in the third and fourth quarter for that channel for that brand. We're lapping it when you look at the underlying brands like <unk> and OTB Theyre, both doing double digit growth.

<unk> is growing 50% in the grocery channel as an example.

Which is fantastic right one of the reasons why we bought that brand was to see the expansion of it beyond mass into areas like grocery and food.

And we're really seeing.

The results of that so yes, I would just take it as.

It's just a blip in time snapshot.

Okay and then.

Same thing.

What do you think there is any Dennis.

From the category or even to your business from Canada.

Another phase of reopening.

Schools, all kind of back to normal versus last year I think it goes back to the office a little bit more maybe benefited single serve or higher price points, but I'm not sure.

You would have a better idea of kind of looking at that if that had an impact.

Yes, I don't really I mean, I think when.

When it became work from home people asked us if thats why sales were up.

Because everybody is working from home.

And then it became a hybrid where.

Some people were back two or three days a week into the office and sales continued to be up not just for us but for the category, It's a super strong category.

And now if it's sort of a little shifting towards.

More people working back in the office and less people working from home.

Seeing obviously some channel shifting right, it's probably that's probably more economic driven than like work from home driven.

People are seeking out a discounted product to buy and maybe changing some of their <unk>.

Patterns, but I think our sales momentum has continued a strong the categories continued strong.

Pricing, obviously is a part of that low elasticity as a part of that.

Low private label.

Penetration our unique route to market right.

You think about our DSD and I alluded to that in the last question how strong that is it's a.

A little bit over 50% of our business.

We have over 2100 individuals' independent business operators for the most part going into stores everyday selling our products and that's a really strong.

A favorable moat and our route to market that is unique I think for our category because it's not just us many of our competitors have it as well and I think that's a route to market that is very strong for our continued success in this in this category.

Okay got it and last one for me just any update on the public's rollout here in Atlanta, and certainly starting to see the product, but I didn't know if you saw the most of the impact in <unk> or we would see most impacted by <unk> thoughts would be great.

Yes.

We started setting stores in I believe April may so that was second quarter.

Third quarter started to build it.

This is this is public as an example.

Ed.

I prefer not to talk about specific customers, but we've sort of named publics because it was such a large sort of entry for us but.

We're in such early innings I've been doing this for 27 years 28 years almost.

It's about building relationships with customers that go on for decades.

Obviously, he was here back in the day when.

Walmart was a $50 million business for us.

Whatever 567 times bigger today, you build a relationship with a customer you service them right.

We had.

Under 3% market share in Florida, It's a $2 2 billion.

<unk> category, we're obviously growing that as we build out this sort of <unk>.

Publix relationship, but this is such early innings I mean, we want to be talking about public's 10 years from now when it's just a massive customer for us.

And what it really does is beyond just that customer publix. It really opens up all of the other channels customers in that market. There is no reason that we shouldnt have.

8%, 9%, 10% market share like we do up in the mid Atlantic 567 years from now and it's a nice $2 billion market. Obviously is growing as we all know as a category, but also as a statement geography growing quite well. So we look at this as early innings it should be easily a 50.

Million dollar customer in the short term it should be.

Two to three times that in years to come just because that's the natural progression of most of our customer relationships.

Great. Thanks, so much.

Our next question from.

Our next question comes from Ben do you have any from Stephens. Please go ahead. Your line is open.

Hey, guys I've got Jim <unk> on for Ben.

I wanted to ask on the volume side of things I think you guys saw negative volume for the first time. This year is that also just a function of lapping the higher promotions last year or maybe we started to see kind of the upper point of consumers' tolerance for these price increases.

Hi.

I'll take that.

The main driver of negative 2% volume in the quarter was 300 to 300 to 400 basis point.

Pulled down because of our own SKU rationalization activities.

Really the business the underlying business is pretty strong if you back that out.

We've had a couple of points up on volume.

You're looking at the retail data.

There is a lot that.

The retail data.

It does not capture in terms of consumption.

There is a business that retail data does not capture.

We are growing in that part of the business.

As well as there is a distinction between units and palms, how units are doing well.

Pounds are impacted by some weight outs and activity that we have done in terms of mix.

So there are dynamics in there, but the bottom line as we reported negative.

Negative two on volume it would have been positive two if you back out.

The impact of SKU rationalization.

Okay, Great and I guess just to build off of that when you guys do this SKU rationalization, especially if youre pulling out some of the partner brands and private label is the hope that you then replace that shelf spot with.

Either a power brand.

We're one of maybe like a newer product or are you just getting up that spot and letting somebody else kind of take a lower margin business on the private label side.

Yes, Jim. This is this is me and as an example on like partner brands. We took a partner brand that was running around $5 million in 2021 at the end of 2021, we terminated that partner brand relationship we've replaced that space with brands.

The conversion process creates a couple of months of sort of murky to us right.

<unk> does not necessarily equal one onemain equal six but then two months later it equals eight three months later equals one eight months later, it equals $1 to $1 three and two maybe of Jay's comments earlier about mix and the more that we replace that partner brand with a.

Power brand <unk>, we're going to have a larger margin attributable to it. So we're thinking very long term.

This goes against private label and partner brand as well, we're thinking very long term, we have our partners that makes sense for us strategically and we're going to maintain those.

They're good for our system for our efficiency and then we have ones that I think we can rationalize and we will continue to sort of drive that so when we think about our net sales growth in the quarter.

We think about volume some of that we are literally proactively going out like the example, I gave we're eliminating a customer relationship and then we're replacing that.

With our either production.

Perhaps removing a private label customer that we're making product for our brands.

Places like a partner brand that we have the opportunity to do that.

As long term strategic.

In our opinion the right thing to do.

Okay excellent.

Thanks, guys I'll pass along.

Okay.

And our last question comes from Peter Galbo from Bank of America. Please go ahead. Your line is open.

Hey, guys. Good morning, Thanks for fitting me in.

Just two really quick clarifications I think on my end.

First a day on your margin comment on fourth quarter being down versus the third quarter I'm, assuming that the EBITDA margin comment, but does that also apply to gross margin.

Yes, it's both.

And then maybe just secondly, going back to Andrew's first question, obviously trying to understand some of the qualitative moving pieces on 2023 revenues or the revenue build.

I guess it would just be helpful.

The SKU rationalization that the $3 to 400 basis points. It was in the quarter is that a good carryforward to use on a <unk> basis, and then when does that kind of finalized out.

<unk> 23, and maybe the same on the on the Io discounts should you be mostly through that at some point through 'twenty three thanks very much.

So <unk> first.

I think.

At some point.

Thinking in the middle of the year Youre going to start to snap.

The impact that we saw this year.

So so when we lap those youre not going to see as big of an impact as we are seeing in the current quarter.

But we will continue the <unk> program, probably not to the extent that we did this year, but.

Continue the program.

We'll start to lap this year.

Some point in Q2 next year and then on the Io conversion piece we.

We'll be substantially converted by the end of Q4, we will have probably 100 ish routes to still convert.

The first half that is normal that as always there are always without being brought in and then please sold et cetera.

That youre going to see but for the most part Sam.

Sam paying once we are fully converted sometime in the first half of 2003.

This impact from fresh conversions will start to lap itself and eventually go away when we get to the end of 'twenty three.

Great. Thanks very much.

Thank you we have no we have no further questions I would like to turn the call back over to <unk> CEO for closing remarks.

Thank you very much for joining us today for our third quarter financial results, we ended with a great year.

And it's a testament to our team and to our brand and to our company and we thank you all very much for joining us today.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

Sure.