Q3 2023 Utz Brands Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Thank you for standing by my name is Adam and I'll be your conference operator today at this time I would like to welcome you to the <unk> brands incorporated third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session if you'd like to ask a question during.
This time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one again.
I would like to turn the call over to Kevin powers Senior Vice President of Investor Relations. Please go ahead.
Good morning, and thank you for joining us today on the call today are Howard Friedman CEO, Ajay Qatari, yet CFO and carried a or C O L.
Howard and Jay will make prepared comments this morning, and all three will be available to answer questions. During a live Q&A session.
Please note that some of our comments today will contain forward looking statements based on our current view of our business and actual future results may differ materially. Please.
Please see our recent SEC filings, which identify the principal risks and uncertainties that could affect future performance.
Before I turn the call over to Howard I have just 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 Howard.
Thank you, Kevin and good morning, everyone.
I am pleased to be speaking with you today and I look forward to seeing many of you at our Investor Day next month, where we will discuss our opportunities for growth and value creation over the next few years.
Given that I'm going to keep my remarks, this morning focused and make sure to allow enough time for your questions and on that point I'd like to welcome our new covering analysts to us and I look forward to working with you.
In the third quarter, we delivered solid results on both the top and bottom line with organic net sales growth of 3% and adjusted EBITDA and adjusted EPS growth of 9%.
Retail sales increased 3% led by power brand growth of 5% driven.
Driven by continued momentum for Utz potato chips on the border.
<unk> and Boulder Canyon.
Power brand growth was most pronounced in our expansion geographies fueled by distribution gains with growth at 8%, which exceeded category growth of 6%.
While expansion was a bright spot in the quarter our growth in our core of one 6% lagged the category.
This was primarily due to lapping very strong prior year at brand growth of 20% and the corps and challenges with our foundation brands.
Our foundation brands declined faster than we anticipated due to our supply chain and portfolio optimization efforts.
The impact can be seen most acutely in the Golden slate brands that said on a positive note. We are seeing service levels steadily increasing over the past five weeks and we are in a much better position moving ahead and these collective efforts have accelerated our productivity savings in the current year.
Of note in recent quarters, our consumption growth has been tracking well ahead of shipments due to performance in non tracked channels and our SKU rationalization actions.
Which have been focused on private label and partner brands, neither of which are in our retail sales results.
This quarter shipments were in line with our consumption due to better performance in non tracked channels to include dollar discount and natural and also from earlier than expected holiday shipments.
This timing change benefited third quarter net sales more than we originally expected and will impact our fourth quarter.
In the second half of the year, the combination of timing elements consumer demand trends and specific transactions have impacted our growth and led us to lower our near term sales outlook.
As salty snack category growth is normalizing as we lap the price increases from the past couple of years, we are seeing consistent trends, indicating that consumers are increasingly looking for value as wallets are being stretched by well known macro factors.
We are seeing this manifested in a few ways to include shopping for absolute price points trading to private label and channel shifting.
Today consumers can find ads across all classes of trade to include value channels and we are focused on how we can deliver more value regardless of the shoppers definition.
This includes being laser focused on our price pack architecture strategies up and down the ladder.
Evaluating smaller pack sizes at key pricing thresholds.
Producing more value options.
Increasing usage occasions, and better leveraging the breadth of our product assortment to meet retailers' needs.
Importantly, our hybrid model and DSD capabilities enable us to implement these strategies across channels with flexibility around merchandising product placement and timing of events.
Beyond consumer trends as we've been discussing for the past few quarters, we've been taking aggressive actions to optimize our supply chain and portfolio to be better positioned for the future.
And capture our full potential.
These actions include reducing our plant network size to 13 plants, reducing our SKU count in sourcing volume from commands and transitioning production across the network and most recently moving from flex multipack and variety pack bags to boxes.
Change like this it speed doesn't come without challenges and these collective actions impacted our second half volumes more than we anticipated with a disproportionate impacts to our foundation brands for which retail sales declined about 9%.
The Foundation brand most impacted with Golden Flake, which until June was made in our Birmingham, Alabama plant.
In summary, we underappreciated the complexity of integrating Golden flake into our Hanover facilities and deploying finished goods to local southern markets as.
As a result, we fell behind meeting our case fill requirements until October.
As we continue to explore opportunities to optimize our supply chain network. There are several key learnings we will apply from this experience.
First recent plant closings have provided us with insight and best practices that will inform our approach to future network optimization decisions second.
We will be more conservative with respective inventory safety stock levels and third we will look to trusted cohmad partners to provide redundancy.
Over the years, our team has acquired and integrated several manufacturing facilities without incident.
While closing a plant requires a modified approach we.
We're now much better prepared for future network optimization for example, I would point you to the recent sale of our Bluffton facility, where our transition has gone very smoothly.
While these activities impacted second half volume the stepped up pace of supply chain and portfolio optimization has already delivered increased productivity and other cost savings, which enable us to maintain our adjusted EBITDA guidance.
Moreover, despite navigating dynamic consumer trends and the beginnings of our own transformation, our consumer panel trends have been very positive on an absolute basis and relative to the category.
In the quarter, we increased our household penetration ahead of the category, while we maintain consumer trips despite declines for the category.
As we all know driving household penetration is a key indicator of long term business success, and we continue to have significant white space opportunities in our expansion geographies. We look forward to discussing this more at our Investor day in December.
Now I'd like to turn the call over to Jay and then I'll make a few final remarks before we open the call for questions Jay.
Thank you Howard and good morning, everyone.
In the third quarter, we delivered organic net sales growth of three 1%.
And adjusted EBITDA growth of nine 2%.
As our productivity programs and actions to optimize our network and portfolio are delivering stronger profitability.
Of note our organic net sales growth combined with these actions resulted in a third consecutive quarter of adjusted EBITDA margin expansion.
I am proud of our team's efforts during a dynamic consumer environment to deliver these results.
While we continue to make structural changes to access a higher level of productivity.
These collective efforts helped us deliver 14% adjusted EBITDA margins in the quarter.
Which I will note was our highest level in two years.
During the quarter, our organic net sales growth was led by price realization of three 7%.
Partially offset by lower volume mix of <unk>, 6%.
While it was impacted by three 3% due to SKU reductions, which was slightly more than what we expected due to earlier than planned transition of certain skus.
Let me adjust for SKU rationalization, we estimate that our volume mix grew two 7%, which is an acceleration from one 8% last quarter.
Our broad based SKU rationalization actions are complete.
Looking ahead to 2024, we don't expect these impacts to be material blood is us.
Finally, our total net sales growth was impacted by two additional factors.
First net sales continued to be impacted by the conversion of company owned RSP routes to independent operators.
Which reduced growth by 60 basis points.
Similar to SKU rationalization.
This will be largely complete by the end of the year and will not have a material impact on our fiscal 2020 for sales growth.
And second our third quarter net sales benefited from some earlier than expected holiday shipments that were originally forecasted to occur in the fourth quarter.
This timing factor along with a strong performance in unmeasured channels resulted in shipments that were more in line with consumption than recent quarters.
Moving down the P&L.
Adjusted gross margin declined in the second quarter, primarily from our conversion to IR outs, which had an adverse impact of 60 basis points.
Excluding this impact adjusted gross margins expanded year over year by 40 basis points led by our pricing and productivity programs.
This more than offset commodity and labor inflation.
In addition, our SKU rationalization programs are improving our margin mix as we reduced lower margin private label and park, Nebraska Skus.
That said that the margin performance in the quarter was slightly less than our expectations, primarily due to lower fixed cost leverage from softer than expected volumes.
As Howard described earlier.
Adjusted SG&A expense declined one 8%.
An improvement of 97 basis points as a percent of sales.
As a result of our productivity initiatives focused on logistics and lower administrative expenses.
As our sales growth normalizes, we have been able to manage spend cost control measures.
In addition to driving productivity within our selling and logistics costs.
Partially offsetting these factors with continued investments in e-commerce people selling infrastructure and supply chain capabilities to support our growth.
Bringing it together.
Adjusted EBITDA increased by nine 2% to $52 1 million.
And margins expanded 87 basis points to 14% of sales.
The margin expansion was driven by 370 basis points of price.
280 basis points of productivity.
Partially offset by 530 basis points of inflation and 40 basis points of impact from our continued investments to support our growth.
In addition, <unk>.
Adjusted net income increased nine 5% and adjusted EPS increased by nine 2% to 17 cents per share.
Stronger operating earnings and a more favorable tax rate were partially offset by higher interest expense, primarily due to higher rates on our floating rate debt.
Thanks.
Turning to cash flow and the balance sheet.
Consistent with normal seasonality and from our cross functional efforts to improve our cash conversion cycle.
We generated strong cash in the third quarter of $53 4 million.
I am happy to report that our transformation efforts in this important area are working and we are now seeing the benefits in our results.
This now brings cash flow from operations year to date to $49 1 million.
And we remain on track to reduce leverage below four five times by the end of the year.
We also remain committed to our capital priorities.
And year to date capital expenditures were $45 7 million.
Primarily related to supporting our productivity programs.
And our investment in our Kingsport and manufacturing plant.
In addition.
We have paid $24 1 million and dividend and distribution to shareholders.
Finishing with the balance sheet.
Cash on hand was $60 1 million.
And our liquidity remains strong at over 209 million, giving.
Giving us ample financial flexibility.
Net debt at quarter end was $875 9 million.
Our four eight times trailing 12 months normalized adjusted EBITDA of $181 8 million.
While leverage remains above our targeted range I'll remind you that roughly 70% of our long term debt is fixed at approximately four 7%.
We have no significant maturities until 2028.
And our credit structure is comprised of covenant light instruments.
Now turning to our full year outlook for fiscal 2023.
Okay.
As Howard mentioned earlier today.
Today, we revised our organic net sales outlook to 3% to 4% growth to reflect normalizing category trends.
And greater than expected volume impact from our aggressive supply chain and portfolio optimization actions.
To better position our company for the future.
This results in volume mix now to be modestly lower than fiscal 2022 with modest growth in the fourth quarter.
Yes.
But I'll remind you.
That our fourth quarter as yields about two 5% impact to volume.
SKU rationalization.
And adjusting for that impact, we expect to grow branded volumes by nearly 3%.
That said, our stepped up pace of supply chain and portfolio optimization is already delivering increased productivity benefit.
And these savings combined with disciplined spend management has enabled us to maintain our adjusted EBITDA outlook of 8% to 11% growth.
Before additional items, we now expect our full year 2023, adjusted effective tax rate to be approximately 17% to 18%.
What's this 20% to 22% previously.
Due to our state tax optimization efforts.
Interest expense of approximately $55 million capital investments of between 50% and $55 million are both unchanged.
Now I would like to turn the call back over to Howard for some final remarks.
Thank you Jay before I open the call up for questions I want to tell you I am confident about the future of our company and category over both the short and long term.
First when you look across the store salty snacks, as an attractive and growing category with relative resilience and strength versus other food categories with consumption growing nearly 6% in the latest quarter.
I have few doubts as we lap several years of price increases that the category will normalize and continue to grow at levels that existed prior to the unique environment. We've been in over the last three years.
Second we have an advantaged portfolio of brands that are resonating with retailers and consumers highlighted by a 5% growth of our power brands with significant white space distribution opportunities.
Third.
While our supply chain and portfolio optimization actions this year temporarily impacted volume more than we expected we learned important lessons that better position us for stronger execution and.
And in doing so we were able to deliver productivity and other cost savings that enabled us to maintain our earnings outlook for the year.
And we are building a stronger foundation that positions us for growth and margin expansion.
Fourth we continued to develop our existing talent through embracing new ways of working and continuous improvement while augmenting the team externally when appropriate.
Lastly, our cash performance in the quarter was strong through cross functional efforts to improve our cash conversion cycle and keeps us on track to hit our full year leverage goal, which will position us well for continued improvements in fiscal 2024.
And now operator, we'd like to open the call for questions.
At this time I would like to remind everyone to ask a question Press Star then the number one on your telephone keypad.
First question comes from the line of Johnny Samir Your line is open.
Great. Thanks, This is actually Andrew Lazar Barclays. Good morning, everybody.
Good morning, Good morning, guys. Good morning.
I guess first question Howard as you mentioned some of the continued weakness that youre seeing in the core markets I realize some of this as you mentioned is a tough year ago comparison, and some weaker foundation brand performance, but still.
Was hoping maybe you could dig in a bit deeper on that and just go through some of the drivers and maybe more importantly, how youre thinking about sort of that metric as we go forward.
Yes, thanks for the question Andrew.
Thank you.
The first thing I'd say is we're certainly not pleased with losing share in our core.
Because as you know our goal is to make sure that we maintain the corps and then expand share in our expansion geographies.
I think over the long term that is what we expect and I think thats what other should expect from US when you look at the current quarter. There were a couple of pieces in the prior year brand was up about 20% in the corps and so we're lapping that and you really see it.
And the share in the consumption performance on that brand in the in the current period.
Second our foundation brands really are more heavily weighted to the corps and so when they tend to drag they actually have.
Oversized impact.
And driven really by a lack of consumer and brand investment as well as they have been a primary focus of our SKU rationalization programs over the last couple of over the last couple of quarters.
Third we mentioned a little bit around the oldest like weakness that's been about getting our pricing and packaging right in the store.
But also making sure that the supply chain.
From our Birmingham transition, which as we talked about really it did affect our Q3 and leak a little bit into October as well, but that said.
On the upside and the thing I think we're most excited about is when you look at our power brands. They continued to perform nicely.
Both in our core and expansion geographies for example on the border grew over 30% is absent Boulder Canyon are also growing really nicely and then in our expansion markets, we actually outpaced the category growing about 8%.
So I think if we roll it all up together and say, we're not happy about where the core is very clear and laser focused on improving those trends and remain really optimistic that from an expansion perspective that customers and consumers embrace and welcome these brands onto their shelves into their pantries.
Great and you mentioned.
Power brand growth that youre seeing in expansion markets.
Which seems to be going really well I was hoping maybe you could put a little finer point on that just kind of what youre, what youre, what youre seeing is it.
Is it new new distribution, new accounts in new regions kind of where you're starting to see that and is it is it using some of the metrics and performance from the from a launch in the southeast, but youre able to communicate more fully to some new accounts I guess in some new areas is that helping.
Yes, I mean, certainly a couple of I think it's all of those things that certainly what we learned in the southeast about how to enter markets with thought with anchor consumers and how we enter markets. When we look at the expansion through.
Distribution.
Buybacks and partnerships that we've been able to do all of those things I think translate into better core performance, but I think as you look at our I'm, sorry that our expansion performance, but I think when you look at our power brands Boulder Canyon is growing very quickly.
Pension markets is absent and its also continuing to improve and probably the highest compliment that we get is when we enter into markets and we demonstrate that we can grow the category and that were incremental in helping build baskets that we tend to get expanded distribution as we lap it which is which we also continued to enjoy.
Great Great to see you in December.
Look forward to it thanks Andrew.
Next question comes from the line of multi Nick Your line is open.
Thanks, Good morning, everyone.
I guess the question is given the topline guide down the implied margins for the fourth quarter is still pretty healthy. So Howard Ajay I was wondering if you guys could just opine and just give us more clarity, maybe a little more detail around those productivity efforts and kind of what's driving driving the offset.
Yeah. Thanks, Nick first of all welcome where we're excited to have you on the call and look forward to working with you as we go forward.
Look ultimately I think that our story has always been about continuing to be able to fund our growth by by creating fuel in our productivity line.
And if you look at the progression of this company over the last couple of years few years short years ago, we were only at about 1%, we're feeling very comfortable at 4% this year and thats really being driven by the aggressive supply chain actions. We took on the quarter. So Birmingham, obviously was a was a decision that we announced in June really the benefit there is.
Mostly in front of us, but we're starting to see some of that flow through.
We took actions on our private fleet and we're able to start to get some.
You see an uptick in our productivity as we go forward there and we also are seeing benefits from the sale of our Bluffton from our Bluffton plant. So when you put all of those things together a lot of those things were not necessarily contemplated earlier in the year, but we've been able to.
And be able to pull some of those things into our guide and into our confidence level as we move forward to offset some of the call down.
On our volume side.
Excellent. Thank you I'll pass it on.
Thanks, Dan.
Next question comes from the line of Rob Moskow with TD Cowen Your line is open.
Hi, How're you doing.
Sure.
Hey, Rod.
I wanted to know.
Hey.
You said that you learned lessons from the Golden Flake supply chain disruption during the transition.
But I get the sense that there's going to be a lot more supply chain optimization to come.
Probably more consolidations so it.
There's going to be a lot of these moves coming can you be more specific as to what you learned and why you feel confident that you can obviate these types of issues going forward.
Yes. Thanks for the question Robyn welcome back we missed you last.
Last call, but glad to have you back on and with us.
Look I think there's a couple of things as I look youre right. When we look at our supply chain and we understand our overall cost structure that there is there are things that we're continuing to evaluate on ways of ways of working and being able to drive greater productivity.
But there are several key learnings that we had in the quarter and some of them as is frequently the cases seem somewhat obvious on the face, but obviously get a little bit more complicated as you get below.
First through our history, we've done a lot of planned acquisitions and planned acquisitions tend to be the foundation of a lot of our metrics closings are a little bit different and I think we've learned a bunch of things about how the how they vary but number one really is around making sure that we understand the the right TPI or <unk>.
<unk> indicator as we hit a gate specifically with respect to safety stock right. So we felt pretty good about what the number needed to be but I think underestimated and didn't appreciate the cycle, but it took to start to build the production and make sure that the product is flowing through our network as effectively as we needed it to as it moved back into the southern its mark.
So I think we need to be more conservative there as we go forward.
Second is making sure that we have redundancy, we've talked about trusted com and partners and making sure that we had some supply chain redundancy in the event that we need it to make sure that if we stumble even a little bit that there is somebody behind us that we know we can that can meet.
Our augment our demand as we transition.
And third really is around the dedication having a dedicated team while we had a dedicated team on it.
They were working through the transition, making sure that that team has got the ability to make calls at speed to understand the metrics and are dedicated specifically to this transition until we get through through and we're stable I think we might have we might've been a little more optimistic a little too soon with with respect to when we can.
Rotate off and get back to speed. So all of those things will be built into our future. We've learned a lot. We had a quantitative view of the lessons learned and and have a team that now has more experience as we look forward.
How are these are these moves things that you kind of have to do one at a time.
Or do you have the resources to do multiple consolidations at once.
So I think we I think we have the resources to be able to do multiple consolidations at once if the conditions.
Certainly from a firepower capacity.
Production capability, we have the capability to look and understand how to meet the consumer demand I think a lot of it is is more just when does the market.
Consumer market and the customers.
<unk> is a good time to do it and when we're confident that that we're clear on how the project needs to affect us moving forward.
Okay, Great alright, thank you.
Your next question comes from the line of Peter Galbo Bank of America. Your line is open.
Hey, guys. Good morning, Thanks for taking the question.
Pete maybe.
Howard I just.
I wanted to maybe unpack a bit more your comments.
Around the channel shifts.
I know you kind of gave it his rationale for maybe some of the softness in the quarter.
It's also though in the in the in the outlook as a reason for kind of why the sales guidance has come down. So I. Just I was hoping you can elaborate a little bit more there.
Is this a is this a channel exposure problems specific to us.
Your relative share of I don't know some of the club non measured is lower than peers, just and Thats why youre seeing some of the shift just anything more you can do to kind of help unpack that.
Yes. Thanks for the question look I think in order of magnitude the channel shifting is.
<unk> speaking a much smaller impacts to the to our go forward look and I think it is largely something that depending on how you look at it as either a cause for is a cause for optimism.
Yes, because really channel, while we are growing nicely in a lot of those unmeasured channels. They are relatively speaking smaller for us so much like expansion geography, as we're growing quickly in those channels the ability for them.
It's a really positively impact us just takes a little bit more time.
We're lucky to have a hybrid distribution model around DSD that we can flex there and make sure that our merchandising and our promotional environment as is solid but in terms of overall impacts to our business.
We're still developing much like an expansion geography would so do.
Do I think it's a I think it's certainly an opportunity for US we are very much focused on making sure that we are growing in those channels that we're meeting with the shopper once we have a great offering to.
To do that but it's still more white space opportunity for us that established business.
Okay. That's helpful. And then maybe just a really quick clarification I think Joe gave some color on the fourth quarter volume mix. I think you said there'll be a two and a half point drag from from SKU rat.
Otherwise your volume mix would be up 3%, so netting them like a half point positive do I have that right or did I Miss something.
Yes, I think thats right.
Okay perfect. Thanks, guys.
Thanks, Pete Thanks Pete.
Your next question comes from the line of her past per week with Oppenheimer. Your line is open.
And thanks for taking my question. So as we think about cost pressures in your business. Just curious if you have any early reads in terms of what inflation could look like next year and whether you see a need to take pricing at this juncture.
Yes, thanks for the question.
As is our first we are expecting a normalized inflation on price environment.
<unk> 2020.
Last year and secondly as of now.
Normal cycle, we had about we are in the contracting cycle for next year, and we had about 30% of the way there.
<unk> nugget for us is potatoes, those contracts will be signed in the next.
I want to say four to eight weeks. So we'll know more about the inflation basket as a whole for the year. So we should be able to talk more about it when.
When we see you in December and definitely as we guided in March.
Great and then maybe one additional question just on the competitive front given the category is slowing.
How would you characterize the competitive environment is still rational are you seeing any changes out there.
No look I think the the overall environment is rational and is what we would expect I think what we saw in the category to your point.
When we looked at the quarter, even a few months a few weeks ago.
What we saw with the category starting to it was starting to slow more than we would have anticipated, but in terms of competition pricing customer or competitive behavior, they're all largely in line with what we would expect nothing nothing crazy.
Thanks, Craig.
Your next question comes from the line of Michael Lavery with Piper Sandler Your line is open.
Thank you good morning.
Hey, good morning.
Just was wondering if you could.
Touch on Boulder Canyon. Its growth obviously is extraordinary what are some of the drivers there and how sustainable might not be.
Yes, So look I think we feel really good about where Boulder Canyon is and it really is a good example of a brand that we acquired.
And can show the strength of our network, it's really predominantly a better for you story.
Because obviously, it's the avocado oil and olive oil trends that we are obviously seeing that are driving a lot of it but consumer acceptance of the brand has been quite strong mostly in.
Our natural channel in some of the unmeasured channels and then obviously coming into grocery. So I think we believe there's a long runway for the brand has got a clear point of difference.
Sumer.
Cohort that is clearly interested in it and as you see the economy continuing to move when we talk about value.
Boulder Canyon for a segment of the consumer base is is valuable and so it's one of the places where it's not just about pricing, but it's over the total offering of the brand.
And is it.
Broad distribution and velocity gains or is there a big win a certain timing cycle, we should keep in mind as far as how that yet.
No. It is distribution and velocity gains in household expansion. It is not a we gained a clock.
Class of trade that we didn't have previously.
I think theres a lot of runway left for that brand.
Okay great.
Zaps, obviously that one's been on.
On fire and its.
Much more regional skew that.
To broaden.
Nicely, but maybe can you touch on how the pretzel launch is going up in that brand and what else you can do with the zaps brand overall.
Yes, so look I think the pretzel. The pretzel launch has been great for US and continues to perform in line with our expectations were obviously getting to the point now where we're lapping the initial introduction, but we think that seasoned and flavored pretzels that segment continues to be a big opportunity and we continue to intend to address it.
I think from a from an overall <unk> perspective, I think there are three things that we believe that we have opportunity on one is about continuing to broaden its distribution.
Not only geographically but within channels.
Got a significant channel opportunity.
Number two is from a purely from a marketing communication and brand perspective. It is a brand that I think has not had the marketing yet that.
Deserves and obviously as we expand our marketing investment over time, we will look at that as one of the supported brands as we go forward.
And then last but certainly not least at least from our from from my perspective.
It is a it is a brand where.
Kevin.
It's a brand where we have channel opportunities and e-commerce opportunities where consumers see it in foodservice see it in <unk> and then go looking for the brand and if we're thoughtful about the distribution placement will also continue to be an opportunity for us.
Okay, great. Thanks, so much thanks.
Thanks, Mike.
Your next question comes from the line of Jason English with Goldman Sachs. Your line is open.
Hey, good morning folks thanks for slotting.
Hey, good morning, guys.
You are one of three reports and conference calls I'm juggling today. So there is a reasonably good chance that you've already answered this and I am asking redundant question, if so I apologies.
But the SKU rationalization drag is proving longer and larger than we expected.
I know this time last year, you thought it would be done by midway through this year I know you extended it out a bit more coming into the year, but.
Where do we stand on that and how much longer is it expected to be to be a headwind is there a chance that we're actually going to be able to close it out this year and go in with with clean clean portfolio. If you will into fiscal 'twenty four.
Jason Howard Thanks for the question Jay assures me that my holiday New year's presence.
We'll be the elimination of discussing SKU rationalization as we go into next year and I confirm.
So we will while SKU rationalization will always be something that we'll do as sort of good hygiene. The extraordinary drag that we are experiencing this year, which creates a lot of.
Challenges for us as you kind of look at the underlying strength of this business and you see what our power brands are really delaying in what we're doing with bottlenecks SKU rationalization is a drag that we all look forward to anniversarying at the end of the year and we will stop talking about it.
As we go into next.
So I'm going to hold you to the Howard and Tom.
Yes.
I'll buy you a.
So at Investor Day.
Reaffirm my promise well, let's do better than that we'll meet up after the investor day with something better than a soda.
Yes.
So speaking of Investor day, you've foreshadowed.
A lot of discussion around productivity and supply chain optimization.
And my question is whether or not or how or why we should have confidence that you can walk and chew gum. If you will at the same time, so differently a lot of companies often go after big productivity initiatives.
Initiatives and rarely has it done without some market share in market turbulence and some topline consequences should we expect the same sort of turbulence for you and if not what gives you confidence that we won't we won't live through some of those bumps.
Yeah. So.
I agree with your thesis.
Why should you believe us.
A lot of what our Investor day will be about is showing you why you should believe us, but I think what makes US unique is that not only do we have the supply chain optimization opportunities that will walk you through in some level of detail introduce you to the team that will be responsible for executing it but we also have an outsized expansion geos.
<unk> opportunity as well and so I think that as you think about our top line growth in the head space that we have to support that growth with our within our network. I think we believe that we should be able to to your point walk and chew gum at the same time be able to look at it improve our network be able to look at the investments that are required.
To be able to increase automation drive capacity and run the railroad the way, we would want to and at the same time be able to drive greater growth in our expansion markets, where we are able to do that today.
And we expect to do it tomorrow, but all of that will be we'll lay out at the Investor Day, and then I think I am sure you will give us your verdict on whether you believe us.
I always do alright, I look forward to learning more thanks, a lot guys I'll pass it on thanks, Jason Thanks, Jason Thank you Jason.
Your next question comes from the line of Scott <unk> with Jefferies. Your line is open.
Hi, Good morning, all thanks for thanks for taking my question.
Good morning, Scott and Scott.
Good morning.
Wanted just to follow up on some of the SKU rationalization conversation obviously, that's adjacent point, obviously it seems like it's been going on for a little longer and deeper than expected. Just wondering what this does in your confidence regarding kind of go forward volume growth potential.
And is this SKU rationalization kind of replaced one for one on shelf with the power brand item or some other innovation just trying to.
To get a sense for that.
Yes.
Yes, so Scott.
First thing is I think it has always been our belief that this year was going to be a year of SKU rationalization. If you went all the way back to Q1, we were around 400 basis points expecting to step down basically 50, each quarter, but we've always given a sense that we would be in the 300.
Ish range. This year is a drag to our.
Two our print.
No.
From our perspective SKU rationalization is what is consistent with what we've been saying would be.
This year.
But again look forward to the holiday gift from a Jay when we stopped talking about it.
Second with respect to private to retail brand and partner brands. There is a couple of things. They are not one for one replacements because in some of the cases they were rationalization actions that we took as we acquired <unk> in a couple of other places where the retailer.
<unk> was using was using.
The brand continues to want to what we had alternative uses for the capacity, so being able to strengthen and build out our tortilla chip on the border brand we needed the capacity, which is why we started to shed them. So in some cases the retailer.
<unk> their brand. They just went elsewhere, which makes it a little bit different from a assortment management and then say pruning a SKU that has a tail SKU for us and replacing it with a higher performer.
Got it thanks, so much ethanol.
Thanks, Scott and welcome.
Your next question comes from the line of Bill Chappell with Truth. Your line is open.
Hi, Good morning. This is David <unk> on for Bill Chappell.
Hey, Dave wondering if you guys Hi, I was just wondering if you all could provide us with a little bit of an update on the partnership with Publix.
Yeah.
Look we continue to feel really good about our <unk> relationship. They have been excellent partners for us we've been enjoying not only our core distribution, but also obviously been building out and you can see that in our consumption and market share trends around them and they've been expanding our distribution.
Into additional skus and additional items broadly so I think we feel really good about how the business is performing I think what is equally important to us is being able to continue to prove to ourselves and to others into all of you that when we enter into a market with an anchor retailer that their shoppers in the.
<unk> is then.
And so you see that in our household penetration gains you see that in some of our buy rate improvements and you see that in our power brands.
So so far so good.
Excellent and also I was just wondering if you could talk a little bit about some of the trends you are seeing in salty snacks like potato chips versus pretzels versus tortilla chips.
Yeah, So I mean look I think.
Overall, what we continue to see is the category remains resilient and and we can and continues to be a great place to operate.
You look at our the potato chip trends overall category. The segment is up call. It call. It six 5% in the quarter were up a little bit less than that which you talked about earlier is a lot about the lack of.
The <unk> brand in our core.
Tortilla chips really was a we're now should we would've been talking the first half of the year, where we were lapping activity prior year than we projected that we would go stronger in the back half. The good news is the visibility. We thought we had is now translating into the category or subcategory growth that we're seeing.
And then pretzels is growing but that's really a place where we continue to have opportunities as the consumer is shopping price points and moving up and down the price ladder.
While we feel really good about things like our barrel business, we do over index to a higher relative price points and have some work to do on.
On the flex side of the business to make sure that we're hitting lower price points in the ladder and then the last two things I would say is look our chief snack business and Port Brian business are not where we wanted them to be there kind of two different issues cheese is really about a lap.
From prior year, which we have been experiencing for a while now but we've said we should be getting through it now.
And then port, Brian we talked a little bit about on supply.
Supply chain side or the optimization actions that we took really disproportionately affected golden flake, which is really shorthand for pork rinds.
But beyond that.
I think everyone's talked about the consumer continues to shop for value. We've seen some channel shifting all in our prepared remarks is kind of what we're seeing across the segments.
Excellent. Thank you I'll go ahead and turn it over.
Thank you.
Again, if you'd like to ask a question press star one on your telephone keypad. Our next question comes from the line of Mitch Pinheiro with Sturdivant. Your line is open.
Yeah, Hey, good morning.
Got it.
Hey.
Tailwind most of my questions have been asked and answered, but I did have two.
I was just curious if you could Howard if you could sort of prioritize the white space opportunities that you referred to.
Whether it's geographic or product or channel.
Very curious about that.
Yeah.
I think from a from a geography perspective, we are continuing to move west work right. So we've had a lot of success with the acquisition that we had in sort of the upper Midwest and we are continuing to build out around Chicago, Indiana, Michigan kind of the normal areas. There we've seen gray.
Performance, there and we continue to be bullish.
We've talked a lot about publics, which has been.
Obviously, a great success for us and where we continue to be grateful for the partnerships, we're getting from retailers, but Florida still is a is a geography, where we have continued opportunities to do it to your point, whether you call. It geography or you call. It a channel question I think is one that you can we can debate a little bit.
But Florida broadly speaking still remains an opportunity as a maturing market.
And then look I do think that when you think about channel shifting when you think about where the shopper is.
Unmeasured channels and value dollar stores discounters mass merch, we have a lot of opportunity still and that's our core items.
Being penetrated in servicing those retailers the way we need to the relationships are there. The product is there. We just we need to continue to demonstrate the value that we create and continue to drive them. So I'll kind of give you those two geographies and then I would say broadly speaking channel expansion.
Our places where I think we feel.
But theres quite a bit of upside and head space for us, especially in an environment, which remains dynamic.
Okay.
Thank you for that and then just one last question.
So when you get down to 13 manufacturing plants from the <unk>.
17.
What type of.
I don't know what kind of measurement in terms of capacity utilization, where you have I mean, how significant of an improvement is it I know you've done some expansion.
To your capacity, but I'm curious.
Just getting from 17 to 13, when you're sort of fully optimized what.
What kind of utilization.
That represents.
Yeah, So a couple of things so.
I would tell you it's really a modest improvement if you think about some of the geographies. Some of the plants that we're talking about Bermingham was a plant that John.
It required a significant amount of investment in order for us to be able to be in a good place with that volume while it was not immaterial to our network was absorbed fairly easily.
Onto our network with the.
Execution opportunities that we've obviously talked about accepted but the three plants that we're talking about are relatively modest in terms of their overall.
It has an impact I think we have further opportunity.
To not only in our ways of working but in our physical footprint to understand how to make sure that we have the capacity we need to grow but we have.
A fair bit of head space still in our OE measures.
To go as we continue to work on our continuous improvement capital expansion Kings Mountain is still in front of US there was a lot of there's a lot of opportunity yet in our network to be able to meet and exceed the consumer demand.
Okay.
Thank you for that.
Thank you. Thank you Mitch thanks, so much.
And that's all the questions we have I'll turn the call over to management for closing remarks.
Yes so.
Obviously, we feel pretty good about the numbers that we delivered we certainly understand.
The expectations have been revised but what I could not be more excited or confident in the future of this business.
I think we continue to be in probably the best category in the in the entire market relatively and absolutely. We have a lot of geographic opportunities yet to go and we have a lot of opportunities to continue to build our brands and grow our business and I look forward to seeing all of you in December at our Investor Day and.
Look forward to speaking in more detail as we go so thanks for your time and have a great day.
Ladies and gentlemen that concludes today's call. Thank you all for joining the amount this disconnect.
Please wait the conference will begin shortly.